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May 15th 2020

The Ecommerce Catalyst: Five Questions with Toby McFarlane

With the COVID-19 pandemic causing widespread store closures, the trend of ecommerce growth has accelerated faster than anyone could have anticipated.


Toby McFarlane, CMSPI’s Head of Ecommerce, provides insight into in-store and ecommerce trends; what the ‘new normal’ will look like; and what merchants should be doing now to overcome the new challenges.

Prior to the outbreak reaching the U.S., what were the growing trends for in-store vs online spending?

Ecommerce volumes have been increasing for a number of years now: with new advances in technology and payment methods, it’s now very easy to buy services and products online. Particular sectors, such as apparel, have been huge beneficiaries of increases in sales on their ecommerce platforms.

Many consumers no longer want to spend time visiting various stores to find certain products, and with younger generations having grown up buying online – that’s only going to increase. Of course, a key trend that has been emerging for several years is the growth of online retail giants – such as Amazon. These merchants have optimized their customer experience to the extent that they are now eating up volumes across many different retail industries.

Other, less mature online sectors have also entered the market recently – such as Quick Service Restaurants (QSRs) via third party apps – with some merchants even trying to build their own apps in-house, with mixed success. Grocery has been one industry where consumers typically want to go into the store to look at the product and assess it before buying: as a result, the industry has historically seen a slower migration to ecommerce.

However, there are always going to be certain products people prefer to shop for in-store rather than online, and some businesses have carved out a niche by being in-store only. The high street will always be there, but it’s likely to become much smaller in future.

How have these trends evolved during the pandemic?

The pandemic has significantly accelerated this shift from in-store to online retail: we’ve seen massive increases in online volumes, with many physical stores closed due to being considered nonessential. In some cases, merchants are seeing over three or four times the volume on their ecommerce platform compared to pre-COVID. Some high street retailers went from being 80-90% in-store to being pureplay ecommerce merchants pretty much overnight. Grocery merchants, who historically have seen ecommerce as less of a priority, have such a huge opportunity now to master the ecommerce customer experience – those that can adapt the quickest stand to gain a lot of market share.

In fact, I had my first ever grocery delivery the other day and it was really convenient. Like myself, people have been forced to go into these new delivery habits. It takes approximately two months to cement a new habit, and after that they’re hard to get rid of. We’ve now passed that mark in the COVID crisis – so in my opinion, those consumer habits are going to be permanent.

"Restaurants have been hit hard, with many of their stores closing. The ones that were quicker to market with ecommerce solutions are benefitting from increased volumes, but many have been slow to catch up."

Toby McFarlane - Head of Ecommerce

Will retail return to ‘normal’ when lockdown ends? If not, what will the ‘new normal’ look like?

Our analysis indicates there will be a permanent shift in consumer spending habits post COVID-19, affecting all sectors. Merchants in the fashion space, for instance, could see transactions via ecommerce channels increase from around 30% pre-COVID to 50-60%. Historically, online grocery has held under 5% of the sector’s market share, but we are currently seeing that shift to around 10-15%. We are expecting the online grocery market share to land somewhere in the middle of those two numbers – certainly at least in the short term, but possibly into the long-term.

Fuel retail can’t really shift towards online easily; it’s not something fuel merchants have generally looked at. However, there’s a huge opportunity for large fuel merchants to get an app out to the market and create an easy-to-use ecommerce solution. The customer experience for paying for fuel has lots of room for improvement in terms of efficiency – those that can optimize will see a big shift in volumes and gain an increased competitive advantage.

For restaurants, there is unlikely to be a substantial shift towards ecommerce, as the level of service and experience of fine dining can’t really be delivered. In the QSR space, however, there has already been a trend of ordering via third party apps. We’re likely to see those merchants put more emphasis on developing their own apps, instead of working with third parties who tend to take a significant share of the revenue. Ultimately, we could see the many QSRs who have the financial muscle invest significant amounts in tech.

What are the biggest challenges for merchants who are trading more online than they were before?

Ecommerce approval rates – calculated as the value of successful authorizations divided by the value of authorization attempts – are lower in the online space by default. Customers can’t verify a transaction as easily online, and fraud is higher – especially since EMV came into play. In-store approval rates are around 97%: but for ecommerce, they are around 85% on average.

If a customer shops via an ecommerce platform, there’s a higher chance of the transaction being declined – running the risk of losing the customer permanently. Our data shows that when a customer must abandon a purchase online, 50% of the time they will take their business to a competitor.

Low approval rates inherently involve instances of false declines: when genuine customers with sufficient funds try to pay online and have their transaction declined. This is especially important now, with a lot of people shopping online for the first time. A negative experience could mean you could lose their custom for life.

The next challenge is preventing fraud. Fraud attacks are 80% more likely to occur online than in a Card Present (CP) environment: but if you don’t have fraud expertise in-house, which third-parties do you engage with? There are many fraud providers available on the market, each with their own unique USPs and qualities for merchants to consider.

Additionally, the cost of processing transactions is higher online – generally due to variations in interchange fees and network fees. Fraud providers will also charge merchants a fee for screening failed authorizations.

For merchants, the biggest challenge is balancing low approval rates, high false declines, high fraud, and high costs to create an optimized, cost-effective customer experience online.

What advice would you give to merchants to ensure success, or survival, during and after this tumultuous time?

During the crisis, merchants must be flexible and constantly adapting to an evolving retail landscape. It’s difficult if merchants have switched to ecommerce overnight to implement new technologies. However, merchants can be successful if they engage and seek advice from their suppliers; make sure they’re up to date on what the market is doing; and involve expertise from third parties. At CMSPI, we have in-depth visibility into our global client base and what’s happening in the market – enabling us to advise our merchants on what to do to mitigate any potential damage during the crisis.

Post-COVID-19, there are a number of key actions market-leading ecommerce merchants will be taking to maximize their online revenue:

  • Continuing engagement of suppliers and third parties to ensure an optimal approval rate and customer experience
  • Benchmarking arrangements to make sure they can effectively measure how their approval, fraud and chargeback rates compare against their peers in the industry
  • Ensuring they’re not blinkered, by looking at benchmarks from a range of providers to create a best-in-class comparison and highlight inefficiencies in their supply chain
  • Using information from benchmarking to hold suppliers to account and working with experts in the industry to optimize – increasing approval rates alone could be worth tens of millions of dollars in revenue and market share
  • Looking at payments in a more strategic way, ensuring they’re modelling for future impacts on ecommerce to mitigate and budget
  • For those transacting internationally, looking at what’s happening with SCA and 3D Secure in Europe, in terms of tailored exemption strategy
  • Making sure the balance is right between letting good customers through and stopping fraud

Toby explores these issues further, and offers practical tips for merchants, in our recent merchant-only webinar. To find out more about how your business can adapt for a more online retail environment, request the full recording today: ‘The Ecommerce Catalyst: Adapting Your Payments for an Online World’.