Payments’ Innovation Half-Year Progress Report

At the start of the year, I wrote a piece that outlined six trends that I suggested would set the agenda for payments innovation and commerce reinvention in 2016. The foundation for those six trends was the ability for innovators to leverage the near ubiquity of mobile devices and the ability to connect those devices – and many others – to the internet.

That, I suggested, would give everyone a blank slate to think cleverly and creatively about how to use software, apps and data to add value to the payments and commerce steam. When combined with a good, hard look in the rearview window at the payments sizzles and fizzles of years gone by, I posited, gave the industry a unique vantage point upon which to ignite the digital payments aspirations that have been pursued for the last seven or so years.

Naturally, given the nature of these trends – which were all pretty big concepts — it was impossible to imagine that any of them would be “one and done” in the space of a year. Rather, I had envisioned them as critical waypoints along the path to creating those new opportunities for customer engagement using payments and commerce.

Since we are (unbelievably) just about at the halfway point in the year, I thought I’d revisit what I said to see how much — or how little — progress has been made in each of these areas.

And whether I should withdraw any of the trends or just give up predicting anything about payments and go lie on a beach.

1. Mobile Apps Kill Countertop Checkout

I said that it was unlikely that we would find ourselves in a store that didn’t have countertop devices of some kind on a merchant’s store counter — this year or probably even in our lifetimes. But what I had suggested was that they would become less relevant, over time, for a growing number of transactions. That trend was based on the ability for mobile devices plus apps to make it possible for “checkout” to happen in the cloud – wherever the consumer happened to be – including well before that consumer stepped inside the store.

We’re making some headway and in some important areas.

Mobile order ahead for pick up in-store is on fire and it’s making the service experience better for the consumer and more operationally efficient for the retailers. We’re seeing this play out increasingly in the QSR sector – a highly competitive sector facing rising labor costs as minimum wage hikes loom in the U.S., and retailers fear customer satisfaction backlash over the move to EMV and the impact on speedy checkout.

Mobile order ahead pacesetters Starbucks and Taco Bell demonstrated the benefit of shifting checkout from in-store to online by putting it, quite literally, in the hands of their customers and transforming the customer experience enormously in the process. Consumers win by avoiding the line, and merchants win by experiencing an increase in the average order value – with fewer staff. Not surprisingly, many more QSRs have climbed on the mobile order ahead bandwagon and seen similar results. Just a few weeks ago, Chick-fil-A became the hottest app in the Apple app store when it added that functionality to its app.

Mobile order ahead doesn’t always require a consumer to step foot inside of the store, but simply enable delivery of something that they might ordinarily have to visit a store to procure. Amazon’s Alexa is enabling order ahead — and same-day delivery, in a very different construct – for a variety of retailers who want to tap into the consumer’s desire for speed and convenience. Walmart is, too. Its recent deal with Uber/Lyft allows consumers to buy groceries online and have them delivered within 2 hours and offers similar benefits. Then there’s UberEATS, which allows people to order meals from restaurants and have them paid for and delivered via the Uber app.

I have a feeling that what we are seeing is just the tip of that mobile order ahead iceberg across all of these use cases.

Large retailers have found success with the mobile order ahead tactic, too. Dubbed BOLPUIS in the retail channel, the ability for a consumer to search, find and buy something online that they can then pick up within a 2-hour window at the store has paid big dividends for those who enable it. Target, one of the early adopters of BOLPUIS, said that the demand from consumers to buy online and pick up in-store increased by 60 percent in 2015 and by 50 percent so faster in 2016. While not without its operational and logistical pain points, retailers find any pain well worth the gain since a large fraction of consumers buy more things when they get to the store to pick up the goods they ordered online.

“Mobile order ahead” is also at the heart of how pay-at-the-pump is being reinvented. Cumberland Farms and Zipline are among the early pioneers, with Cumberland Farms surpassing $1 billion in transaction volume last year with its Smart Pay app which lets consumers essentially buy online and fill up at the pump without interacting with the terminal on the pump itself. Chase Pay’s deal with Shell is said to enable something similar later this year.

An interesting and potentially transformative development though – and the one I am most jazzed about — is the ability for a consumer to use the same digital payments method across every channel they shop, regardless of the device they are using to enable payment. In some cases, consumers won’t even have to physically interact with a terminal to enable in-store checkout.

In January, Walmart announced that Walmart Pay would be its cross platform/cross channel/cross payment tender mobile payments application using its Walmart.com app to enable checkout in-store. Any consumer with any phone can enable this checkout experience, provided they download the Walmart.com app. Since January, we’ve seen Walmart Pay expand nationally. Chase Pay’s cross-platform/cross-channel app, when it launches later this fall, will offer a similar experience for its 94 million Chase cardholders. Apple Pay, as much excitement as there was last week for its move to the web in order to enable that same thing, I don’t think will check that box given its limitations on browsers and devices.)

