4 page white paper on the impact of digital wallets in the retail industry.

1.
April 2016
Digital wallets: the future of world class retail
customer experience
The rise of digital wallets
Advances in technology over the last decade have transformed mobile devices from simple phones into powerful
compu ng tools that can be used for everything from loca ng a nearby restaurant to paying for their groceries. Consumer
use of mobile devices to shop both online and in‐store combined with a digital economy forecast to reach $850 billion by
2020 is pushing merchants to adopt the use of digital payments. A recent study by Ci Retail Services found that shoppers 1 2
are embracing digital wallet adop on at a growing pace with usage increasing from 35% in 2014 to 55% at the end of 2015.
Asia Pacific leads the way in digital wallet adop on and growth forecasts with clothing and accessories being the most 3
common mobile shopping purchases there at 35% . Retailers need to be taking steps now in order to respond to this growth 4
area and ensure they are ready to evolve with their customers.
Recent innovations in nancial technology have implications on moulding client behaviours and
fueling expectations of consumers with regard to ease, convenience and speed of payments
.
5
Recent innovations & gaps present opportunities for retailers that go beyond the transaction
Whilst advances in technology are driving behavioural change, in line this we are seeing regulatory developments in the UK
that are helping to drive change across the digital wallets space.
The introduc on of Apple Pay and Google Wallet/Android Pay has
resulted in increased consumer exposure to digital wallets, coupled
with the growing support of the banking industry. All major UK banks
now support Apple Pay
while many popular financial ins tu ons
6
worldwide have already offered support for one or both of the
Apple/Google services. This has proven to be a sensible move as
consumer usage of these services is growing steadily (Figure 1 ). For
7
example, in the US there is a steady growth of Android Pay amongst
consumers (using Google Wallet) with 1.5 million new registra ons
happening each month
. This is an indicator of the poten al spread
8
of this feature in the UK for Android users.
Further, an increasing focus by regulators on consumer protec on has led the European Commission to develop a unified
payment services regula ons framework that be er fosters compe on, innova on and security leading to the crea on of
the Payment Service Direc ve 2 (PSD2) ,
. The leading regulatory framework for the UK is the Payment System Regula ons
9 10
(which implements PSD2 and the Electronic Money Regula ons). Retailers and payment solu ons providers will also have to
consider Data Protec on laws. .
11
1
iHuman Meda 2015, h ps://ihumanmedia.com/2015/02/21/digital‐wallet‐economy‐850‐billion‐apple‐pay‐google‐paypal‐square‐facebook/
2
Luxury Daily 2016, h p://www.luxurydaily.com/shoppers‐are‐adop ng‐digital‐wallets‐at‐a‐rapid‐pace‐ci /
3
Allied Market Research 2013, (NFC, Digital Wallet) Market… h ps://www.alliedmarketresearch.com/mobile‐wallet‐market
4
Enterprise Innova on 2016, h p://www.enterpriseinnova on.net/ar cle/digital‐wallets‐surge‐popularity‐asia‐pacific‐1733203163
5
BNY Mellon 2015, h ps://www.bnymellon.com/_global‐assets/pdf/our‐thinking/innova on‐in‐payments‐the‐future‐is‐fintech.pdf
6
TechCrunch 2016, h p://techcrunch.com/2016/04/05/all‐major‐uk‐banks‐now‐support‐apple‐pay‐as‐barclays‐finally‐goes‐live/
7
Adapted ‐ Sta sta 2015, h p://www.sta sta.com/sta s cs/251735/consumer‐awareness‐and‐usage‐of‐digital‐wallet‐offerings/
8
Android Blog 2016, h p://officialandroid.blogspot.co.uk/2016/03/tap‐pay‐uk.html
9
European Payments Council 2014, h p://www.europeanpaymentscouncil.eu/pdf/EPC_Ar cle_309.pdf
10
Sepa for Corporates 2015, h p://www.sepaforcorporates.com/single‐euro‐payments‐area/5‐things‐need‐know‐psd2‐payment‐services‐direc ve/
11
Crowd Fund Insider 2016, h p://www.crowdfundinsider.com/2016/04/83896‐the‐uk‐wants‐to‐lead‐the‐world‐in‐digital‐payments‐regulators‐are‐there‐to‐help/

2.
This is leading to the UK retail market being ripe for change and innova on. In par cular, savvy retailers should work quickly
to address gaps that exist due to concerns that have been raised by consumers around issues such as security and ease of
use:
,
12 13
Getting ahead of the curve - what’s at stake?
The race to succeed in the digital wallets space extends beyond a retailer’s tradi onal compe tors. Banks (with their
current payments and financial management exper se), "tech giants" (providing payment solu ons) and retailers (with the
offer of loyalty and omni‐channel convenience) all stand to benefit from
increasing adop on of digital wallets as a way of building customer
rela onships. Failure to do so will lead to loss of customers, loss of profit and
poten ally the loss of the business in its en rety.
Late adop ng retailers account for 25% of the market (Figure 2) and those 14
op ng for an industry mobile wallet will be le at a serious disadvantage as
more consumers may favour compe tors that keep up with digital trends.
There is a huge opportunity for retailers to capitalise by building customer
rela onships through omni‐channel shopping and loyalty.
As consumers grow accustomed to the bene ts of using technology in their
daily lives, their expectations also grow.
15
12
Luxury Daily 2016, h p://www.luxurydaily.com/shoppers‐are‐adop ng‐digital‐wallets‐at‐a‐rapid‐pace‐ci /
13
S ecurity Intelligence 2014, h ps://securityintelligence.com/target‐breach‐protect‐against‐similar‐a acks‐retailers/,
h p://www.gallup.com/businessjournal/184034/no‐one‐winning‐ba le‐digital‐wallet‐customers.aspx
14
h p://www.strategyand.pwc.com/report/serving‐connected‐customers
15
McKinsey 2015, P17
h p://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/Financial%20Services/Latest%20thinking/Payments/Global_payments_2015_A_healthy_industry_confronts_disrup on.ash
x

