IDC Retail Insights: "Digital transformation is a train retailers cannot afford to miss"

While technological transformation has been constantly occurring over the last decades, what sets the digital age apart?
Digital transformation represents a fundamental change to business models through ICT, especially the 3rd Platform (cloud, mobile, social business and Big Data/analytics). Prior technology driven transformations have been typically IT led, with business stakeholders and focused on how IT improves and supports existing business models and practices. However, the era of digital transformation is business led, with IT stakeholders, and is focused on how technology transforms business processes in regards to engaging an organization`s customers/clients seamlessly across business functions.

As retailers in Europe seek new ways to differentiate themselves from the increasing number of competitors in the region, digital transformation is a train they cannot afford to miss. IDC Retail Insights sees a race to digitise happening among the largest retailers in Europe (all of which have varying degrees of maturity) to harness the new revenue streams and retail operational efficiencies that digital transformation can provide. At the moment, all the top Western European retailers are in the process of determining how digital impacts them and what their digital transformation approach and strategy should be.

Based on the evidence we’ve been collecting so far in IDC Retail Insights, achieving a seamless digitally enabled business is an omni-channel retail mandate. This is setting the path retailers must follow to maintain relevance as customer expectation, in regards to how they engage with retailers through technology, continues to rapidly evolve in an ever competitive retail market. Currently, retailers are predominantly dealing with the disruption, and the related risks, introduced by digital transformation in the following 4 different areas:
1. Creating an omni-channel backbone to provide single views of customer, order, and inventory
2. Digitalizing the physical store to be as personalized as the online store experience
3. Enhancing the online commerce platform across channels
4. Omni-channel fulfilment and execution

What types of payment technologies/ trends are currently driving digital transformation in retail/ payments?

According to IDC Retail Insights 2015 European Consumer Survey, European consumers awareness, usage, and comfort of new payment methods provided through technology, whether that is mobile app or device driven, continues to grow strongly. As expected, the established leaders in payment preference for shoppers is still cash and credit/debit cards but contactless payments are growing rapidly in the countries that have adopted it. In fact, in the past 12 months, 23% of European shoppers have used contactless credit/debit cards to pay for their in-store purchases and just under 20% have used contactless payments through their smartphones, despite the nascent nature of this technology.

Bearing this in mind, thinking about the increasing digitalisation of the store, IDC Retail Insights sees contactless payments continuing to gain momentum in Europe, with consumer mobile devices continuing to play a big role as the technology rapidly matures.

IDC Retail Insights continues to observe an increase in NFC ready products from both payment/tender system vendors, checkout hardware providers, and smartphone producers from both established and new vendors. Moreover, this upsurge will be sustained by the fact that card issuers are now in control of the NFC environment for mobile payments. Although one should take into consideration that bringing NFC-based mobile contactless payments to the next level will have to overcome banks being cautious and concerned about the business opportunity for them and brand impact.

Eventually, new payment technologies - such as Smartwatches and other types of wearables and biometrics for payment initiation and authentication - will allow retailers to improve the speed of customer service at the point of sale, reduce queuing time, and all of this will happen without sacrificing security.

In your opinion, what will be the most transformational technologies impacting digital payments in the next 2 to 5 years?

Mobile, and in particular the way location impacts customer experience, is the next frontier of engagement for all customer-facing businesses. The technological component parts of mobile payments have become significantly, and rapidly, more established, despite adoption being nascent in nature, and IDC Retail Insights believes that consumer demand will continue to drive this evolution within retailers year-on-year. Retailers are at the forefront of this trend, with consumer expectation making no distinction between experiences of a brands presence on a traditional PC or mobile device. Retail companies must look to integrate their more sophisticated loyalty and promotional activity with mobile payments too. The impact of mobile payments on retail IT investments will continue the shift toward other 3rd platform-enabling technologies — cloud, social and analytics. Interestingly, in the mid- to long term, NFC-ready POS and payment/tender system rollouts and upgrades are likely to accelerate, with North America and Western Europe likely to lead adoption.

Regulation will continue to play a very active role in the payment industry on multiple aspects, including among others the quest for guidelines to protect consumer data. If Europe is, relatively speaking, more mature in terms of EMV and PCI compliance, we expect the US to be more challenged in this area in the short-term future due to their switch to chip-&-pin.
The importance of cybersecurity will continue to be on European retailers’ business and technology agenda. With new payment options made available to customers, all the players in the payment ecosystem (retailers, card issuers, banks, etc.) should focus on increasing the overall security level of any transaction made either online or in-the-store. With this respect, the most innovative technologies that are being either used or explored include: EMV chip (that creates a unique single cryptogram for every single transaction), encryption software (that codifies all the data so that only authorized parties can have access to the payment data) and tokenization (that substitute a sensitive data element with a non-sensitive equivalent which is useless if stolen).

About the authors:

Spencer Izard is the European Head for IDC Retail Insights. In this position, he manages IDC Retail Insights across Europe, and provides advisory services, research, and consulting to end-user organizations and IT vendors operating in, and serving, the retail sector.

Luca Bonacina currently holds the position of senior research analyst for IDC Retail Insights. In this position, Bonacina is responsible for leading both quantitative and qualitative research and analysis of retail-focused technology markets across the Western European region.

About IDC Retail Insights:

IDC Retail Insights assists retail businesses and IT leaders, as well as the suppliers who serve them, in making more effective technology decisions by providing accurate, timely and insightful fact-based research and consulting services. Staffed by senior analysts with decades of industry experience, our global research analyzes and advises on business and technology issues facing the retail industry.