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© Edgar, Dunn & Company 2012 Ten trends in retailing in the next ten years and their impact on consumer payments A thought leadership paper from Edgar, Dunn & Company supported by ACI Worldwide December 2012
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© Edgar, Dunn & Company 2012

Ten trends in retailing in the next ten years and their impact

on consumer payments

A thought leadership paper from Edgar, Dunn & Company supported by ACI Worldwide

December 2012

Ten trends in retailing in the next ten years

Contents

Confidential

Page i

Contents

Introduction ............................................................................................................................ 1

Ten Trends .............................................................................................................................. 2

1 Simplification ................................................................................................................... 2 1.1 Payment transactions will be simplified at the point of interaction ................... 2 1.2 The impact of simplification .................................................................................. 2

2 Alternative Payments ...................................................................................................... 3 2.1 The convergence of traditional and alternative payments ................................. 3 2.2 The impact of alternative payments ..................................................................... 3

3 Social Commerce ............................................................................................................. 4 3.1 The road to genuine consumer engagement ....................................................... 4 3.2 The impact of social commerce ............................................................................ 4

4 Location-Based Services .................................................................................................. 5 4.1 Are we there yet? ................................................................................................... 5 4.2 The impact of location-based services .................................................................. 5

5 Multichannel .................................................................................................................... 6 5.1 A unified approach to customer service ............................................................... 6 5.2 The impact of multichannel ................................................................................... 6

6 Merchant Diversification ................................................................................................. 7 6.1 The price of convenience....................................................................................... 7 6.2 The impact of merchant diversification ................................................................ 7

7 Self Service ....................................................................................................................... 7 7.1 Helping customers help themselves ..................................................................... 7 7.2 The impact of self service ...................................................................................... 8

8 Cashless Payments .......................................................................................................... 8 8.1 The death of cash? Probably not ........................................................................... 8 8.2 The impact of cashless payments ......................................................................... 8

9 m-Commerce.................................................................................................................... 8 9.1 The Point of interaction will be mobile ................................................................. 8 9.2 The impact of m-commerce .................................................................................. 9

10 Loyalty .............................................................................................................................. 9 10.1 Personalising the shopping experience ............................................................. 9 10.2 The impact of loyalty .......................................................................................... 10

Conclusion ..............................................................................................................................11

ACI response ......................................................................................................................... 12

Glossary ................................................................................................................................. 13

About the authors ................................................................................................................ 14

Ten trends in retailing in the next ten years

Introduction

Confidential

Page 1

Introduction

Since the 1960s, traditional retail marketing theory has been based on the four 'pillars',

or ‘The Four Ps’: Product, Price, Place and Promotion. However, taken in isolation,

these pillars are a remnant of a different world – one where the marketers and the

retailers were king. In today's world, the consumer has come to the fore, and retail

strategy must become a consumer-oriented model, rather than a retailer-oriented one.

Edgar, Dunn & Company (EDC) believes that two new factors will move to the

foreground of any successful retail strategy:

Consumer preference – the focus of retail strategy has shifted to satisfying

consumer needs, and retail strategies should be built with the consumer at the

centre: obtain a single customer view through aligning data across sales channels,

optimise payments (both acceptance and process), and create a seamless shopping

experience designed around consumers' preferences.

Technology – over the past few years, rapid consumer adoption of emerging

technologies has facilitated changes in shopping behaviour. From mobile commerce

and self service to social media, both retailers and consumers have had to adapt to

the new ways in which they interact with each other.

Working in concert, these two factors will drive emerging retail trends over the next ten

years. Driven by consumer preferences, technology is facilitating significant changes in

the retail landscape – from enabling new sales channels, driving social interaction and

giving access to new customer analytics, to providing consumers with entirely new

ways to interact and ultimately, transact with a retailer.

EDC has found that successful retailers place the consumer at the centre of their retail

strategy in order to enhance the customer experience and provide greater speed and

convenience of service. A content-rich customer experience has become the norm in

online retailing; EDC expects that this will transcend into the physical retail

environment, creating a future where m-commerce, e-commerce and in store shopping

become a single integrated shopping experience.

This paper presents ten trends that EDC believes will significantly impact the retail

industry over the next ten years and their effects on consumer payments.

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 2

Ten Trends

1 Simplification

1.1 Payment transactions will be simplified at the point of interaction

Payment is often viewed as merely the concluding step in the purchasing process, i.e.

the closure of the sale. The payment experience should be at the heart of an integrated

retail strategy. Customer payment preferences have evolved and EDC sees potential for

a major divergence between what a retailer does and what a customer wants from their

payment experience.

