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© Edgar, Dunn & Company 2012

Payment trends in the European retail sector

Edgar, Dunn & Company

November 2012


2012 EDC Retailer Survey – White Paper


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Contents

1 Executive summary ......................................................................................................... 1 1.1 Introduction ........................................................................................................... 1 1.2 Survey scope .......................................................................................................... 1 1.3 Objective and Methodology .................................................................................. 1 1.4 Key findings ............................................................................................................ 2

2 An integrated multichannel strategy is key to growth .................................................. 3 2.1 The importance of an Integrated Multichannel Strategy .................................... 3 2.2 Benefits of an integrated multichannel strategy ................................................. 5 2.3 Challenges of an integrated multichannel strategy ............................................ 6

3 Payment mix is at the heart of an integrated multichannel strategy .......................... 8 3.1 Payments are key to linking different sales channels ......................................... 8 3.2 Towards a frictionless customer experience ....................................................... 9 3.3 Striking a balance between convenience and security ...................................... 10 3.4 Counting the costs of an integrated multichannel strategy .............................. 10 3.5 Issuing new payment products ............................................................................ 11 3.6 Contactless is growing but is not there yet ........................................................ 13

4 The future of retail payments is mobile ....................................................................... 14 4.1 The rise of the m-‐wallets ..................................................................................... 16 4.2 Non-‐payments and an integrated multichannel strategy .................................. 17 4.3 Mobile commerce and social media .................................................................... 18

5 Other payment trends that might impact retailers ..................................................... 19

6 So where should retailers start? ................................................................................... 21 6.1 Conduct an EDC 360° Payments Diagnostic ........................................................ 21 6.2 Develop a payments optimisation plan .............................................................. 21 6.3 Establish a programme of on-‐going monitoring and management .................. 22

Figures

Figure 1: Multiple customer touch points ............................................................................. 3 Figure 2: An integrated multichannel strategy ..................................................................... 4 Figure 3: Drivers to accept new payment methods ............................................................ 8 Figure 4: Key challenges for payment acceptance .............................................................. 11 Figure 5: More payment methods in the next few years ................................................... 12 Figure 6: Payments in a cloud .............................................................................................. 13 Figure 7: Why not contactless? ............................................................................................ 14 Figure 8: The new shopping basket is a smartphone scanner ........................................... 15 Figure 9: Mobile shopping is the future .............................................................................. 16 Figure 10: The M-‐wallet is expected to be the preferred mobile payment method ......... 17




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1 Executive summary

1.1 Introduction Payments have always been hot topic for retailers. When a consumer makes a payment in-‐store or online there is a rich array of psychological factors coming into play. There has been a lot written about the psychology of shopping. What consumers perceive in-‐store or online and how they treat information during their browsing, researching, decision making and purchasing at the point-‐of-‐sale or on the checkout page can be a fascinating topic. Even gender differences and the evolutionary hunter-‐gatherer behaviour are expressed in shopping malls around the world.

Making a payment has not really changed much – it has been cash, cheques and cards. Cash still dominates face-‐to-‐face retailing, there are some paper cheques being used but they are hardly seen or consumers do not like using them. Then there is the prevalent plastic payment card, which has been extremely successful in the last 50 years. However, EDC believes we are currently standing at the crossroads of a substantial change in retailing and how consumers pay. The genesis of this change has been the use of the internet, the prevalence of e-‐commerce since the turn of the millennium and the rapid consumer adoption of smartphones.

In the next 5 to 10 years EDC expects that changing consumer preferences and technological developments (e.g. mobile payments) accompanied by the emergence of a number of new retailer business models and sales channels will have a substantial impact on the retail landscape. Change in the way consumers pay for goods and services will be fast. Largely driven by technology, consumers are responding positively to innovation and many retailers are finding this a challenge to be up-‐to-‐date and respond to the expected change.

1.2 Survey scope From the onset of the 2012 EDC retailer survey we wanted to focus on retailers who had traditionally operated physical store locations and who had entered into other sales channel such as the internet or mobile. At EDC we call these retailers ‘multichannel retailers’. The term ‘Omni-‐channel’ is often used in the industry and we wanted to focus our attention on retailers operating in more than one channel but look into how Omni-‐channel retailing may one day be the next evolution of multichannel retailing, where retailers has achieved a seamless approach to the consumer experience through all available shopping and marketing channels.

1.3 Objective and Methodology

The objective of this white paper is to gain a better understanding of how change related to payments are affecting the way multichannel retailers are doing business,

There is a rich array of psychological factors coming into play when a consumer makes a payment at a retailer




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creating opportunities to increase sales, enhancing customer service and optimising payments to differentiate its customer proposition.

This study is based on the findings collected from an online survey of over 290 contacts across 130 individual multichannel retailer brands located across the three largest retailing markets in Europe; UK, France and Germany. The online survey was conducted in October 2012 with individual telephone interviews being conducted with several retailers during the same period. The findings described in this paper provided a representative sample of multichannel retailers and the opinions of experts within the industry whose jobs depend on the smooth processing of consumer payments from a retailer’s point of view.

1.4 Key findings The survey findings suggest that many multichannel retailers are increasingly focusing on payments to reduce costs, increase customer service and differentiate their service in a highly competitive market. The key findings of this survey can be grouped under three areas:

An integrated multichannel strategy is key to growth

The payment mix is at the heart of an integrated multichannel strategy

The future of retail payments is mobile

As retailers grapple with a difficult economic market and rising costs, the payments piece for any retailer has to be strategic, supported at board level, covering the issuance (where applicable) of payment methods (e.g. gift cards), payment acceptance and payment processing, all within an integrated strategy. The EDC 360° Payments Diagnostic will encourage the smart use of payment information as a valuable tool, helping to reduce operational costs, improve revenues, engaging customers online or in-‐store, regardless of their preferred payment method. EDC would suggest a three-‐step approach to optimise operations in relation of consumer payments for retailers:

Step 1: 3600 Payments Diagnostic -‐ Where are you now?

