Technologies and trends shaping the future of commerce
USE ARROW KEYS OR SWIPE
Stories of innovation serve as a reminder of our collective ability to reach beyond the moment. These stories inspire us to advance our thinking, to include multiple perspectives, and to test the limits of what is possible. Whether it is employing emerging technology as seen in the case of hobbyists around the world using 3D-printing to manufacture equipment for hospitals or pivoting online strategies to meet new pain points as in the case of OpenTable accepting reservations for grocery stores. In the face of a global health and economic crisis, what new ideas will emerge? What stories will we write? In this issue of Mastercard Signals, we explore opportunities in commerce that both push against and reach beyond accepted boundaries. In Augmented Commerce, we examine the impact a new layer of digital engagement—detached from the screens in our pocket—may have on commerce. As AR technology advances in sophistication and adoption, will the combination of voice, augmented reality, and 5G pave the way for new interfaces and how interactions between consumers and merchants are evolving? As part of exploring the wave of technology-led changes to day-to-day interactions, we contemplate how peer-to-peer payments—growing in excess of 12 percent year over year for some providers—are moving beyond the initially intended niche use cases of small ticket transactions and bill splits to become a powerful driver of acquisitions and entryway into financial services for this generation of digital natives and adopters. From our home offices, playing our part to stay socially [or physically] distant, we look forward to the future when we are back on the road and travelling beyond our borders. For now, we must resign ourselves to thinking through the possibilities for innovation in mobility from last mile delivery to payments in space. In our business, we have always recognized the power of networks to bring parties together and create value. Today, the power of collaboration and partnership has never been more evident or needed. To this end, we hope this edition of Mastercard Signals inspires you with ideas and perspectives on which to build the next wave of innovation. Working together, we will realize a future full not only with renewal and growth, but also inclusion and well-being for all.
Maja Lapcevic SVP, Innovation Management & Marketing, Products & Innovation
Femi Odunuga SVP, Digital Future, Products & Innovation
AUGMENTED COMMERCE VIEWPOINT: Issuers respond to Covid-19 THE FUTURE OF P2P PAYMENTS IN CONVERSATION WITH: Andrew Buckley SIGNAL SHIFT: The New Frictionless REACHING BEYOND: Payments in Space SIGNAL SHIFT: Target Digital Financial Inclusion RETAIL IN MOTION SIGNAL SHIFT: Marketplaces, Aggregators and MSPs?
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In the future, shopping will take on an added dimension. Imagine wandering the aisles of a grocery store with your digital shopping list and seeing the specific items you want digitally signed on the shelf. Without touching the item, you can see the expiration date, nutritional information, price history, and product reviews. Personalized deals appear before your eyes. You may not even need to be in a store for this kind of shopping experience. Meet a friend on the street wearing cool new headphones, and you could buy a matching pair, or a pair in a different style, just by looking. All this will be possible because of Augmented Reality (AR), which superimposes a digital layer onto the real world around us. We’re already seeing AR adoption by companies such as glasses retailer Warby Parker, which lets you use the front-facing camera of a smart phone to see what any pair of frames will look like on your face. But that’s just the beginning. As 5G and advanced chipsets propel innovation in AR-enabled glasses and even contact lenses, more companies will use the technology to seamlessly integrate digital and physical commerce.
Principles of Quantum Mechanics
THE MECHANICS OF AUGMENTED REALITY
AR is the addition of digital content onto the viewer’s perception of the physical world. While we tend to think of AR as new technology, it has long been a fixture in broadcast television. The virtual first-down line for American football games, for example, debuted in 1998. Digital graphics and images are often used as overlays to physical content to provide more information and tell a better story for viewers. On a spectrum of digital immersion—where one end represents physical reality and the other end represents fully immersive Virtual Reality (VR), augmented reality constitutes all possible experiences between the two end points. Where any given experience sits on this spectrum will depend on the hardware employed, the quality of digital content, and the ratio of real to computer-generated experiences perceived by the viewer. As with other pieces of digital content, the market can be thought of in terms of consumption and creation.
Consumers view AR content through three primary means of access:
1. Device-based app or browser
2. Smart glasses or headsets
3. Projected AR
The first and most prevalent means by which consumers access AR content is the device-based app or browser. In today’s context, this is typically a smartphone, but it also includes televisions, standalone “magic mirrors”, and other digital displays. In these experiences, the consumer generally captures live or still images of the physical world with the phone’s embedded camera and views the combined digital and physical image on the device’s screen.
A second means of access, still in the early stages of growth, is often referred to as smart glasses, AR glasses or headsets. Devices such as Microsoft’s Hololens, for example, are two early but highly sophisticated attempts to free the consumer from the limitations inherent in viewing the world through a smartphone camera and screen. Instead of having to hold a phone to view AR, these newer kinds of hardware allow users to see the digital layer through glasses that are already over their eyes.
The third means of viewing AR content is a special kind of projector—aptly known as Projection or Projected AR. In this model, digital overlays are projected directly onto the physical world. Projected AR images are visible with the naked eye, eliminating the need for viewing hardware.
A variant of projected AR—Holographic AR—projects digital 3D objects into the physical world. This is a nascent field, but one that could impact how products are showcased and merchandised. Today, however, this kind of AR content largely falls in the domain of sci-fi movies.
1. Markerless Recognition
Markerless recognition or superimposition allows the user to visualize an AR image independent of the environment in which it is placed. Ikea’s Place app, for example, contains a library of digital images from the Ikea catalog that can be superimposed onto a live image, allowing users to see if a couch or table will look right in their living room.
Most of the AR content available today is builtfor smartphones using software developmentkits (SDKs) from the major operating systems. Within this segment (smartphone-based AR) iOS and Android have, and are projected to maintain, a dominant market share position of almost 75 percent. Both the headset-based and projection AR markets are more fragmented, as software is typically tied to hardware. So it’s no surprise solutions from Microsoft and Magic Leap dominate the small but emerging headsetAR segment. Regardless of the underlying coding platform, all AR software must ultimately perform the task of anchoring digital content on or over physical images or spaces. Warby Parker’s AR, for example, must recognize the location of the consumer’s eyes, nose, ears, or other features to realistically showcase the frames on the user’s face. Based on the sophistication of both the software and hardware and the nature of the intended experience, this anchoring can be accomplished through one of three mechanisms:
2. Marker Recognition
By contrast, marker recognition relies on visual markers to initiate an AR experience. In its most simple form, the AR software looks for a known marker or symbol to generate a digital image. For example, the Google Translate app uses text as a marker, allowing the app to overlay translations in-line with menus, books, street signs, etc.
Finally, some solutions rely on GPS positioning or other location-aware aspects to render an image. Pokémon Go relies on this mechanism to render content for the app’s users. When a user enters a defined geographic area, the app renders an AR image.
Many merchants in the beauty category have also launched AR experiences for consumers. The Sephora Virtual Artist app, for example, allows consumers totry on products and looks using their smartphone. In some cases, these experiences also provide instruction on the use of products and the techniques to achieve certain looks. In Brazil, apparel retailer C&A has deployed AR to provide additional information to in-store shoppers. Through the company’s mobile app, consumers can view product details, user-generated content, social feeds, and other relevant information simply by targeting their phone’s camera on specific products. Looking ahead, we might expect these experiences to evolve into virtual sales associates, contextual models, and situations. Other merchants have also explored in-store uses for AR. Lowe’s, for example, launched an AR-based navigation tool to provide directions within the store to specific products and sections. Saks (in partnership with Mastercard) partnered with ODG and Qualcomm on an AR pilot that allowed consumers to outfit a virtual mannequin and complete a purchase using smart glasses. Whether AR will be able to produce a justifiable return on investment in all cases is a question that remains unanswered. Few, however, would argue against the technology’s ability to deliver a compelling experience that can deliver value to consumers and merchants alike.
