Optimizing payments for omni-channel commerce 5 best practices

1 www.adyen.com Foreword Adyen, the payments technology leader, commissioned Edgar, Dunn & Company (EDC), an independent global financial services and payments consultancy, to undertake this white paper. The white paper would not have been possible without valuable input from key merchants that shared insights into their advanced omni-channel payments strategies. Adyen and EDC would like to thank Dave Redmond of Inditex, Virginie Melaine-Christensen of Burberry, Derk Busser of de Bijenkorf, Martijn Cornelissen of Rituals, Frans Jonker of ticketscript, and Jan van der Holst, for contributing their time and knowledge to this research.

2 Contents

Executive Summary 4 Introduction Omni–channel from buzzword to reality 6

Section 1 What are the main use cases that merchants are focusing on, and their benefits? 8 Use case 1 Endless aisle 9 Use case 2 Click and collect (buy online, pick up in-store) 10 Use case 3 “One–click” in an omni–channel environment 12 Use case 4 Omni–channel returns 14 Use case 5 Future use cases 16

Section 2 What are the best practices to ensure that payments can support these omni-channel use cases? 18 Best practice 1 Make the payment step as frictionless as possible 19 Best practice 2 Three Ts: Test, Train, and Top champions 21 Best practice 3 Centralize payments management 22 Best practice 4 Leverage authorization capture delay 23 Best practice 5 Adjust fraud prevention approaches 24

Adyen: Payments as a key driver of omni-channel commerce 26

Appendix What are the three main drivers of change in favor of omni-channel? 30 Driver 1 Changes in consumer expectations and behavior 30 Driver 2 New technologies 31 Driver 3 Regulatory changes and emerging standards 33

Conclusion and next steps 34

3 Executive Summary

Location, location, location. This has been the mantra in both real estate and retail for decades. The origin of this famous mantra was apparently a 1926 real estate classified ad in the Chicago Tribune: “Attention salesmen, sales managers: location, location, location, close to Rogers Park1.”

However, times are changing. The emergence of “omni-channel” is driving major restructuring within the retail Section 1 overview - use cases sector as merchants seek to serve the omni-channel shopper, who is keen to Use case High–level description Benefits for merchants buy whenever, wherever and however they want. This white paper undertaken 1. Endless aisle Consumers can make Helps address OOS issues by Edgar, Dunn & Company (EDC) an online purchase that result in 4% loss in demonstrates that “omni-channel” is no while in-store for out-of- category sales. Adyen’s longer just a buzzword, and provides stock (OOS) items via a merchants grew sales by examples of implementations. consumer-facing tablet (or approximately +2%. in-store kiosk) with a card- The new guiding principle for retail accepting mPOS. may no longer be the 1926 classified ad’s mantra, but instead: experience, 2. Click and collect Consumers can request to 32% of consumers (UK) experience, experience; with “payments” (Buy online, pick up their online shopping purchased an additional as a key enabler for delivering this omni- pick up in-store) cart at a physical store item while in store, with an channel customer experience. (sometimes same day). average extra spend of £18.

3. Omni–channel Consumers can store An Adyen merchant This white paper does not discuss one–click their card details during generated up to 55% omni-channel in a generic or theoretical an e-commerce or face- (ticketing operator) manner, but takes a much more to-face purchase, and incremental sales thanks pragmatic approach involving specific can pay via one-click to one-click. real-life examples (based on interviews or zero-click for future with merchants) and tangible data m-commerce. about their impact. It is divided into three sections: 4. Omni–channel Consumers can return Lower level of return fraud returns their online purchase via (a $17.6bn per annum Section 1: Examples of omni-channel any physical store and issue in the US alone), plus initiatives and their actual impacts receive a refund on their an opportunity to cross– card. sell. Section 2: Payments-related best practices for omni-channel merchants 5. Future use Deployment of mobile Typically merchants cases wallets like Apple Pay; expect a higher Appendix: Insights into what drives the social media payments; conversion rate (especially emergence of omni-channel mPOS; suspended basket; among m–commerce online view of stock transactions). availability; faster delivery time; Internet of Things.

4 1 Source: http://www.nytimes.com/2009/06/28/magazine/28FOB-onlanguage-t.html Section 2 overview - best practices Appendix - drivers of omni-channel Best practices Key takeaways for merchants Driver 1: Changes in consumer 1. Make the payment step a. Enable payment data storage for a seamless expectations and behavior as frictionless as possible omni-channel customer experience Mobile devices (especially b. Ensure the right payment acceptance policy smartphones) are changing the for each channel consumer’s daily life, how they shop, c. Deploy innovative in-store technologies to and how they make their purchase address real pain points decision.

2. Three Ts - Test, Train, a. Test in the physical environment For instance, over 25% of consumers in and Top champions (“test and fail fast”) Australia or the US changed their mind b. Train (especially sales assistants) about an in-store purchase following c. Identify top champions in physical stores research on their smartphone. Also over 40% already make purchases on 3. Centralize payments Consolidate payments partners across channels their smartphone. management and countries, and centralize internal back-office activities such as reporting and reconciliation. Driver 2: New technologies A long list of new technologies 4. Leverage authorization Authorization capture delay at the point-of- are impacting and enabling new capture delay sale allows merchants to receive a payment omni-channel use cases including authorization, but only capture it when the order mPOS, in-store kiosks, near field is shipped, or cancel it in case the goods cannot communication (NFC), new mobile- be shipped. based wallets such as Apple Pay that 5. Adjust fraud prevention Merchants should adjust: leverage tokenization, and beacons. approaches a. Fraud policy such as relevant velocity rules b. Fraud tools such as dynamic use of 3D Secure Driver 3: Regulatory changes and c. Internal organizational structure and emerging standards fraud processes There are a large number of regulatory d. Fraud KPIs changes that typically favor merchants, including emerging international standards (such as nexo) that will enable greater agility (thereby supporting the move towards omni- channel), the MIF regulation and PSD2 in Europe, and the increasing adoption of EMV globally.

5 Introduction Omni–channel From buzzword to reality

Why is omni-channel such a big deal? As the retail business has evolved, merchants have typically set up each sales channel (e.g. telephone, online) separately. This means that the current situation for a merchant typically involves:

“As it evolves, digital retailing is quickly •• Customer service organized around each specific channel; no single view of the morphing into something so different customer’s interactions with the different channels has been created or held that it requires a new name: omni– centrally and made available across the whole business regardless of the function. channel retailing. The name reflects •• An organizational structure focused on each channel: for instance, a marketing the fact that merchants will be able team focused exclusively on the e-commerce channel, and another marketing to interact with customers through team focused on in-store sales. countless channels—websites, physical •• An IT infrastructure and contracts with external partners dedicated to each stores, kiosks, direct mail and catalogs, channel; for instance, arrangements with payment service provider (PSPs) and call centers, social media, mobile devices, acquirers focused exclusively on online payments, and another set of payment gaming consoles, televisions, networked partners for in-store payments. appliances, home services, and more •• Business processes and rules centered on each channel: for example, there is (…) an entirely new perspective—one typically an e-commerce stock that is segregated from the stores’ own stock, and that allows them to integrate disparate online sales orders can only be fulfilled from the e-commerce stock. This can channels into a single seamless omni– generate unnecessary delays in fulfilling online orders and clumsy processes for channel experience (…)”.2 consumers to return purchases.