EDC's client experience demonstrates that in a complex, multichannel retail

environment 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. Part of this is that retailers

must better understand the customer's point of view on the payment process,

recognise his/her pain points and identify areas of improvement.

With a growing mix of payment methods to accept, no clear winner can be predicted in

terms of universal adoption. 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 will want a simple and fast

payment process, overhauling the underlying principles of the POS and transforming it

into the point of interaction (POI)1.

EDC has found that retailers are keen on using the POI to simplify the customer

experience, as well as improving cost efficiency. Retailers are also being forced to

mirror this simplification in their back-office operations (e.g. reconciliation and banking

arrangements).

1.2 The impact of simplification

EDC believes the POI will represent a point of convergence for different forms of

payment, such as smartphone initiated payments, electronic couponing, loyalty and

contactless payments. In this environment, mobile POS devices will enable customers

to finalise their purchase, irrespective of where they are in the store. Consumers expect

a quick and easy checkout experience and want to avoid the traditional long lines in

store and the complicated online checkouts associated with a retail shopping

experience.

1 See Glossary

Is your point of interaction optimised for a frictionless customer experience?

The point of interaction represents an opportunity for retailers to simplify both front and back-end payment processes

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 3

2 Alternative Payments

2.1 The convergence of traditional and alternative payments

There is a huge amount of discussion surrounding the future of 'the way we pay', often

centred on the popularity of alternative payments and if or when they will overtake or

even replace existing dominant payment methods such as cash and cards. However,

both alternative and traditional payment methods have their own distinct advantages:

Alternative payment methods

Cost of transaction – for merchants, the cost involved in a transaction can be lower;

as some alternative payment providers do not levy a fee that is commonly based on

a percentage of the transaction amount; in many cases they also avoid the services

of third-party acquiring banks and the fees associated with them.

Customer convenience – because it typically only requires a unique identifier the

information entered when using alternative payments is often less time-consuming

than that associated with traditional payment methods. Alongside this, the payment

experience will become more integrated as consumers combine payment with other

aspects of their transaction (e.g. a loyalty card).

Traditional payment methods

There are several stakeholders in the card payments value chain (acquirers, issuers,

processors, etc.) that all play important roles in risk management.

Building new, alternative systems takes time, especially from a risk and

governance perspective and many current alternative payment methods lack this

level of oversight, which is often perceived as critical to enforcing security,

adjudicating disputes and assessing liability.

The current card payment acceptance network is unrivalled by existing alternative

payment platforms.

2.2 The impact of alternative payments

Currently, alternative payments exist primarily in the online channel. As alternative

payments gain popularity and become more commonly accepted, EDC expects to see

alternative payment methods at the physical POS, offering consumers increased choice

at checkout. An example of this trend is PayPal's recent entry into payments in store at

the POS, which allows consumers to pay either by using a PayPal Access Card connected

to their account, or, entering their phone number and PIN at the POS terminal.

Are the different forms of payment you accept today appropriate for future consumer needs?

Traditional and alternative payments will co-exist in the same channels

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 4

3 Social Commerce

3.1 The road to genuine consumer engagement

Social networking is the most popular online activity; more than 82 percent of the

world's online population engage in social networking2. Social commerce has always

existed in the form of individuals making recommendations to friends and family, and

word of mouth is still the most trusted form of advertising – this is directly mirrored in

the digital world. 40 percent of Twitter users regularly search for products or services

(via Twitter) and 77 percent of online shoppers use reviews and ratings before making a

purchase.3

Many retailers are struggling to successfully address social commerce, commonly falling

into the trap of simply recreating their existing web stores on a social platform. Social

commerce does not necessarily have to be through a social network; it starts with the

addition of customer reviews and other user-generated content. In order to take

advantage of this growing trend retailers need to design the experience around the

consumer, taking advantage of all the available tools.

Benefits of social commerce

Sales uplift – social engagement can lead to significant increases in conversion rates,

average order values, and repeat business.

Increase brand engagement and loyalty – social commerce gives consumers greater

opportunity to interact directly with the brand, potentially building natural and

lasting affinity.

3.2 The impact of social commerce

The full impact of social commerce is still to be determined, however, it is likely that we

will see some more immediate implications on consumer payments:

Loyalty – will be key to successful social commerce, and retailers need to take

advantage of the affinity social commerce builds between consumers and brand, as

well as to each other. Loyalty programmes are now being designed that reward

consumers not just for the business they directly bring to the retailer but for their

advocacy of that brand.

m-Commerce – social commerce will drive m-commerce. Smartphone users who

engage in social media through their devices are among the most avid mobile

shoppers.

