Disintermediating the established intermediaries has become something of an art form in payments and retail these days.
Physical retail is being disintermediated by a host of new players using digital technologies and data that further erode their relevance.
Point-of-sale (POS) terminals are being disintermediated by consumers using the very device that gave digital payments acceptance to micro-merchants: the mobile phone.
Traditional banks are starting to feel the disintermediation pinch by alternative lenders who lack their legacy infrastructure and cost structures and use digital-first, artificial intelligence-powered processes to underwrite risk and extend credit instantly.
Traditional acquirers are being marginalized by technology players that provide solutions — not just payments processing — to software platforms who want more control over the end-to-end payments experience for the merchants with which they do business.
And digital wallets face new risks to their model on the heels of the card brands’ recent embrace of browser-based, EMVCo-based online standards (Secure Remote Commerce, or SRC) that deliver a robust card-on-file solution experience for their issuers’ products inside a single “Pay” button.
To name but a few.
The truth is that intermediaries have always found themselves on both sides of the disruption dynamic, and not all who aim to disintermediate are successful. Survival depends upon how well the incumbents anticipate a future beyond the one they entered the market to disrupt — and how prepared they are to change their strategy to disrupt their once-disruptive ways of doing business.
Disruptors Being Disrupted
Sometimes it helps to put things in context.
In 1734, in a city outside London, shoppers walked into a single store, Bennetts, to buy the things that once required visiting many different stores. For the first time, shoppers could conveniently visit one store to see, touch and buy things, many of which were simply not available to them in the stores lining the main streets in their towns. The brick-and-mortar department stores that disrupted those main street merchants took off, flourished and remained largely unchanged for the next 270-plus years.
In 1916, Clarence Saunders opened the first self-service grocery store in Tennessee. Just like department stores, Piggly Wiggly gave shoppers the chance to personally see, inspect and then select food they wanted to buy in one place. Before Piggly Wiggly, shoppers went to multiple shops to buy meat, produce and canned and dry goods — all of which were kept behind counters and required a salesperson to get. Almost overnight, grocery stores, the brick-and-mortar intermediaries that disrupted main street food purveyors, became the way that shoppers bought all their food. And just like their department store counterparts, grocery stores remained largely the same for the next 100-plus years.
In 1985, Blockbuster opened a chain of stores that let consumers rent video cassettes of the movies that had recently been playing inside movie theaters and watch them at home. For the first time, local and regional rental stores aside, people across the U.S. who wanted to see a popular movie didn’t have to buy a ticket and go to the movie theater to watch it. Video rentals and movie nights at home became the go-to consumer movie ritual for the next two decades.
In 1979, Sony introduced the Walkman, an innovation that made music both portable and personalized. Before the Walkman, portable music came via the portable radio and whatever songs the stations were playing on-air. For the first time, consumers could buy a cassette — and later a DVD — with the songs they wanted and listen to them anywhere they wanted to go. The “There’s A Revolution In The Streets” ad campaign that introduced the Walkman to the U.S. market in 1980 was said to have been the most effective product launch ad campaign in the fifty-year period prior to its introduction and gave Sony a 20-plus foothold on the portable music market.
In 1995, one year after Amazon was founded, eBay opened its virtual doors to consumers who wanted to sell the stuff that was taking up room in their attics, basements and garages. Before eBay, sellers and buyers were largely limited to their local geographies and the effectiveness of newspaper classifieds. The retailer became the category leader by moving yard and garage sales online and later by expanding into selling new branded products. That was until Amazon branched out of books and niche players like Etsy provided a different and better product selection with a cleaner user experience less than a decade later.
In each case, marketing and merchandising became the tools used by these once-disruptive intermediaries to hold their competitive place in line. The competitive dragon they were slaying was the “other guy” just like them who wanted in on their turf. The battle was fought on a playing field that was more about being a better intermediary than the other guy — more products, better products, newer products, cheaper products, unique products, better in-store experiences, rich loyalty schemes — than it was about reexamining how to deliver an even more convenient consumer experience.
Until it became a defensive move and a new crop of disintermediators used new technologies that would, like they did decades ago, redefine the role of an intermediary and the customer value they could deliver.
Digital swamped physical.
Software swamped hardware.
Frictionless swamped friction-filled experiences.
And the ability to deliver the convenience that once put these intermediary pioneers in a position of power ended up swamping them all.
See the Future — or Face the Inevitable
In 2018, it’s a little bit of déjà vu all over again.
Those who continue to believe the Census Bureau reporting that 90 percent of retail sales are still done in physical stores are living with their heads in the sand. The cycle of failure defined by a record number of mall and store closings and bankruptcies over the last decade is a very visible sign of the wholesale decline of physical retail that we seem now to witness daily.
As someone I was speaking with about this very point said the other day, “I mean people even buy mattresses online today.”
Yes, they do.
Digital and mobile and the use of data to enhance the consumer shopping experience that have disrupted the retail status quo will continue to disintermediate retail.
All of it.
Playing the Digital and Physical Fields
We’ve been studying consumers walking in and out of physical stores every quarter for more than a year. We’ve talked to 8,000 consumers over that period of time and examined their shopping behaviors at physical stores large and small across four retail segments — mass merchants, including department stores, grocery, apparel and health and beauty.