6 2 Source: Harvard Business Review, December 2011, “The future of shopping” by Darrell Rigby Burberry’s in–store iPads

Omni-channel as a key growth driver for merchants Burberry is a luxury goods retailer with a very impressive growth record in recent years. Its retail sales increased by •• Merchants addressing new initiatives as isolated “projects” 15% in full year 20143. Burberry explained this growth to its which rarely adopt any joined-up thinking across the investors by citing three key drivers, including one related to entire business. This can result in a disjointed customer omni-channel: experience, especially when the customer wishes to deal with the merchant across different channels for the same “Reflecting changing consumer behavior, Burberry continued to transaction. blur the lines between the physical and digital (or offline and online) to enable customers to interact with the brand however So why is it bad to have stand-alone sales channels? First, it is they choose. For example, orders taken on iPads in-store bad for consumers because it does not support the vision of a accounted for over 25% of total digital sales - up from around “single seamless shopping experience”. For consumers, buying 15% last year.” across stand-alone channels is like buying from different merchants. As this white paper will show, this fragmented Blurring the lines between physical and digital, a.k.a. omni- customer experience results in missed sales opportunities. channel, has been a key priority and success factor for Burberry. Second, it is bad for merchants: not only because of the missed Other merchants have now set similar priorities. Omni-channel sales in the near term, but also because it will put merchants initiatives, i.e. integrating sales channels (e-commerce, mobile, at a competitive disadvantage in the long term if they can not social, catalog, and stores), were highlighted by 76% of retail deliver the type of customer experiences that omni-channel CIOs as one of their primary business priorities for 2015, an merchants will be able to deliver. increase from 61% in 20144.

In a nutshell, many merchants remain organized around stand-alone sales channels (with differentiated organizational structures, separate IT systems, separate business processes, separate partner relationships, etc.). This fragmented approach is a barrier to delivering a seamless and integrated customer experience across all channels.

3 Source: http://www.burberryplc.com/documents/results/2014/brby210514.pdf 4 Source: National Retail Federation/Forrester Research Inc. Report “Retail CIO Agenda 2015: Secure And Innovate” 7 Section 1 What are the main use cases that merchants are focusing on, and their benefits?

Rather than discussing the topic of omni-channel in a generic or theoretical manner, the authors of this white paper decided to take a much more pragmatic approach. EDC, as an independent consulting firm, undertook in-depth interviews with Adyen’s merchant clients (Burberry, de Bijenkorf, Inditex, ticketscript, and a global apparel brand) in order to understand specific use cases. For each use case, these interviews covered the following topics:

•• What is the problem / issue that the merchant tried to address? •• What is the omni-channel solution that the merchant has already deployed in order to address this problem / issue? •• What are the benefits and the results driven by this deployment? •• What is the roadmap of future initiatives?

8 Use case 1 de Bijenkorf kiosk Endless aisle

The biggest nightmare for a merchant in-store. The kiosks have helped achieve So what are the benefits associated with is to spend millions on marketing, the following: this “endless aisle” use case? A study merchandising, sales training, and 1. The customer experience has been conducted by the Grocery Manufacturers so on, and then be unable to fulfill a streamlined; in store, consumers with of America5, which surveyed 71,000 shopper's order when they come into a de Bijenkorf client account (typically consumers in 661 retail outlets, found the merchant’s store. This is especially half of consumers) are guided by a sales that the average out of stock rate6 in a relevant for verticals such as clothing assistant at kiosks, where they can login grocery category was 7.9%, and it costs (with each product coming in multiple simply by using their email address with retailers a 4% loss in category sales. This sizes or colors), or for specialty no password, and can pay via one-click study confirmed the typical consumer city center stores (e.g. outdoor if their payment credentials are stored response to OOS cases that explains this equipment) that provide a “long tail” online. This process relies on the de 4% loss in category sales. When faced with of products within a small retail area. Bijenkorf employee to “authenticate” the an OOS issue in one store, close to 1/3 The key challenge is how to ensure consumer, thereby avoiding the usage of (31%) of consumers buy the same item that an out-of-stock (OOS) issue does any login passwords (online the password but at another store. In addition, nearly not turn into a lost sale. is always requested at login). In fact, it 10% do not purchase the item at all. could be argued that this merchant does Let’s focus on the “endless aisle” not provide a one-click but a zero-click In the de Bijenkorf case, two key results capability (i.e. the ability for consumers functionality, i.e. a completely frictionless were of interest: to purchase from the merchant’s full payment experience. •• Close to 90% of in-store kiosk product catalog, irrespective of what transactions are related to OOS cases. is in stock within a given store) that 2. For cases when a consumer has to The other 10% corresponds to bulky the department store de Bijenkorf has use their payment card, a mobile POS purchases whereby consumers prefer deployed in the Netherlands to address terminal is integrated within the kiosk the convenience of home delivery. this issue. that can handle chip & PIN transactions. •• Initial indications are that these in-store This is a real case of “blurring the lines” kiosks have generated a significant This department store has set up with a digital order combined with a chip incremental sales at de Bijenkorf. in-store kiosks for consumers to make & PIN card transaction! Interestingly this merchant noted an online order (i.e. among the full that other smaller and more online product catalog that would 3. Consumers can request a next-day specialized merchants have achieved include the complete range of products delivery at their home address or via a incremental sales in the range of +10% in all sizes and colors) while shopping network of collection points. to +14% with a similar approach.

5 Source: Investigating Effects of Out-of-Stock on Consumer SKU Choice, Hai Che, Jack Chen, and Yuxin Chen 6 Defined as the percentage of SKUs that are out-of-stock in a store at a given time point. 9 Use case 2 Click and collect (buy online, pick up in-store)

Delivery has always been a key issue to address since the inception of e-commerce: how can merchants deliver efficiently (at a low cost) while providing a convenient solution?

Initially most e-commerce merchants only provided one delivery solution: home delivery combined with differentiated pricing (e.g. free delivery for slower delivery vs. a fee charged to consumers for next-day delivery). This type of delivery solution is sub-optimal for many consumers and merchants; many consumers find it inconvenient to wait at home over a range of hours to receive and sign for their delivery, and it can be an expensive cost layer for merchants.

In order to address this issue many merchants have deployed a “click and collect” - also known as “buy online, pick-up in-store” - option for online purchases. For instance, nearly 50% of a sample of online UK retailers7 offers this option. Different approaches can be applied:

•• Consumers can request to pick up their online shopping from one of the merchant’s own physical stores (or at a facility built by the merchant nearby their main store) at an agreed time, such as next day, or some merchants even enable consumers to pick up their orders within one hour.

•• Consumers can pay online and collect at the store, or some merchants enable consumers to pay in-store at time of collection.

•• Consumers may also pick up orders at third party providers such as Collect+, Doddle, Yodel, etc. eBay provides a click and collect service in partnership with Argos, the UK electronics retailer. Example: For many Canary Wharf workers in the UK, the convenience of receiving a parcel at work is no longer possible. Banks including HSBC, Citi and JP Morgan have all banned non work-related deliveries. This is one of the reasons why Doodle has opened a new Canary Wharf store to handle the 11,000 parcels delivered on average every month just in the E14 postcode.

10 7 Source: IMRG Collect+ UK Click & Collect Review 2015 (sample of 46 online retailers) In the case of Zara, the e-commerce channel was set up not as a stand-alone channel but as a support channel for the physical stores, and click and collect was enabled from day one. Typically click and collect is provided for free with pick-up at any store within 2-3 days:

Examples of delivery options at Zara

“Click and collect” has proved popular in certain markets, especially in France. For instance, one tier 1 French merchant achieved a 30% penetration of buy online, pick up in-store orders (vs. close to 50% via home delivery and the remaining 20% via a third party network).

Results like these show that buying online and picking up in-store meets a clear consumer need, and the even better news is that it helps generate incremental sales for merchants. In Verdict’s March 2015 survey8 of 10,000 online UK shoppers, 32% said that they purchased something else on the last occasion they bought online and picked up in-store, and the average additional in-store spend was close to £18. As one specific example, a global apparel brand interviewed for this white paper indicated an expectation of incremental sales closer to 5% for this use case.

The Jumbo supermarket chain highlighted another positive benefit, namely that click and collect can help with customer acquisition: in the initial phase of their implementation, 40% of users who buy online and pick up in-store are new customers for this merchant.

