Payments and the Convergence of Physical and Digital Commerce

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“Data is the weapon”

Dan Schulman, AXP

Consensus is that smartphone penetration (now over 65% of US mobile subscribers) will allow digital brands to extend their e-commerce franchises and data-enabled marketing skills to the physical environment. Google, for example, is executing its mission “to organize the world’s information and make it universally accessible” through using public and permissioned data to construct generalized maps that, like online spiders on the web, can be crawled by robots (cars, drones, glasses etc); and, of course, in this virtual reality Google’s skill advantage in data-enabled modeling of human behavior supports its commercial interests.

We believe smartphone penetration will also have the reverse effect: retailers with an analog heritage will mount an “app-and-mortar” challenge to digital brands using real-time, data-enabled marketing of their own. Already, as physical and digital commerce converge around mobile, CMOs have become more intensely focused on digitizing in-store workflows and keeping the resulting data out of the digital common space. The SBUX mobile app, with a core objective of preventing transaction-data leakage into the payments ecosystem, is an early example of this digital enclosure; and the control and protection of data is increasingly shaping physical infrastructure as in the case of the merchants’ payment consortium, MCX, and ChaseNet.

  • Illustrating the mobile, and more broadly “omni-channel”, business case for retailers, WAG reports[1] that customers who use mobile for shopping spend 4x the amount of non-internet walk-ins, and those using both mobile and walgreens.com spend 6x. Meanwhile, in its omni-channel push, WMT plans to match AMZN for online product-range and shipment-speed in 2016.
  • Through digitizing in-store workflows, large retailers will generate transaction data at internet-scale. E-commerce payments are expected to reach $365bn in 2016[2] and, while mobile payments (where a smartphone is used to make an online purchase) will likely be only 10% of this, mobile-influenced offline sales are projected at more than $700bn. WMT notes “the possibility of bringing the web to the store is incredibly disruptive … we have 140mm shoppers in the US and that is internet scale in the offline world”.

In pursuit of app-and-mortar strategies and a customer experience that is, in WMT’s framing, “the digital equivalent of the analog experience in store”, retailers will: (i) digitize in-store workflows; (ii) execute data-enabled, digital marketing campaigns; and (iii) view payments as strategic to marketing given the transaction data it generates and the ability of chip-enabled payments devices to act as marketing media (whether customer interaction is through a screen-enabled payment terminal or a ‘phone). The resulting winners include:

  • PAY and NCR who can support retailers, including banks, in enabling “smart” physical infrastructure to engage wirelessly with customers. The reported launch by AAPL in the iPhone 6[3] of a mobile wallet, capable of in-store navigation coordinated through iBeacons, is a likely catalyst for retailer investment in physical infrastructure as a core element of data strategy.
  • ADS and COF who can support retailers in leveraging data into targeted digital marketing campaigns. There is a secular shift in marketing from generic brand-advertising to digital channels, and a convenience-opportunity to integrate e-coupon redemption into the payments stream (through statement credits in a mag-stripe environment and pay-with-points in a digital environment). Private-label credit card issuers are well-positioned because of their retail partnerships; ADS already has strong momentum and Richard Fairbank, CEO of COF, has described the “huge opportunity to really leverage information”.
  • FIS, VNTV, and ACIW who can help reduce the risk of payments-data leakage by routing transactions directly from retailer to issuer hence by-passing the branded networks. This also saves network fees as noted by ACIW CEO Phil Heasley: “direct routing can create efficiency with issuers paying 0.005 cents/transaction vs. at least 5 cents charged by Visa.”

The integration of payments and marketing will catalyze structural reform in the card business, and a shift in the payments revenue-model from interchange, traditionally paid by retailers to issuers based on network rules, to bilateral deals for sharing the economics of collaborative marketing. The incentive for this collaboration arises from data synergy: retailers have access to the in-basket (i.e. product-level) purchase data of customers, and issuers have access to the away-spend data (albeit only at ticket-level) of customers at other stores. ChaseNet, announced in February 2013, is an early example with Jamie Dimon noting that it allows JPM[4] “to go to merchants and strike our own [deals]”; we expect other large banks to announce direct-routing schemes in 2015.

  • Visa could respond by insisting, as it has in the past (including with litigation settled in its favor in July 2006 against First Data), that transactions acquired on Visa-branded cards must be processed on the Visa-branded network. However, Durbin does not allow this insistence in debit and large banks may migrate card-spending to debit, reversing the recent trend where consumers have increasingly used credit cards for rewards not financing, if Visa resists in credit.
[1] http://analysis.openmobilemedia.com/commerce-brands/navigating-mobile-retail-revolution-part-i

[2] http://www.theatlantic.com/magazine/archive/2014/03/get-ready-to-roboshop/357569/

[3] https://www.theinformation.com/Apple-Mobile-Wallet-Talks-Heat-Up

[4] http://online.wsj.com/news/articles/SB10001424127887324338604578328352611255658

 

Please see our published research for the full note and tables.

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