What we are starting to see everyone across the ecosystem realize is that consumers today are equipped with checkout devices – their mobile phones – that offer more power, utility and value than any terminal on a countertop ever could. Terminals are about enabling a payment – securely – but not much more. Mobile devices and apps can do that, plus offer consumers and merchants a whole lot more value (and even security) before, during and after the checkout experience.

2. Faster Payments Won’t Just Be About Speed

At the start of the year, the narrative around a new set of payments rails in the U.S. was all about the need for speed. Every mandated faster payments initiative worldwide was predicated on the need for speed — not just faster but in real time. The U.S. was challenged to step up to keep up.

As a result, a number of proposals and propositions were put forward. Banks were being asked to contemplate and invest in a variety of initiatives all designed to make money between parties move faster and settlement and posting to happen in real-time. The Fed’s Task Force on the topic was named the “Faster Payments” and the use cases for faster payments were narrowly, in the opinion of many, focused on the consumer and business exceptions and not the rule – final paychecks to terminated employees, P2P and real-time bill payment to avert service interruptions.

And as the year progressed, corporates began to question the need for “real-time” given that the accounting systems they managed remain, by and large, a batch which makes real-time a relatively moot point.

Since January, the narrative has started to shift albeit slowly, and I think in a much more positive way. While there remains a debate over how fast is fast enough and whether real-time is what is really needed, no one disagrees that banking rails could be better. They are old, and modern day technologies could make payments better and more efficient. That could mean faster, maybe it could mean slower, but it also probably more than anything means that they could be more intelligent with rules that travel with the payment.

We’ll see later in the year where we end up as new proposals wind their way into the beta tests and pilots. But it’s encouraging that we are starting to stage the right set of conversations since they will ultimately focus everyone on a solution that makes payments potentially better – and not just faster – for everyone.

3. Contextualized Commerce Will Redefine Impulse Buying And Payments Innovation

I suggested in January that just sticking buy buttons inside of the places where consumers search for the stuff that they might want to buy was missing a much bigger opportunity. That opportunity, I said, was to engage the customer where there was an actual intent to buy. I think we are starting to see the stage set for this in a very material way.

For instance, I was scanning my Yummly app to find something yummy to make for Father’s Day, and I was prompted to build a grocery list to buy anything I needed for the recipe but didn’t have in my pantry. Instacart would have delivered it in an hour. If I was missing an ingredient, I would have done just that. (OK, honestly, I would have made Dad make a run to the store — after all isn’t that what they are there for?)

Messenger is using bots to bring commerce inside of its messaging app where consumers are responding to friends and could be prompted to take an action, including ordering an Uber to meet them for a drink after work.

Apple’s iOS 10 will do the same thing, and even gives users the ability to make a reservation on OpenTable inside of iMessage. Snapchat is hosting shoppable ads inside of Cosmopolitan’s content on the app. Uber is making third-party content available through its app, and letting Hilton Honors members check in remotely on their way to the hotel, book a ride when a restaurant reservation is made via Zomato – and probably in the not-too-distant future, order room service from the hotel and even book spa services. Venmo has added payment inside of the app to enable purchases, and with its social features, probably inspire others to follow suit – not just pitch in to pay their fair share.

Amazon continues to expand the number of Dash buttons so that consumers can order stuff when they see they are running low on an item where they also use it. Samsung’s smart refrigerators show consumers what’s inside the fridge and therefore what they might want need to replenish as they see supplies run low.

Contextual commerce has tremendous potential to drive commerce, even impulse purchases, by tapping consumers when the intent to buy is very strong. Yet none of these commerce opportunities are possible without an expedient way to pay. Digital credentials will be critical to making contextual commerce a reality – since without it no consumer will be patient enough to go to the trouble.

4. Online Friction Will Increasingly Drive Consumers Into Amazon’s Retail Arms, Unless …

Unfortunately, we have a lot of work to do here.

Our latest Checkout Conversion Index published last week shows that some improvement has been made this quarter over last, but not enough. Even though a few more of the 650 sites we shop each quarter got an “A” grade, where an “A” is a 70 and above (yes, we graded on a heavy curve), the vast majority — more than 635 merchants — failed to capitalize on the opportunity that digital commerce presents. More surprising, large retailers fare no better than the smaller ones in moving shoppers from their virtual front doors and out again with a purchase in hand, an observation that we attribute to four big blind spots that have diverted their time and attention over the last few years.

These blind spots hurt large retail in a number of ways.

They obviously make it hard for retailers to capture their share of the $162 billion in lost sales that we estimate that underperforming merchants miss when they fail to convert shoppers to buyers.

These blind spots also risk alienating those consumers – and losing that sales opportunity – forever. There are 10 best practices that the best in class from our Index have – from offering express checkout to making offers and promotions more transparent to getting consumers in and out in less than 70 seconds – that make the difference between an abandoned cart and a sale.