Step 2: Payments optimisation plan -‐ Where do you want to go?

Step 3: On-‐going monitoring and management -‐ Are you getting there?




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2 An integrated multichannel strategy is key to growth

Developing an integrated multichannel strategy can be the key to a differentiated shopping experience for customers and lead to additional benefits and sales growth for retailers. However, there are challenges for prospective retailers who are embarking on the road to an integrated multichannel retailing strategy.

Figure 1: Multiple customer touch points

Bricks and mortar shops, along with the internet, are the channels most frequently supported by our survey respondents. Whilst telephone orders are widely offered, mail order is supported by just 12% of our respondents, it is likely that the importance of mail order has declined over the past 10 years, having faced substantial competition from online shopping.

The mobile channel has entered mainstream use in today's retail landscape, currently supported by more than 50% of respondents, and EDC expects this trend to continue.

Many retailers sell through multiple channels, both physical and virtual, however, it is the degree to which these channels are integrated that indicates the strength of a multichannel retailing strategy.

2.1 The importance of an Integrated Multichannel Strategy There is a substantial difference between retailers who operate a multiple channel strategy and those who have an integrated multichannel strategy:

Multiple Channel Strategy is simply a channel mix where each channel operates independently of the others

0%

20%

40%

60%

80%

100%

Brick and mortar

Internet Mobile app

Mobile website

Kiosk Phone order

Mail order

Which channels do you use to sell to your customers? The in-‐store and

online channels remain the most widely supported by retailers




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Integrated Multichannel Strategy has genuine channel integration, which involves a synergistic combination of channel functions and services, in order to offer customers convenient cross-‐channel benefits.

If a customer wants access to new channels, then a multiple channel strategy will likely serve the purpose. However, EDC has seen that retail customers are increasingly receptive to the cross-‐channel benefits associated with an integrated multichannel strategy and so developing such a strategy is becoming important for retailers seeking competitive advantage.

The survey asked retailers how they would best describe their integrated multichannel retail strategy. The following statements were presented to survey respondents to indicate how they define their strategy:

¡ Developing primarily a marketing strategy

¡ Bringing together both business processes and technology systems

¡ Maximising revenue and loyalty

¡ Consolidating purchasing data into a single customer database

59% of respondents indicated that an integrated multichannel retail strategy is comprised of all of the above elements. EDC shares this view with the retailers; a truly integrated multichannel retailing strategy should combine all of these ideas.

EDC also asked our retailers to indicate if they had already begun developing this strategy within their business, and if not, were they planning on doing so in the future?

Figure 2: An integrated multichannel strategy

More than 80% of respondents have begun implementation of an integrated multichannel retail strategy and those who have not, intend on doing so in the near future. The importance of developing such a strategy cannot be overstated and in order to truly take advantage of multichannel retailing, the retailer must decide which

82%

12% 6%

Have you developed an integrated multichannel

strategy?

Yes No N/A

60%

40%

If not, do you plan to develop an integrated multichannel

strategy?

Yes No N/A




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channel model to operate, and develop an integrated multichannel strategy to fit the chosen channel model, providing definite cross channel benefits for its customers.

2.2 Benefits of an integrated multichannel strategy A key goal of any retailer choosing to expand their business into multiple channels is improved sales performance and this was supported by how survey respondents defined their 'integrated multichannel retail strategy'. 30% of respondents indicated that an integrated multichannel strategy was about 'maximising revenue and loyalty'. There are a number of other benefits of using multiple channels in a more seamless and integrated way, these included:

¡ Access to a valuable subset of new customer segments (multichannel customers)

¡ Access to improved and actionable customer information (across all channels)

¡ Improved shopping experience, customer satisfaction and loyalty.

Optimising payments acceptance is not given the same level of importance as other potential benefits. EDC believes that this is because payments acceptance is a necessary part of any integrated multichannel retail strategy, and not strictly a benefit. Payments acceptance is something that has the potential to differentiate the shopping experience and is something that should be controlled and owned by the retailer.

Survey respondents indicated that the two factors of greatest importance were; improved customer experience (88% high/very high) and improved customer satisfaction (80% high/very high).

EDC agrees that these two factors will be of greatest benefit to retailers, and will help lead to the improved sales performance so sought after.

Improved and Actionable Customer Information

A physical store often faces difficulty in linking customers to specific past transactions – particularly if the customer has paid by cash or with a third party credit card. In order to address this, many retailers encourage the use of loyalty cards, store cards or asking shoppers for identifying information. In contrast, when looking at transactions through the internet or mobile channels, retailers automatically collect customer information in order to ship the merchandise. In addition to this, these channels offer retailers the opportunity to collect data about a customer’s online shopping behaviour.

Retailers can see where on their website a consumer has browsed and where the customer has connected from, be it a search engine, comparison website or social network, and what days of the week and times of the day the transactions occurred, all of which gives the retailer valuable insight into the customers’ shopping habits.

