Digital disruption in financial services technology – a.k.a fintech – is causing foundational changes in customer behavior when it comes to paying for purchases in stores and online.
With all the talk about contactless payments, digital wallets, and mobile technology as well as generational shifts in payment habits, you’d be right in thinking that retail and online commerce has gone futuristic. But the reality is that in the near-term, digital, frictionless payment systems will continue to grow and develop alongside their more physical counterparts of cash and traditional credit-card use. A good example is mobile-forward systems like the “Just Walk Out” payment method that debuted within physical Amazon Go stores several years ago.
Cash payments have become less common in recent years, according to research by Statista, with about 11% market share at U.S. stores in 2021. Credit cards and debit cards still rule, with nearly equal market share in 2021 among U.S. retailers at 40% and 30% of the in-store payments market respectively. Digital or mobile wallets were used in about 11% of U.S. in-store transactions, equal to cash payments.
And, much like the direct-to-consumer ecommerce market itself, POS systems like Buy Now, Pay Later (BNPL) are another small but fast-growing sector at about 1% of in-store payments market share in 2021, according to Statista.1
The payments market landscape blurs quickly when you consider the overlap between types of payment systems. The digitization of the payment landscape is making it possible for hybrid solutions to combine the strengths of different systems to render greater customer retention in consumers’ quest for speed and convenience. Examples include in-store BNPL plans and mobile wallets when shopping online.
Muddying the picture are multi-channel shopping experiences—in-store, online, and everything in between—which are often led by digital payments but involve different touchpoints. Established shopping modes can also take an online experience on the front end and combine it with an in-store experience on the back end, whether picking up in-store (BOPIS), pick up at curbside (BOPAC), or in-store returns (BORIS).
Mobile or digital wallets, a form of contactless payment, are in increasing use as more and more online merchants are accepting digital wallets at checkout. One estimate by Global Market Insights Inc. put the entire global mobile wallet market at over $350 billion by 2026 – and newer estimates go even higher.2
Both online and offline, digital wallets such as Apple Pay, Google Pay, and PayPal are often used in conjunction with mobile ecommerce systems, and more stores are accepting these forms of semi-closed wallet payment methods. Digital wallets are also available by more traditional financial providers like American Express, Bank of America, and Mastercard, in the form of open wallets that can be used where retailers accept digital wallets.3
Other digital wallets are available from retailers like Walmart Pay as closed wallets i.e. only available for use at the merchant or vendor issuing it. In the case of Walmart, consumers add their credit card, debit card, or gift cards to their wallets to facilitate transactions.4
Closed wallets are leading the charge in the digital wallet marketplace—leaning toward retailers’ and online retail giants’ favor—as person-to-merchant transactions that only exist between wallet holder and issuer. The closed wallet market, Global Market Insights reported, is set to grow at an annual rate of over 25% through 2027 owing to the increasing number of investments by brands, retailers, and other ecommerce players to launch their product offerings. These initiatives are all in the name of convenience to promote customer loyalty and repeat purchases.5
Global Market Insights said: “Additionally, various data security issues associated with third-party vendors are creating the need for ecommerce players and device manufacturers to launch their own closed mobile wallets.”
Statista made sense of the digital wallet market, noting in its 2021 store payments market share statistics: “While digital methods, such as digital or mobile wallets, have become more common, the number of credit cards does not seem to be declining significantly. This is in part due to the fact that these wallets use a credit or debit card to facilitate the transactions.”6
As suggested, shopping apps and digital wallets go hand in hand. In the name of convenience and customer loyalty, a lot of merchants today embed payment systems via open APIs in their apps to create more seamless experiences. This means merchants have oversight over the entire payment process, without the consumer having to leave the app or website.
Digital payment options such as Amazon Pay, Android Pay, and PayPal are embedded into many ecommerce platforms7 like Shopify Plus to give merchants the ability to offer fast, seamless checkout and payment processing to their customers.
Visa recently polled 2,250 small business owners and 1,500 consumers across the U.S. and in eight other countries to learn about digital payments, and about 60% of the businesses said they’re only accepting digital payments, or plan to accept only such payments within the next two years.8
Cryptocurrencies receive a lot of buzz in the media, and these digital forms of payment are a reality today, increasingly accepted by online merchants. A growing number of mainstream payment providers and card networks are making it easier for retailers to accept various types of crypto.9 Among the small businesses responding to Visa’s survey, 24% said they plan to plan to accept digital currencies including Bitcoin in 2022.10
The bottom line? Digital payments and currencies are here to stay. Merchants both in-store and online are able to control more of the payment processing function, gaining greater potential to get insights from their customers’ purchase behaviors, reduce processing costs and drive retention.