The Payment Innovation Gap Facing Merchants

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According to a recent report, merchants are currently falling behind in online payment gateway technology and innovation when compared to banks and fintechs.

For the past ten years, merchants have been transitioning to ecommerce, with newer merchants focusing solely on the online space. Prior to the pandemic, digital displacement was occurring, but COVID-19 has exacerbated the schism between brick-and-mortar and online stores. Because there are no geographical boundaries, the online space has become hypercompetitive, reshaping how merchants conduct business.

Differentiation and a clear focus on improving customer experience are critical to surviving in a crowded market. To carry out strategic initiatives, both of these things necessitate flexibility, speed, and agility. In short, merchants have reached a crossroads with digital transformation. While there may be reluctance to invest in digital transformation initiatives, that reluctance should be balanced against the risks of falling behind other merchants, banks, and fintechs. The growing innovation gap between merchants and their more tech-driven counterparts ...
... could have serious consequences if merchants fail to keep up.

The Innovation Journey
According to an ACI Worldwide report, organizations can be classified into five types based on their approach to business transformation and innovation:

Emerging — these organizations place a high value on innovation but lag behind the market in terms of execution and delivery.
Laggards — these are organizations that are behind the curve in terms of innovation and frequently outsource services. They are aware of their challenges but are not actively engaged in addressing them, and they lag behind the market in terms of customer experience innovation.
Trailblazers — these are organizations that are strong in digital and have built their business around innovation. They are at the forefront of technology adoption and product development.
Advanced — these organizations are intent on making innovation an enterprise-wide endeavor. They have a documented strategy for tech adoption and are leaders in product innovation.
Tech-Led — these organizations are weak in terms of innovation and enterprise-wide approach but strong in terms of technology investment. However, they are rarely at the forefront of product innovation and have centralized ideas and technology.

According to the ACI Worldwide report, the majority of merchants fall into one of three categories: Emerging, Tech-led, or Laggard. No merchant segments (telecoms, hospitality, digital goods, and retail) are Trailblazers, and they all trail retail banks, corporate banks, and fintech firms. Approximately 14% of merchants are classified as "Emerging," a nod to the efforts these organizations are making toward tech-enabled innovation. However, the emphasis on delivery and execution is deficient. On the other hand, while 24 % of merchants are more likely to invest in technology, they lack cross-team collaboration and an innovation nucleus within the organization.

Perhaps more concerning is the number of large merchants ($10 billion or more in revenue) classified as Laggards. Currently, 37% of large merchants are in this category, with very few in the Advanced or Trailblazer categories. Alternatively, merchants in the $5-$10 billion range have only 23% in Laggard territory, with the remaining 37% in Advanced or Trailblazer territory. This schism could pose significant challenges for large merchants who continue to lag in innovation initiatives even as the market becomes more competitive.

Closing the Gap with Technology
Larger organizations may face a significant challenge in adopting emerging best online payment gateway technologies, modernizing systems, and advancing innovation initiatives because their sheer size makes it difficult to remain agile and flexible in the face of rapidly changing market demands. Infrastructure management should be a top priority, and these organizations should strive to balance existing infrastructure with the necessary transformation to stay ahead of the curve.

Cloud Technologies
Among all merchant segments, 21% intend to increase their investment in cloud technologies such as serverless computing and containers. This push for operational efficiency is intended to pave the way for rapid innovation in a rapidly changing space. Eighty-one percent of merchants intend to move mission-critical workloads to the public cloud, with telecoms (82 percent) and retailers leading the way (84 percent ).

Security
Merchants are also concerned about security as data breaches continue to rise and consumers speak out loudly with their wallets when they believe a merchant lacks the necessary security. Globally, 73 percent of merchants believe they are more vulnerable to data breaches than they were a year ago, and 76 percent believe security concerns stifle innovation efforts. However, merchants in the Trailblazer category are less concerned about security, which could be attributed to the effectiveness of previous investments in fraud and risk mitigation.

Artificial Intelligence (AI)
When merchants consider promising emerging technologies to support innovation, artificial intelligence (AI) is also on the table. The telecommunications and hospitality industries are particularly interested in AI, with 42 percent of hospitality businesses indicating clear plans to increase their use of bots and machine learning. Thirty-nine percent of telecoms report the same, indicating that data use is a high priority across the enterprise.

Whether a Laggard or a Trailblazer, one thing is clear: innovation must remain a top priority to differentiate and remain competitive in a rapidly changing and hypercompetitive marketplace. Companies must be diligent in balancing technology and financial resources with the future needs of consumers. Taking action now to implement new technologies and to focus on digital transformation will pay dividends in the organization’s ability to weather new entrants and serve customers at the highest level.