Improved Shopping Experience

In our experience of working with offline, online and multichannel retailers, EDC has found that customers want a seamless shopping experience regardless of the channel

Over 80% of survey respondents said improving customer experience and customer satisfaction were an important part of their integrated multichannel strategy




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or payment method. Customers expect the same level of customer experience from a retailer’s website or mobile app as from their in-‐store channel. Furthermore, customers expect to be able cancel or exchange purchases via any channel, regardless of where they initiated the transaction or what payment method they used.

EDC Perspective: EDC was interested to see customer experience emerge with such importance among survey respondents. As in a complex multichannel retail environment, EDC's client experience demonstrates that the customer’s perception of value is influenced by the perception of service quality. Customers do care about price, but at the same time there is a rich array of other considerations that they also take into account.

2.3 Challenges of an integrated multichannel strategy Many retailers have now become or are becoming, multichannel operators, but some are intentionally turning away from this type of strategy for two main reasons: 1) the costs of supporting a multichannel offering and 2) operational difficulties of integration.

In addition to these, retailers may face several other challenges, such as organisation structure, lack of a CRM1 approach, IT constraints, lack of data integration and customer analytics.

Respondents did not put as much emphasis on the challenges of an integrated multichannel retail strategy as the benefits and ranked most challenges fairly consistently. However, the survey does identify three areas where retailers are particularly concerned:

Operational aspects -‐ where 56% of respondents indicated that this was of high or very high importance (e.g. customer services)

Data integration -‐ 65% of respondents indicated that this was of high or very high importance (i.e. data across channels)

CRM and centralisation of customer data -‐ 56% of respondents indicated that this was of high or very high importance

EDC also sees these three challenges as significant hurdles to implementing an integrated multichannel retail strategy, especially as both data integration and CRM are operational concerns.

CRM and Centralisation of Customer Data

Traditionally, customer data collection and management is handled by a particular channel, with the consequence being that retailers do not have the capability to track

1 CRM: Customer Relationship Management is not merely a software package but a way of running the operation with the aim of capturing customer data, profiling customers, growing the customer base and retaining customers through customer satisfaction and brand experience




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transaction information across multiple channels and link it to a specific customer, and therefore track a customer’s activity and profitability across channels. In direct channels, such as the internet, retailers are able to easily identify and track a specific customer’s shopping behaviour. However, when this same customer interacts with the retailer's store channel, it is difficult for the retailer to link this new interaction with the shoppers purchase history on the internet. This is particularly highlighted with the rapid growth and adoption of ‘client & collect’ services whereby customers buy online and collect in-‐store (or return in-‐store). The agnostic nature of customers and how they interact with different retail channels has placed a greater emphasis on forming an integrated multichannel strategy.

Linking these databases to form a single view of the customer is key to a successful integrated multichannel strategy.

Data Integration

Customer transactions (both online and offline), conversations and intentions can all be brought together by retailers and used to both improve the retail shopping experience and maximise revenues. Collectively, this information is commonly referred to as 'Big Data'.

The issue lies in that Big Data refers to both structured and unstructured data:

Structured data -‐ refers to data easily captured in existing databases and may include transaction and conversion rates, amongst other statistical indicators

Unstructured data -‐ this is more fluid, being comprised primarily of social media interactions.

EDC customer experience indicates that unstructured data is currently less of a priority for retailers, who already face a significant challenge in making productive use of the sheer amount of structured data they collect. Going forward, integrating structured and unstructured data into a single database will be a key challenge, but will provide retailers with a wealth of actionable customer information.

EDC Perspective: Whilst there are no ‘one size fits all’ solutions to multichannel retailing, EDC believes that a more centralised, integrated organisational structure offers a more efficient approach when operating in multiple channels. If a retailer sells through multiple channels, but manages each one as a separate entity, it is likely to pose difficulties in creating a single brand identity, which is vital to securing customer loyalty. Nor will it facilitate the sharing of customer behaviour and preferences across channels, which is an integral part of delivering a compelling retail experience.

‘Click & collect’ accounts for about 40% of online orders for global retailers -‐ according to American Express (June 2012)




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3 Payment mix is at the heart of an integrated multichannel strategy

Retailers need to differentiate themselves in a highly competitive environment and the payment mix can become a significant differentiating factor as part of an integrated multichannel strategy.

According to the survey, retailers acknowledge the significance of different forms of payment. When asked which business drivers influence their choice of new payment methods, respondents considered that increase sales (67%), improving customer experience (67%) and targeting new customer segments (60%) are the three most important criteria.

Figure 3: Drivers to accept new payment methods

New payment methods can unlock specific customer segments and generate additional sales. For instance, American Express, with its feature-‐rich programmes, tends to generate higher transaction value and PayPal provides access to a global customer base of more than 120 million people. Appropriate payment methods need to be offered taking into consideration opportunities and restrictions relevant to each channel. The ‘1-‐click ordering’ feature developed by Amazon is characteristic of a simple customer experience designed to encourage repeat sales and it is positioned at the core of Amazon's payment checkout strategy. Retailers need to decide which payment methods to accept and which payment methods to issue.

3.1 Payments are key to linking different sales channels

Besides increasing sales and unlocking customer segments, payments can also play an even greater role and link different channels. The payment process needs to be

67% 67% 60%

53% 53%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Increase sales in-‐store

Improve consumer experience

Target new customer segments

Improve loyalty

Decrease payment

acceptance costs

Decrease fraud

Which business drivers would influence your choice of accepting new payment methods?

Appropriate payment methods increase sales and improve customer experience

New payment methods can unlock specific customer segments and generate additional sales




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consistent and support brand identity across all channels. Customers increasingly use a combination of channels (in-‐store, social media, computer, tablet, smartphone) to support their purchase decisions. 87% of French consumers researched the internet before purchasing products in-‐store and 52% indicated that they search on the internet in-‐store with their smartphone2.