It is difficult to evaluate the overall operational cost of providing click and collect, but it is likely to be lower (compared to providing free home delivery) based on anecdotal evidence. Fraud levels are also typically much lower compared to home delivery, especially if payment is handled in-store as customer-present transactions.

Finally, it should be noted that when transactions are finalized in-store as the shopper picks up their item, the merchant benefits both from the EMV liability shift and Point-of-Sales interchange fees, which are typically lower than e-commerce interchange.

All of these results indicate that there are direct and indirect benefits associated with click and collect.

8 Source: Verdict, Patrick O’Brien, 30 June 2015 11 Register card Charge registered card

Shopper purchases online, Downloads app Adds goods to Pays with stores card and registers basket one-click

Register card

Shopper visits Registers card at POS and Downloads app Adds goods Card is charged when the store receives login details by email and logs in to basket goods are shipped

Overview of one-click omni-channel checkouts Use case 3 “One–click” in an It is just the same with one-click that enables consumers to pay omni–channel for their online purchase without re-entering their payment credentials each time. It appears to be an obvious idea but it environment was so important to Amazon’s success that Amazon obtained a patent in 1999 in the US for this technique. It might be hard Most of us suffer from a so called “hindsight bias” (“I knew to quantify the impact of one-click on conversion rates, and it it all along”), and that’s why many great ideas appear to be will vary a lot by merchant sector and country, but it will most obvious after they have been discovered. Think of wheels likely generate incremental sales. For instance, one of Adyen’s on a suitcase. Seems like such an obviously good idea but merchants in the gaming sector conducted A/B testing to it was only introduced in 1970. If it seems like such a “no monitor the impact of one-click and identified that it generated brainer”, what were suitcase manufacturers thinking of 25% incremental sales. So the challenge is: how do you replicate during the 50s and 60s? the success of one-click in an omni-channel environment?

In order to address this challenge an increasing number of merchants are enabling new ways for consumers to save and then re-use their payment credentials. Two typical scenarios are emerging, that can be seen in the diagram above:

•• In the first scenario, the merchant enables consumers to save their card details during a traditional e-commerce purchase so that these consumers can then pay for future purchases via the merchant's mobile app using one-click. •• In the second scenario, the merchant enables consumers to save their card details during an in-store face-to-face purchase so that these consumers can pay via one-click in future m-commerce transactions.

12 citizenM check-in kiosk

For instance, citizenM, a global hotel chain, worked with Adyen For m-commerce, one-click is a must. The main reason is to implement a solution where payment details captured that conversion rates are much lower among m-commerce online at the booking stage are used to support a frictionless transactions, typically 1/3 of traditional e-commerce omni-channel customer journey. When arriving at the hotel, conversation rates. One of the main reasons behind this guests are able to bypass the traditional queue and check-in much lower m-commerce conversion rate is the additional themselves at check-in kiosks. The RFID-enabled room card “friction” due to the need to enter the long suite of card details that guests receive at check-in can be used in the hotel to pay into a much smaller device (compared to the traditional for food, beverages, and services. The checkout process is also desktop or laptop). One-click is therefore likely to have a done by guests themselves at the kiosks and the receipts can very positive impact on m-commerce conversion rates. be emailed to them. One large ticketing operator working with Adyen explained: This is all possible because citizenM uses Adyen tokenization “comparing our sales six months before and six months technology, which also makes possible for returning guests after the implementation of the one-click feature, we to make new bookings with one-click, without having to enter benefited from a 55% increase in incremental sales. While their payment details again. At the hotel they will even be this is due to a combination of factors, we are convinced able to check in and out using the room card they have used that one-click played a significant role in generating these previously in any citizenM hotel around the world. incremental sales.”

citizenM payment page

13 Use case 4 Omni–channel returns

Returns are not “sexy”, but the topic is a very important Returns are part of the “customer service” value proposition issue for both consumers and merchants. Returns provide provided by merchants but can be a major drain on the “peace of mind” for consumers that they can return a retailers’ financials, largely because returns represent a purchase if it does not meet their needs (and makes it more significant proportion of total sales: 8.9% of all sales in the likely that they will make the initial purchase). According US in 201410. Returns can be higher in certain segments, such to a 2014 study by Accenture, 42% of shoppers said they as fashion, and in certain markets; there is a high degree of wanted to be able to bring online orders back to a store, returns in Germany relative to other EU markets (although and a greater number of retailers (49%) said they were able this is likely to change as a result of EU wide legislation that to do so9. states consumers must bear the cost of returning products).

9 Source: Multichannel Merchant, Executive Summary: Returns, January 2015 14 10 Source: 2014 Consumer Returns in the Retail Industry, NRF This ratio is even higher among online sales, where returns were estimated to be 12% of all sales by the 2014 State of Online Retail report from Forrester and Shop.org.

Not only is it costly for merchants to process these returns, but fraudulent returns are also a challenge. In the US alone, the NRF has estimated that return fraud and abuse amounted to $17.6 billion in 2014 (6.2% of all returns).

In order to address these returns-related challenges an increasing number of merchants are enabling omni-channel returns. Typically this involves:

•• Enabling an additional option for returning online purchases, whereby consumers can return their online purchase via any of the merchant’s physical stores and get a refund on the card that they used to make the initial purchase.

•• Replacing the existing return options (e.g. sending the online purchase back to the merchant via traditional mail or delivery services such as Fedex) with a single option of returns via the merchant’s physical stores.

•• Providing the option of returning goods via third party providers, such as Collect+, Doddle, Yodel which are located at convenient locations, such as rail stations, where there is a high commuter footfall.

Merchants expect the following benefits from this “omni- channel return” use case:

Lower levels of return fraud: Consumers are less likely to “misbehave” if they need to return their online purchase by interacting with a sales assistant as opposed to sending it back in a more “anonymous” manner via mail.

Opportunities to cross–sell other products to the incoming consumer: Even if the level of cross-selling is not likely to be as high as for “click and collect” (where UK merchants achieve a 32% cross-sell rate11), a returning consumer who was willing to make an initial purchase from this brand still provides the sales assistants with another opportunity for selling.

11 Source: Verdict, Patrick O’Brien, 30 June 2015 15 Use case 5 Future use cases

Based on the merchant interviews, there are a number of other projects aimed at enabling new or improving existing omni-channel use cases, including:

Deployment of mobile wallets such as Apple Pay For merchants such as Rituals, interactions via the consumer’s mobile is absolutely essential as m-commerce already represents over 50% of customer-not-present sales, and as mobile enables innovative types of interactions. In late 2014, Rituals launched a mobile-based solution through which consumers in Germany and in the Netherlands could send a gift card along with a video.

Merchants such as Rituals are very interested in accepting mobile wallets such as Apple Pay (and/or whichever mobile wallets will be adopted by their consumers) that Touch-ID checkout with Apple Pay can be used for convenient in-store contactless purchases and for in-app purchases.

Social media as a support channel for payments For merchants like KLM, social media is a very important service channel to handle large volumes of questions (over 35,000 questions per week) via Facebook or via Twitter from customers that have already bought a plane ticket.

A lot of these questions are related to topics such as a potential change of flights, and therefore it was important for KLM to provide a simple payment functionality (e.g. to pay the change fee) following a customer request for a flight change.

KLM worked with Adyen to generate a transaction-specific “social payment link” that can be sent to a customer wanting to make an immediate payment following their request via social media. Social media payment (KLM example)

Leveraging mPOS for card acceptance outside of traditional stores ticketscript enables event organizers to sell tickets to their consumers via a professional looking “white label” website capability along with an advanced back- office dashboard. Initially, ticketscript focused on the online / mobile channel but recently launched a “ticket box office kit” for face-to-face ticket sales, e.g. at the door of the event. This kit contains a tablet, printer, and mPOS terminal to accept cards.

