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Table of Contents

Lead Story

Change agents, the democratization of retail

Ann Train

News

Industry Update

Visa unlocks innovation

Small Business Finance Association lays out guidelines

NYPay panel deliberates blockchain's future

Transaction Alley drives fintech innovation

Features

Online lending drives main street small business satisfaction and growth

Approaches to prepaid program management

Are CNP fraud warnings on target?

Mobile rules the roost

Views

Trade Association News: Transact 16: A defining moment for post-disrupted payments

Beating the payment fraud carnie game

Patti Murphy
ProScribes Inc.

Can ISOs and MLSs sell banking services?

Brandes Elitch
CrossCheck Inc.

Education

Street SmartsSM:
The alternative small business loan

John Tucker
1st Capital Loans LLC

Review residual reports, protect your profits

Jeff Fortney
Clearent LLC

Education, the key to unlock consumer innovation adoption

David Poole
myPINpad

Strategic conclusions traditional acquirers can draw from Square

Marc Abbey and Brooke Ybarra
First Annapolis Consulting

Company Profile

Go Direct

New Products

Newly enhanced payment platform for small to midsize merchants

Genius STX
Cayan LLC

Compact, versatile EMV solution

M010
Miura Systems Ltd.

Inspiration

Applying the five W's to merchant services

Departments

Letter from the editors

Readers Speak

GS Book Notes

Resource Guide

Datebook

A Bigger Thing

The Green Sheet Online Edition

May 09, 2016  •  Issue 16:05:01

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Change agents, the democratization of retail

By Ann Train

Five years ago omnichannel commerce was more an expectation-laden buzzword than reality. Major retailers were the first to jump in, learning through trial and error how to deliver seamless experiences for consumers traversing channel lines. Today the unified commerce journey still has potholes to fill, but progress inches forward.

Soaring smartphone adoption has made these devices an indispensable tool not just for communication but to connect with brands in meaningful ways at any point along the commerce journey. Many are calling it the democratization of retail, driven by the masses who now wield the mobile power to decide instantaneously whether a brand is worthy. Understanding the customer journey and how to optimize it has never been more crucial.

"Where they are looking for inspiration, where they are engaging with the brand is all on mobile," said Joe Megibow in describing his experience as Chief Digital Officer for American Eagle Outfitters during a mobile summit in San Francisco. He was recently appointed President of ecommerce startup Joyus Inc.

"We actually had more traffic online every day than we had going into our stores," Megibow told summit attendees. "Even though the majority of revenue was still happening in physical stores, the majority of daily engagement with customers was digital, on mobile devices."

But as an early adopter, the company's ability to manage customer engagement across channels exceeded technical capabilities at the time, so store systems had to be built from the ground up. "I've got my digital direct channel, inventory and distribution channel," Megibow said. "It's no longer viewable that way, and we have to really move from the back end forward in the omnichannel. It's how we eliminate conflict."

Other retailers have faced a similar dilemma. Unifying siloed systems, especially legacy systems, has not been easy. A recent survey of merchants by Boston Retail Partners revealed just 18 percent had implemented a unified commerce platform, and a majority felt system improvements were needed (see accompanying Unified Commerce Services chart, from the BRP Special Report: Unified Commerce is the Goal, "Faux" Omni-channel is the Reality!)

"The customers don't think about channels," said Brian Brunk, Principal at BRP. "When we shop with a retailer we're shopping a brand. We're looking for products; we're looking for service. We're not thinking about interacting with them online or on mobile; we're just shopping."

Different mindset

This new way of thinking has forced merchants, many for the first time, to consider unifying business systems into a single interface. According to BRP, to meet demand for the expected 78 percent of retailers who plan to implement some form of unified commerce platform by 2020, cloud-based middleware offerings will soon bridge previously disconnected systems.

Companies like Shopify set the stage early on. Over 200,000 merchants use its platform to manage their businesses, from products to orders, across all channels. Brightpearl, which also caters to small and midsize businesses (SMBs), offers a cloud-based, multichannel management platform that allows merchants to integrate accounting, inventory, purchasing, customer relationship, shipping and fulfillment, and other modules.