Similarly, John Lewis found that more than 60% of their customers researched products online before visiting a shop to make a purchase. In-‐store WiFi access at John Lewis allows them to continue and complete that journey, accessing product information and viewing ratings and reviews to influence their purchase. Similar research in other markets has indicated that customers are becoming channel agnostic, there is a constant blurring of the lines of distinction between in-‐store and online browsing, price comparing, reviewing, researching and buying.

A retailer's website has evolved beyond a 'simple' e-‐commerce channel for online sales to become a multichannel source of information. A retailer's website actually becomes a significant sales driver for in-‐store, online and mobile interactions and needs to assist customers at the three major points-‐of-‐interaction: in-‐store, on the go or at home.

Retailers need to consider the whole payment process to generate synergies across channels. Design of the payment process should not only consider the last step in concluding the purchase transaction, but it should be viewed as playing a core role in a multichannel strategy and linking different channels across all payment methods and non-‐payment types of interaction between the customer and retailer. Retailers using an integrated multichannel strategy could identify customers based on the usage of payment methods and provide loyalty or marketing offers at time of purchase. Retailers can also use electronic wallets to store customers' personal and payments information. Electronic wallets link online and mobile channels to provide a consistent customer experience, simplify payments and encourage repeat sales.

EDC Perspective: By considering the whole payment process and all the points-‐of-‐interaction, retailers can optimise both front and back-‐end payment processes. For instance, returns or refunds ought to be part of a holistic approach. Retailers would need to brush aside inconsistencies and focus on implementing consistent return and refund policies regardless of the channels used. This will contribute to providing a consistent customer experience and will strengthen customer loyalty.

3.2 Towards a frictionless customer experience The proliferation of new sales channels has significantly modified customers' expectations. Customers now demand convenience, simplicity and an effortless experience. Apple was one of the precursors by offering the possibility to pay vendors directly without queuing in its Apple stores and creating a quick and simple payment process for customers. Called ‘EasyPay’, Apple has created a payment wallet using the

2 Opinion Way survey -‐ September 2012

Retailers need to consider the whole payment process to generate synergies across channels

Apple’s EasyPay is effectively an electronic wallet




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iTunes account allowing customers to scan the barcodes of products in-‐store and pay without going to the checkout. Customers can also reserve products, arrange for home delivery, book a one-‐to-‐one training session or attend a workshop, all via their iPhone.

High customer expectations of service require retailers to offer a frictionless customer experience and develop an appropriate payment process for each channel. Retailers need to optimise all points-‐of-‐interaction, of which payment is a significant element. 98% of respondents to the EDC Advanced Payments Survey3 considered that convenience, ease of use or speed of payment were the key drivers for adoption of mobile payments and this is confirmed by the retailers in this survey. 67% of retailers said that implementing new payment methods would improve the customer experience (e.g. make payments simple at the POS) and 63% considered that simplicity for the consumer is one of the key challenges faced when accepting payments.

3.3 Striking a balance between convenience and security In their quest to provide a seamless shopping experience regardless of the channel or payment method, retailers also need to consider customers' concerns. The increased quantity of personal information shared with different entities across different channels makes customers apprehensive of potential data issues. Security breaches as evidenced in different cases in the US and Europe have become a significant issue and source of genuine concerns for retailers and customers. 73% of consumers in the US and 72% of consumers in the UK stated that ‘payment security’ was their main concern shopping online4.

Fraud proves to be very expensive for retailers both in terms of costs to prevent fraud as well as fraud losses. Retailers consider fees (for payment acceptance), security and fraud as the top challenges when accepting payments, as seen in Figure 4 from the survey below.

The customer experience should be at the heart of the value proposition whilst ensuring a high level of security. Balancing these two aspects should be considered when adding new payment methods and optimising payment processes (i.e. purchase, refund, return, etc.)

3.4 Counting the costs of an integrated multichannel strategy 81% of the survey respondents considered that the greatest challenge is related to payment fees paid by retailers to other stakeholders. Retailers need to take into account all payment costs when accepting payments, encompassing both direct costs (e.g. fees to acquirers, third party payment service providers) and indirect costs (e.g. chargebacks related costs). This is equally related to the cost of offering an integrated

3 The 2012 EDC Advanced Payments Report included a global survey of 525 payments professionals. Link to the report: http://www.edgardunn.com/uploads/100012_english/100407.pdf 4 Consumer Survey conducted in October 2012 by Neoworks

Retailers need to provide a frictionless payment experience

The customer experience should be at the heart of the value proposition whilst ensuring a high level of security




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multichannel strategy: 44% of retailers surveyed indicated that cost of building an integrated multichannel offering is one of their key challenges.

Figure 4: Key challenges for payment acceptance

Another significant challenge in an integrated multichannel strategy is choosing the appropriate payment methods corresponding to their customer segments and their channels. 50% of survey respondents considered the acceptance of alternative payments at POS and 31% regarded the acceptance of alternative payments online as key challenges when accepting payments. This is to be linked with 55% of retailers surveyed considering operational aspects and 53% thinking POS IT constraints as key challenges of an integrated multichannel strategy.

This highlights that the challenges faced by retailers in accepting payments are central to the key issues of implementing an integrated multichannel strategy. EDC believes this is likely to be related to the problem that many retailers have not invested in new shop floor or back-‐office technologies which has resulted in a plethora of legacy systems and in-‐house built solutions that are unable to support new world expectations.