These blind spots also crater investor confidence. When investors don’t see the growth they expect in a channel that they know will define the future of retail, and when that lack of growth is accompanied by a decline in physical store sales, stock prices take a walloping.

And their customers? Well, they’re just as content not to buy, or to buy from someone who can offer a better experience. That could be an online merchant with express checkout enabled via PayPal or Visa Checkout or MasterPass. Or it could be from Amazon who’s slowly and steadily expanding both its retail payments footprint off Amazon and marketplace selection through interesting new retail partnerships.

Now, eCommerce is still a small part of overall commerce – 10 percent is what most sources agree is a credible number, but it’s growing and physical store sales are declining. Forty percent of U.S. consumers surveyed last year say that they bought something online and 75 percent of them said that they access the web via mobile device. It doesn’t take much to move up the Conversion Index. But it does take focus and a realization that there’s a problem to be fixed.

Psst, retailers, there’s a problem to be fixed.

5. Loyalty Will Become Payment’s Killer App

Maybe this is a work in progress or maybe it’s just an opportunity yet to be activated, but it will take a big shift in thinking to realize the potential that I believe this trend portends for the payments, retail and commerce community.

And while I have seen glimmers of that shift, it still appears to be a heavy lift.

First, the glimmers. We’re starting to come to grips with the realization that what we have been hawking to consumers – a mobile wallet – isn’t what they really want. Consumers aren’t all that excited about an app that is a branded container inside of which they have to stick the things that they might want to use at checkout and/or while shopping.

That’s too much like work.

What they’d like instead is a digital credential that’s smart enough to do all of that for them, a digital credential that they can use at the places that they like to shop: on and offline. Maybe even one that remembers the last card used in that store, or knows that they are a loyalty club member and applies relevant discounts at checkout.

That’s magic.

Until a few years ago, the focus for most of the players with digital payments offerings has been to create “containers.” We saw a bit of a pivot a year or so ago when the focus was instead on “buy buttons” — digital acceptance marks that signaled to the consumer that a particular method of branded payment was available for them to use at that site, and that a quick checkout experience could be expected.

More recently, we’ve seen an emphasis on digital accounts and credentials that make transacting online more than just an acceptance mark.

Starbucks customers know that payments and loyalty are inextricably linked and redeemed when earned. A consumer’s PayPal account can enable a payment where accepted plus offer transactional credit and apply offers and discounts. Walmart Pay tracks Savings Catcher balances and unused gift cards and prompts consumers to redeem if they so choose. Visa’s recent Digital Commerce App announcement will enable issuers to extend issuer-branded credentials to consumers that they can use to manage their card accounts and, as part of Visa Checkout, enable payment online where Visa Checkout is available – and given its broader commerce capabilities, likely in the future integrated offers and rewards.

Online acceptance obviously remains as the last mile that each of these players has to run in order to make any digital commerce experience possible. That’s the race to watch, one that might be decided longer term by who can enable this experience in the most meaningful way for the consumer and the merchant.

6. Consolidation Will Shift Payments’ Balance Of Power

There have been a few big consolidations so far this year as players across the ecosystem look to enhance their respective integrated merchant solutions and/or cross-border payments capabilities (e.g. ACI/Pay.On, TSYS/TransFirst, Global Payments/Heartland, Amazon/Emvantage), or expand their capabilities in the niche they serve (e.g. PayNearMe and Prism and Payoneer and Armor Payments).

But perhaps the most interesting consolidations – at least so far – that have some bearing on the ecosystem’s balance of power are only these three: the death of MCX, the bankruptcy of Powa and the acquisition of Demandware by Salesforce.

The death of MCX – boy, that sure wasn’t a surprise – was the latest in a long and expensive series of moves to oust the existing card networks (remember, that was what Softcard wanted to do, too, in the beginning). The expensive lesson learned is the need to solve a problem for a stakeholder that drives the revenue line, and not the cost line. MCX, was just another middleman in the payments stream – a different one that at the start was positioned as merchant-centric – but a middleman nonetheless.

Powa’s knockout punch is a telltale that the consolidation of the very large and very fragmented mPOS ecosystem may be starting. We track more than 200 of them every month in the mPOS tracker. Consolidation and acquisition is inevitable.

Salesforce and Demandware show the power of commerce embedded into software. Demandware’s retail stronghold, when paired with Salesforce’s cloud-based CRM and marketing capabilities, has the potential to recast the balance of power in the retail eCommerce vertical.

But hold on, perhaps the most disruptive plays have yet to be made — we still have six more months, after all.

Now, I do observe that some of these trends are moving so slowly we’ll probably be talking about them next year, and next year and so on. But I’m not going to withdraw any of them and will also be adding a few more to my list in the coming weeks. And as much as I’d like to go lie on a beach and focus on payments only when I pay for my margarita, I think I’ll stick around to see how they all play out.