Thanks to ticketscript, event organizers can sell across multiple channels (including “at the door”), provide mobile tickets, and manage their event via a single dashboard.

ticket box office kit

16 “Suspended basket” Merchants like Burberry would like to allow a consumer to start a shopping basket in one channel (e.g. in-store or via their website), keep it open for a period of time (e.g. 24 hours) and allow this consumer to make changes to this shopping basket and initiate the payment via any other channel.

Online view of physical stock availability Internet of Things (IoT) For merchants such as de Bijenkorf, a and wearables major improvement will be to provide There may be some an online tool for consumers to obtain BUY ONLINE degree of hype around the real-time information about the Internet of Things (IoT), availability of a given product at one of but it continues to gather their stores. This will respond to a real RESERVE IN STORE momentum. The launch of customer need; it is currently the main the Apple Watch and health reason for customer enquiries via this bands such as FitBit is driving merchant’s call center. And it reinforces consumer connectivity. the positioning of this merchant as “one Homes, cars, taxis, public company” across all interaction points. transit, advertising billboards and offices will be seamlessly linked via newly available intelligent devices, streamlining the way Faster delivery times, especially related to click consumers live, work and and collect shop. The IoT might become The next stage for merchants like Zara is to pilot a click and mainstream by the end of the collect option that would enable consumers to pick up their decade, and it is predicted order at a given store within four hours. In some cases, this that there will be 25 billion could provide a competitive advantage for a merchant and it smart objects worldwide will get nearer this vision of a “seamless” customer experience. by 202012.

EDC’s perspective As mentioned by Sir Philip Green, Arcadia’s chairman13: “a lot of our efforts is just: how do we make the retail experience a great one”. In other words, all of these use cases try to deliver a customer experience that will meet or exceed consumers’ expectations and that will create a sustainable competitive advantage for the merchant.

Differentiation will increasingly come from “how” a merchant sells (as opposed to “what” products they sell). There are more opportunities to exceed the consumers’ expectations pre- and post-payment (which can be an interaction that lasts just a few seconds). Helping customers search and find the right products, to include relevant product information and customer reviews are vital in the buying process. After customer care, including returns, warranties, loyalty, rewards, etc. are just as important as the actual shopping experience.

12 Source: http://www.zdnet.com/article/25-billion-connected-devices-by-2020-to-build-the-internet-of-things/ 13 Source: https://www.vendhq.com/images/university/retail-survival/Retail_Survival_of_the_Fittest.pdf 17 Section 2 What are the best practices to ensure that payments can support these omni-channel use cases?

Interviews with merchants and with Adyen’s representatives And payments is an equally important issue when making a enabled the authors of this white paper to describe below purchase via a smart-phone or tablet: the main best practices to ensure that the “payments” function can support these omni-channel use cases. What stops you buying on your mobile?

At first, why is it important to think of “payments” to support ‘Nothing stops me’ Reasons for not buying on mobile 9% Difficult payment experience omni-channel use cases? Because “payments” matters, 29% Lack of trust related to payment especially to consumers! Based on a July 2015 survey14 of 2,000 23% security consumers in the UK, payments-related issues are one of the 77% main reasons why consumers drop out from the final checkout 62% Other reasons page when making a traditional e-commerce purchase:

Independent interviews were conducted with a number of If you have ever left the checkout page before completing a Adyen’s merchant clients (such as Burberry, de Bijenkorf, purchase, what was your reason for doing so? Inditex, ticketscript and a global apparel brand), and five payments-related best practices were identified: None - Have never abandoned a purchase at the checkout page 28.8% Retailer charged extra fees to use my payment methods of choice 26.0% Best practice 1: Make the payment step as frictionless I didn't trust the site's payment security 22.8% The payment proces was too difficult 19.8% as possible I had to input too many payment details 18.8% Best practice 2: Three Ts (Test, Train, and Top champions) Retailer didn't provide my payment method of choice 16.9% Best practice 3: Centralize payments management The payment failed 16.7% Best practice 4: Leverage authorization capture delay I got redirected to an unknown page 11.6% Best practice 5: Adjust fraud prevention approaches Other 7.3% Retailer didn't provide my currency of choice 5.7% 0% 5% 10% 15% 20% 25% 30%

18 14 Source: Drapers Multichannel Survey (undertaken by OnePoll in July 2015) Best practice 1 Make the payment step as frictionless as possible

Merchants trying to optimize the payment experience for consumers in an omni-channel environment face many questions: •• Will the storage of payment data via a client account enhance the omni-channel customer journey? •• Should the selection of payment methods be adapted for each channel? •• Which digital in-store payment technologies (e.g. kiosks, mPOS) should we deploy?

Enable payment data storage for a seamless For sectors with fairly frequent purchases such as grocery, omni-channel customer experience fashion, travel / transportation, gaming, etc., merchants should The number one concern of all merchants interviewed was consider providing this one-click functionality. Merchants and the reduction of friction at the checkout phase. Recognizing their payment partners will obviously need to meet PCI DSS shoppers across payment channels, and thereby enabling a (Payment Card Industry Data Security Standard) requirements, faster check out regardless of location or device they are using, and take all the required steps to avoid payment card is a clear benefit of an omni-channel approach. data security breaches. Adyen in particular offers several implementation options enabling merchants to almost Most interviewed merchants provide two options at time completely outsource the PCI compliance burden. of checkout: Ensure the right payment acceptance policy for •• Consumers can either make a purchase as a “guest” (i.e. each channel without setting up a client account). Merchant interviews have confirmed that consumers use different channels at different times for different purposes, •• Or they can set up a client account for future purchases. and therefore it makes sense to think about what payment In this second case, consumers can typically store not only methods will be the most convenient in order to offer the their delivery address, but also their payment credentials best experience for customers in each situation. For instance, (e.g. credit card details). This provides the basis for the Adyen’s Mobile Payments Index16, which tracks sales made one-click functionality. by shoppers across different devices, shows that the average transaction value varies significantly depending on the device This one-click functionality clearly meets the needs of nearly used by consumers, and that the most expensive purchases half of consumers that value the convenience of not re-entering are still made on a desktop. payment credentials for each purchase: Average transaction value by device 120 •• Based on a July 2015 survey15 of 2,000 consumers in the UK, 44% of respondents want “easy and quick check-out, with as few clicks as possible” when browsing a fashion 80 retail website. 40

•• Interviews with merchants such as department stores € 0 confirm that about half of online orders are completed by Android mobile iPhone Android tablet iPad Computer consumers that have set up a client account.

15 Source: Drapers Multichannel Survey (undertaken by OnePoll in July 2015) 16 Source: https://www.adyen.com/home/business-intelligence/mobile-payments-index 19 In any case, merchants should avoid applying a basic “cut and paste” of the same range of payment methods across all channels. Online merchants should use tools such as A/B testing to fine-tune their customer-not-present channels. This method involves presenting a random selection of customers with a slightly different version of the checkout page (e.g. a new payment method, a different format, etc.) to test which permutation generates a higher conversion rate. At the point- of-sale, adding additional payment options has been proven to increase conversion as well. JCB and UnionPay cards in particular are increasing the number of Asian customers at stores where they are supported.

Deploy innovative in–store technologies to address real pain points Innovative in-store technologies should be able to address real consumer pain points, and it would be wasteful to miss out on these new opportunities due to poor planning or testing. What are the real pain points that could be addressed via in-store technologies? Two examples are highlighted in the July 2015 survey17:

If you have ever been in-store, wanting to purchase a product but walked out of the store before doing so, what was the reason(s) for this?

‘Have never done this’ Have reason(s) for walking out

23% 54% Queue too long

77% 41% Stock not in-store

5% Other reasons

For the first pain point (“queue too long”), some merchants are leveraging mPOS technology for queue busting. The idea is to empower each sales assistant with a device (e.g. tablet) that equips them not only with an electronic catalog, but also with the equipment to accept card payments. Consumers would not need to queue up anymore for paying. It also provides merchants with the opportunity to engage the consumer in a post-shopping interaction and encourages future cross selling (e.g. sending the mPOS receipt via email with an offer to buy extended warranty for the product that the consumer just bought in-store).

