Coronavirus

Why Direct-to-Consumer Payment Models Will Become A Mainstay

“Payment solutions providers are likely to see an increase in DTC spending and demand, and they should prepare now to help facilitate a smooth transition,” RS2 CEO Daniela Mielke told PYMNTS. “This virus may be contained in a few months, but the long-term impact to the economy is still unknown.” Read Mielke’s full comments in Black Swan, a special report exclusively from PYMNTS.

The following is an excerpt from Black Swan, contributed by RS2 CEO Daniela Mielke.

Why Direct-to-Consumer Payment Models Will Become A Mainstay

In the numerous articles about 2020 trends and predictions, no one foresaw anything like the current COVID-19 pandemic. That is the very definition of a “black swan.” Businesses are facing a new reality, and now realize that black swans can change the trajectory of the world.

Payment businesses are somewhat resilient to economic crises — they go up and down with the economy on average, but are not disproportionately hit like the travel industry has been today. Despite the buffer, when a black swan hits — like the current COVID-19 pandemic — a payment business should quickly assess how consumer habits are impacted and how change is imminent across the globe.

Supply chains will re-shape and adapt, remote work and communication will accelerate, and broader parts of the population will get accustomed to ordering everyday items online. In fact, China saw a 300 percent increase in online grocery orders in January and February this year due to the pandemic.

We are also experiencing an unprecedented demand for essential goods. Hand sanitizer and toilet paper are available from one store or website, but not from another. Consumers are turning to ordering directly from manufacturers, and direct-to-consumer (DTC) services will undoubtedly continue to see an uptick.

People are preparing to be at home for long stretches of time, and as an industry, payment companies need to seize the moment and adapt quickly by adding card-not-present options, while independent software vendors (ISVs) have the opportunity to quickly enable D2C ordering applications.

One such vertical that was already rapidly growing even before economic changes from the coronavirus is consumer packaged goods (CPG). Currently, nearly half of U.S. consumers shop for CPG online, and by 2022, U.S. households are expected to spend $850 per year on online food and beverages, according to FMI and Nielson.

Many innovators, whether in the personal care or beverage sectors, sell their niche products via DTC options, allowing them to reach broader markets and cut out the middleman. In fact, Aaron Doades, CEO of Peach, a D2C provider of bath tissue, said that as of March 12, sales had gone up about 267 percent in two weeks.

Outside of the coronavirus shopping rush, DTC brands such as razor brand Billie and footwear-focused brand Soludos are not only flourishing, but are expanding their product offerings.

As consumers will likely rely more on delivery for common household items and food, the payments industry will see the DTC industry expand. That will also bring a reinvigorated focus on supplying manufacturers with payment options that make the customer and merchant payment process seamless, an element that is often overlooked by CPGs, according to Shopify.

However, the transition from retail to DTC should be strategic. Most commonly, DTC payment options are debit and credit cards and PayPal, but the increased costs of setting up the required logistics and payment options could potentially offset any capital gains from utilizing the DTC model. In addition to traditional debit and credit, providing options such as monthly subscriptions, direct debit and instant payments (such as the request-to-pay model) could be advantageous.

Payment solutions providers are likely to see an increase in DTC spending and demand, and they should prepare now to help facilitate a smooth transition. This virus may be contained in a few months, but the long-term impact to the economy is still unknown.

In this “new normal,” ISVs and payment facilitators should prepare by partnering with a payments processor that can help them quickly adapt and scale new payment methods.

Read more executives' insights on the COVID-19 crisis in Black Swan.

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