Electronic gift cards accounted for more than $17 billion in holiday sales in 2004 (approximately eight percent of all holiday retail sales), according to the National Retail Federation. The cards have quickly become the product of choice, with both givers and recipients citing convenience and flexibility as key factors in their use of the cards.
Merchants like them too; of those who receive cards, 56 percent spend more than the initial value of the card they received, according to the 2005 First Data Prepaid Services' ValueLink Consumer Insights Survey. Forty-one percent of the survey's respondents also said they are interested in a spending card that is tied to a rewards program.
Rewards or loyalty programs and electronic gift cards are just two of the many new payment options for consumers that merchants need to provide. "Payment options and transactions have become more complex than in years past, with most being electronic," states Steve Herrmann, Senior Vice President, Enterprise Customer Development, First Data Corporation, the Colorado-based global provider of electronic commerce and payment solutions. Besides the complexity challenges, there is a cost factor for a merchant in acquiring the ability to handle the increasing mix of different payment forms.
So retailers in more than 200 countries and territories, spanning the gamut from large retailers with a mammoth amount of payment transactions all the way to Mom-and-Pop stores, are outsourcing their payment processes to First Data. The provider guides them through the payment challenges and keeps the processes running efficiently and effectively.
Outsourcing Lightens the Burden
A pile-up of interlocking factors hems retailers in on every side when it comes to payment transactions these days, and they have become the drivers for outsourcing payment functions. Like most operational processes, technology has impacted payment transactions. But Hermann says consumer behavior has also made an impact.
"Debit transactions, for instance, have been available for quite some time. But since the late 1990s, we've seen about a 25 percent annual compound growth rate in debit overall and an even faster growth rate if you look specifically at PIN-based debit, requiring entry of a code known only to the customer," he says. "Consumers are showing a greater desire for PIN-based debit cards because of the security associated with that transaction."
Consumers doing business abroad also want the capability to execute their payment transactions in their host country's currency.
Then there is the factor of rewards. Originally reward programs were associated only with credit cards but have now expanded to debit cards as well. Retailers like reward vehicles associated with carded transactions, which increase customer loyalty; and customers like accumulating rewards.
Stop & Shop, a chain of more than 360 food retail stores throughout New England, New York, and New Jersey, recently began a pilot in several stores for a relatively new payment form that links a consumer's direct deposit account, credit, or signature debit card to the company's loyalty programs. The chain outsourced the processing for this pilot to First Data. The strategy is fairly unique and gives Stop & Shop a competitive advantage in the grocery business.
The merchants have a list of wants and needs, too.
In addition to the usual ongoing problems of battling hackers, security is an increasingly challenging area with the ever-changing rules of compliance often levied by the card associations. Hermann reports this is a real challenge for merchants and a significant reason why they turn to outsourcing service providers for help.
First Data also helps protect merchants from fraud. "Depending on whom you listen to," states Hermann, "people perpetrate $3 to $6 billion dollars worth of fraud annually across the United States." First Data assists merchants with security compliance and helps authenticate and authorize payments to reduce merchants' exposure to fraud.
Speed of the payment transaction is also critical. "Ten years ago, it might be common to write a check at the grocery lane," explains Herrmann. "But today we have other means of getting access to that same account source that are far speedier." Many consumers also like the clean, quick, ease of checkless transactions.
Conducting business online has created a new set of payment challenges for merchants, and managing them is not a retailer's core expertise. "We're now seeing the growth and extension of payment options on the Web," reports Herrmann. "Originally it was only credit cards on the Web, but now you can do debit cards, present checks, gain instant credit through certain payment vehicles, and use gift cards on the Web. Merchants need experts to help them navigate through those, and process and settle all those transactions.
Complicating matters even more is the trend of globalization. There are many multinational companies with operations in many countries, and the payment infrastructure is very different from country to country. "There are different needs per country, and we help our clients navigate through those needs on a country-by-country basis," says Herrmann. Clients also reap the benefit of having a sole provider for those services worldwide.
Making the Decision to Outsource
Despite these drivers, some retailers have yet to move from an insourced to outsourced model for payment transactions. Some have significant in-house investments in infrastructure; others fear a loss of control over the work. But the reality is, if outsourcing is done well and with the right partner, the merchant gains capabilities, protections, marketplace wisdom, and expertise that far outweighs other concerns.
As Herrmann points out, an outsourcing service provider with comprehensive services can help maximize the client's total environment in a more fluid way. "We take a look at all that a particular company needs to achieve in the world of payments and bring those solutions to bear. We can help them direct payments to the most cost-effective channel and help better manage fraud. If they aggregate all their payment functions--not just looking a single piece of the payments world, like just credit, debit, or checks--we can bring even greater advantage and opportunity to them."
First Data's clients also benefit from the provider's high degree of retail specialization. "If the client is a supermarket, for example, (or a specialty retailer, hardware store, or petroleum and convenience store), we align them with our experts who really understand that particular business," explains Herrmann. This expertise is as important as the firm's payment expertise.
His advice for companies now considering whether they may want to outsource their payment functions in the next year or two is to first look at areas where they might have exposure. Fraud and security, for instance, are the foremost arenas that can be really damaging to a business, he warns.
Enterprises should also look at the opportunities available for helping with customer retention or attraction of new customers. "It's becoming more and more common these days that payments are a vehicle that allow merchants to do that, just as Stop & Shop uses payments as a loyalty and retention vehicle," says Herrmann. "In today's hyper-competitive world, consumers have so many choices, so merchants need to be as flexible as they possibly can." The best way to achieve flexibility and cost-effectiveness is outsourcing.
Lessons from the Outsourcing Journal:
- Payment options and transactions have become more complex than in years past, with most being electronic. Without outsourcing these functions, there is a significant cost factor for a merchant in acquiring the ability to handle the increasing mix of different payment forms.
- Security is an increasingly challenging area with the ever-changing rules of compliance often levied by the card associations. This is a real challenge for merchants and a significant reason why they turn to outsourcing service providers for help.
- Outsourcing payment functions is a highly effective strategy for mitigating companies' risks associated with increasing exposure to consumer fraud.
- Payment infrastructure is very different from country to country. An outsourcer can help merchants navigate through those regional needs and also yield the benefits of having a sole provider for worldwide services.