Merchants Have Fallen Behind in Payment Innovation, Study Reveals

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Merchant companies have fallen behind the retail banking and fintech industries in terms of payment innovation, based on a report by research firm Ovum and payment solutions provider ACI Worldwide.

The merchant segment of the index identified five types of organizations by their approach to innovation and business transformation: Laggards, emerging, tech-led, advanced and trailblazers.

The report’s index identified significant regional differences in terms of innovation. In Europe, 35% of all merchants were classified as laggards, compared to 30% globally. European retailers as a subset of merchants were further behind, with 43% classified as laggards in the index, reflecting the challenges of rapid shifts in customer’s ecommerce shopping habits.

“Merchants in Asia are highly focused on investing in technology, with 26% in the advanced category,” said Michael Grillo, vice president, merchant segment and solution marketing for ACI Worldwide. “This may reflect the pace of change with respect to the customer journey in this region. By and large, mobile has driven a lot of the customer experience and engagement in Asia. Also, there is greater freedom from complex legacy infrastructure, making tech innovation easier.”

Merchants in Asia are also highly focused on technology investment, with 32% in the tech-led category and 26% in the advanced category; only 19% were classified as laggards.

Merchants in the U.S. are polarized, the report found, with 34% in the laggard category and 16% in the trailblazer category. This reflects the growing gap between traditional merchants and the rise of digitally native brands.

“Trailblazing innovators are digitally-led, or strongly digital organizations,” Grillo said. “Their businesses are structured around driving innovation and they are leaders in technology adoption and delivering new products and services. Payments innovators embrace a mobile-first approach as well as alternative payment methods and open APIs.”

Grillo said laggards are generally behind the curve in terms of both culture and technology, often with a preference for outsourcing services. He said they’re generally aware of the challenges they face, but do not actively respond and are not innovators in terms of the customer experience.

The questions in the index considered inputs such as cultural and organizational drivers of innovation, with a focus on organizational structures that identified changing customer needs, competitive challenges and new market opportunities. It also considered outputs such as tech adoption and investment and product innovation.

Somewhat counterintuitively, Grillo said the largest retailers are most likely to fall into the laggard or emerging categories because of the greater complexity of system requirements as well as legacy infrastructure. This puts a damper on agility in terms of technology innovation in the area of payments.

ACI and Ovum found that payments innovation is focused on areas that enhance customer experience, including new payment options, a focus on mobile, especially in store, and a stronger, more seamless cross-channel payment experience.

Security initiatives such as PSD2 (Payment Second Services Directive) and SCA (Strong Customer Authentication) are driving the need for technology innovation in order to balance fraud prevention with maximizing conversion rates. These regulatory requirements may motivate merchants to close the innovation gap relative to retail banks, Grillo said, especially as they have been a driver in that sector. He said payment innovators in general embrace a mobile-first approach as well as offering alternative payment methods and using open APIs to connect with partners.

“Voice also appears to be an area of digital differentiation, with 50% of trailblazer merchants indicating they’re investing in voice to support sales through digital assistants and other forms of connected devices, compared to 26% of merchants overall,” Grillo said.

Digital payments innovation can have a huge impact on things like customer engagement, tying together omnichannel touchpoints such as in store, online, mobile, kiosks and wearables.

“When done right, these can have a huge impact on customer loyalty,” said Grillo. “Similarly, on the business end, payment technologies like machine learning and AI can make the difference when converting more business at checkout and properly counter-balance it against keeping fraud at bay. The right mix will result in more conversions and revenue generation.”

The Culture of Innovation Index from ACI and Ovum was based on interviews with senior executives in about 1,200 global enterprises. Scores were based on plans and behaviors across a range of cultural, organizational and technology factors.

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