3.5 Issuing new payment products

The world of retail payments remained relatively constant with cards, cheques and cash being dominant until the beginning of 2000s. However, since then there has been a proliferation of new payment methods and the advent of online and mobile commerce has contributed to increased complexity in accepting payments.

Beyond loyalty cards, some retailers have issued store cards, co-‐branded cards or prepaid gift cards to issue their own payment instruments and strengthen the customer relationship. The change in the payment landscape provides an opportunity for retailers

81%

69% 63%

56% 50%

31%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Payment fees

Security Simplicity for consumers

Fraud Acceptance of alternative payments at

POS

Acceptance of alternative payments online

What are the key challenges you face to accept payments from your perspective?

50% of survey respondents considered the acceptance of alternative payments at POS

62% of retailers surveyed planned to launch new payment methods in the next 2-‐3 years




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to issue new payment instruments, with 62% of retailers indicating that they plan to launch new payment methods in the next 2-‐3 years.

Figure 5: More payment methods in the next few years

Payments play a central role in the strategy of retailers to offer new points-‐of-‐interaction and strengthen customer loyalty. It is expected that new payments using recent technological developments (e.g. contactless for card payments, online or mobile channels for wallets) will become increasingly valuable by interacting directly with customers. The different functionalities of smartphones (e.g. internet, camera, in-‐app features) or the use of social media are very likely to create new use-‐cases and generate additional sales. For instance, push messages or location-‐based offers will create targeted incentives for customers and are likely to increase in-‐store or online conversion rates.

As payment complexity has significantly increased, retailers face pressure to be compliant with the latest payment standards. Regulatory constraints, for instance, PCI DSS5 compliance, can create a significant burden on IT resources.

Faced with this increased complexity, 75% of retailers surveyed indicated that they would consider using third-‐party providers such as hosted services or services in the cloud for payment-‐related services. Payment partners can help retailers benefit from specific expertise, implement projects when facing low bandwidth and shorten time-‐to-‐market to launch innovative solutions.

5 PCI DSS: Payment Card Industry Data Security Standards is a worldwide information security standard defined by all the key stakeholders of the payment card industry

63%

38%

Do you plan to launch new payment methods in the next 2-‐3 years?

Yes No

Non-‐payments activities will play a key role at the various points-‐of-‐interaction and will strengthen the customer loyalty via the smartphone

75% of retailers would consider partnering with a specialist third party provider/vendor




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Figure 6: Payments in a cloud

3.6 Contactless is growing but is not there yet One of the recent innovations in retail payments is the advent of contactless payments. Contactless is an innovation requiring investment from all stakeholders (issuers, acquirers, retailers and other stakeholders such as POS terminal manufacturers) and needs to be supported by the whole payments industry. This would explain why the development of contactless varies significantly by country.

The UK has seen a significant investment by the issuing banks, with 29 million contactless cards expected to be in issue by the end of 2012. In France, large retailers such as Auchan, Casino and Carrefour have invested in contactless by issuing their own contactless cards and deploying contactless-‐enabled POS terminals in their stores. French financial institutions have also started to issue contactless cards and some are now in the process of replacing most of their card portfolio by contactless cards. It is estimated that there will be about 12 million of contactless cards in the French market by the end of 2012, taking into account both retailers and banks contactless cards.

However, the number of contactless terminals in both countries remains relatively modest with 124,000 contactless terminals in the UK and 61,000 active contactless terminals in France (it is estimated that 58,000 additional contactless terminals could become active in France in the next few months). Turkey, Poland and Spain have also invested in contactless but other European countries have seen little investment. Overall, usage of contactless has started but remains relatively low in Europe.

Although contactless is growing, it still accounts for a very low share of payments in Europe. This is further seen by this survey in which 88% of retailers surveyed stated that they currently do not accept contactless payments.

75%

25%

Would you consider using third-‐party providers such as hosted services / services in the cloud for

payment-‐related services?

Yes No

The rollout of contactless in Europe varies significantly by country




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This low rate of adoption can be explained by two key reasons. Retailers indicate that contactless is expensive (33% of retailers surveyed) and rolling out a high number of contactless terminals would be costly. However, the key reason lies elsewhere, with retailers considering that there is a lack of customer demand (33% of retailers surveyed) and a lack of maturity in contactless (again, 33% of retailers surveyed).

In other words, retailers are not ready (yet) to invest in contactless and this is confirmed in this survey with 53% of retailers surveyed indicating that they have no plans to accept contactless payments in the future or they saw them as not applicable. This could be because certain survey respondents believe contactless is not relevant for their business, such as where the average transaction value is high. However, contactless is gaining some recognition as a third of respondents plan to invest in contactless by 2014, highlighting that contactless is growing, albeit slowly. Contactless can bring significant benefits to retailers. For instance, one large French supermarket group has indicated that the use of contactless has decreased the time to complete a payment and has provided a 15% time saving on the end-‐to-‐end checkout process.

Figure 7: Why not contactless?

4 The future of retail payments is mobile

The increased penetration of smartphones in developed markets creates new opportunities for retailers. 2012 has seen an explosion in the number of mobile wallets or retail services using smartphone features. This includes mobile wallet pilots or launches such as Google wallet, PayPal, ISIS, PassBook, EasyPay or the development of V.me by Visa or PayPass Wallet by MasterCard.

Retailers have also been active in the development of mobile wallets like in the US with more than a dozen of large retailers, including Walmart and Target, participating in the Merchant Customer Exchange (MCX) initiative. There are also an abundance of mobile apps providing loyalty, retail discounts or added-‐value services such as SavvyShopper,

33% 33% 33% 33%

27%

13%

0% 5% 10% 15% 20% 25% 30% 35%

Expensive implementation

costs

High average

transaction value

Lack of customer demand

Contacltess cards are

not matured yet

No physical POS devices

Lack of contactless

cards

Why do you not accept contactless cards?