VENTURING INTO AR FOR COMMERCE
Since 2016, the free Pokémon Go app has been downloaded more than one billion times, generating more than $3 billion in revenue—largely driven by in-app purchases of in-app content. And while the success and longevity of Pokémon Go suggests real promise in the viability of AR as a gaming platform, some traditional merchants are experimenting with AR to foster brand engagement, enhance the shopping experience, and improve conversion rates.
In his short film, “Hyper-Reality,” Keiichi Matsuda imagines aday in the life of a consumer in which augmented reality is aconstant companion. The result is a provocative dystopian view of the future where contextual ads and other digital content relentlessly distract and direct consumers. While Matsuda’s vision of a digitally-bombarded population iscertainly possible, we are bullish that AR’s impacts will be far more positive than negative. For merchants, adding a digital layer to physical stores and products could provide interesting opportunities in advertising,marketing, and sales. AR could also be used to promote and sell products after the consumer has left the retailer’s domain. By embedding a “buy now” feature with product descriptions and other relevant content, retailers may be able to turn any city street into a shoppable runway. On the advertising front, AR’s ability to virtually increase a store’s surface area could open the door to new advertising and promotion paradigms. In the same way the endcap added shelf space and prominence for brands willing to pay for it, digital experiences (welcome splashes, aisle takeovers, etc.) may provide additional opportunities for merchants to boost revenue and brands to differentiate their products. There is still a long way to go for the consumer to make AR partof their everyday world. But as prices drop, designs improve,and 5G allows for lightning-fast data movement, consumeradoption of AR will grow.
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DEMISE OF THE SCREEN
There’s a possibility that AR—especially in combination with voice—could sidestep the screen as the focal point of digital commerce and enable a “hands-free” digital ecosystem for commerce. As 5G and improved chipsets enhance the speed with which high-quality content can be made available to consumers, and non-smartphone-based AR solutions improve in terms of everyday utility, one might envision a future where use of the smartphone screen is replaced by AR. As AR takes center stage, data collection on consumer shopping behavior will also need to move to the AR space. Today, consumer activity can and is tracked through the browser. Merchants can see where consumers are coming from, where they are clicking on a site, and how long they are staying on a given page. In an AR model, these same points of data would instead need to be collected from AR experiences and the hardware that enables them. From a content consumption perspective, moving to an AR first environment would require a holistic rethinking of almost every aspect of the digital shopping experience. Interaction models would need to evolve beyond touch to some mix of gesture and voice controls. Today’s authentication and security models or modalities may also need to evolve in recognition of new threat vectors.
AR is one of a few new emerging interfaces changing the way we interact with digital environments. With supporting technologies and hardware evolving rapidly, the ability to create and deliver digitally modified reality is getting easier and the experiences themselves are getting more sophisticated. Ultimately, whether AR is expanding the physical store’s footprint, improving the ability to offer personalized service or simply delivering unique digital experiences, this emerging interface is opening new dimensions of service and consumption for digital commerce.
VIEWPOINT: Issuers respond to COVID-19
J.P. Vivas, Senior Vice President, Issuer Engagement, Digital Payments & Labs, Mastercard
Q: J.P., thanks for sitting with us today. Let’s start with a quick introduction. What is your role at Mastercard? Thanks for inviting me. For the last 2 years I have had the privilege to lead the Issuer Engagement team based out of our Purchase headquarters. In a nutshell, my team works with global issuers on anything related to Digital Payments and Innovation.
Q: So, how are some of the largest issuing banks responding to COVID-19? We are seeing some rather consistent themes from issuers in their responses to Covid-19. First and foremost, the overarching message from issuers has been one of support and compassion for their employees, partners and clients. While there are of course business interests at play, the degree to which banks have focused on helping their customers is wonderful to see. There is a clear recognition that we are in fact in this together and banks play a critical, front-line role in helping consumers and businesses through the crisis. And, it’s not just lip service. The level of philanthropic giving from issuing banks and their employees for things like medical equipment or community support is in the hundreds of millions of dollars
Q: That is inspiring – are there more tactical trends that you are observing? Yes, there are. As you probably know, banking services are increasingly being migrated to digital platforms - for example, websites, apps, and voice assistants. However, despite an overall shift in digital delivery, many consumers still rely on their branch network to complete critical banking business. In recognition of this, we see a two-pronged approach from issuing banks today. First, they are taking steps to protect both their frontline employees and their customers. This can mean funneling more business through drive thru windows, or limiting which branches are open. It also means that banks are pushing consumers to use online tools like mobile check deposit or online dispute management.
Q: That feels like a win-win for the bank in the long term. For sure. Banks get a lot of value from digital services. There was a study last year from Fiserv and Bank of the West that showed how digital banking consumers are ultimately better customers for banks on a number of different metrics including monthly revenue per customer, number of products held, rate of attrition and frequency of transactions. So not only is investing in your online portfolio smart in terms of helping keep people safe and connected during this Covid-19 crisis, but it also will have benefits down the line. Instant issuance, self-onboarding, or digital new customer acquisition will become paramount in this new normal environment.
Q: We’re talking a lot about contactless lately. Oh yes. Given the pace at which behavior typically changes, it is remarkable to see how quickly consumers embraced Contactless payments. In April we interviewed 17K consumers in 19 countries and found that nearly 80% of respondents are now using contactless payments. The result is contactless transactions are now growing twice as fast as non-contactless transactions. Consumers resist touching anything other than their own card, mobile device or payment-enabled wearable, and it’s a payments behavior which is here to stay.
Q: Should we expect to see a similar uplift in Open Banking? That’s a bit tougher to gauge. On the one hand Open Banking has largely been driven by small, agile fintech focused on enhancing the consumer experience. However, the anticipated economic downturn is likely to change the landscape for these neo-banks – both in terms of the availability of capital and consumer appetite for risk. So, in the short term we might expect Open Banking initiatives to slow down. That said, we could see traditional banks take advantage of the market conditions and acquire some of these neo banks giving them the capital to continue to move forward with Open Banking initiatives. Also, as the need to ensure digital financial inclusion grows, Open Banking could provide flexibility around how and where data and services are delivered.
THE FUTURE OF P2P PAYMENTS
At the turn of the 21st century, solutions like SMART Money and later GCASH in the Philippines rode a wave of SMS and text adoption to enter the remittance market. These geographically localized mobile money solutions simplified the process by which peer-to-peer (P2P) payments, both cross-border and domestic, could be made. In 2002, eBay acquired PayPal to facilitate payments between buyers and sellers on its marketplace. And in 2007, Vodafone’s M-Pesa service launched in Kenya and quickly expanded to what is now 24 million users—almost 50% of the country’s population.* The rapid consumer adoption of these mobile money schemes served as a rallying cry for banks, non-bank financial service providers, digital platforms, and mobile network operators (MNOs) to enter the P2P space. Smart devices and cellular data are increasingly available. New use cases have grown consumer demand both as senders and recipients of these financial transactions. New service providers have both widened the tent for consumers to exchange money every day and steepened the trajectory of P2P volume growth. The result is an environment where a growing share of the global population can easily accept and receive electronic payments; where providing P2P payment services is increasingly turnkey; and where the delivery of these payment services becomes an attractive pathway to other forms of consumer engagement.