2 ComScore 3 Juniper Research

Are your consumer touch points integrated into the social commerce channel?

Social commerce has the potential to dramatically increase brand engagement

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 5

4 Location-Based Services

4.1 Are we there yet?

In their simplest form location-based services provide the ability to track someone's

exact location, through a mobile device. Although there are several variations on the

technology and process used, from a retailer point of view location-based services allow

retailers to 'find' customers when they are in close proximity to their stores and deliver

targeted marketing messages.

Almost one fifth (19 percent) of the world's mobile users already use location-based

services, with a further 62 percent indicating that they would like to do so in the future.

Users of location-based services are realising that there is something to be gained from

sharing their locations; 12.5 percent already share their location in exchange for special

offers and discounts. A further 21 percent of mobile users say that they find mobile

advertising interesting to them if it offers a deal close to their current location.4

Consumer engagement with location-based services is experiencing impressive growth,

and retailers will turn their attention to the potential benefits of integrating such

services with their marketing strategies, such as:

Drive traffic in store – by providing incentives and helping consumers locate their

nearest store, retailers have an opportunity to drive consumers into stores using

location-based services.

Build customer loyalty – location-based services represent a new point of contact

with which to build brand engagement and present new ways to engage with and

retain key audiences.

4.2 The impact of location-based services

For the most part, location-based services are delivered through a mobile device and

present a clear opportunity to drive uptake in mobile payments. Mobile wallet services

are increasingly being paired with location-based offers, such as the combination of

Google Wallet and Google Offers.

As this trend continues, we will see an increasing number of location-based offers used

in conjunction with mobile wallets and payments. EDC expects that retailers will

combine payments with location-based services and achieved by either as a remote

(cloud-based wallet) technology or through a Near Field Communication (NFC)

proximity technology.

4 TNS Global

Will your business be ready to proactively locate and engage consumers with relevant information?

Location-based services will drive consumers in store

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 6

5 Multichannel

5.1 A unified approach to customer service

Developing an integrated multichannel strategy (sometimes referred to as omni-

channel) can be the key to a differentiated shopping experience for customers and lead

to sales growth for retailers. Truly multichannel retailers need to integrate processes,

procedures, customer data and operations across all channels.

Multiple channel strategy vs. integrated multichannel strategy

There is a substantial difference between retailers operating 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.

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.

Benefits of an integrated multichannel strategy

A successful integrated multichannel strategy provides improved and actionable

customer information, which if used correctly, improves customer satisfaction and

loyalty and increases sales.

5.2 The impact of multichannel

As this trend continues, retailers should position the customer’s payment experience

and preferences at the centre of an integrated multichannel strategy. This will include

measures such as:

Optimised payment methods – payment methods must satisfy two major criteria: (1)

meet consumer preferences, both with traditional payment methods and newer,

alternative payment methods and (2) reduce the risks and costs to the retailer that

are associated with cash and non-cash forms of payment.

Optimised payments technology – EDC recommends that retailers start thinking

about payment acceptance as something that has the potential to differentiate the

shopping experience.

Customer payment process – the customer payment process is at the heart of an

integrated multichannel strategy and customer experience is key to a smooth

payment process.

Can you identify your multichannel consumers that spend more, influence others and exhibit stronger loyalty?

An integrated multichannel strategy will unify the customer experience

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 7

6 Merchant Diversification

6.1 The price of convenience

The 'death of the high street' and the 'death of independents' are topics that have been

debated hotly over the past decade. The reasons for any decline are diverse. The

global recession in combination with the increase in out-of-town retail, the growth of

online retailing, the advent of mobile retailing, the speed and sophistication offered by

the major national and international retailers have all conspired to change today's retail

landscape.

The most important lesson to take away from these trends is not the impact it is having

on the high street, but the obvious changes in consumer preferences that are driving

them. Supermarkets, often cited as a major driving force behind this trend, are

diversifying their product offerings and expanding into smaller store formats. They are

delivering highly convenient, needs-based retailing that addresses current consumer

preferences.

EDC expects consumer preferences to continue to evolve in this direction, prioritising

convenience, value and a seamless experience when they shop.

