Digital Payments in Retail
The retail payments landscape has undergone significant and rapid transformation in recent years. The use of cash, the dominant form of payment until a decade ago, is in rapid decline, while there has been a corresponding rise in the use of card payments and in the introduction of new digital payments in retail.
Digital wallets are at the forefront of new digital payments and they have already achieved widespread adoption. By linking to a card holder’s debit or credit card account which utilises the major card schemes such as Visa and Mastercard to authorise and settle payment, digital wallets such as Apple Pay, Google Pay and Samsung Pay enable contactless payments in-store through near-field communication (NFC), and mobile payments online.
While these digital wallets are now becoming relatively commonplace in Western markets, Chinese companies, Alipay and WeChat, offer digital wallets that have already come to dominate their home market. Instead of using NFC in-store to communicate with POS terminals, Alipay and WeChat use QR codes to initiate and complete the payment process, offering a different means of achieving contactless payment that has a lower cost of entry for merchants and consumers, as payment terminal and smartphone support for NFC is not required.
One new form of digital payment in retail that does not rely on the use of digital wallets is Pay by Link. At the point of checkout, the retailer creates a URL which links to a webpage where the customer can enter their payment details and authorise the transaction. Pay by Link offers an easy and secure way to accept payments remotely, without using a card machine, and can be used over social media, online, over the phone and in-person. Pay by Link is offered by major Payment Service Providers (“PSPs”) such as Adyen, Paypal and Worldpay, and by recent market entrants such as Square, SumUp and Zettle.
A third new type of digital payment in retail that is rapidly gaining widespread global adoption is ‘buy now, pay later’. While instalment credit is not a new concept in retail – retailers have offered credit to customers since the days of mail order – the particular innovation is offering instant credit to customers shopping online. Companies like Alma, ClearPay, Klarna, Laybuy, PayPal, Scalapay and many others offer customers the option to split the payment for their purchases into a small number of interest-free instalments spread across weeks or months. The advantage to consumers is being able to buy items when they need or want them; the advantage to retailers is higher sales and basket values by extending credit terms to customers, without taking on the credit or financial risk.
The adoption of each of these new types of digital payment in retail – QR codes, pay by link and buy now pay later – has been accelerated by the Covid-19 health crisis, with consumers opting for contactless or remote payments when possible. But aside from this, innovation in the payments sector continues apace, driven by the pursuit of greater convenience and security for consumers and the desire to improve customer experience.
For retailers, these new digital payments present both challenges and opportunities: retailers must choose between a multitude of new digital payment methods as they plan their future payment strategies and then decide how best to integrate each individual payment method with their existing POS solution. Key among their concerns will be how to choose between the broad and often overlapping product and service mix of the PSPs and online payment companies, and how to select the right strategic payments partner.
With over twenty years’ experience of developing, implementing and supporting retail payment systems for physical retail, and integrating payment software with POS solutions, MWC Partners can bridge the technology and knowledge gap to help PSPs, online payment companies and retailers integrate their payment systems.
This article goes on to discuss the new types of digital payment now being used in bricks and mortar retail in more detail and introduces some of the considerations PSPs, online payment companies and retailers must make when developing their new digital payments strategy.
Quick Response (QR) Codes
QR codes are two-dimensional barcodes that can store much more information than conventional barcodes. Invented in the mid-1990s, they have only recently gained widespread adoption by retailers, with their use in Western markets again accelerated by the global pandemic and customers’ desire for contactless transactions. In China and other Asian markets, QR codes are widely deployed as part of retailers’ payment strategies to accept Alipay and WeChat in order to facilitate digital payments in-store.
QR codes can be used to encourage offline to online customer interactions. Applications include removing friction from the customer journey, enabling touch-free customer interactions and simplifying retail processes.
High levels of smartphone penetration mean that consumers are readily able to scan QR codes and view the product and transaction information contained within them on their mobile phones. When used for payment, the information captured can be transferred directly to a payment app – whether the customer’s favourite digital wallet or a retailer-own app.
Different QR code payment flows are possible, with either the retailer or the consumer presenting a QR code which contains transaction and payment information. Payment requests can be initiated at the POS or at a PIN Entry Device (PED), with the QR code generated and presented on the POS or PED screen, which the shopper then scans with the digital wallet on their mobile phone. Alternatively, in the case of Alipay, the QR code can be created by their wallet app, and scanned by the POS, or by the PED if it has a scanner.
In a typical payment process, the code is read by the PSP, which acts as an intermediary or gateway in the payment chain. In the case of PSPs such as Adyen or Worldpay acting as the gateway, the request is then pushed out to Alipay or similar for authorisation, before being pushed back to the consumer’s smartphone for acceptance. In this configuration, all payment reconciliation is done by the PSP. Unlike Pay by Link, the QR code payment process is real-time: the payment terminal or consumer’s mobile phone receives an immediate dedicated response authorising payment.
Integration is typically achieved by interfacing Alipay, PayPal or WeChat to the backend of the PSP’s payment gateway. Alternatives are possible, however: the QR code can be sent straight through to the payment providers, and not via the PSP gateway, provided that the payment details captured at the POS or PED are available for transfer and securely transferred.
Incorporating QR codes into a retailers’ payment strategy offers other opportunities. One example is simplifying and enhancing a retailer’s customer loyalty programme. Using a payment app which already contains the customers’ details removes the need for a separate loyalty account but also ensures that loyalty points are awarded and can be redeemed with each transaction. If the retailer implements a direct link between their payment service and loyalty providers, the loyalty card can be represented by a QR code, allowing the entire transaction to be paid for by simply scanning a QR code.