P2P payments volume grew significantly in 2019
2018 total volume
Volume in first three quarters of 2019
The proliferation of mobile, connected devices (particularly smartphones) and growing availability of internet access are enabling the growth of P2P. There are well over 7.7 billion mobile device in use today.* Between 2008 and 2016, the average price of a smartphone fell more than 20 percent. As ownership continues to rise globally, more individuals will gain access to P2P services.** Emerging markets will continue to drive the expansion of mobile and internet access in the coming years as evidenced by a recent history of high growth rates. Between 2015 and 2018, global internet access in emerging economies surged from 40% to 60% driven by young adults in developing economies who are increasingly using smartphones. Between 2013 and 2018 for example, the percent of consumers aged 18-34 with a smartphone in India, Nigeria, Kenya and South Africa grew by an average of 27%. In Brazil, growth in smartphone ownership among young adults exceeded 60% over the same period. As today’s youth comes of age, we’ll see an entire generation of digitally savvy new consumers demanding digital services such as P2P. Similarly, banks and payment networks have vastly expanded the number of payment accounts from which consumers can transact with one another. Over the past few years, billions of consumer debit accounts have been connected as sending and receiving endpoints for P2P transactions. The result is a nearly ubiquitous ability for bank customers to send and receive money across any licensed digital P2P platform.
Around the globe, the growth of P2P is being driven by three underlying factors. These factors include foundational elements such as the near-ubiquity of connected devices and P2P-enabled financial accounts. They also include market forces such as the increased demand for P2P services.
of the Swedish population is reached by the country’s SWISH service—an account-to-account service created by the largest banks in Sweden***
SWISH transactions grew by 30% between 2018 and 2019 with volumes exceeding $20 billion***
*** RealWire, European card growth slows to 2.7% as digital payments start to bite, February 2020.
* GSMA, GSMA Intelligence Tracker, 2017. ** Pew Research, Smartphone ownership is growing rapidly around the world, but not always equally, 2019.
INCREASING AVAILABILITY AND USABILITY OF P2P SERVICES
P2P payment services launched by established digital marketplaces (e.g. Alibaba), device manufacturers (e.g. Apple, Samsung, Google) and social platform providers (e.g. Facebook, Tencent) are taking advantage of their existing user bases to quickly scale the size of these new payment networks. In launching P2P services, digital platforms are seeking to drive customer engagement with the site/app through yet another dimension - payments. In doing so, digital platforms hope to drive increased utilization of other services offered through their apps or devices by existing users, and acquire new customers due to the inherent viral effect of P2P. At the same time, the P2P space is also growing thanks to the increasingly intuitive and user-friendly experiences delivered by these P2P apps. By simplifying tasks such as identifying counterparties for transactions from the consumer’s contacts or embedding P2P services into chat apps, sending money has become as simple as sending a text or instant message. On top of this, sound effects, emojis and other tricks of the mobile app trade are being employed to acquire and maintain consumer engagement.
of P2P users in the U.S. say it is more convenient than cash/check
say online and mobile P2P gives them added control
Lastly, demand for digital P2P services continues to rise. Consistent with the overall shift from paper to digital payments, consumers are increasingly turning away from cash and check-based P2P transfers. Among U.S. users of P2P services, 45% say that online and mobile P2P is more convenient than cash or checks, while 30% say it gives them added control.* Consumers are also increasingly using P2P platforms for use cases beyond traditional friend and family transfers. For example, demand for P2P among consumers doing freelance work is rising. A large share of the future labor force (nearly 200 million workers in the next decade and by some estimates over 50% of U.S. jobs by 2027**) will be freelance workers who, instead of consistent salaries, will receive ad hoc payments for intermittent work. For independent freelancers, P2P solutions may prove to be the preferred method of payment, either because they are believed to be more fit-for-purpose or because of a perceived lack of alternatives. If these freelance workers do not qualify for traditional merchant accounts, or are unaware of them because they fall outside the definition of an acquirers’ target customer, they will make use of more readily available and likely familiar solutions. Similarly, consumers are using P2P platforms for digital tipping. It is becoming increasingly common to see QR codes enabling P2P transactions replacing the traditional tip jar. This behavior eliminates the potential for theft from the recipient and also makes it easier for consumers to provide a tip when cash is not readily available. Commercial and government promotion of P2P is also helping fuel consumer demand. For example, gig platforms such as Uber and Lyft use P2P technology to provide on-demand disbursements of earnings to their drivers as a fee-based service. Insurance companies and NGOs are using P2P solutions to facilitate payments to consumer accounts in cases of natural disasters and other emergencies. And countries such as Thailand, India and Australia are promoting P2P as an initial use case to encourage adoption of national payment schemes.
Source: Puey Unophakorn Institute for Economic Research: The Journey to Less-Cash Society: Thailand’s Payment System at a Crossroads
ThailaND - Digital paymenT oveRview (yeaR-end 2018)
ThailaND - General Overview
Registration Numbers 46.5 Million
Daily Transaction Volume 4.5 Million
Average Transaction Value 5,000 baht
Transaction Volume Growth 20% per month
Population in Thailand 69 Million
E-commerce Market Value $26.2 Billion
Internet Penetration 53%
Bank Account Penetration 81%
CASE IN POINT
PromptPay is a government-led payments modernization program to support financial inclusion and the roll-out of electronic payments in Thailand. It is operated by National ITMX Ltd, a national payments service provider in Thailand. PromptPay runs on Mastercard’s Instant Payment Service (IPS) and, combined with our Multi Proxy Service, offers residents and businesses in Thailand access to real-time payments via mobile, online and ATM channels without the need to know or share bank account details. Mastercard designed, developed and implemented the solution in conjunction with National ITMX. The solution included training, implementation support, test planning and support, and we are providing ongoing enhancement of the software via planned releases each year. Since going live in January 2017, PromptPay has contributed significantly to the 83% rise in digital payments between 2016 and 2018.
Registration by Proxy Type
Mobile Phone Number
As P2P grows in both availability and consumer awareness, demand for these low-cost, friction-lite payment options is expanding beyond the initially intended use cases. On the small merchant side, this is already happening to a degree. M-Pesa offers payment services for businesses including bill pay and commercial payments. Apple Cash accounts used to send money between phones are funded in part by the rewards earned by consumers using an Apple Card. Venmo began supporting consumer-to-merchant payments at select online and brick-and-mortar retailers in 2017. Over time, the traditional lines separating consumers, businesses and individuals will continue to blur. As providers of P2P solutions grow to meet the needs of these new use cases and users, three opportunities may deserve further attention: enabling interoperability across platforms, sustaining profitability and mitigating fraud.