The advantages of unified systems are compelling. "Our customers continuously outperform the market and compete on par with large retailers, and we believe this is a testament to the operational efficiencies that Brightpearl helps them deliver," said Charles Grimsdale, Executive Chairman of Brightpearl. "Our customers sell globally on multiple channels both online and offline."

Not all merchants see the bigger picture. "There are a lot of retailers we talk to that don't think of themselves as having an order management solution that are quickly realizing, as they are looking to support this holistic customer experience and the idea of having a single shared cart across that experience that travels with that customer, that the easiest and most natural way to support that is with an order management solution," Brunk said.

Having real-time visibility into customer data across channels enables sales associates to personalize the shopping experience and engage in a process known as clienteling. A study commissioned by Yes Lifecycle Marketing found that 42 percent of retail store associates knew little or nothing about the store's most profitable customers. "By utilizing clienteling best practices, retailers can drive more in-store traffic, engagement, sales and loyalty," said Michael Fisher, President of Yes Lifecycle Marketing.

Ecosystem reconfiguration

With the path to payment being less linear in the omnnichannel world, some merchants will adapt more readily, while others with cost-intensive legacy systems to upgrade could take longer. Aite Group LLC Senior Analyst Thad Peterson underscored the underlying macro trends in a report titled Three Trends Reshaping Retail Payments: Sublimation, Globalization, Disruption.

In payment sublimation, the payment process is embedded in the commerce experience without being a separate activity. Peterson describes it as "payments as plumbing," where payment functions in the background, as is the case when hailing a ride with Uber or reserving a table via OpenTable Inc. Both enable payments, but the convenience to consumers creates the context for rich digital experiences that can build brand loyalty.

In many such cases, repetitive purchase behavior is a key component. "Clearly the progenitor of this is subscriptions, an auto renewal of a subscription of some form," Peterson said. "Essentially the payment is funded. You never see it. It just happens."

According to Peterson, the globalization of commerce has been fueled by online marketplaces – Alibaba in China, Rakuten in Japan, and Amazon.com in the United States – which all combined are expected to generate in excess of $1 trillion in cross-border transactions by 2020. The impact on retailers is unprecedented. Not only are businesses transacting globally, but product sourcing has become more global as a result.

Through gateway providers like BlueSnap Inc., many of the regulatory and language hurdles associated with global commerce have been removed by virtue of well-connected networks. Alpha Payments Cloud was early to market with a hub of application program interfaces made available through a global marketplace. Peterson noted that Alpha differentiated itself by creating an exoskeleton merchants can access from virtually anywhere. Even traditional players are opening platforms to accelerate development.

This transition from closed-loop to open architecture platforms, though viewed as disruptive, has made it possible for third-party developers to layer in nonpayment solutions. For the payments industry, the integrative process has led to next-generation POS systems that are "a hybrid of the hardware and software, like the Verifone Carbon or Poynt, that can really make the thing sing," Peterson said.

Square effect

Whenever payment disruptors enter the conversation, Square Inc. is often cited, and it has yet to turn a profit. What Square proved to the world in a highly visible manner was that a simple dongle device could enable millions of mobile-connected users to micro-transact, and it accomplished this feat through social and mainstream media.

More importantly, Square improved the enrollment process, a pivotal development in democratizing retail from the merchant side. "To me, Square wasn't a revolution in mobile payment acceptance," said Chris Wuhrer, Vice President of Product Development for Sage Payment Solutions. "It was more of a revolution in enrollment and simplifying enrollment."

Unified Commerce Services

Starting a small business is complicated enough. "Imagine a world where I'm a small merchant, and I can go and get my merchant account and hardware right here, or I can take my solution online through a single enrollment," Wuhrer said. "And by the way, if I need a loan, I can actually push a button that says activate. We want to provide an environment where merchants can touch all of those things at once."

Though roundly criticized for initially committing to micro-merchants, which many viewed as unsustainable, Square adjusted. According to company data, 87 percent of its merchants processed less than $125,000 annually in 2011. By the end of 2015, only 61 percent of Square merchants fit this category. The percentage of merchants processing $125,000 to $500,000 increased from 11 percent to 27 percent within that same period.

Another point illustrated by Square was the integral quality of being adaptable, especially as a startup. "They were one-size-fits all, and they started to realize that there are these major differences in requirements between, say, quick service restaurants and health and beauty," Wuhrer said. More experienced players in the payments industry recognized long ago that niche market solutions can enhance business performance categorically.

