Why Payment Companies Are The Key Players In The Great E-Commerce War

Gulnaz K
31 Jul, 2020

This post was originally published on Forbes.com.

You might not have noticed, but there is a war going on in the world of e-commerce. With e-commerce penetration accelerating wildly this year, this fight for industry domination is quickly heating up. You might imagine that such a war is fought by e-commerce platforms and service providers – but the main battle is currently between payment companies. Surprisingly, they are not competing to offer the fastest or most hassle-free payment services, but for consumer attention.

But why would payment companies be at the center of this?

These companies are sitting on massive treasure troves of data and with that comes a lot of potential value. For example, the data they have collected about consumers’ spending preferences and habits can be very valuable in itself. But that data can also be used for demand forecasting that can give them a competitive advantage in the eyes of their customers, the merchants.

So it is no surprise that many of the major payment companies are experimenting with and betting on commerce functionality lately. Klarna, for example, launched an app where consumers can not only see their purchases and payment history, but also use the built-in browser to purchase any given product with a Klarna virtual card, regardless of whether the merchant is actually partnered with Klarna or not. This gives consumers a seamless experience, effectively simulating that every online-shop in the world runs on Klarna’s popular “buy now, pay later” service.

Another company in the space, Venmo, is also expanding their offerings beyond payments with the test launch of Venmo for Businesses. This feature allows small merchants to set up a professional profile page with contact information like address, phone number, and website etc. The goal is to help small merchants to build a community and raise awareness about their brands through Venmo’s social elements like the feed and search. For example, users can discover new local businesses from the purchases that their friends are sharing in their social feeds.

Afterpay has a different approach. They recently launched an omnichannel product that allows consumers to choose their “buy now, pay later” service as an option in any of the partner retail stores without additional interest or fees. With this feature Afterpay can now also gather insights about consumers’ real world spending habits and tie it to what they already know about consumers’ digital behaviour. The company also launched personalised recommendations for consumers based on merchants that are on Afterpay’s platform – another step towards becoming a one-stop destination for shopping. In the US in April they “sent ten million leads from our shop directory to our retailers”, according to the company’s founder Nick Molnar.

This trend of payments expanding into e-commerce is not just happening in the US and Europe. In China, WeChat and AliPay have been doing it for some time and it has appeared in other emerging markets as well. The digital payment provider in Kazakhstan, Kaspi.kz, is another interesting example. Like many providers in the space, they started as a tool to do peer-to-peer transactions and pay for utility bills and other everyday services. Today, the payment platform is the most popular digital payments service in the country with a 65% share of all digital payments. The company’s expansion to e-commerce is seen as a natural progression. In my conversations with the CEO and Co-founder of the company Mikhail Lomtadze, he mentioned that “The ability to make frictionless payments is essential for the success of any e-commerce business and made an integrated Marketplace a natural addition to the Kaspi.kz app”. According to recent surveys the Kaspi.kz Marketplace is no.1 in Kazakhstan with a 46% share of the e-commerce market.

Making a platform play

The strategy of merging payments with social and community elements and integrating commerce is what we would call a “platform play”.

One of the biggest platforms in the world, Facebook, has been doing just that with their multifaceted approach. Firstly, they are moving full steam ahead with their payment solution, Facebook Pay. Secondly, Facebook has three massive platforms that they are optimising for user engagement and discovery in Facebook, Instagram, and WhatsApp. Coupled with the recently announced Facebook Shop, a storefront for merchants, and expanded functionality of Instagram Shop, the company is creating a place where users can interact with merchants and finalise purchases. According to a recent research, 84% of shoppers review at least one social media site before purchasing, so Facebook’s moves in e-commerce are more than justified.

Other platforms are also making their bets, like Shopify – the e-commerce platform beloved by many merchants and direct-to-consumer brands. They partnered up with Facebook to facilitate the launch of Facebook Shop. The company also introduced Shopify Mail, as an alternative to Mailchimp, to manage consumer communication, Shopify Pay to facilitate payments, and most recently a partnership with Affirm to launch a new interest-free, zero-fees payments program.

But their most interesting bet, in my opinion, is their Shop app – a consumer app that turned from a simple order tracking to an integrated shopping app. It offers discovery feature that lets consumers scroll through all shops that are using Shopify and showcases local businesses and favourite brands. The app also enable consumers to seamlessly place an order and check out from a unified interface. I won’t be surprised if they, in the near future, expand the app to offer direct communication with shops, post-purchase feedback, and higher levels of personalisation. They have the consumer data, they have the merchants – now it is all being combined for more added value.

Shopify launches Shop, a new mobile app
Shopify launches Shop, a new mobile app SHOPIFY INC

The role of fashion and beauty

As I have argued before, the fashion and beauty industry are likely to be the ones that will determine the winners and losers of this industry war for dominance.

Looking at it from a demographic perspective, millennials and Gen Z currently make up more than 60% of the world’s population. They are going to shape and influence the economy for decades to come and their habits are different from those of previous generations.

So where do they choose to spend their money? It might not come as a surprise that 47% of millennials and 41% Gen Z-ers purchase a fashion item each week, according to a survey conducted by Afterpay. Global fashion e-commerce is projected to reach $713 billion by 2022,  making it one of the fastest growing verticals online with a compound annual growth rate of 10.6%. This is a massive market opportunity, especially when coupled with the spending preferences of these two generations.

Most importantly, fashion is notoriously a hard industry to crack with a straightforward tech approach. It has a massive problem with returns – the average number of returns reaches 30% and can go as high as 50%, according to Shopify’s industry report. It hurts retailers’ bottom lines and it hurts the environment as one of the key negative factors in fashion’s sustainability problem.

Young woman unpacking a grey pullover sweater
Young woman unpacking a grey pullover sweater GETTY

Fashion and beauty are highly reliant on consumer expectations of personalisation and curation. According to one survey, 63% of them expect personalisation as a standard service – especially in fashion where product offerings are quite broad and the entire experience might feel too crowded and overwhelming. Sorting fashion taxonomy and inventory is a tricky task – from fast fashion brands producing 30+ collections per year to the ubiquitous problem of dealing with sizing.

To win, you have to be consumer-centric

Becoming the one stop e-commerce destination is the final goal for these players. Being a place where the entire journey can take place – from discovery and engagement, to purchase decision and checkout, to finally the post-purchase experience.

Capturing the attention of gen Z, the first truly digitally native generation, that grew up scrolling and switching between apps and screen is the key in the long run. We know from consumer research that these so-called zoomers are unlikely to use many different apps and will look for marketplaces that offer their favourite brands. This gives centralized platforms like Shopify’s Shop an edge. We’ve also learned that zoomers like to shop in a context where they can see what their friends buy and where they can have a direct connection with a brand. This tendency fits with what Venmo, Facebook, Instagram and the likes are trying to cater to with a focus on social sharing, brand visibility and convenience. Young people shopping directly on social media apps like Instagram, TikTok, or WeChat is no longer a fad, it’s here to stay and therefore the integration between retailers and payment platforms is necessary and inevitable.

I believe that in this fight for consumer attention, the “winner” will be the ones that manage to understand the demographic changes and accommodate consumer preferences in the most streamlined package. Furthermore, I think the company that manages to embrace the fashion industry and build tailored solutions to solve the problems inherent to that space, will be the one that has an unbeatable advantage over the competition.