Today, P2P schemes largely exist as a set of walled gardens. Transactions must be originated and received on the same platform. From a strategic standpoint, this is not unexpected; digital ecosystems are incentivized to keep consumers on their platforms and have a history of pursuing—at least initially—closed-loop platforms. However, these fragmented ecosystems introduce added friction for both consumers and service providers resulting in higher costs for all parties. Senders and recipients must identify and agree on a shared platform. For platform providers, a lack of interconnectivity can increase the cost of customer acquisition and retention, and—given enough uncertainty—depress overall industry adoption. In at least one example, though, financial service providers are launching services to integrate disparate networks. In 2018, money transfer service SimbaPay and Family Bank Limited launched a service in Kenya allowing M-Pesa users to transfer money directly with WeChat users. In response to growing Chinese expansion into the Kenyan economy, the service enables Kenyan importers to more cost- effectively pay Chinese producers.* Stitching networks together in this manner not only increases the overall size of the network but can strategically unlock pools of volume and subsequent revenue opportunities.
U.S. mobile P2P volume is projected to triple to over $500 billion by 2024*
Mobile P2P is defined as any peer-to-peer payment or transfer conducted using a mobile device, including both smartphones and basic feature phones.* Business Insider Intelligence, The Payments Ecosystem, 2019.
* Quartz Africa, Kenya’s M-Pesa mobile money service now works with China’s WeChat Pay, 2018.
American Banker recently reported that only 11% of consumers think banks should be able to charge for basic P2P services.* Not surprisingly, many (though not all) P2P transactions are provided without any transaction fees for consumers. For banks and other issuers of financial products, the benefits from P2P are generally found in the subsequent consumer spending and account services that follow a transfer. Additionally, by enabling card portfolios and accounts to receive P2P funds, institutions increase the relevancy of their products across multiple digital platforms. In this way, P2P acts as the tip of the spear to both bringing in new and profitable digital customers and driving increased revenue from existing customers. It should be noted that providers including Venmo have been able to capture fees associated with certain actions such as funding payments via card. While this does generate substantial revenue (to the tune of $300 million**), fee revenue is only one path to profitability. Instead, digital providers often follow a parallel path to banks, where consumer engagement is monetized through other platform services. Instead of relying on consumers to pay for transactions, non-bank providers can (and do) use P2P to further drive engagement with other services offered on their digital platforms. In this way, P2P is similar to other tools (games, social feeds, messaging, etc.) used by digital ecosystems to attract and sustain consumer engagement. Case in point: During WeChat’s six-day Red Envelope promotion, 760 million users (nearly 80% of the monthly user base) sent a P2P payment. More importantly, these same users spent more than 17.5 billion minutes on audio and video content and exchanged 230 billion messages.*** Unlike most other “free” services provided by digital ecosystems, P2P payments require consumers to link a financial account. This requirement lowers the future acquisition costs of new payment solutions within the platform. It also provides a new source of consumer data that, responsibly utilized, could provide value to both the user and the platform.
* American Banker, How much does P2P drive engagement for banks?, 2019. ** CNBC, Venmo has 40 million users, PayPal reveals for first time, 2019. *** ZDNet, WeChat red packet senders total 768M over Chinese New Year, 2018.
As with any payment system, there is always an opportunity to take steps to mitigate fraud and misuse—intentional or otherwise. Failure to do so will lead to decreased enrollment and transaction volumes, especially given the number of providers in the market and the relatively low switching cost to consumers. Providers therefore must continue to take steps to mitigate fraud through technical and operational solutions before, during and after the transaction. Because P2P accounts may ultimately be linked to a consumer’s demand deposit or current account, losses from fraud can be highly damaging to the consumer and difficult to recover—at least in the short run. Last year, several instances of fraud were reported by users of Zelle that appeared to be the result of a successful phishing attack. When fraud is detected, it is imperative that P2P providers have mechanisms to recall funds from the perpetrator and restore consumer trust in the solution. In addition to actual fraud, the ease with which P2P payments can be made increases the chance of mistakenly sending funds to the wrong person. To combat this, companies such as Venmo are adding extra steps to the send process to confirm the identity of the intended recipient. While these speed bumps slow down the process, they ultimately provide greater trust to users of P2P solutions.
There is no question that P2P will be a large facet of the future of payments. The growth of P2P transactions over the last decade will only accelerate in the years to come, both as new entrants continue to invest in solutions and as bank-led services expand in popularity. In addition to a continued focus on transaction speed and ancillary services, investments in interoperability, new revenue models and fraud mitigation will continue to move the industry forward in a responsible and beneficial way for all parties. Like a flywheel in motion, the increasing ease with which consumers can send money using P2P will almost certainly contribute to even more usage. This will create opportunity for stakeholders across the payments ecosystem. It will also reveal new questions to be considered. Will P2P solutions expand to cover use cases outside of payments, for example, sharing medical records with a new doctor? What new sources of fraud may emerge, and how can we defend against them? What consumer and industry-wide education will be required as adoption and utilization grows? The growth of P2P is moving the market forward in new and not wholly anticipated directions. The next few years will offer opportunities for innovators and incumbents alike. Whether it is existing providers looking to grow share or new entrants looking to gain a foothold, the future history of payments will be written today.
In conversation with
Andrew Buckley EVP Product Management, New Payment Platforms, Mastercard
When we look across the digital landscape today, almost every device manufacturer, digital platform and tech startup has a P2P service. What, in your mind, has changed to account for this seemingly sudden shift in a few short years?
The simple answer is it’s a continuation of the shift to electronic methods of payment, from offline to online. P2P payments have been around for as long as value exchange has existed. What’s changing, and what we’re witnessing today, is the conversion of these P2P transactions from cash and check to digital payments. This conversion is happening because of the speed, the convenience, the security and, most importantly, the superior user experience delivered by digital P2P payments. This migration is creating a bigger opportunity for multiple players.
In our article, we hypothesize that P2P will become a dominant driver of new customer acquisitions and engagement for financial services and digital players. What do these players need to do to take advantage of P2P?
Increasingly, the provision of P2P services is becoming table stakes.
In the case of traditional (non-challenger) banks and national payment programs, P2P appears to be providing an entry point for consumer acquisitions. In the US for example, we understand new bank accounts are growing at a rate of roughly 2%, while P2P accounts are growing at almost 20%. In addition, almost 50% of consumers prefer the convenience of digital P2P solutions vs paper. And with PromptPay in Thailand, the mobile registration numbers suggest P2P has helped foster the more than 80% growth in digital payments in the country.
The goal for service providers isn’t necessarily to make money on the P2P service itself, but rather to encourage consumers to more deeply engage with provider’s platform and to use it for other purposes that can be monetized. But offering convenient P2P transfers is probably not enough. Instead, service providers need to solve real pain points in a manner that appeals to particular consumer segments. And then they need to continuously innovate to offer new value props that not only help acquire new customers, but also help protect existing share.
That’s a fair point. PromptPay does appear to have benefited from both domestic and cross-border P2P, but it’s worth remembering there are other services like bill payment, QR codes, and digital wallets which contribute to the success of the program.
Do you have any examples of how P2P services are being used creatively?
Service providers are integrating P2P as a way to increase consumer engagement across multiple fronts.
Finally, given the opportunity P2P represents, how is Mastercard supporting our customers, partners, and ecosystem to drive P2P growth?
Consequently, we are seeing P2P technology used as a value-added feature to enhance an increasingly relevant number of adjacent products from retailers or payroll firms for example. For example, our own solution, Mastercard Send can provide the rails for a typical P2P transfer, but it is also used for many other use cases. Consumers can use Mastercard’s Send solution in a “me2me” manner to move money between their own accounts when they receive wages on a salary card and want to move the funds to an account linked to a preferred card. Or they can use Send in a “bill pay” manner to make a credit card payment in near real-time. Similarly, we see consumers using Send’s technology to quickly “cash out” balances on their P2P wallets into their debit accounts. Finally, Send can also be used as a substitute for cash to quickly and securely pay a babysitter, a dog walker or to unlock a range of other day-to-day P2P transactions that typically occurred via cash and check.
