As volumes begin to stabilize and the new normal begins to emerge, now is the perfect time for grocers to take stock. Chief among this should be your payments strategy: if optimized, you will see increased revenue, improved customer experience, reduced costs and mitigated risk.
CMSPI is behind many of the world’s leading payments teams, and in this article, I’ve picked two key considerations for grocers: increased online volumes and the growth of contactless.
Unfamiliar Territory – The Shift to Online
Like many industries, grocers have seen a surge in online spending during the pandemic. Research from Bain suggests online volumes increased from 3-4% of all grocery spend to 10-15% at the height of the pandemic. It remains to be seen how much of this volume will stick post-pandemic, but Bain states it is likely to settle at between 5-10% of all grocery spend. In monetary terms, that means U.S. online grocery spend is scheduled to increase from $13.1 billion in 2019 to $51.4 billion in 2020, a nearly fourfold increase (based on 2019 grocery volumes of $373.5 billion and 2020 grocery volumes of $411 billion (a 10% increase), and assuming a 3.5% online grocery share in 2019 and a 12.5% share in 2020).
This brings with it several challenges, not least a total operational re-calibration. Grocers will also find that online payments acceptance is a lot more complex than it is in-store. Firstly, there is a larger supply chain to coordinate, including third-party gateways and fraud management suppliers. Additionally, there is also substantially higher risk. Online grocers need to strike a balance between fraud, conversion rates and approval rates. Fraud is much higher online: Nilson Report figures suggest the card not present fraud rate is 0.247% – more than six times higher than the card present fraud rate. U.S. merchants can expect to see online fraud increase by $95 million in 2020. Customer drop-out rates are also far higher online, with average card abandonment rates of nearly 70%. Meanwhile, CMSPI estimates that the average approval rate for online transactions is 85%, far lower than the 97% average approval rate for in-store purchases. U.S. grocers can expect to lose $7.7 billion in online declined transactions in 2020, a rapid increase from $1.96 billion in 2019. Further, CMSPI analysis suggests one in five declined transactions is a false decline (where transactions are declined due to friction within the payments supply chain – completely out of the merchant’s control), meaning U.S. grocers will miss out on $1.54 billion from good customers in 2020.
What does this mean?
Grocers urgently need to address their approval rates, or face losing out on like-for-like sales (in-store to online) and customers switching to competitors. CMSPI has a dedicated approvals & fraud team that specializes in capturing as many legitimate transactions as possible, and driving up revenues through an analytical, scientific approach to optimizing the payments supply chain. We have a track record of boosting the retailers top-line by reducing friction between each player.
Unfortunately, the average cost of card payments acceptance is also much higher in the online space. Additionally, in the online space it has historically been a lot more difficult to engage competitive forces through Durbin’s No Network Exclusivity (NNE) clause (Durbin’s NNE clause mandates that every debit card issued in the U.S. needs to include at least two unaffiliated networks, which gives merchants the choice of which network to route transactions through), keeping online interchange and network fees high. PINless debit has been developed by local U.S. networks to enable them to process online transactions and should be the “white knight” here, but many banks are not enabling PINless functionality on their cards.
There is hope on the horizon for merchants however, as the Federal Trade Commission (FTC) launched an inquiry in November 2019. CMSPI is currently supporting merchant trade associations such as RILA and the MAG in discussions with the FTC, and there is hope a positive result can be achieved for merchants. With online PINless volumes potentially substantially increasing soon, online grocers need to be assessing the business case for implementation now.
"Many grocers are accepting online payments for the first time, while for others low volumes pre-pandemic meant it wasn’t previously a strategic focus. The inevitable result is that many online grocers currently have poor arrangements which are costing them; both in top-line revenue, and in inflated swipe fees. CMSPI has vast experience in partnering up with grocery firms to boost revenues, implement strategic solutions to improve customer experience, and drive down the cost per transaction."
Elley Frost - President (North America)
The Growth of Contactless – Friend or Foe?
Contactless payments have so far struggled to take off in the U.S., in sharp contrast to countries such as Canada, Australia and the UK, where contactless now constitutes more than half of all card transactions. One of the key reasons for this is a large portion of merchants have not switched on contactless Near Field Communication (NFC) capability. A study from Forrester suggests 60% of merchants did not accept contactless payments prior to the pandemic.
There are two fundamental reasons why grocers are so reluctant to embrace contactless. Firstly, it cannibalizes cash payments, which are still generally the cheapest tender type for merchants to accept. Secondly, contactless potentially restricts merchants’ ability to route debit card transactions to local debit networks, which are typically lower cost for merchants. The issue is the highest priority application identifier (AID) is automatically selected for contactless transactions, and that is Visa and Mastercard’s Common AID, which does not enable routing to local debit networks.
The pandemic has, however, forced merchants’ hands. 18% of U.S. merchants have switched on contactless during 2020 according to Forrester, with a further 19% planning to do so in the next 18 months. Grocers to switch on contactless during the pandemic include Publix. This is an inevitable response to consumer demand: the Forrester survey suggests 40% of grocers using contactless are now seeing it for more than 50% of their transactions.
During the pandemic we’ve regularly seen a focus on touchless payments: avoiding physical contact at the POS. It’s important to mention that contactless is just one type of touchless payment for grocers. Other touchless solutions grocers may want to consider promoting include QR codes, PINless debit, no signature card transactions, curbside pickup, buy online and pickup in-store and remote ordering for delivery (Source: Merchant Advisory Group).
What does this mean?
Debit routing is complex, and there are many barriers – the growth of contactless is a rising blockade – but routing is still one of the biggest opportunities where merchants can drive cost reductions. CMSPI is uniquely positioned to work with the grocery sector to ensure that incentives are maximized and rates are optimized.
The average cost per transaction is soaring, and the shift to online presents new, often unfamiliar challenges for merchants. CMSPI is behind the leading payments teams across the globe – our team of expert payments consultants have a track record of driving revenue growth, mitigating fraud, and delivering substantial cost reductions. If you’d like to find out how a CMSPI process works, then contact me today at …. I’d welcome a discussion about the issues you’re seeing in relation to payments.