As well as helping to refine established payment processes and enhancing consumer choice, both QR codes and Pay by Link (see below) are particularly applicable to specific uses, such as kerbside collection, for example, from a DIY store or garden centre.
Pay by Link
In a Pay by Link transaction, the basket total captured at the point of sale is passed to the PSP. The PSP creates and then sends to the customer a link to a web page which allows the customer to enter their card details and authorise the transaction online.
Pay by Link can be deployed in a variety of ways. Options include: provision of a one-time link to allow a customer to pay for an individual product or service; a multiple-use link, the value of which can be changed by the seller; embedding or associating a link within an emailed invoice or electronic document; requesting a deposit; finalising a booking; and adding items to a bill. Links can be sent via email, SMS, social media or a PSP’s own digital wallet.
Pay by Link not only accepts conventional debit and credit card payments, but also digital wallets and other online payment methods, meaning that customers can complete a transaction without having to carry a bank card, and the retailer does not need to have PEDs.
Prior to the Covid-19 health crisis, Pay by Link had become popular with trades people billing for services and with online retailers taking payments over the phone. But the pandemic, and consumers’ desire for sales to be processed online or remotely, has fast-tracked the adoption of this technology. Retailers have acted quickly to add Pay by Link to their payment options line-up. Examples range from car dealerships, which have started to use Pay by Link to facilitate contact-free payment for car servicing, to cafes and restaurants charging for take-away collections.
While Pay by Link can be used to send a transaction direct to a customer’s mobile phone via email, this process may not offer sufficient speed of throughput in a busy retail in-store environment. A better alternative might be to send links via a payment provider’s app. Such an approach has the potential to speed up the transaction process, making it feasible for use at a busy checkout.
Pay by Link can be used as an alternative to the customer reading out their card details over the phone – making the process faster and more secure – and represents a new, improved way of processing CNP transactions.
Retailers who are considering introducing Pay by Link into their payment strategy should evaluate whether their current PSP can offer this service, or whether a direct integration to a third-party online payment company might offer similar or better functionality for less cost. MWC Partners’ dedicated payment software integrations team can assist retailers in assessing the technical challenges posed by these different integration options.
Buy Now, Pay Later
Buy now, pay later (“BNPL”) companies offer customers the option to pay for their purchases over a small number of instalments, with the first payment made in store. At the retailer’s check-out, the customer selects the BNPL option and then enters their debit or credit card information. A credit check is performed and if successful the first payment is typically made on their debit or credit card account with the balance picked up by the BNPL provider.
BNPL payment solutions are free to use for customers who pay their instalments on time. The business model sees the merchant pay a percentage of the value of sales to the payment company. Late payment fees are charged to customers, although, depending on the provider, they can be capped and do not necessarily accumulate over time.
BNPL is now widely deployed across thousands of eCommerce sites, a relatively recent trend that has taken off in just a few years. Leading payments company, Worldpay, forecasts that BNPL will account for 10% of all UK eCommerce by 2024 (Finextra, 2021).
BNPL companies are now seeking to extend their reach and achieve further growth by expanding into physical retail– and at a rapid rate.
In the UK, the market leader is Klarna, which in early 2020 had already acquired 7 million UK customers (Klarna, 2020). The company offers a number of products: 0% interest when you ‘Pay Later’; 0% interest when you ‘Split it in 3’ and 0% interest with ‘Klarna Financing’ over 6 – 36 months. It charges merchants a percentage of the transaction value to use its services.
Competitors like Afterpay, an Australian-owned company expanding into the UK as Clearpay, offer a slightly different proposition. They allow customers to pay in four fortnightly instalments paid within 6 weeks. Others, such as PayPal, offer customers 0% interest for four months, with the balance due at the end of the period.
Klarna is also integrated with multiple third-party payment providers to enable what they call ‘external payments’. Payment via PayPal, Amazon Payments, Google Wallet, bank transfer or even bitcoin are possible.
BNPL, QR codes and Pay by Link payment methods are not individually separate and distinct. Rather, there is crossover between them and between digital wallets, with online payment companies utilising these tools to create hybrid offers. For example, Klarna has recently incorporated QR codes into its payment app. It can generate a custom QR code which allows consumers to create a digital Klarna card that can be added to their Apple Wallet, allowing consumers to pay for their items with Apple Pay.
Retailers and online payment companies considering BNPL as part of their payment strategy need to examine how to integrate these systems and what the process flow between customer, retailer and BNPL provider should be as multiple options for data interchange are available.
Evaluating Digital Payments in Retail
Retailers who are evaluating their payment systems strategy will also want to review whether to handle all of their payment options via a single PSP, or whether to maintain relationships with several payment companies. There are clearly benefits to the former: one company, with overall responsibility for third-party integrations, minimises complexity for the retailer, although the PSP is likely to want to charge a percentage to host them. If retailers choose to have several direct relationships with their payment providers, challenges around security and the complexity of implementing multiple integrations arise.
Consumers have become accustomed to switching their shopping between physical and digital channels and this is true of payments too. The evolution of new types of digital payments in retail now gives consumers greater choice and the flexibility to choose their preferred payment method whether shopping in-store or online. Digital wallets, Pay by Link, QR codes and BNPL payment methods and schemes are reshaping the retail payments industry, creating both new opportunities and challenges for payment companies and retailers.
MWC Partners’ dedicated payment software integrations team have helped many of the world’s leading payment companies to develop and integrate solutions for physical retail. We are here to assist you to bridge the gap between your payment systems and POS solutions in the physical retail world.