We provide both the infrastructure and applications that enable real-time payments to and from any endpoint in many markets globally. We do this through Mastercard Send, which supports both domestic and cross-border P2P payments.
An interview by Femi Odunuga, SVP, Digital Future, Products & Innovation
The New Frictionless
For years, frictionless has been one of the bigger buzzwords in retail. With advancements in computer vision and other unattended shopping technologies, merchants were experimenting with grab-and-go concepts. Checkout moved to check-in and the use of cash was increasingly discouraged. In the immediate future, frictionless will become a key part of providing consumers with a safe and well-managed shopping experience. At the checkout, we expect to see more touchless options that allow consumers to pay with a wave or a tap of a credit or debit card or mobile phone. Behind the scenes, booking and reservation software may be employed to help limit the number of people in a store or restaurant at the same time. Online ordering and curbside pickup will allow small and medium businesses to continue to operate in a world where consumers may not feel comfortable in enclosed, public spaces. These relatively simple upgrades are crucial in helping employees and customers stay safe and healthy. As businesses get back on their feet, investments in computer vision systems or smart shelving may return at levels even greater than before. These solutions—formerly considered to be differentiating and innovative—may become more run-of-the-mill and as necessary as backup generators and flood insurance.
* Business Insider survey, 2019. ** Mastercard study, 2020.
of U.S. consumers preferred a checkout experience that didn’t require them to stand in line to pay, but rather pick up an item and leave*
consumers now prefer contactless for in-store payments**
Reaching beyond: Payments in space
Over the last 20 years, private industry has aggressively moved into the business of space—outer space—bringing new technology to the field and raising expectations for what is possible both on Earth and beyond. In 2019, private investors funneled almost $6 billion into the space industry. SpaceX, the aerospace company owned by Elon Musk, has planned to launch 38 missions this year and almost twice that in 2023. Overall, the global space industry is expected to generate over a trillion dollars in revenue by 2040. The heavens have never been closer. Interest in the cosmos extends far beyond the realm of aerospace firms. Consumer packaged goods, travel, and other industries are investing in a future that includes space tourism, space habitation, and the use of space technology to improve experiences on Earth. Four years ago, First Data and Nationwide Building Society completed a contactless transaction 100,000 feet above the Earth using a robotic arm and a weather balloon. Last year, Hilton Hotels became the first hospitality company to participate in research aboard the International Space Station (ISS) by sponsoring a program to bake Doubletree by Hilton’s signature chocolate chip cookies in space. P&G has been sponsoring research on board the ISS for almost a decade, leading to the development of new ideas, patents, and products.
Private industry funneled almost $6 billion into the space industry in 2019
"Because it's there."
— George Mallory (in response to the question, “Why did you want to climb Mt. Everest?”)
It would be easy to dismiss these explorations as PR exercises, but the advancements to space flight achieved in the last decade suggest there is reason to consider a future where humans both inhabit space and make use of either space-based or space-developed technology on Earth. So, at what point should we contemplate payments in space? If we expect space communities to exist within our lifetime, people or devices will eventually need to complete payment transactions. What near-term opportunities may exist? What will it take to realize them? And why, in the end, should we care? To answer these questions we spoke with experts, enthusiasts, physicians, educators, urban planners, and entrepreneurs to help us form a vision for what life might be like among the stars. Our goal was to paint a realistic picture of what living, working, buying, and selling in space would entail. The Earth is unique in the universe, as are its inhabitants. Thus, life off planet, at least initially, will be very different. Our homes, our commutes, the way we brush our teeth. Our notion of exercise, our vehicles. The resulting portrait suggests life off planet would require significant changes to almost all facets of human behavior, including commerce and payments, as we know it today.
The global space industry is expected to generate a trillion dollars in revenue by 2040
SURVIVING IN SPACE
Space flips our conventional notion of scarcity on its head. Rare earth minerals such as gold and platinum are believed to exist in abundance beneath the surface of asteroids and other celestial bodies. By some estimates, certain asteroids could contain more platinum than has ever been mined on Earth. Similarly, asteroids may contain enough iron, nickel, and cobalt to meet our needs on Earth for 3,000 years. Space also provides an ample supply of renewable energy in the form of solar energy. Over the last ten years, the cost of capturing and delivering solar power on Earth has fallen dramatically. Between 2009 and 2019, the cost of solar panels fell from over $8 per watt to around $2.50 per watt. In addition to solar, depending on the atmospheric conditions of the planet, wind power and even methane or hydrogen-based solutions could become viable. Conversely, items we take for granted on Earth—water and breathable air, for example—are in very short supply in space. In space, water will be among the most precious of commodities—perhaps even traded as such in global (galactic?) markets. In anticipation of this, some companies have focused their attention on solving for this life-sustaining requirement. The Japan-based ispace Inc. is working to develop low-cost lunar modules in the hope of efficiently transporting water and other resources between the moon and Earth. Where water is present in the form of ice, it needs to be mined, melted and processed before it can be consumed. Once consumed, water will then need to be treated and recycled. The need to recycle water consumed in space is complicated by the introduction of shampoos, detergents and other materials used in our everyday lives, which will need to be filtered out and disposed. Food, on the other hand, may be less of a constraint on our ability to live in space as humans require lower caloric intake while living there. Today, astronauts living on the ISS consume pre-packaged food, some of which must be prepped using water and an oven. Used food packaging is stored and returned to Earth as cargo where it can be disposed. Looking further out, it appears feasible that we could ultimately grow food from Earth-derived seeds.
LIFE IN SPACE
“Space exploration is a force of nature unto itself that no other force in society can rival. Not only does that get people interested in sciences and all the related fields, [but] it transforms the culture into one that values science and technology, and that’s the culture that innovates.”
— Neil deGrasse Tyson
On Earth, life as we know it—the warmth and light of the sun, the Earth’s atmosphere, the currents of the ocean—depends in some way on gravity. So, how will we live without it? Today on the ISS, occupants must learn new habits and use specially designed equipment to conduct daily activities. Blankets float away if not strapped down. Droplets of water bounce off their intended target. Moving from one place to another requires forethought and planning. The simple things we take for granted on Earth become challenging puzzles in space. In an orbital space station, gravity could be manufactured using what are known as O’Neill Cylinders. First proposed in 1976 (and most recently by Amazon’s Jeff Bezos), O’Neill Cylinders are large cylinders designed to recreate gravity through centrifugal force. Under these circumstances, life in space—housed within giant rotating cylinders—could look very similar to life on Earth in terms of apparent gravitational force. By contrast, the moon and Mars have only one-sixth and one-third of the Earth’s gravity, respectively. Without a mechanism to recreate gravity in these environments, the challenges of emulating day-to-day earthly activities would be significant. Without gravity, our collective reliance on the use of pockets, wallets and handbags may need to change in space. Physical currency such as coins would pose a clear annoyance and potentially a safety hazard in places with diminished gravity. Contactless and online payments will most likely be the preferred payment mechanisms. Alternatively, biometrics could be used to identify consumers entering into a potential transaction. In fact, preserving the safety and security of the space community may require far more intensive tracking of individuals than we are used to. Location data, water, oxygen, and radiation levels will need to be monitored in real time. Given limited supplies, staying on top of resident health and welfare will be critical.