6.2 The impact of merchant diversification

As retailers adapt to evolving consumer preferences emphasis should be placed on

supporting the different payment environments that will facilitate the best consumer

experience. Self service checkout, click and collect, and contactless payments will

become standard practice in many retail outlets and will be supported by huge growth

in both the acceptance and use of mobile payments.

7 Self Service

7.1 Helping customers help themselves

The retail industry is at the forefront of self-service technology, with no shortage of

companies attempting to improve the retail experience and consequently sales through

the implementation of kiosk, tablet and smartphone self-service technologies.

The implementation of self-service at the retail POS is a trend that will soon experience

explosive growth. Although less than 5 percent of POS terminals are currently (2012)

self service, EDC expects self service to account for 20 percent of all POS terminals by

2022. Some stores will operate at rates of 90 to 100 percent self service, allowing them

to redirect staff to improve the consumer experience elsewhere.

Does your retail strategy address the changing landscape of consumer preferences?

What type of checkout do you want your customers to experience?

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 8

7.2 The impact of self service

Self service needs to be supported by appropriate payment method acceptance; it is

imperative that all relevant payment methods are accepted at the self-service checkout.

The use and acceptance of contactless payments will be driven by the expansion of self-

service checkouts, which represent an ideal convergence of technology. Contactless is

used primarily for low-value transactions and self service is most often associated with

small baskets. We will see contactless payments become standard for these terminals.

8 Cashless Payments

8.1 The death of cash? Probably not

The way shoppers pay has been constantly evolving, from the rise of transactional

accounts to the advent of the credit card and later the debit card, people today have

more payment options at their disposal than at any other point in history. Throughout

this change cash has remained the dominant payment method, despite the availability

of 'convenient' cashless alternatives, with 90 percent of all payment transactions

worldwide (85 percent in Europe) still being conducted with cash5. In fact, the use of

cash around the world has steadily been increasing at a rate exceeding that of GDP

growth. Cash is currently more popular than ever, and its popularity has been fuelled by

the recent economic downturn experienced worldwide.

8.2 The impact of cashless payments

Cash will remain the dominant payment method, although we will see newer

technologies driven by changing consumer preferences. These will include mobile and

contactless payments, which will facilitate the migration of cash transactions to

electronic transactions, albeit gradually.

9 m-Commerce

9.1 The Point of interaction will be mobile

With the rapid increase of smartphone and tablet penetration, m-commerce is moving

much closer to becoming a mainstream reality.

5 Crane Payment Solutions

Smartphone ‘scan as you shop’ is rapidly winning grocery customers

Can you operate without accepting cash?

Cash will continue to be the dominant method of payment

Does your business payment strategy include mobile?

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 9

Smartphone Penetration6

Smartphone penetration is increasing rapidly

in both Europe and the US and is overtaking

that of feature phones for the first time.

In Europe, currently less than four percent of

mobile users are 'buyers', equating to

roughly €4 billion. By 2017 buyers are

expected to be worth €19.2 billion and

represent 30 percent of mobile users7.

EDC expects that NFC will be a driving force in the expansion of mobile payments. By

2016, it is expected that there will be more than 600 million NFC mobile wallet users,

which will facilitate more than $75 billion in mobile payments8.

9.2 The impact of m-commerce

Mobile devices will become the preferred access point to the internet, which will

coincide with a marked shift towards mobile payments being one of, if not the primary,

e-commerce channel. NFC-ready POS terminals will enter mainstream deployment over

the next few years, from 3.9 million in 2011, to more than 40 million by 2017. This will

result in more than 50 percent of all terminals being NFC ready.9

10 Loyalty

10.1 Personalising the shopping experience

In the retail sector, customer transactions (both online and offline), conversations and

intentions can all be brought together by the retailer to improve the customer shopping

experience. This information is collectively referred to as ‘Big Data’.

Big Data is currently making waves in the loyalty world; however, understanding of the

term is inconstant, which is not helped by the vague terminology. Big Data refers to

both structured and unstructured data:

6 ComScore; EDC 7 Forrester Research; EDC 8 ABI Research 9 Berg Insight

Mobile devices are fast becoming the primary access point to the internet

Can you turn your data into actionable information to enhance the experience for your most valuable customers?

50%

51%

42%

27%

22%

31%

USA

UK

EU5

2010 2012

Ten trends in retailing in the next ten years

Ten Trends

Confidential

Page 10

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, comprising primarily of social media

interactions.

If effectively used Big Data gives retailers the power to improve efficiency and provides

a more responsive and personalised shopping experience.