76% of retailers surveyed consider mobile payments either important or very important




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RedLaser Milo, FidMe or Shopmium (the list is almost endless). The significant increase in the number of smartphone-‐related initiatives highlights the potential of mobile, and it comes as no surprise, that 76% of retailers surveyed consider mobile payments either important or very important.

Many retailers have developed or intend to develop specific mobile websites or smartphone apps to create a direct relationship with customers. French supermarket Monoprix has launched a multichannel app, which can be used both with computer and mobile to provide customers with a convenient and simple way to do their day-‐to-‐day shopping. The app combines a multichannel approach with, for instance, the possibility to have home-‐delivery or pick up in-‐store and pay directly with a smartphone. Results are very positive as the iPhone app currently accounts for 8%-‐10% of all digital sales. Half of m-‐commerce sales done with the mobile app have been incremental (either new clients or additional sales of existing clients).

Figure 8: The new shopping basket is a smartphone scanner

Mobile payment is definitely a priority for retailers as 82% of retailers surveyed indicated that they currently accept or will accept mobile payments (either remote or proximity payments) in the future. Almost 30% planned to accept mobile payments by the end of 2012 and 53% intend to do so by 2015. Mobile allows different forms of interaction with customers (e.g. push messages, location-‐based offers, barcode/QR scans) and creates the foundation for significant innovation as part of an integrated multichannel strategy.




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Figure 9: Mobile shopping is the future

4.1 The rise of the m-‐wallets

Mobile has become a priority for many stakeholders who perceive the significant size of mobile payments opportunities. 64% of the survey respondents declared that they are planning to launch a mobile wallet (or m-‐wallet) in the next 2-‐3 years compared to only 35% for prepaid cards and less than 10% for co-‐branded cards. This high number shows that the future of retail payments is expected to be mobile and it will likely be an m-‐wallet. Its brand is yet to be determined and this alone will not be a trivial marketing matter to overcome.

Retailers are expected to combine a range of services using the rich functionality of smartphones and payments to generate additional sales and increase conversion rates. For instance, retailers such as Tesco in South Korea and the UK or Carrefour in France have launched virtual stores projecting images of their products complete with their barcodes (or QR codes), effectively converting urban metro stations or airports into a shopping aisle. Commuters can scan barcodes using their smartphone app and complete their daily shopping while waiting for the metro. Another example is PayPal testing window-‐shopping using smartphones in Amsterdam; customers scan barcodes located on shop windows with their smartphone and receive goods at home within 48 hours. These are examples of new use cases created by the mobility and increased functionality of smartphones.

currently accepting or planning to in

2012 29%

by 2013 29%

by 2014 12%

by 2015 12%

No plans to implement mobile

payments 18%

When do you plan to implement mobile payments?




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Figure 10: The M-‐wallet is expected to be the preferred mobile payment method

Retailers need to consider the specificities of smartphones with a reduced screen size and on-‐the-‐go usage to increase sales. Customers could for example start a purchase with a smartphone app and would expect to continue it later regardless of the place they are or the availability of network connection. When it comes to payments, customers are more likely to complete a purchase with 1-‐click payment options (i.e. the m-‐wallet) as opposed to typing all the details required for a card payment. The time and the convenience required to complete a transaction with a smartphone are significant considerations to take into account.

The majority of payments stakeholders are investing in developing m-‐wallets and grabbing a slice of mobile payments. In the EDC Advanced Payments Report, 80% of payments professionals considered that the m-‐wallet would become the preferred tool for mobile payments. The future is very likely to see an increase of m-‐wallet propositions developed by a variety of stakeholders. As with the busting of the dotcom bubble, not all m-‐wallets will survive. Only time will tell.

Three payments professionals out of four indicated that consumers would prefer only one mobile wallet for all their credit and debit cards. This would create a race to become the first m-‐wallet offering on the market but it depends on the value proposition and what is included in mobile wallets.

4.2 Non-‐payments and an integrated multichannel strategy Non-‐payment services before and after the payment can be key to providing relevant and timely information to customers. Store finder, product list, product information and price comparison tools give customers relevant information to plan a purchase. Pre-‐purchase marketing will increase likelihood of generating additional sales. ‘Social marketing’, such as push marketing messages, location-‐based offers and direct interaction with customers creates a new channel of communications using smartphone features (e.g. SMS, in-‐app messages) and can directly influence shopping behaviour.

64%

36%

9% 9%

0% 10% 20% 30% 40% 50% 60% 70%

Mobile wallet Prepaid or gift card

Co-‐branded card Loyalty card

Which new payment methods do you plan to launch in the next 2-‐3 years?

M-‐commerce must encompass the whole purchase process (before, during and after payment) and provide value-‐added services




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Pre-‐payment Services

Pre-‐payment services need to be combined with additional services at the time of payment. For instance, retailers would need to provide a seamless integration of payments with loyalty cards or other coupons to ensure that the customer benefits from appropriate and timely discounts. Marketing messages such as “You have just saved €3 or earned additional 30 miles with this purchase” will provide a positive impression and strengthen brand loyalty. This could also be an opportunity to drive repeat sales by providing limited time marketing offers such as "Buy another product today and receive an additional 15% discount".