For the second pain point (“out of stock”), use case one has demonstrated how merchants as different as Burberry, de Bijenkorf and Zara have implemented consumer-facing technologies (typically relying on tablets) to enable consumers to place a digital order within the store for out-of-stock products.

The examples demonstrate that there are many moving parts and payments play a key role in streamlining the customer experience. However, it is unlikely that a single “big bang” approach will work and merchants should fine-tune the payment experience over time – which will require the management’s attention and resources.

20 17 Source: Drapers Multichannel Survey (undertaken by OnePoll in July 2015) Best practice 2 Three Ts Test, Train, and Top champions

Omni-channel technology is a new thing for most merchants and there are consequently few examples out there for merchants to refer to (or benchmark against). Therefore pioneer omni-channel merchants have adopted a “Three T” approach: Test, Train, and Top champions.

Test in the physical environment In addition, Burberry highlighted the need to train sales assistants Even though it sounds basic, it is important to ensure that about other more payment-specific aspects such as ensuring there is sufficient time and iterations to test out different that sales assistants are compliant with the PCI / data security devices and/or different steps in the purchasing and requirements (e.g. closing down online sessions after each payment processes, and to look for feedback across basic purchase, never writing down or storing CVV numbers, etc.). requirements such as uptime, robustness, user-friendliness, cleanliness, etc. Top champions in physical stores Merchant interviews highlighted that there is a huge variance Rituals mentioned that a key learning was to “test and fail in the rate of adoption of the “endless aisle” use case from one fast”, and ticketscript confirmed that their main challenge store to another. Its success is mostly driven by the attitude of was to test the physical interactions (especially for a pure the store manager and sales assistants. Sales assistants will e-commerce player venturing into the physical world). only mention and promote the “endless aisle” option if they see it as a complementary sales support tool and if they feel At a minimum, testing should involve a group of local comfortable with this in-store technology. employees, or ideally a control group of consumers that are willing to participate in a test. To address this potential hurdle, de Bijenkorf has appointed “ambassadors” for this technology in each store. These Train staff (especially sales assistants) ambassadors tend to be technology savvy employees who Merchant interviews highlighted two types of training that are “power users” and train other sales assistants. In addition, are required. Obviously, sales assistants need to be trained the best-in-class merchants make sure that the compensation about the new tools / new functionalities, as well as the package of in-store sales assistants takes into account the overall benefits for consumers and for themselves. sales credits associated with such use cases as “endless aisle.”

21 Best practice 3 Centralize payments management

Very few merchants have a truly global omni-channel set-up because traditionally channels are run as complete separate entities. As a result, many merchants have a payments function that is set up separately for each channel and/or each country.

Large international merchants often sign a MasterCard / Visa Merchants like Rituals highlighted the importance of choosing a contract for their in-store sales with a local acquiring bank in small number of payment partners (PSPs and acquiring banks) each country, and a separate contract for their online sales in order to “scale fast”. Rituals was able to deploy specific across each region globally. enhancements across 21 countries in 11 weeks with Adyen.

The main complexities created by a “fragmented” payment citizenM explained that with Adyen, they are able to support set-up are: multiple sales channels across different continents without the hassle of connecting through different acquiring, routing •• A puzzle of reporting flows with no overview due to or POS terminal providers. Furthermore, as all sales channel different sources of data feeding internal reporting and payments go through the same system, the company benefits reconciliation. Working with different partners means from one reconciliation and settlement flow, and all information merchants have to reconcile payment flows from multiple is accessible through Adyen’s online back office system. sources, which usually entails a lot of manual work. •• A slow time-to-market and lack of flexibility for merchants As a result citizenM has a payments solution that can expand that want to deploy changes across channels and/or across with the business geographically and technologically – all from countries. This complexity arises with the need to deal with one provider, which reduces the complexity of their global several contractual and technical partners and adjust to payment operations. different systems and technologies. •• Inability to support omni-channel use cases such as As part of their omni-channel roadmap, merchants should handling a refund via a different channel. evaluate the business case related to a consolidation of the •• Higher costs. For instance, merchants might have set up number of payment partners across channels and countries, duplicate internal resources to handle multiple channels and related to the centralization of internal back-office and/or countries, and might not have optimized fees activities such as reporting and reconciliation. A change in related to card acceptance. corporate culture may be required and should therefore be treated as a “change management” project.

22 Best practice 4 Leverage authorization capture delay

Online pre-authorization of card payment with a delayed capture of funds, is a common practice for businesses with a subscription model or in the travel industry. Online payment technology now available at the point-of-sale makes it possible for merchants to use this feature to simplify omni-channel processes.

All card transactions rely on a three-step process : When the process is handled by a Payments Service Provider encrypting the transaction data for the merchant and using 1. Authorization: merchants send a real-time authorization tokenization technology, the process of delayed authorization request in order to obtain an approval from the capture can be done to outsource the burden of PCI compliance consumer’s bank (issuing bank). to the merchant’s payments partner. 2. Capture / clearing: merchants send (typically at the end of each day) a batch file with all of the day’s card transactions Tokenization is a process by which the payment data is and these transactions are sent for clearing via the card replaced with a surrogate value called a “token”. The major networks. benefits for merchants are that storing tokens instead of 3. Settlement: financial value is exchanged to finally pay payment data reduces the merchant’s effort to implement merchants. PCI DSS requirements, and limits the risk of card data security breaches. A stolen token is useless to fraudsters because they An authorization capture delay allows merchants to receive an have no way of linking it back to the consumer’s payment data. authorization, but capture the payment later. For merchants offering in-store e-commerce (endless aisle), that makes it possible to delay the capture until the moment the order is shipped or to cancel the transaction in case the goods cannot be shipped.

The delayed capture functionality also makes it possible to reduce refunds. By delaying the capture by several hours, transactions can just be cancelled if a shopper decides to return the goods. This also avoids that a shopper sees the amount to be refunded blocked on his card.

23 Best practice 5 Adjust fraud prevention approaches

An omni-channel approach to For example, ticketscript is a target for fraudsters as an event ticket bought with payments should also include an a stolen card is essentially free money. Working with Adyen, ticketscript scores in omni-channel approach to fraud. An real-time all transactions coming from all sales channels. Because all payment data attack on a specific channel gives a captured is processed on the Adyen platform, Adyen leverages online, mobile and warning for purchases through other point-of-sale data to assign a risk score to each transaction in real time. Suspicious channels with the same card, email, transactions are either rejected or reviewed manually by the ticketscript risk team. IP or all the other data linked to that specific transaction. Compromised Unfortunately, when merchants do not have an omni-channel approach to payments data is recognized across channels and different sales channels payment data are processed in silos, fraudsters can “play and used to prevent fraud. one channel against another”, or identify potential cracks in omni-channel processes.

For instance, some travel merchants such as airlines reported that fraud rates have been increasing among sales via their call centers. There are a number of main reasons for this trend:

•• Some of the fraud prevention tools and customer authentication tools (e.g. 3D Secure) are available for online sales but not for call center sales. •• In some cases, fraudsters undertake a “clean” online transactions (i.e. with the cardholder’s correct names and addresses), and then contact the call center a few minutes later to request a change in the passenger name, thereby by-passing the fraud prevention rules applied to online sales. •• Another area is where fraudsters are sending targeted phishing emails via the retailer or the bank to capture information about the customer. The fraud protection vendors are most concerned about evolving methods of phone fraud, mostly because it is the least protected of card-not-present (CNP) transactions, and therefore, the most vulnerable means of attack in an omni-channel environment, as found in large modern retailers.

Another example of emerging fraud patterns relates to buy online and pick up in-store. The average fraud loss rate was relatively low for these purchases, i.e. lower than the overall fraud for online purchases. However, the fraud loss rate varied significantly based on the time of collection: it was 5-6 times higher in cases when consumers (fraudsters) picked up very quickly after their online order.

