Retailers have had to face many challenges in the last few years. Not only from new, innovative entrants to the market, offering improved customer propositions and experiences (our thoughts on innovation are well documented here and here), but also from the supposed death of the high street and the uncertainty surrounding Brexit. The result? A palpable decline in consumer confidence and significant downward pressure on discretionary spend across the board.

Growth in discretionary spend has been slowing down for several years, and in fact remained flat in 2018 (ONS statistics), as the shift in spending habits and retail business models continues to change and evolve. The dismal Christmas trading which normally buoys most retailers is yet another example of this.

As this downward trend looks to continue for the foreseeable future, retailers must therefore continue to analyse not only the ‘what’ in consumer spending habits, but also look to analyse and respond to changing trends in the ‘why’ and the ‘how’. The ‘how’ of consumer spend is often overlooked. Where a retailer’s sales proposition creates a barrier or avoidable friction in the conversion process, it will undermine the ‘what’ and the ‘why’, regardless of that retailer’s products, brand perception or even price.

According to the BRC annual payments survey, cards were used to pay for 76% of retail sales volume in 2018 and contactless cards, only introduced to the market ten years ago, accounted for over a third of these card payments. This won’t come as a surprise to most of you, we are after all heading towards being a cashless society. With online estimated to have accounted for 22% of total UK retail sales in 2018 and 75% of millennials saying they prefer to shop online rather than in physical stores, this percentage is going to increase, rapidly spurred on by the prevalence of mobile and tablet shopping.

In fact, claims that the forecast for card use in 2026 shows a 7.3% increase in debit card payments, a 32% increase in credit card payments with a further 43% drop in cash payments. Consumers are becoming savvy to using store cards, debit cards from new fintech entrants such as Monzo and the likes of online services such as PayPal and Klarna to pay for purchases. It is becoming evident that consumers not only want choice and transparency from their retailers, demanding better customer service and improved propositions when choosing where they spend their hard earnt quote – unquote “cash”; but also choice and transparency with how they pay for their purchases.

As consumers become savvier to more beneficial and safer ways of paying, retailers must keep up, or risk losing custom to competitors that offer alternative methods of payment.

Alternative payments options (APOs) now appear endless as well. Why choose between just cash and card when consumers can use ‘Buy Now Pay Later’ (BNPL) to delay payment or pay in instalments? Or get discounts and points when using a store card or have purchases protected when using a credit card? As consumers become savvier to more beneficial and safer ways of paying, retailers must keep up, or risk losing custom to competitors that offer alternative methods of payment.

In Australia, the revolution is already well under way. Buy Now Pay Later (BNPL) has already had a market-changing impact in the last few years with over 25% of Australian millennials expected to use BNPL through the leading provider in FY18 alone. And the Generation X take up is also growing fast. In the UK, to keep up with their customers’ needs and buying habits, the likes of Topshop, Amazon, Argos, Apple, New Look, John Lewis and Miss Selfridge have already introduced try before you buy options. And with the introduction of SWIFT’s new ‘Pay Later’ API standard in January 2019, it will now be even easier for other retailers to offer it too (we will be looking further at initiatives such as SWIFT’s Pay Later and Open Banking in one of our upcoming blog posts).

Although at first glance it appears that the customer has all the control, the benefits to a retailer who offers multiple ways to pay are also abundant. Data from Australia shows that both basket size and conversion rate for retailers improve by more than 20% when BNPL is used as an option. And repeat customer transaction levels are high with 85% of customers taking out more than one plan. In the UK, figures show that 30% more customers make purchases when credit is offered.

It also offers the opportunity to build stronger relationships with customers, improving loyalty and stickiness. A great customer experience means happy customers which means higher sales. We’ve seen this positive correlation between choice and loyalty clearly with Amazon and their multiple options for delivery service and associated costs. Through this choice consumers have become loyal to the largest conglomerate on the planet. Retailers need to look at the whole customer journey and alternative forms of payments are often the forgotten link in the chain, and potentially the one most capable of improving loyalty.

Alternative forms of payments are often the forgotten link in the chain and potentially the one most capable of improving loyalty.

Luckily there are plenty of ways for a retailer to improve their credit proposition quickly and easily. Credit options include a BNPL scheme or a pay-by-instalments offering (no longer just limited to large ticket items!) Or offering a white-labelled store credit card; becoming a lender themselves; or partnering with the likes of Klarna or Openpay to provide this choice for customers. With regulatory implications to think about and internal capabilities to juggle, the thought of branching out into this potentially unfamiliar financial territory may seem a little daunting…

And, of course, a credit proposition will always involve a regulatory angle for a retailer. This should not, however, be viewed with circumspection, but embraced. While there is an operational cost and risk, firms should view regulatory standards on matters such as good corporate governance, risk management, leadership, conduct and customer service, as simply good practice that firms should look to emulate regardless of whether or not the activity is ‘regulated’. Those risks commonly perceived as being ‘compliance risks’ are actually those that most customer-centric retailers will have already captured in seeking to drive good outcomes for their customers. These include being clear when promoting credit, treating customers fairly before, during and after sales or responding appropriately to customer concerns.

The benefits of including a payments proposition as a core component of their brand’s position have proved to be invaluable for the retailers that do offer it. With the right regulatory expertise, it is not as daunting a prospect as it may seem…

Consumer confidence is low in our current retail climate, and loyalty is hard to come by. Surely, all retailers should be doing all they can to engage and delight their customers, and it seems like flexible and safe payment options are a powerful way to do just that.