Post-‐payment Services

Post-‐payment services also need to be considered such as a digital receipt (SMS, in-‐app, email). PayPal offers the possibility to select another card for a payment made with its wallet, offering the flexibility to customise the choice of payment methods depending on the type or amount of purchase. Other services could be linked to specific purchases: a supermarket could provide recipes based on ingredients purchased, a department store could provide an electronic copy of assembly instructions and warranty for electrical goods, or a do-‐it-‐yourself store could provide advice and tips, via a YouTube video, e.g. how to use the latest power tools. Post-‐purchase services can strengthen brand loyalty and offer additional points-‐of-‐interaction. For instance, a mobile app could provide customers with the possibility to be contacted by a call centre at their preferred time to discuss potential issues after a purchase.

This highlights that the value proposition of m-‐commerce needs to include concrete value-‐added services beyond payment. 95% of payments professionals in the EDC Advanced Payments Report stated that m-‐commerce would be driven by a bundle of value-‐added services including targeted offers and deals, and not just payments. Providing a mobile website or a mobile app with a compelling value proposition is very likely to increase sales.

EDC Perspective: Combining services beyond payments will have a stronger impact. The creation of new services (some of which are yet to be defined) will address specific customer problems and could make a difference in the way customers shop.

4.3 Mobile commerce and social media The rich functionality of smartphones provides an array of possibilities for retailers to interact with customers. The development of new services will create a closer bond between retailers and customers. For instance, customers are likely to receive more appropriate messages based on their location. Retailers will gain additional data to analyse and understand customer behaviour.




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Social media can also help to better define customer patterns. Social networks are powerful engines connecting with a large number of customers with the use, for instance, of viral marketing strategies. The combination of social media and an integrated multichannel strategy provides retailers with the possibility of creating multichannel communications and improving brand perception. For instance, customers could conduct conversations across multiple channels that can stop and start again over hours or days and in a sustained context. Transactional messages or automatically generated notifications could prove to be beneficial. Beyond the message 'I bought something on Amazon or I paid for something online through PayPal', notifications can be the starting points of answers or comments and reflect trends in the way customers shop.

EDC Prospective: A better understanding of customer behaviour will be strengthened if retailers have also developed an integrated multichannel strategy. A multichannel and multi-‐service approach will provide retailers with additional behavioural data and will encourage the smart use of payment information as a valuable tool, helping to improve revenues, engaging customers online, on-‐the-‐go or in-‐store, regardless of their preferred payment method.

5 Other payment trends that might impact retailers

The payments industry is undergoing many structural changes and this could impact retailer’s plans to issue their own payment method (such as a wallet), accept new forms of payments or how they process payments. Some of these changes include the following:

Deployment of new point-‐of-‐sale payment technologies:

¡ Whether it is customer, mobile network operator, retailer or card network initiated, the key to success for a retailer will be to remain flexible in any future investments at the point-‐of-‐sale (POS)

¡ Retailers want a simple and fast payment process. By overhauling the underlying principles of the POS and transforming it into the point-‐of-‐interaction (POI) can be achieved by leveraging technologies such as kiosks, self-‐service checkout, mobile devices for store assistants and personal shoppers

¡ IP connectivity at the Point of Sale (POS), enabling payment cards terminals to provide new value added services (e.g. ability for retailers to see the consumer’s preferences, send electronic receipts, view customer reviews, arrange home delivery, etc.)

¡ Contactless cards to enable faster check-‐out for small ticket purchases




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Emergence of a multitude of new entrants and new payment alternatives at the international level and/or at the national/regional level, especially for the online channel:

¡ At the international level, the major new or existing alternatives include PayPal, Amazon Checkout, Google Wallet, Skrill, etc.

¡ At the domestic level: examples include Buyster and Kwixo in France; iDEAL in the Netherlands; Zappit and Faster Payments in the UK; Giropay and Sofort Banking in Germany; etc.

Surcharging: regulators in many European countries have already enabled retailers to apply surcharging, i.e. the ability for retailers to charge additional fees based on the payment method chosen by the consumer

¡ Travel suppliers such as low cost carriers, theatres and cinemas have adopted this fairly widely

¡ The European Commission’s Customer Rights Directive (CRD) is about to be implemented in national member’s law. It has a clause (Article 19) that will effectively ban excessive retailer surcharging

¡ Article 19 of the CRD will be implemented early 2013 in the UK and the rest of the CRD will be in force across Europe by June 2014. Whether countries who have already banned surcharging, such as France, will adopt the full harmonised CRD remains to be seen

¡ A concern for consumer groups is that the CRD legislation could legitimise surcharging by mainstream retailers. However, EDC believes it is likely to be a turning point for retailers and encourage them to open the door to more alternative forms of payments (online and offline), which are cheaper to process. CRD will allow for retailers to surcharge certain, more expensive, forms of payment (such as credit cards) to encourage a shift in customer behaviour towards the less expensive form of payment (such as a bank transfer)

Payment Services Directive (PSD): Ability for non-‐banks to enter the payments industry more easily (e.g. creation of the status of “Payment Institutions” in Europe that, for instance, enables non-‐banks to become members of MasterCard or Visa)

¡ This legislation (already live since 2009) allows for retailers to process their own payments instead of the acquiring banks and payment services providers or issue debit payment products

¡ This could be an attractive proposition for the larger retailers who are accepting a high volume of transactions and wish to reduce the degree their payments are outsourced to third party payment providers




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6 So where should retailers start?

This study has clearly identified that there are a large number of payments-‐related opportunities that retailers can further explore to general additional sales, reduce costs, enhance profitability and improve the customer experience. So the next question is “where should retailers start?”

EDC would suggest a three-‐step approach.