24 As merchants aim to serve customers across multiple channels, the fraudsters are also using the lack of joined-up thinking by impersonating a merchant’s service center. Fraudsters will cold call a customer, for example, claiming that their credit card or bank account has been subject to fraud during the transaction with the merchant, so that the customer reveals information about the transaction and changes the arrangements for collection of the goods.

Merchants need to adjust their fraud prevention approach to omni-channel commerce:

•• Having an omni-channel payments partner enables merchants to have an omni-channel approach to fraud prevention and link risk data across channels and countries. •• When payments are processed by different payments partners, internal organizational structure and processes related to fraud prevention should be centralized, with a team of analysts updating rules and staff and undertaking manual reviews of suspicious orders across different channels or geographies.

Based on merchant interviews, there does not seem to be a “one size fits all” answer for all omni-channel merchants, but merchants must ensure they think carefully about the best way to set up their internal fraud prevention organization and related processes.

Fraud KPIs What are the new fraud KPIs (Key Performance Indicators) that omni-channel merchants should monitor?

Once again, there is not a “one size fits all” answer, but it is clear that merchants need to ensure that new omni-channel use cases (e.g. endless aisle, click and collect) do not generate abnormal decline rates or abnormal fraud rates. Tracking consumer behavior through browsing, shopping and returns history across different channels will help merchants design fraud strategies to detect suspicious transactions.

Furthermore, a lot of merchants and fraud prevention vendors commonly collect fraud statistics for payment methods such as debit and credit cards. The more innovative merchants are issuing and accepting mobile wallets, carrier billing, prepaid payment products, loyalty and reward products, gift cards, social and peer-to-peer payment products. Fraud KPIs need to take into account these alternative forms of payment.

25 Adyen: Payments as a key driver of omni-channel commerce

Built from the ground up as the world’s only unified omni- channel infrastructure, the Adyen payments platform brings Internet technology to the point-of-sale. This makes it possible for merchants to unify e-commerce and in-store payments in one system, supported by one risk management solution, and unified cross-channel reporting in a single backoffice.

The benefits of this approach provide a significant, measurable competitive advantage to omni-channel businesses, and have a direct positive impact on revenue.

In this section, we explore some of the key benefits of working with Adyen’s single omni-channel payments solution across multiple markets.

1. A seamless shopper experience in any channel Due to its single unified platform across the point-of-sale and e-commerce, the Adyen payments platform gives omni- channel businesses the ability to recognize shoppers across these channels. This simple, powerful benefit can be utilized in a number of ways:

Faster checkout with one-click or zero-click payments A key way to increase conversion at the checkout stage is to minimize the steps to make a payment. If shoppers choose to have their payment data securely stored with Adyen’s tokenization technology, they are able to make future purchases either online with one-click or at the point-of-sale without needing to enter payment details. In-store, once the sales assistant has verified the identity of the shopper, the Adyen payments platform is able to accept a payment immediately – a ‘zero-click’ payment flow – removing the barriers to making a payment, improving conversion, and increasing customer satisfaction in the process.

The endless aisle and click and collect With Adyen’s single solution, shoppers can order out of stock items in-store with a tablet-assisted sales terminal that carries the entire web-based inventory, and then have the item delivered to their home address or other location. The e-commerce equivalent of the endless aisle is click and collect – where a merchant partnering with Adyen can give e-commerce shoppers the option to pick up items in-store – removing delivery costs for the shopper and reducing logistics costs for the merchant.

26 Shopper loyalty Being able to recognize shoppers across channels gives merchants a treasure trove of information for loyalty marketing purposes with loyalty cards and personalized service.

For example, after making a number of e-commerce purchases, a shopper later visits the bricks-and-mortar store. At the checkout, along with the zero-click payment, the sales assistant gives a personalized offer based on the shopper’s previous purchases. Shoppers are also able to accrue loyalty points across e-commerce and in-store purchases, deepening the merchant's relationship with the shopper and increasing valuable repeat sales.

Returns Working with the Adyen payments platform offers a great deal of flexibility with regards to returns. Thanks to the single system, shoppers that buy an item online at home are able to return it in-store, and can be refunded with cash or be credited on their card.

Outcome: increased revenue for merchants Each of these possibilities delivers a better experience for the shopper, but also closely correlates with increased revenue. This is also simple to measure – omni-channel merchants can (for example) see a direct increase in conversion on the payment page with one-click payments, or significant uplift in repeat purposes from shoppers who can accrue loyalty points across e-commerce and in-store. With the endless aisle capability, merchants have reported 4-12% in extra sales through solving the out-of-stock problem. And for click and collect, merchants have reported up to 4% of extra sales from online shoppers making additional purchases as they pick up their items in-store.

2. Exceed shopper expectations with the latest payment innovations Because it brings Internet technology to the point-of-sale, replacing traditional hard-coded terminals used by merchants today, Adyen enables you to quickly deploy the latest payments industry innovations in-store, and exceed shopper expectations in terms of both service and ease of payment.

Eliminate checkout queues The length of a checkout queue is a significant pain point for shoppers. Adyen’s Internet technology enables you to equip staff with mobile point-of-sale (mPOS) terminals. With these you can process payments from anywhere on the shop floor, meaning you can deliver a much faster payment experience and close more sales.

27 Welcome international shoppers Supporting the relevant local payment methods makes it easy A retailer might use this solution to delay the capture of a for international shoppers to pay, and will help boost your payment until the customer’s item is ready to be shipped, or conversions. Adyen supports 250 payment methods in 187 alternatively it could be used to allow a customer a window of currencies, including credit cards such as JCB and UnionPay, and time in which to cancel an order. payment methods such as SEPA DD and Apple Pay. Because all these methods are processed in the same system, it is easy to If the order is cancelled within the given time, Adyen cancels add and manage additional payment methods and avoid losing and reverses the process immediately, giving the customer sales because your international shopper is unable to pay. direct access to his account balance.

Adyen also enables you to offer your international shoppers 3. Simplified setup: One partner across channels the option to have their purchases converted into their local Currently, merchants work with a number of solutions for currency at the checkout by integrating Dynamic Currency e-commerce payments, and a number of solutions for in-store Conversion (DCC) directly into the POS terminal. payments. If they operate across multiple markets, this number can quickly mushroom into hundreds of suppliers and Stay abreast of the newest payment methods contracts with different paymentspartners. and technology By supporting NFC methods such as Apple Pay and Samsung One solution. One contract. All your payments. Pay, you are delivering the most cutting-edge payment Adyen is the only payments company that allows you to experience to your customers. As well as a means of operate across multiple channels and geographies with one differentiating your business, your shoppers will benefit from single contract. This covers the entire payment flow from the most convenient in-store or online payment experience. checkout, to acquiring, to risk management, right through to Adyen ensures that its clients are always at the forefront of the final settlement. latest payment trends and was one of the first official partners of Apple Pay in-store and online in both the US and the UK. The consolidation of all these functions with a single partner translates into significant cost savings for omni-channel Reduce refunds businesses. While the amount varies from one business to the Sometimes it is not possible to fulfil a customer order and it next, savings related to POS payment centralization has been becomes necessary to refund the item amount. As refunds well documented by merchants adopting the nexo standard - can be a drain on both resources and revenue, Adyen offers an initiative to standardize card payment and cash withdrawal a unique solution in which you can delay the capture of a systems around the world - of which Adyen is a member. payment after it has been authorized, so the order can be cancelled within a given timeframe.