3.
It is vital that retailers meet customer expecta ons and respond to the four key opportuni es iden fied ‐ there is a need to
take ac on now in order to get, and stay, ahead of the curve. By doing this retailers and their customers stand to benefit in
a number of areas ,
: 16 17
Customer Benefits
● Shopping convenience ‐ removal of payment detail
forms online and shorter in‐store queues
● Easy overview of expenditure ‐ digital wallet
accounts allow quick grasp of current spending
● Free of charge ‐ no cost to the customer
● Accurate informa on ‐ reduces chance of human
error that can cause delivery failures
● Secure payment due to encryp on of financial data
○ Privacy is maintained ➔ customer control
● Instant deals
● Personalisa on with relevant content & offers
● Data transparency by retailer & payment providers
● Customers enjoy a seamless payment experience
Retailer Benefits
● Reduced shopping cart abandonment ➔ higher online
conversion rates
● Secure receipt of payment & fraud protec on
● Lower cost:
○ Elimina on of expensive point of sale transac on devices
○ Fewer cashier personnel
○ Removal of intermediaries ➔ no interchange fee
● Compe ve advantage over other retailers
● Smaller and cash‐only businesses can now accept credit cards
via digital wallets
● Loyalty reward programmes can be incorporated
● Mutually beneficial buying‐and‐selling ini a ves of insigh ul
consumer data between wallet providers and retailers
● Customer advocacy ➔ loyalty
Implementing a digital wallets initiative
Recommendations for world class customer service
We have iden fied four key recommenda ons needed to implement a successful digital wallet programme:
1. Ease: Deliver seamless payment experiences which are integrated with wider purchasing ac vity that work on all devices
across all channels
2 . Security: Convince customers that payments can be made securely and privately
3 . Awareness: Raise awareness so that customers are sufficiently informed to make decisions
4 . Value: Increase the value provided to customers making digital payments through an enhanced customer experience
incorpora ng rewards, loyalty, personalisa on, receipts, financial management and more
Strategy for change
A two stage approach is recommended to develop and implement a successful digital wallets ini a ve:
1. Tac cal ac on: There is a need to directly respond to the customer facing opportuni es iden fied. This will help to drive
adop on of digital wallets and provide enhanced customer experience.
2. Organise for ongoing improvement: Once the ini al ac ons have been completed a more strategic approach is needed
to enable the retailer to establish an ongoing process of reviewing, measuring and evolving the customer journey. It is
necessary to ensure that organisa ons have the necessary skills and structure to enable them to keep abreast of and
respond to ongoing market changes.
16
S ecure Trading 2015, h p://www.securetrading.com/blog/rise‐digital‐wallet‐benefits‐online‐merchants/
17
Market Watch 2012, h p://www.marketwatch.com/story/5‐things‐to‐know‐about‐digital‐wallets‐2012‐11‐29

4.
Key tactics for implementation of each recommendation together with associated risks and challenges
Conclusion
The increasing relevance and disrup ve nature of digital wallets/payments in the retail industry cannot be over
emphasised. With an ever growing global interconnectedness, enabled by technology advancements, the retail industry has
evolved to witness a huge consumer base that surpasses geographical boundaries. While this evolu on has come with
opportuni es and benefits for retailers with the appropriate agility and financial muscle, it also presents a real problem for
retailers that are not capable of keeping up with the required innova on to compete for global and technology savvy
customers. For the la er kind of retailers, their profit margins and client base would no doubt be threatened. Digital
wallets will have the effect of changing the retail (and other) industry structures, compe ve environment and compe on
strategies for retailers. A 2015 report by McKinsey suggested that bank profits from payments may fall by up to 35% in the
next 10 years due to the rise of digital payments ; a typical example of digital wallets affec ng en re industries. 18
This trend does not come without its risks; the growing dependence on technology for payments will no doubt raise issues
of data protec on, privacy and cyber security. Moreover, there may be issues around increasing harmonisa on of tax
management, owing to growth in digital ‘money’. These are all concerns for relevant na onal and interna onal financial
and trade regulatory authori es to contend with. It remains to be seen to what extent the regulatory authori es will indeed
‘regulate’ this trend in payments and in the retail industry. Nonetheless, digital wallets may just be the future of retail.
18
The Globe and Mail 2015, h p://www.theglobeandmail.com/report‐on‐business/fintech‐startups‐pose‐threat‐to‐tradi onal‐banks‐retail‐profit/ar cle26587892/