The Evolving World of eCommerce Payments
Since the first eCommerce transaction in 1994, eCommerce has grown rapidly, impacting the way we shop today and leading to the formation of a whole new industry of eCommerce businesses and support services. Global eCommerce reached $1.9 trn in 2016, and is poised to grow at ~19% CAGR up to 2020¹.
Advances in technology have led to the proliferation of alternative payments methods, which are making financial interactions easy, quick and secure. Examples include Ideal, Sofort, PayPal, and Klarna. According to Worldpay, there are over 300 different types of payment methods used in eCommerce.
The Challenge—a fragmented market unsuited to merchant needs
Traditional merchant acquiring is physical—with POS and PEDs (pin entry devices) in shops—and it is also local. Traditional merchant acquirers have been slow to develop or acquire their own digital capability, or if they have a payment gateway, it is typically separate to their core POS services with little integration. However, to tap the full potential of global eCommerce and mCommerce, acquirers need to support a single, seamless, multi-channel, multi-payment type, multi-country payment service across the full payment value chain, to support all the payment needs of their merchants and their merchant’s customers.
There are few if any payment service providers who can do this on a truly global basis. As a result, payment companies are focussed on M&A and partnerships to acquire country and technology capability, and to invest in new technology and new business models.
Strategic actions to provide a full, global, multi-channel payments service
Across the eCommerce value chain organisations include merchants, payment gateways, merchant acquirers, processors, payment networks and issuers of payment instruments. Each faces difficulties in creating a global payment strategy due to the diversity of requirements on the demand side and fragmentation of capabilities on the supply side.
For merchants, payments have become strategic. M&A and tactical initiatives in the past have often led to the use of different gateways and merchant acquirers by different parts of the business. This combined with ageing POS estates and new regulation such as PSD2 presents an opportunity for merchants to rationalize and consolidate their payment providers, and seek improved analytics and other payment capabilities.
For payment gateways, defining their target markets is critical in terms of geographies and merchant segments. Key strategic considerations include whether to go to market direct-to-merchant or through merchant acquirers; the alternative payment methods to support (typically, only a small number are used in a particular geography, despite over 300 globally); the provision of POS services, to enable merchants to operate seamlessly with online; and the network of merchant acquirers they support.
For merchant acquirers, building an integrated POS and eCommerce capability is paramount. Merchant acquiring is still mainly a domestic business, due to the physical nature of selling, implementing and maintaining a POS network, but as eCommerce grows, as merchants become cross-border businesses and consumers become international (e.g. tourists and expats from China), merchant acquirers need to determine their cross-border and eCommerce strategies carefully.
Processors, networks and issuer businesses are dominated by cards. However, the alternative payment methods to cards are emerging rapidly, with strong adoption in eCommerce, which itself is displacing POS retail sales. Processors, networks, and issuers need to set strategies that capture alternative payment volumes and which reposition their cards business for digital commerce.
Setting a payment strategy for eCommerce is critical. The business of retail is undergoing a seismic shift to eCommerce, substituting in-store for digital purchases and generating complex consumer interactions that cross both channels, with significant implications and opportunities for the business models of all organizations in the value chain. As these implications play out, it will be exciting to see how eCommerce players navigate through these dynamic times.
Originally released on Accenture Banking Blog, June 7th, 2017, http://bankingblog.accenture.com. Jeremy Light is the Managing Director of Accenture Payment Services in Europe, Africa, and Latin America.
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