28 Faster time to market in multiple markets For example, in a recent white paper EDC found that retailers Operating from a single system allows you to scale fast and report significant financial benefits to the centralization of roll out enhancements such as new payment methods quickly payments systems and operations as a result of working and easily. This makes it easy for local customers to pay and with nexo standards. Retailers interviewed cited cost savings increases speed to market. as an important aspect of the business case for adopting nexo compliant payments systems, with one retailer saying Furthermore, consolidating your payments means just one set it expected a 2-3 year payback on its investment and 20-30% of reporting. This not only simplifies your administration but cost savings. also gives you access to detailed cross-channel analytics and a 360-degree view of your shopper. With this you can make This is due to a number of reasons: data-driven decisions to further optimize your conversions and increase your customer engagement with cross selling and •• Fewer suppliers means less resources required for technical loyalty rewards. integration and relationship management. •• Larger volume in fewer systems across countries means Outcome: Drastic increases in cost efficiency and time gains lower hardware costs, and enables merchants to benefit The net result of this solution is drastic increases in cost from more attractive processing fees. efficiency and time gains, freeing up internal resources to •• Avoidance of per market certification costs. With concentrate on other valuable tasks. Furthermore, unifying the average amount spent on market protocols at Internet and point-of-sale orders means you can consolidate approximately EUR 35,000 annually, this means a significant stocks and logistics. This increases efficiency and further saving. reduces operation costs by eliminating the need for multiple teams managing duplicate set-ups. Global acquiring. Local cards. Additionally, with a single partner managing the entire payment flow, you can be sure of the best possible results for every payment. Adyen applies the optimal mix of cross- border and local acquiring to ensure your transactions have the highest chance of authorization, and your payments operations are reinforced by our technical support and point- of-sale specialists.

29 Appendix What are the three main drivers of change in favor of omni-channel?

To understand how omni-channel can be implemented and what the main benefits are for merchants, it is important to discuss the three drivers of change in favor of omni-channel, so that we can anticipate how omni-channel will evolve over the coming years: •• Driver 1: Changes in consumer expectations and behavior •• Driver 2: New technologies •• Driver 3: Regulatory changes and emerging standards

Driver 1 Mobiles also play a role in how consumers shop, including how Changes in consumers make their purchase decision. A large minority of consumers (close to 1/3 in countries such as Australia and consumer the US) use their smartphone as a key influencer in their final decision related to an in-store purchase. A higher percentage expectations of consumers have started to purchase on their smartphone:

and behavior Purchased a product or service on their smartphone USA

Mobile (especially smartphones) is changing the Australia

consumer’s daily life UK Mobile phone technology is now ubiquitous in developed Germany markets and is increasingly so in developing markets. Half of France the world’s population has subscribed to a mobile network 0% 25% 50% 75% 100% (3.6 billion unique mobile subscribers18 at the end of 2014). Smartphone penetration is way above 50% in major developed I have changed my mind about purchasing a product or service markets: over 70% of consumers in Australia and in the UK have in a shop as of a result of information that I gathered using my a smartphone19. smartphone

USA

However, the speed and extent of consumer-side innovations Australia created by mobile technology is only now becoming fully UK apparent. Mobile innovations are rapidly changing everyday France consumer habits, including where / how consumers look for Germany shopping information and how consumers shop. 0% 25% 50% 75% 100%

In many developed countries (especially in countries such as Research on smartphone then purchased it offline

Australia and the US), close to half of consumers use their Australia

smartphone frequently to obtain product information and USA information about local businesses: UK

France Smartphones as a key source of information Germany USA 0% 25% 50% 75% 100%

Australia

France Altogether the above research findings confirm the large role Germany that smartphones play in the shopping experience, especially UK where / how consumers look for shopping information and 0% 25% 50% 75% 100% how consumers make their purchase decision.

18 Source: The Mobile Economy 2015, GSMA 30 19 Source: source: Deloitte Mobile Consumer, 2014 And social media? Among other factors that are changing consumer behavior, it is worth highlighting a few key figures related to the impact of social media. It is quite difficult to assess the real impact of social networks such as Facebook, or of platforms with user-generated content such as TripAdvisor or Yelp, or other platforms such as blogs, forums, etc.

However, the sheer amount of consumer participation is staggering. One of the most amazing examples is WeChat that EDC’s perspective was launched in China by Tencent in 2011, and already claims Merchants need to ensure that they maintain an over 500 million active users20 in early 2015. in-depth understanding of changes in consumers’ expectations and behaviors that are induced by But does it impact or change consumer behavior? When mobiles and by social media. For instance, specific making decisions about what to buy, consumers rank21 blogs consumer segments might be interested in receiving as the third22 most influential digital resource (31.1%), followed relevant “push” communications via their mobile from by Facebook (30.8%), and YouTube (27%). their preferred merchants. However, smartphones might enable new sales hurdles to overcome (e.g. In addition, social networks such as Facebook or Twitter have ability for consumers to check competitors’ pricing started to enable “buy” buttons so that consumers can make while they are in-store, a.k.a. showrooming). a purchase at the “moment of interest”, i.e. at the time when consumers interact within these social networks by reading a Successful omni-channel initiatives will most likely tweet or a Facebook message23: involve the agile implementation of “trial and error” initiatives designed to introduce technological and As another example, WeChat enables its users to set up a process improvements to sales channels on two “wallet” so that they can make purchases within the WeChat levels. Firstly, agility “within” a given sales channel app or in-store via a QR code displayed on their mobile. will be required to rapidly undertake “trial and error” initiatives (e.g. related to the retailer’s mobile Even though the actual impact of social media on consumer app). Secondly, agility “across” all sales channels behavior is hard to evaluate, it might at the least create another will be required to quickly integrate any channel- strong source of information or another sales channel for specific initiatives and to be able to make on-going merchants (“social commerce”) and will therefore contribute adjustments based on “trial and error” feedback. to the importance of omni-channel initiatives.

Driver 2 New technologies

The “blurring of lines between digital and physical” is being Mobile Point-of-sale (mPOS): These POS devices can be very enabled by the wide range of new technologies at the point- small and basic card reading devices used by mobile merchants of-sale. Some of these new technologies are being adopted (e.g. taxis, home delivery, kayak rental on a beach, etc.). They widely and others are at a more experimental stage. can also be a scaled down / lighter version of traditional POS terminals without a printer for in-store purchases and that can Innovative point-of-sale technologies send electronic receipts via email. The traditional POS arrangement at a typical physical merchant used to include a cash register and a POS terminal to accept In-store kiosks: The kiosks typically involve an in-store consumer- card payments (on a stand-alone basis or integrated with the facing tablet (or a similar device) located in a dedicated area cash register). within the store or within some kind of user-friendly piece of store furniture. This kiosk enables a consumer to access the full online Merchants now have a much wider range of options, and product catalog and make an “online” purchase. some of these options enable omni-channel use cases that are described in this paper. These options include:

20 Source: https://www.techinasia.com/wechat-500-million-active-users-q4-2014/ 21 Source: http://www.marketingprofs.com/charts/2013/10336/digital-influence-blogs-beat-social-network-for-driving-purchases 22 “retail sites” and “brand sites” were the first two digital resources 31 23 Source: extract from http://www.kpcb.com/internet-trends Near field communication (NFC): A protocol that enables House of Fraser provides another example in the UK where it smartphones or contactless payment cards to transact with a enables its customers to check stock availability, read online POS terminal. reviews in the store, and find information about products displayed on a beacon-equipped mannequin through its latest mobile app.

Merchant interviews indicated that many merchants are very interested in beacon technology, and the central question is whether / how consumers will adopt this new way of communicating with the stores that they visit. There are a couple of consumer issues to be addressed such as:

•• Security concerns: a segment of consumers might be worried about opening up communications with their own mobile via Wi-Fi or Bluetooth, as this might enable security breaches on their mobile handsets.

•• Spam concerns: merchants will need to quickly demonstrate that consumers receive only (or mostly!) communications that are relevant not only to their profile, but ideally related to their specific location within a given retail department, or at a specific time for a store-wide promotion.

What types of in-store technology do you like to see in fashion stores?