We asked them what they bought, why they decided to shop that store and how much of their shopping they do in that store and other physical stores like them and how much of their shopping is done online.
We have complied a pretty compelling story.
Across the four merchant segments that drive a large part of consumer spend, most people don’t shop exclusively in physical stores anymore.
For mass merchants, only 35 percent said they shop only at the physical store — defined as 50 percent or more of their spend in that channel — with 49 percent saying they shop both physical and digital channels.
For grocery, the number of physical store-only shoppers was slightly higher at 41 percent. Fifty-five percent of consumers said they shop both physical and digital channels.
The story is the same for apparel: Thirty-three percent said they shop physical exclusively, with 58 percent shopping across both. In health and beauty, 39 percent of consumers shop exclusively in the physical store, and 52 percent shop both digital and physical channels.
The shoppers who play the digital/physical field are younger, more educated and more affluent than their physical store-only shopper counterparts.
They are the future of retail, and their shopping habits and preferences are now well-shaped.
But regardless of age, income, education, spend or preferred retail channel, there is one constant undertone: What decides their channel and store preference is convenience.
Prices come second. Convenience comes first.
More than rewards. More than loyalty programs. More than product selection. More than support or service. More than what payment methods are accepted.
Increasingly, the shoppers who are leaning toward digital said they’re leaning on technology and the variety of connected devices in their possession to find the convenient shopping experience they want.
Convenience Inspires Disintermediation
The ripple effects of this shift are profound and are being felt throughout the entire payments and commerce ecosystems.
Software plus digital is swamping physical retail intermediaries and the ecosystems that support them.
Standing in line and checking out at counters and terminals will be the exception and not the rule of what people do in stores a decade or so from now — because it’s increasingly not what people are doing today.
Checkout is happening in the aisles, on mobile devices while in the store or via an app before a customer even gets to the store to pick up what’s been bought.
Software and apps and connected devices are disintermediating the POS checkout experience that has been retail’s cornerstone for more than 270 years using a device that, ironically, expanded digital payments acceptance for small merchants in 2009 with Square.
Product discovery is happening on mobile devices and more recently with Alexa and Google Assistant. These virtual assistants can also buy the products consumers find with their help. Stores — not products — risk disintermediation as consumers search for what to buy first and then make the buying decision on who can most conveniently get the product into their hands.
Assuming, of course, that consumers don’t find it more convenient to start and end their search on Amazon.
Frictionless swamps friction-filled payments experiences and the ecosystems that support them too.
Issuers and digital wallets are facing their own version of disintermediation , as consumers set, forget and default to the payment method and/or registered card on file option that they like and always use.
Top of wallet could be decided by default because it’s what’s most convenient for the consumer.
In a world in which voice may be emerging as a dominant access channel for retail, voice platforms could become the new intermediary for not only what stores consumers buy from, but how they will pay for what they want to buy.
So, too, could a universal pay button that makes the registered card options already a part of a consumer’s digital payments experiences available across all of the merchants they want to shop.
All of these same forces are disrupting banking and lending.
Convenience-driven consumers have been trained that using mobile and digital banking channels are easy and secure. Physical interactions are no longer a requirement to get what they want, including loan products.
On the consumer side, Quicken Loans is now the biggest mortgage lender in the market, with a 6 percent share. Consumers happily traded off the inconvenience of an in-person mortgage process at a bank for the convenience of an online lender who could give them an immediate credit decision — from the comfort of wherever it was convenient for that consumer. Small businesses are gravitating to online lenders, too, for the same reason: using technology to instantly underwrite and pay out loan proceeds that provide them with important sources of working and growth capital conveniently and quickly.
Digital, software and frictionless payments have dented the lucrative lines of business that were once the traditional banks’ to lose.
What’s an Intermediary to Do?
That’s up to the retailers, payments players and lenders, all of whom are facing a new crop of disintermediators, to decide — and not all of whom are venture-backed startups with a big hill to climb and big intermediary shoes to fill.
For retailers, it will mean standing at the digital — and now voice-enabled — fork in the road and picking a path, using the requirement of meeting the consumer’s need for convenience and the requirement of making a sale as waypoints. Now — before voice becomes the next wave of consumer innovation for which they have to play catch-up.
For lenders, it will mean using technology to rethink data flows that can both leverage their balance sheets and expand credit options for consumers and businesses.
For digital wallets, it will mean preserving their current role as a value-added intermediary to merchants and consumers by upping the convenience quotient, adding new sources of value that make transacting across digital and physical channels seamless, efficient and ubiquitous — today.
For everyone, it will require new strategies and ways of thinking that use the assets they have and marrying them with the new technologies that deliver the experience that defines the consumer’s behaviors today. And being open to partnerships that once seemed like an anathema in an earlier time.
And two more things.
Understanding that consumer convenience, throughout history, has driven disintermediation and defined innovation — across all sectors.
And recognizing that time is a precious currency.
Department stores have been around for 271 years, but the digital blows that have sent them reeling started, in earnest, about 10 years ago when the iPhone and apps were introduced. Banks have been lending for 150 years, yet it took Quicken Loans only 32 to capture the mortgage lending market.
Ten years from now, the world of retail, payments and lending will look quite different, and intermediaries will play an important role in shaping it.
The question to be answered between now and then is who will disintermediate whom. It’s a question rife with speculation — but with, at least today, few clear answers.