“Everything every day here on Earth is based on gravity, and you don’t realize it until you don’t have it anymore.”
— Peggy Whitson, Ph.D and NASA Astronaut
Where will we live in space? Today, most investment is targeted at developing habitats on orbital space stations, the moon or Mars. Orbital space stations would seem to have considerable advantages over both the moon and Mars in the near-term. On MIR and now the ISS, individual astronauts and cosmonauts have on more than one occasion spent more than six consecutive months in space – in some cases more than a year. Conversely, humans have not walked on the lunar surface since 1972, and we have yet to set foot on Mars. Because of their proximity to Earth, orbital space stations also provide more optionality and security in terms of transporting people and cargo. When this will happen is an open question. The structural elements required to house human life for extended periods of time in any of these locations could take years to transport or develop. Whether components need to be fabricated on Earth, sent into orbit, assembled and tested, or 3D-printed on site using resources mined from (or near) the intended location, the timeline may be quite long indeed. Of course, all of this could change very quickly. NASA is targeting a return to the Moon in 2024. Bezos’ private space company Blue Origin is developing rocket engines that could power future lunar landings. Musk’s SpaceX remains focused on the goal of not just putting boots on Mars by 2025, but breaking ground on a Martian city by 2030. Where and how we live will directly impact what we own and buy. On the ISS, the entire crew lives and works in an area just over one thousand square feet. Without room to store things, one wonders how often consumers will make purchases in space. In theory, this lack of storage could result in an increased demand for digital content. In closet-sized living compartments, digital windows and artwork could provide much needed distraction and customization. Esports could replace traditional sports. Music, movies and books will be digital. We will still need clothing, but even apparel will need to be rethought for space. Within the confines of a secure, pressurized environment such as a space station, people could theoretically wear clothes much like they do on Earth. However, washing and folding laundry present interesting challenges in the absence of gravity and readily available water. In open space, specialized equipment is needed to maintain life. There is no barometric pressure, gravity or oxygen, and temperatures outside of the Earth’s atmosphere are understatedly described as extreme. Temperatures in Earth’s orbit fluctuate between -250 degrees to 250 degrees Fahrenheit depending on the position of the sun. On Mars, the average temperature is about -80 degrees Fahrenheit. In this harsh climate, machine-to-machine communications including payments are likely to be needed. Activities such as delivering supplies, mining asteroids and terraforming planets will likely require prolonged exposure to inhospitable environments. Machine-to-machine payments would enable the exchange of payloads and information in addition to payment instructions to facilitate these operations. And what about stores? The lack of shelving and storage may mean merchant locations are almost entirely digital. Not only will this limit the amount of room needed to store inventory, but it will also eliminate the need for point-of-sale terminals, electronic cash registers and ATMs.
Payment transactions between Mars and Earth could take almost 45 minutes to complete
Information is the lifeblood of an economy, allowing markets to function efficiently. In more developed economies, the ease and speed with which information can be sent and obtained is an afterthought at best. Consumers shop the global marketplace from the phone in their pocket. Factory floors can operate on a minute-to-minute basis. High-speed trading algorithms execute financial transactions faster (literally) than the blink of an eye. As we move towards 5G, our expectations for speed and availability will further advance. Today’s communication technology introduces significant latency into the system. Between the ISS and Earth, for example, communications experience a one- to two-second delay. But between the Earth and Mars, the delay could be anywhere from 4 to 24 minutes depending on the distance between the planets at the time of transmission. In an information market, how will this delay impact commerce? Consider a simple in-store credit transaction. A card is tapped or dipped; an authorization request is sent to the consumer’s issuer, and fraud checks are executed in real time by multiple parties. The authorization comes back to the merchant and the transaction moves forward ultimately to clearing and settlement. Imagine this same transaction on Mars. If the consumer or the merchant must communicate back to Earth to proceed, the payment process could take almost 45 minutes. If people living in space are going to maintain Earth-based financial accounts (an open question), then real-time communication between a space economy and the Earth will be required. Today on Earth we have mechanisms for dealing with communications that are delayed or interrupted. Stand-in authorizations, local processing solutions, and prepaid accounts, for example, can mitigate delays at the transaction level. Distributed ledger technology may also ultimately prove to be useful in these circumstances.
Between 1970 and 2000, the cost to launch a spacecraft was about $18,000 per kilogram. Today, the cost of a SpaceX trip to the ISS comes in at about $2,700 per kilogram
In addition to delayed communication, we will also need to contend with the challenges of keeping time. At one level, there will be an adjustment as we move to something other than a 24-hour day. A day on Mars is slightly longer than a day on Earth. On the ISS, the sun rises and falls 16 times over the course of the equivalent of a single day on Earth. Operating on a 24-hour Earth clock would at a minimum feel strange for anyone living in space. On top of this, it is incredibly challenging to maintain time synchronization between Earth and space. On Earth, refrigerator-sized atomic clocks help us maintain a common sense of time around the globe. In space, an equivalent solution is in testing, but it is not yet proven to be failproof due to the distance and environmental considerations involved. Why does this matter for commerce? Imagine the challenge of settling disputes or conducting exchange-based trades from space. Not only will there be delays in the messaging, but the time of the trade will need to be synched to the local time to maintain an accurate ledger. The distance between Earth and potential space habitats also creates some interesting challenges. A trip to a low-Earth orbital space station will take about a day. Travel to the moon takes up to three days, while travel to Mars takes approximately six to eight months. Additionally, because objects in orbit don’t stay in the same place relative to one another, a round trip can take more than twice as long as a one-way trip to complete. And of course, the cost of transporting cargo into space is considerably more expensive than on Earth. Between 1970 and 2000, the cost to launch a spacecraft was about $18,000 per kilogram. Today, the cost of a SpaceX trip to the ISS comes in at about $2,700 per kilogram. By contrast, the cost of moving freight by air on Earth today is estimated around $1.50 - $4.50/kilogram. Free shipping and returns are unlikely to be coming to space anytime soon.
1 Moon day = 27 Earth days If you were standing on the surface of the Moon, it would take about 27 days for the Sun to move across the sky and return to its original position.
Not all investments in space are as forward-looking as cities on Mars. Several companies are attempting to use space technology to deliver solutions here on Earth. In each of these technologies, there are clearly opportunities for payment use cases on Earth, although the extent to which they outperform current tools and methods is not yet known. Within the last decade, the cost of launching satellites into space has come down dramatically. As a result, many companies such as OneWeb, SpaceX and Laserlight are attempting to deliver low-cost broadcast and communication capabilities. The hope is that satellites will make high-speed internet access ubiquitous on Earth. Today, connectivity is hampered by physical constraints that would not impact the signal from a satellite orbiting above the Earth. These same communication networks could be used to send and receive payment information to remote regions in an effort to bolster financial inclusion. Blockchain and AI innovations built for space-based use cases will support the growing adoption of these technologies on Earth. Blockchain technology is being explored as one way to account for transactions of money, inventory supplies, and information. As transaction ledgers are adapted to meet the complex needs of outer space, improvements to the use of blockchain systems will no doubt increase the effectiveness and power with which we use blockchain for applications on Earth. Likewise, machine learning and artificial neural networks are playing a significant role in space exploration. With applications ranging from navigation to enhanced situational awareness, AI will play a major role if we are to ultimately send people to Mars and other locations beyond the Earth-moon system. In 2018, NASA and Intel partnered to develop an alternative to GPS that could assist with navigation on the moon. Instead of relying on a satellite and tracking software to determine one’s location, the system relies on AI-processed images of the lunar surface.