In today's collaborative ecosystems, the role of each participant becomes even further magnified. "Our focus is accounting, payroll and payments," Wuhrer said. "We're really good at providing that infrastructure, but payments are complex, so we work with that complexity by finding the best-in-breed partners anywhere in the world and plug them in."

Within that framework, unified partners can connect all endpoints internally and with third parties to create a single view for end users. The enrollment process for merchants presents a sandbox of service options for building mobile, online and in-store applications that are ready to integrate universally. To facilitate transitioning merchants, service providers still need to support multiple environments as convergence in the marketplace continues to deliver more robust offerings.

Value proposition

For additional global viewpoints on changing dynamics in the omniverse, The Green Sheet spoke with U.K.-based Sage Pay CEO Seamus Smith, who has nearly 30 years' experience in global payment and financial services. According to Smith, similar to the U.S. market, margins on payment processing have eroded in Europe as a result of card interchange reductions introduced either voluntarily or by prescription from European regulators, which has also driven industry consolidation there.

Equally influential was the European Commission's adoption of the Payment Services Directive in 2007, which created a single EU-wide market for payments and has allowed companies like Sage to process payments, which in the past only banks could do. "That is not the case now," Smith said. "The legislation created a new strata of organizations that are able to offer value-added services."

Recent revisions to the PSD could spur further innovation. "In Europe, one of the implications of the Payment Services Directive 2 is effectively the unbundling of acquiring with acquirer processing and various other pieces," Smith said. "One of the main motivations for that is to improve choice, to create more pure market dynamics of supply and demand rather than bundled or packaged services that can't be unbundled."

With more consumer choices, the emergence of a customer end-user focus has become a chief catalyst for payment innovation, sublimation, integration and solutions development, not just in Europe, but globally, Smith noted.

As an example of this end-user focus, he said, "We have a Pay Now button integrated into our invoice issuance from certain software programs that we run for accounting, which has been hugely successful in driving usage of Sage Pay's payment system, not because it's out there as a standalone option for payment processing, but because it's integrated into another utility that's important for small and medium businesses." With this extension across the value chain, industry players can now participate in multiple parts of the payments ecosystem as opposed to existing in just one area. "I see a much more integrated ecosystem," Smith said. "If you are a hardware provider today, you are desperately trying to get into software and value-added services," and vice versa for software developers.

At the same time, more SMBs today conduct business through multiple channels. "This is where the multichannel dynamic is really coming to the fore, and historically multichannel was the preserver of large organizations with big infrastructures, supply chains and investment capability," Smith said. "But that's not the case anymore. Technology now delivers enterprise-level services to all the mom-and-pop retailers. They can buy technology and get services in the cloud. We see huge potential in that."

Transacting across borders has also proliferated. "We're seeing an increasing number of smaller merchants transact in more than one currency, transact internationally across borders as part of the global ecommerce phenomenon," Smith said. "Five years ago about 20 percent of businesses were transacting internationally, and that has grown four- or five-fold in the last five years."

While many credit financial technology companies with driving recent innovations, pure technology players have influenced dramatic changes in how financial services are delivered. "It's definitely tech-fin, because if you think about who's innovating and who's driving change, it's Apple, Samsung, Amazon, and we could put Sage in there, as well, as a technology organization that's using payment for the benefit of its end users to strengthen its proposition," Smith said.

One reason technology companies outside the financial perimeter may have an edge is the close connectivity with customers that each maintains has created an incubator for responsive innovations that ultimately lead to service developments in other sectors, including financial services and payments, Smith noted.

As solutions providers, the question to ask in advance of launching new product or service initiatives should be what problem does it solve for the benefit of the consumer or merchant? Wuhrer added, "What really makes sense? And sometimes that's the hard part for us as product guys, is really figuring out what do merchants need, what do merchants think they need, and what do they need that they don't know. That's our triangle, our common dilemma that we face every day."

The answers to these questions will serve as compass points for innovation, which in turn will be guided by the market fundamentals of margin and scale and consolidation taking place in the background.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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Spotlight Innovators:

North American Bancard | USAePay | Impact Paysystems | Electronic Merchant Systems | Board Studios