10.2 The impact of loyalty

The move from paper to digital form factor for loyalty is almost complete, which has led

to a vast increase in the amount of structured and unstructured data being held.

Retailers have the ability to use this data, through loyalty and payments, to engage with

customers as individuals.

Retailers will be able to recognise a valued customer regardless of the payment type.

Combining data collated from both structured and unstructured sources, including

social media, can help deliver a far more personalised shopping experience.

In EDC’s experience unstructured data is currently less of a focus for retailers, who

already face a challenge in making productive use of the amount of structured data they

collect.

Effective use of data gives retailers the power to truly personalise the shopping experience

Ten trends in retailing in the next ten years

Conclusion

Confidential

Page 11

Conclusion

Retail is a constantly evolving marketplace, driven by rapidly changing consumer

preferences. Facilitated by the latest technology, today’s consumers will drive change

in the retail experience as they shop. With instant access to product details, reviews

and recommendations from social media, price-comparison sites and increasingly

competitive options, the balance of power has shifted further towards the consumer.

Retailers are investing in technology to create a seamless shopping experience across

channels, be it online, in store, through a mobile device or through new yet-to-be-

defined channels. Retailers need to take advantage of the wealth of structured and

unstructured data at their fingertips, quickly adapt to emerging trends, and deliver a

seamless shopping experience across all channels.

Providing a positive customer experience is key to a successful retail strategy: a good

customer experience drives purchases and improves retention.

Ten trends in retailing in the next ten years

ACI response

Confidential

Page 12

ACI response

A vital element of good customer experience, and therefore key to successful retailing,

is that the customer feels he/she has been treated as an individual. This psychological

driver underpins both the older generation’s fond memories of grocers who knew their

customers by name, as well as the new generation’s fascination with alternative

payments and the ability to transact when, and where and with whom their individual

preferences lead them.

Even though the payment token has evolved – from magnetic stripe through chip to

contactless – the card itself is giving way to alternative forms of payment, the

fundamental aspects of electronic funds transfer remain unchanged. Availability,

responsiveness, security, integrity, authenticity and traceability all remain critical.

ACI Worldwide's extensive experience in the payments industry translates into future-

proof design and failsafe construction of systems to support new types of payment.

ACI foresees these systems being developed incrementally, sometimes re-using parts of

existing payments infrastructure, sometimes complementing it. In either case, its deep

knowledge of today’s infrastructure stands ACI and its customers in good stead.

Ten trends in retailing in the next ten years

Glossary

Confidential

Page 13

Glossary

Alternative payment methods: Typically designed for the ecommerce environment but

also covers domestic schemes from the perspective of an international merchant (e.g. a

US based airline selling tickets in Germany would want to accept ELV payments,

Elektronisches Lastschrift Verfahren).

Contactless card: Contactless payment cards use RFID to facilitate secure payments. No

PIN is required for a contactless card transaction if it is under the agreed threshold,

which varies by country.

NFC payment: Near Field Communication (NFC) is a short-range wireless technology

that enables communication between devices over a distance of less than 10cm. NFC

can be used for card emulation, and although using a different technology to

contactless cards, NFC devices can behave like a contactless card for use in either closed

payment systems or open banking payment systems such Visa, MasterCard or American

Express.

Point of interaction (POI): The point of interaction represents a point of convergence

for different forms of payments, marketing information and customer service. EDC's

view is that retailers will utilise the POI as a means of interacting with consumers in a

variety of different ways, such as mobile wallets, social media, multimedia (e.g. kiosks)

and loyalty programmes.

Traditional payment methods (paper): This includes cash and cheques, which are

typically only accepted offline, however, there are methods that facilitate the

acceptance of cash online e.g. UKash.

Traditional payment methods (plastic): This includes internationally branded payment

cards e.g. Visa/MasterCard/American Express. From a domestic retailer’s point of view

traditional payment methods would also include domestic card schemes.

Ten trends in retailing in the next ten years

About the authors

Confidential

Page 14

About the authors

Edgar, Dunn & Company (EDC)

Edgar, Dunn & Company 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.

ACI Worldwide

ACI Worldwide powers electronic payments and banking for more than 1,650 financial

institutions, retailers and processors around the world. ACI software enables $12 trillion

in payments each day, processing transactions for 14 of the leading global retailers, and

24 of the world’s 25 largest banks. Through our integrated suite of software products

and hosted services, we deliver a broad range of solutions for payments processing,

card and merchant management, online banking, mobile, branch and voice banking,

fraud detection, and trade finance.


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