NEARER TERM OPPORTUNITIES
“There is a fledgling investment boom, but the feasibility of space as an industry (beyond telecom and mapping satellites) requires [not only] engineering feasibility but the creation of economic value.”
— Scott Stern, MIT
As we consider the implications of a future where payments in space may one day be needed, the clear question is why now. Banks are not lining up to establish branches on the moon (yet). Even in an era where space tourism seems likely, there is every reason to believe that any commerce occurring during these astral vacations will be completed using closed systems such as on a cruise ship or in a theme park. If you’re paying $250,000 for a ticket, the bottle of water and the astronaut ice cream had better be included. So why now? On a practical level, there is a growing interest in coordinating public-private partnerships around space to fuel an expanding appetite for research and discovery. Perhaps more importantly, in an era where the path forward is built on the latest innovation, and the challenges of tomorrow will increasingly require a mix of ingenuity, collaboration and diligence, setting our sights on the stars might be exactly the mindset we need. The challenges facing humankind are not insignificant. If we seek to live in a world where anything is possible, why not focus on the impossible? If we hope for a future that is bright and far-reaching, why not reach for rocket ships? To quote the late Norman Vincent Peale, “Shoot for the moon. Even if you miss, you’ll land among the stars.”
Acknowledgements Expertise and inspiration for this article generously provided by the following: • Chantelle Baier (4Space | Managing Partner) • Cezar Rujan (MEGA AS | CEO) • Thais Russomano (InnovaSpace UK | CEO & Founder) • Nihar Shah (SES | VP Strategy and Market Intelligence)
Targeting Digital Financial Inclusion
The need for digital financial inclusion has never been greater. Even at the peak of the long-running economic boom of the past decade, many people still lacked access to financial services. Some 13 million people, or 6% of all U.S. adults, had no bank account and another 16% were underbanked, according to a May 2019 Federal Reserve report. Access to credit had been similarly dismal, with 26 million consumers credit invisible. Across the board, banking and credit issues disproportionately affect minority groups. The COVID-19 pandemic has shown the stark effects of this reality. People without bank accounts have had to wait weeks (some may wait months) to receive their government stimulus payments. They will continue to struggle to receive ongoing government benefits. One solution being discussed in the U.S. is national bank accounts. Proposals vary — one suggests using post offices as physical Fed bank branches, for instance — but the core idea revolves around all Americans having banking services through the Federal Reserve. While this would be the first example of average consumers having such central bank access, it would allow consumers to not only access relief and stimulus funding immediately, but also to send digital payments themselves. Of course, digital financial inclusion is more than just access to financial accounts. Consumers still need access to the devices and services that enable digital connectivity and communication. In the developing world, programs to increase digital financial inclusion have been making progress for years and could provide a roadmap for helping developed nations empower communities that might otherwise be left behind.
* The World Bank
of the 1.7 billion unbanked consumers around the world today have access to a mobile device*
RETAIL IN MOTION
Brick and mortar stores have struggled in the face of an increasing consumer preference for online and mobile commerce. One factor driving this trend is the increasing availability of same-day shipping from digital competition. At the same time, Mobility as a Service providers are seeing growth in non-consumer services like freight and food delivery. As a thought experiment, we consider the potential of a partnership between retail stores and Mobility as a Service providers.
MOBILITY AS AN ENTERPRISE SERVICE
Mobility as a Service (MaaS) sits at the intersection of the sharing and the on-demand economies. Defined by Deloitte in 2017 as “Netflix for transportation,” MaaS platforms allow consumers and businesses to interact with transit and transportation services on an as-needed basis. Examples of solutions include ride-hailing (Didi, Grab, Lyft, Uber), short-term bike and scooter rental (Bird, Cityscoot, Lime, Ofo), and multi-modal transit planning (Google Maps, HERE Mobility, Moovit). Seemingly overnight, MaaS—particularly in urban environments—transformed the way we think about getting from one place to another. Ride-hailing services have become as ubiquitous as taxis in most major cities across the globe. On-demand scooters and bikes have taken over the sidewalks in some cities. And major auto manufacturers have launched or invested in car-sharing services and short-term ownership programs.
Mobile P2P is defined as any peer-to-peer payment or transfer conducted using a mobile device, including both smartphones and basic feature phones.* Business Insider Intelligence, The Payments Ecosystem, 2019.
Mobility market to reach about 5 percent of the more than $7T transportation market by 2030**
* Research and Markets, Global Ride Hailing Services Market 2019-2023, November 2018. ** Goldman Sachs estimate
MOBILITY AS AN ENTERPRISE SERVICE (Contd.)
In the face of sagging demand for new vehicle ownership, increased urbanization and maturing technology, MaaS has thrived. Estimates of the market potential for MaaS vary depending on the definition of the segment. A recent report from Research and Markets, for example, predicts the car-hailing market will grow from just over $50 billion in 2018 to $120.2 billion in 2024. Goldman Sachs has estimated the new “mobility market” to reach about 5 percent of the more than $7 trillion transportation market by 2030 (somewhere in the neighborhood of $350 billion). Driving a growing portion of this growth is the expansion by MaaS companies into what we will refer to here as “enterprise-led” or commercial services. According to quarterly filings, revenues from Uber Eats and Uber Freight—both of which are targeted to commercial enterprises—are growing rapidly and yielding results. Though these enterprise-led rides account for only about 20 percent of Uber’s revenue, Freight grew more than 70 percent from Q3 2018 to Q3 2019 while Eats revenue more than doubled. Given the ubiquity of mobility solutions today and what appears to be a growing appetite for enterprise-led rides, it may be interesting to contemplate how MaaS platforms might partner with enterprise providers. In particular, the economic pressure facing physical stores may provide an opportunity for both retailers and MaaS providers to benefit.
Car-hailing market to grow exponentially between 2018 and 2024*
The physical store has long been a place for consumers to discover, compare and experience merchandise before a purchase. From the open-air bazaars of the ancient world to the pop-up experiences and mega-malls of today, the shop has persisted as a meeting place for buyers and sellers to exchange information, trust and value. But today, in the face of digital competition, physical stores appear to be losing ground. Seduced by the ease of online commerce, consumers have embraced digital interactions as their increasingly preferred means of commerce. Between 2017 and 2023, retail ecommerce sales are expected to grow from $2.3 trillion to more than $6.5 trillion, when it is predicted to make up as much as 22 percent of total retail sales. Comparing the holiday shopping seasons of 2018 and 2019, online sales in the United States grew 18.8 percent while overall retail spending grew by 3.4 percent. Whether by strategy or necessity, brands are closing stores at an accelerating pace. In 2019, more than 9,300 stores closed in North America alone—surpassing the mark of 8,000 closings recorded in 2017. Continuing the trend, forecasts from Cushman & Wakefield suggest the number of major chain store closings in North America could rise to as many as 12,000 in 2020.