Contactless payment

iPads

Kiosks

Staff-held mobile payment terminals New mobile-based wallets: Apple Pay leverages tokenization 0% 25% 50% 75% 100% (i.e. saving sensitive card data on the device as a token) or Android mobiles leverage HCE - Host Card Emulation- (i.e. putting sensitive card data in the cloud).

More experimental point-of-sales technologies In addition to the above options, there are other technologies at a more experimental level that could facilitate additional omni-channel use cases.

Bluetooth beacons are maybe the most interesting example of such technologies. BLE (Bluetooth low energy) radios are EDC’s perspective installed by the retailer in their store, and detect other nearby New technologies provide many exciting opportunities BLE devices (such as the consumer’s iPhone) and send a unique for merchants to enrich their physical and digital user ID (UUID) to the other device. This BLE technology then interactions with consumers. However, these enables real-time “push” communication (from the retailer new technologies might not be acceptable for all to the consumer that has walked into their store) via the consumers. Or they might meet some very practical consumer’s smartphone applications. hurdles such as lack of store employee training, hardware robustness issues after multiple drops, Wi-Fi With this beacon technology, a retailer will know exactly bandwidth constraints, etc. where a customer is in their store environment. This provides an opportunity to send highly contextual, hyper-local, This reinforces the requirement previously mentioned meaningful messages and advertisements to customers on that merchants will need to take a “trial and error” their smartphones. Target has been testing in-store beacon approach, including the ability to quickly “kill” an technology that facilitates the sending of customized messages initiative. This is often easier said than done, especially (including special offers) via the Target app to a consumer if it is the pet project of a senior member of staff. when they enter one of 50 Target stores.

32 Driver 3 Regulatory changes and emerging standards

There are a large number of regulatory changes and online transactions, based on the use of elements categorized emerging standards that are impacting POS interactions, as ‘knowledge, possession and inherence’; if they fail to do so, especially related to payment acceptance. Typically these they will be responsible for the financial damage encountered changes are “merchant friendly” by enabling opportunities by the customer. for reductions in costs and for automating processes and providing greater agility. “'Strong customer authentication’ means a procedure to verify the validity of a payment instrument based on the use of two or Some of these changes include: more elements” categorized as knowledge (something only the user knows, e.g. a static password or a four-digit PIN number), 1. Nexo standards based on ISO 20022 possession (something only the user possesses, e.g. a token, These standards provide merchants with much greater a mobile phone) and inherence (something the user is, e.g. agility to try out new payment features across countries and fingerprint, voiceprint, iris scan). channels. EPASOrg, the OSCar Consortium and the CIR Working Group decided to join forces in February 2015 to create ‘nexo’, The SecuRe Pay Internet Recommendations apply to Internet an international non-profit association based inBrussels. payments. The definition for strong customer authentication contained in the recommendations is almost identical to that in The purpose of this enlarged structure is to deliver state- Draft-PSD2; however, the recommendations provide for a much of-the-art standards addressing the requirements of the more detailed additional regulation. For example, they clearly international card payment market. Nexo will promote the outline who is responsible for what: as such, the PSP issuing global interoperability and efficient implementation of those payment instruments must conduct the strong authentication standards and specifications in the field of card payments. and provide cards that are enabled for strong authentication; the acquiring PSP must enable strong authentication and must This initiative will benefit merchants by simplifying payment oblige the merchant to maintain a solution which enables acceptance without the need to be compliant with country strong authentication; card schemes must adapt liability rules specific standards, and foster innovation in payments thanks accordingly. to greater agility and faster time-to-market.

2. MIF (Multilateral Interchange Fees) regulations and PSD2 (Payment Services Directive) In Europe, these provide opportunities for merchants to reduce their total cost of card acceptance across countries and channels. For instance, the MIF regulation will come into effect in Europe in December 2015 and will cap multi-lateral interchange fees (fees paid by acquiring banks to issuing banks) at 0.2% for debit cards and 0.3% for credit cards.

3. EBA (European Banking Authority) guidelines that will impact customer authentication It is stated in the PSD2, Article 87, that the EBA and the European Central Bank (ECB) must develop security measures guidelines and review them regularly because of the rising levels of fraud observed in internet payments.

“EBA (working with ECB) must develop guidelines for monitoring security measures, and review regularly [...] at least every three years.”

The PSD2 states that PSPs (and consequently the merchants indirectly) must apply strong authentication before processing

33 4. Further adoption of EMV specifications and technology (especially in the US) EMV (Europay MasterCard Visa) specifications and EMV chip technology (typically involving PIN entry by the cardholder) ensure a higher level of payments-related security and should reduce fraud resulting from counterfeit, lost and stolen cards. It is worth noting that:

•• 32% of all card transactions globally were EMV as of the end of 2014. •• The number of EMV payment cards on issue24 increased from 2.4bn at the end of 2013 to 3.4bn at the end of 2014.

This increase is partly due to the US market where over 100 million EMV chip cards were issued to American consumers, as EDC’s perspective local banks prepared to meet the October 2015 deadline. On It’s important for merchants to identify key regulations October 1, 2015, in the US, in-store counterfeit fraud liability and standards (especially in Europe), and understand shifted to the party (issuer or merchant) that has not adopted their impact both on the customer experience (e.g. EMV chip technology. changes to customer authentication requirements) and on the merchant’s internal processes and systems. In most cases, these regulatory changes and emerging standards are “good news” for retailers but require on going monitoring and adjustments as the guidelines are evolving. This could be done either internally if the merchant has its own internal compliance team or by leveraging external resources such as trade associations or payment partners.

Conclusion and next steps

In conclusion, this white paper identified: Hopefully this white paper will contribute to convincing •• Strong use cases with actual implementations and real merchants to: benefits for merchants, either generating incremental sales •• Include payments-related aspects “up-stream” in their for merchants (e.g. by addressing the out-of-stock issue) planning, i.e. when merchants define and design great and/or centralizing payments operations and management. experiences for consumers. •• Five payments-related best practices. In a nutshell, there is •• Ensure that their omni-channel roadmap includes not “one big thing” to get right when it comes to payments- payments-related topics and that they have sufficient related practices to support omni-channel use cases. But resources to manage payments-related issues. there are a lot of small and incremental changes that •• Engage with the right payment partner that will help need to be fine-tuned in order to deliver a great payment merchants to fine-tune the payments experience, which will experience as part of the overall customer experience. in turn help merchants deliver the type of omni-channel •• Three factors that will drive the emergence of omni- experience that will ensure their long term success. channel: changes in consumer expectations and behaviors; new technologies; and changes in regulations and standards. In other words, omni-channel is here to stay and will grow rapidly.

24 Source: see May 2015 press release on http://www.emvco.com/media_center.aspx?id=48 34 25 Source: http://www.emvco.com/about_emvco.aspx?id=202 Conclusion

About Edgar, Dunn & Company About Adyen EDGAR, DUNN & COMPANY (EDC) is an independent global Adyen is a technology company that provides businesses a financial services and payments consultancy. Founded in 1978, single solution to accept payments anywhere in the world. the firm is widely regarded as a trusted adviser to its clients, As the only provider of a modern end-to-end infrastructure providing a full range of strategy consulting services, expertise connecting merchants directly to Visa, MasterCard, and 250 and market insight. other payment methods globally, Adyen delivers frictionless payments across geographies and channels. Headquartered From locations in Frankfurt, London, Paris, San Francisco, in Amsterdam and San Francisco, with offices across North Singapore and Sydney, we deliver actionable strategies, America, Latin America, Europe and Asia Pacific, Adyen serves measurable results and a unique blend of global perspective more than 4,500 businesses, including 7 of the 10 largest U.S. and local market knowledge for clients in over 45 countries. Internet companies, and 3 of the top 5 global apparel brands. Customers include Facebook, Uber, Airbnb, Netflix, Spotify, www.edgardunn.com Dropbox, Groupon, Evernote, Booking.com, Yelp, Vodafone, Superdry, Mango, Crocs, O’Neill, SoundCloud, KLM and JustFab.

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