6.1 Conduct an EDC 360° Payments Diagnostic ¡ It does not need to be a major exercise, but retailers must have a factual

understanding of where they currently stand, i.e. what is currently in place, what is working, what is not working, what is the size of the payments opportunity in terms of incremental revenue and cost reduction?

¡ In EDC’s experience, a 3600 Payments Diagnostic should include collecting not only basic quantitative data (e.g. transaction volumes, actual costs) but also a review of existing payment policies, refunds / cancellation policies, payments-‐related tools and processes, and of the internal organisation

¡ This can be done in less than 4-‐8 weeks depending on whether there is any involvement in issuing payment products and the geographic reach of payment acceptance. The diagnostic sets the basis for identifying and prioritising improvement initiatives, it will appraise your in-‐house payment solutions versus third party payment service providers and other banking relationships

6.2 Develop a payments optimisation plan ¡ Based on the outcome of the above 3600 Payments Diagnostic, retailers will need

to prioritise the list of potential improvement initiatives, which could for instance culminate in the issuance of a request for proposal (RFP) in order to evaluate the most appropriate payment solution partner(s)

¡ Where the 3600 Payments Diagnostic highlights any mobile payment opportunities the EDC Mobile Payments Matrix will provide a framework for retailers to develop new mobile payments solutions, taking into account three key elements:

Mobile proximity payments when considering face-‐to-‐face payments, should it be based on NFC (Near field communication), cloud or QR code (two-‐dimensional matrix barcode) technology. This category also includes mobile phones as POS terminals with solutions, such as Ingenico iSMP, which provides a terminal or device connecting with the smartphone to accept card payments6

6 Payment dongles, such as Square, iZettle or mPowa, for smartphones were not considered to be within the remit of this survey because their primary proposition is not intended for the multichannel retailer

The 360° Payments Diagnostic sets the basis for identifying and prioritising improvement initiatives




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Mobile remote payments when looking at distant mobile payments using the internet or mobile networks to conduct a payment. This would typically include mobile online payments for goods, services and digital content, as well as in-‐app payments to generate additional sales (e.g. 1-‐click ordering)

Value-‐added services providing benefits to customers beyond payments. These services could include location-‐based offers, loyalty or marketing discounts (e.g. integrated loyalty with payments, digital coupons stored on the smartphone, digital gift cards), purchase-‐related services (e.g. in-‐store shopping list, price comparison tools, food recipes, etc.) or direct interaction and social media (e.g. new product release information, 'push' loyalty offers, viral marketing, social marketing, etc.)

¡ The EDC Mobile Payments Matrix allows retailers to consider the different elements of an end-‐to-‐end purchase process and ensure that retailers can consider each of them to develop appropriate solutions and define a comprehensive value proposition. An m-‐commerce strategy must aim to encompass the whole purchase process from a customer's perspective; before payment, during payment and after payment, and dovetail into the retailer’s integrated multichannel strategy

¡ For a revenue increasing initiative this would include setting up the infrastructure for direct prepaid sales, a gift card or a loyalty programme, defining the payment acceptance policy (e.g. which payment methods to accept in which country) for brand.com plus your returns/refunds procedures for each payment method

¡ For a cost reducing initiative this would include reviewing the fraud prevention policies, process and tools, renewing or consolidating the relationships with third party payment providers and banks

¡ In establishing a payments optimisation plan it will take into consideration all the different customer touch points, in-‐store, online, social, and mobility (i.e. not just the mobile device but that it includes all the non-‐payment services that consumers are now expecting – search, product reviews, balance enquiry, loyalty collection/redemption of rewards, servicing, delivery tracking, etc.)

6.3 Establish a programme of on-‐going monitoring and management

¡ Payments within a retailer have always been a hot topic but often they are not given the appropriate senior management attention or executive sponsorship. Payments are strategic and offer a great opportunity for retailers to offer a differentiated, frictionless customer experience

¡ Once the payments-‐related foundation is in place, it is important to have in place the right organisation (e.g. a cross-‐functional ‘payments committee’) and tools (e.g. a payments dashboard with monthly updates on payments-‐related Key Performance Indicators and benchmarks)




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If you are interested in discussing any of these payments-‐related topics, EDC will be pleased to set up an initial conversation to discuss in further detail the learnings from

this study and how retailers can optimise payments.

Contact

Mark Beresford, Head of Retail Practice

e: [email protected]

t: +44 (0)7283 1114

m: +44 (0)7825 027525

EDC's contact in North America: David Poe


EDC's contact in Asia Pacific: Lance Blockley


EDC would like to thank all the UK, French and German retailers for their contribution to this year’s retailer survey, and the many organisations and individuals that provided information and perspectives that collectively form the foundation for this report.

The observations and conclusions in this document are entirely those of EDC and are not intended in any way or form to reflect the views or perspectives of any

individual or retailer.

Copyright © 2012 Edgar, Dunn & Company

All rights reserved. Reproduction by any method or un-‐authorised circulation is strictly prohibited, and is a violation of international copyright law.

Edgar, Dunn & Company (EDC) is an independent global financial services and payments consultancy. Founded in 1978, the firm is widely regarded as a trusted advisor to its clients, providing a full range of strategy consulting services, expertise and market insight.

From offices in Atlanta, Frankfurt, London, Paris, San Francisco, Singapore and Sydney, EDC delivers actionable strategies, measurable results and a unique global perspective for clients in more than 45 countries on six continents.

For more information contact: Mark Beresford Tel: +44 (0) 7283 1114 Email: [email protected]

www.edgardunn.com

Strategy Consultants Specialised in Payments

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