THE DISAPPEARING ADVANTAGE OF LOCATION FOR RETAILERS
While many factors have contributed to the challenges facing physical retail today (cost, scale, etc.), the increasingly lower cost of last-mile shipping has stripped stores of an historical advantage they once held over digital commerce—instant gratification. In an always connected, instant access world, consumers have little patience for waiting—especially when a faster solution may be just a click away. Where physical stores once held a monopoly on this service, digital players and their robust fulfillment capabilities may be proving better able to meet the consumer’s need for convenience. For the on-demand consumer, physical stores once provided the only means of acquiring purchases immediately. Inspired or otherwise motivated to purchase something—say a bag of flour with which to bake a birthday cake—a consumer would go to the store and bring provisions home.
* eMarketer, Global Ecommerce 2019, June 2019. ** Business Insider, More than 2,600 stores are closing in 2020 as the retail apocalypse drags on, March 2020.
Share of e-commerce in total retail is on the rise*...
THE DISAPPEARING ADVANTAGE OF LOCATION FOR RETAILERS (Contd.)
Mail order, telephone and early online commerce allowed consumers to purchase items on demand but not receive them until a few days or even weeks later. This physical constraint underlined the importance of location for retail establishments. Today, the availability of one-day and same-day shipping has all but eliminated the location advantage in terms of serving the “need-it-now” consumer. As of March 2019, Amazon was able to provide either same-day or next-day delivery to more than 70 percent of U.S. consumers, according to RBC Financial Markets. Research completed by Invesp suggests the number of retailers offering same-day delivery service will rise from just more than 50 percent today to 65 percent by 2022. For consumers, same-day delivery has quickly become the norm. Almost half of online consumers (age 18-34) indicate they expect same-day delivery to be available when they shop online . Consumers can now not only get the cake flour they need for tonight’s birthday party, but they can do so without ever leaving the house.
...and so is the number of store closings in North America**
MOBILITY AS A SERVICE AS AN ALTERNATIVE
The scale and expertise of Amazon’s fulfillment capabilities create a formidable barrier for stores to overcome head-on. Even for large merchants, same-day shipping is often available for only a small section of their product catalog and is typically provided with added costs to the consumer. One response from retailers has been the deployment of curbside or “Buy Online Pickup in Store” (BOPIS) solutions as an alternative to same-day delivery. In both cases, consumers place orders online and then pick them up at a nearby store or partner location. This year, the curbside or BOPIS channel is projected to drive as much as $35 billion for retailers with as many as 25 percent of consumers opting for this click-to-brick fulfillment option. As an alternative, MaaS platforms might provide a competitively priced mechanism for last-mile delivery. Parcels “shipped” using a ride-hailing service could arrive within minutes, let alone hours. Instead of long-term contracts with logistics providers, merchants can look to the army of gig workers and readily accessible conveyances to solve their last-mile problems. In addition to carrying cargo, MaaS platforms could be employed in a way that extends the store visit beyond the threshold of the physical shop. One might imagine, for example, an embedded merchant experience within the MaaS booking app that provides a catalog of available merchant inventory, store maps and other contextually relevant information accessible by consumers during the ride to or from their destination. In addition to the physical transport of goods or customers, the added data a store might be able to glean (e.g. advance notice of who is coming the store or the destination from where they are coming) could allow the retailer to deliver even higher levels of time efficiency and personalized service than we might expect today. By moving the identification of the shopper to earlier in the shopping process – say at the time the consumer books a ride to the store – retailers are potentially better equipped to personalize the consumer experience, make the best use of the consumer’s time, and maximize the value of the sale. Rides booked in advance could allow stores to more efficiently predict when employee resources will be in high or low demand. Finally, the in-transit experience could be used to enrich a store’s understanding of consumer preferences and extract feedback on both new and existing products.
Click-to-brick is a growing preference of consumers
Buy Online Pickup in Store is projected to drive $35 billion for retailers
of consumers are expected to opt for click-to-brick fulfillment option
Stores are a seemingly irreplaceable aspect of merchandising, marketing and selling products. In fact, for some segments of the retail community, stores have never been more alluring. With its 2017 acquisition of Whole Foods, Amazon “did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does.” Digital native brands have also embraced the physical store as a new channel for scale and growth. According to predictions from the commercial real estate firm JLL, digital native brands will open as many as 850 stores between 2018 and 2023. Nothing in the market today suggests stores are going away any time soon. Even still, there can be no doubt that the physical retail store is in a period of crisis only exacerbated by online merchants’ accelerating ability to provide same-day shipping. MaaS and specifically the growing opportunity in enterprise-led rides may serve as an effective counterbalance. The flexibility offered in terms of availability and routes paves the way for some potentially interesting use cases that could ultimately drive value for both merchants and consumers. Armed with knowledge of a consumer’s preferences and even intended purchases (e.g. wish lists, abandoned carts), and equipped with the right local inventory, one might envision a Trunk Club-inspired home try-on service where consumers are delivered clothes to try on at home. Of course, ideas such as this and others will need to be thought through on an individual brand and even store basis. Are the goods (or people) safely and responsibly delivered? What investments and processes will be required to manage the potentially limited inventory at the local store level? What other considerations – data privacy, inventory management, restocking costs—will need to be assessed? Today, low- or no-cost same-day shipping is reserved for the largest retailers; however, improving economics will almost certainly drive this capability further down market over the years to come. Technology continues to chip away at the cost of last-mile delivery. AI will continue to optimize delivery routes. The Internet of Things is putting advanced telematic and vehicle health data in the hands of fleets leading to more efficient service utilization, and autonomous vehicles are on the horizon. Whether enterprise-led rides prove to be an effective mechanism by which retail stores can level the playing field against same-day delivery solutions remains to be seen. However, the cost of doing nothing is only getting higher.
stores will be opened by digital native brands between 2018 and 2023
Marketplaces, Aggregators and MSPs?
Already a fast-growing segment, consumer adoption of online commerce has accelerated in the face of increasing demand for home delivery. With a shift away from discretionary spending, consumers largely turned to established, digital marketplaces and aggregators for essentials including food and grocery deliveries. In March, for example, sales of homecare and laundry products by households in Mexico on Mercado Libre jumped by over 400%. Not surprisingly, marketplaces and aggregators have become attractive options for at least some categories of merchants looking to move sales and operations online. Restaurants, liquor stores and grocery stores, for example, are maintaining operations through social distancing and quarantine measures by turning to delivery and curbside pickup solutions. In the wake of COVID-19, Alibaba has taken the opportunity to extend its platform into services (e.g. grocery delivery, legal services) with a target of adding 40 million sellers over the next three years. Interestingly, our notion of a marketplace or aggregator may need to expand as merchants alter business models to shift more of their operations online. For merchants targeting a localized market, global marketplaces and aggregators may not be the preferred partner. Instead, traditional Merchant Service Providers (MSPs) like Shopify and Square as well as social networks may be better equipped to provide the turnkey solutions these freshly digital businesses require (e.g. actionable local insights, pre-order and pickup, appointment management, loyalty programs, etc.)
* Digital Commerce 360, How SARS contributed to the birth of China ecommerce, Feb 2020.** Adobe Digital Economy Index, Adobe Analytics, April 2020.
Sales at Alibaba’s B2B marketplace for B2C commerce rose 50% during the SARS epidemic in 2003 as consumers and merchants in China flocked to it. This inspired Alibaba to develop Taobao, which supplanted eBay as the largest Chinese consumer-to-consumer selling site within two years*
Online sales in the U.S. jumped by almost 50% in the first three weeks of April as compared to early March, before social distancing measures began**
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