Payments Are Transitioning From Cost Center To Commerce Catalyst
Payments have historically been thought of as a ‘cost of doing business’ among retailers – a necessary activity that ultimately chews up margins and adversely impacts the bottom line. By that virtue, retail payment strategies have traditionally centered on reducing the cost of acceptance. While cost mitigation remains an important task of any payments team within a retailer, a payments mindset shift has started to occur in recent years.
Payments are becoming a business-wide priority
Retailers are increasingly viewing payments as a component of the customer experience and a lever that can be pulled to drive topline growth. In fact, according to a Q2 2019 custom survey of US merchants with over 1,000 employees, 451 Research found that 77% said payments have become a highly strategic area of focus for their business that spurs significant competitive differentiation.
Retailers’ increasing emphasis on the strategic potential of payments is evident in the wide array of key decision-makers that now influence the implementation of new payment and commerce technologies. While a decade ago payments were largely a function of treasury and IT, today we see stakeholders from across the organization influencing payment technology decisions, highlighting the growing importance of payments across the business.
To tackle objectives beyond cost mitigation, 451 Research has also observed more retailers placing their payments group outside of their treasury/finance organization. This is especially the case with digital-native merchants. Some place their payments team within the product group because payments are seen as a core component of the digital experience, while others have the payments group sit within the business team to focus on growth and optimization.
Payments can drive business outcomes
Many of the conversations 451 Research has with retailers today focus on the role of payments in driving business outcomes. Retailers are increasingly looking to payments as an area within their business they can optimize to propel revenue growth and are seeking partners that can help them deliver. Specific business outcomes being sought include:
- Lift approval rate. Even a sub 1 percentage point lift in transaction approval rates can have an outsized impact on revenue for retailers. Considering the industry-wide approval rate for digital commerce transactions sits at roughly 85%, there is significant room for improvement. Approaches like dynamic 3DS, intelligent payment routing and account updater services all play important roles in spurring approval rate increases.
- Improve conversion rate. Payments arise at the most pivotal moment of the shopping journey – when a shopper is about to transition to a buyer – meaning there is little room for friction. Unfortunately, many of the key issues causing cart abandonment stem from bad experiences on the checkout page. Digital wallet acceptance, mobile optimization, autofill and streamlined checkout forms are just a sampling of tactics that will help move more shoppers through the funnel.
- Reduce churn. Subscription businesses risk losing a double-digit percentage of their customer base each month due to payment-related issues that lead to drop-off. This primarily stems from customers’ payment cards getting reissued due to expiry or fraud and cards getting declined due to insufficient funds. Account updater services and smart retry logic (e.g., retrying a failed transaction after payday on the 15th of the month) both play significant roles in helping subscription businesses preserve their customer relationships.
- Decrease false declines. Wrongly declining a transaction due to suspicion of fraud can have near- and long-term revenue consequences. Our consumer research shows that more than half of customers that abandon a cart due to friction at checkout (such as a false decline) say they are less likely to return to that merchant in the future. A variety of fraud-prevention technologies such as behavioral biometrics, machine learning, device fingerprinting and EMV 3D-Secure show promise to help merchants enhance their ability to more accurately detect bad actors.
- Attract new customer segments. Payments are an essential ingredient for international expansion. While Visa and Mastercard acceptance may ensure coverage of most of the US market, local payment method acceptance is mandatory internationally. Consider that in the Netherlands, for example, bank transfer method iDEAL accounts for 60% of e-commerce volume. Aligning with partners that have connections with local payment methods and acquiring relationships is key to attracting new customers abroad.
- Optimize operations. While payments are garnering greater attention among retailers, at the end of the day their main objective is to sell products or services. Payment partners that can alleviate the burden of payments (e.g., regulatory compliance, onboarding new payment methods, chargeback management) for retailers ultimately allow them to refocus on their core business and allocate their internal resources more efficiently.
Retailers’ ‘ask’ of the payments industry has evolved from ‘Help me accept and process a payment’ to ‘Help me grow my business.’ This stems from an increasing realization that payments can be much more than a cost center, and if approached strategically can drive topline growth and expansion. To address these requests, astute payment providers must invest in transaction optimization capabilities and machine learning to deliver better payment experiences that ultimately result in business growth for their retail customers.