Payments Innovation

Five Unexpected Lessons Of Summer 2018

The Axis

The term “thinking outside the box” originates from advice that puzzle management consultants famously gave to clients in the 1970s and 1980s to encourage creative thinking. Called the “nine dots” puzzle, the trick was to connect all nine dots in the puzzle with four straight lines, without tracing over or overdrawing any lines, or lifting the pen from the paper.

There are a variety of solutions to the puzzle, but all involve lateral thinking — in that they require the person solving the puzzle to find a solution only by drawing the lines outside the confines of the square, defined by the nine dots themselves. AKA thinking outside the box.

Here at PYMNTS, our resident expert in thinking outside the box, as laid out by conventional wisdom, is Karen Webster — and Summer 2018 has been a particularly good time for drawing long and unexpected lines way outside the box, and into a rapidly changing future. Conventional wisdom, after all, is only as good as the conventions it’s based on. When those conventions start to change?

It’s probably a fine time to give some of the wisdom an update. For that, Karen has a few specific suggestions.

1. “Throw out everything you’ve ever learned about what makes a consumer loyal to a brand.” —Loyalty’s New One Percenters

What you’ve heard about loyalty and the facts on the ground don’t add up. That’s because loyalty, over the last decade or so, has been turned on its head. It’s not about price — a coupon, promo code and discount loyalty programs (long touted as the holy trinity of driving retail loyalty) don’t have that much effect. In fact, loyal customers pay more than 3 percent to 4 percent on average rather than less.

It’s not driven by the trend-setting millennials and Generation Z shoppers, or by the affluent, as it seems to be age, generation, income-independent and geography-independent. It also isn’t being driven by mega brands with mega advertising budgets, but by “long tail brands that enough shoppers like enough to make and keep as their ‘go-to.’”

Loyalty is driven by its own set of special one-percenters, Webster noted. Who they are and what they want is often quite different than what the standard loyalty playbook describes.

What appeals to loyalty one-percenters is the opportunity to find innovative new brands that add value or remove friction, regardless of what name is on the package, whether that consumer has ever heard of that brand before or whether it costs a little more to buy than what’s currently occupying the consumer’s pantry, closet, living room, bathroom or kitchen.

Retailers are where these consumers go to find these new products. That makes product discovery coupled with product innovation the new retail playbook.

It’s why savvy online retailers have an edge — those with marketplaces that give long tail sellers an opportunity to be discovered and find those loyalty one-percenters. It’s where technology, machine learning (ML) and artificial intelligence (AI) are used to find buying patterns and inform purchasing and pricing decisions — almost in real time.

The question that remains unanswered is what happens once these loyalty one-percenters find their new go-to brands. Will they remain loyal to the retailer that helped make the match?

2. “Most consumers often don’t really like living in an unbundled world.” — Has Unbundling Lost Its Cool?

Unbundling is often praised as the way of the future — in music, software, entertainment, media, shopping credit. Just name it. There is an unbundled solution for it, to give “consumers the choice to pick and choose products that are suited to their own needs, preferences and comfort zones.”

However, there is one small fly in that ointment: choice. Customers are overwhelmed, working too hard and spending too much time trying to optimize their choices themselves. Consumers like bundles because too much choice among unbundled features costs them time and creates uncertainty over how things might turn out when choosing among them.

Time and uncertainty can cost businesses sales, since people tend to stick with what they know, rather than buy an unbundled something they don’t know. Too many choices chew up too much of the consumer’s time as they absorb information, then compare and contrast all the options before making one. Too many choices also introduce risk by increasing the level of uncertainty consumers have with making a purchase decision.

This endless aisle of unbundled choices may give consumers more options, but it may not optimize the one thing that consumers value more: their time.

3. “The launch of these Prime Member Deals at Whole Foods isn’t only about converting Whole Foods shoppers into Amazon Prime customers. It’s about creating the flywheel for the physical store version of the Amazon Marketplace.” — Are Retailers Ready For Amazon’s Prime Time?

Before the Amazon acquisition, Whole Foods was called “Whole Paycheck,” and not for nice reasons — the produce and atmosphere was great, but the prices were considered a bit crippling.

All of that has changed in the post-Amazon era. Prices have come down in general, but particularly for Prime Members, who now enjoy member special discounts, free grocery delivery and (for Amazon Prime Visa cardholders) 5 percent off their purchase. “Whole Paycheck,” Webster said, is taking on a new meaning, as Amazon is giving its Prime customers more reasons to shift their grocery spend to Amazon.

The story, though, Webster noted, isn’t merely about bringing Prime customers to Whole Foods. It’s about the power of Prime paired with Whole Foods to create an omnichannel flywheel for Amazon — and perhaps, in the future, power a marketplace for local businesses, much like the one Amazon currently runs online for eTailers.

It may not be happening tomorrow, Webster noted, but the pump is primed, so to speak — and the bigger moves may be soon to follow.

The guy at the front door isn’t asking the consumer to opt into a Whole Foods loyalty app, but a bundle of benefits offered by Amazon Prime that also happens to include free two-hour delivery on groceries and deals on products sold at Whole Foods. Those deals are part of something much bigger and broader than Whole Foods, including access to a library of streaming content that now rivals Netflix for the quality of its original programming, as well as free delivery on items purchased on Amazon.

Putting pen to paper, it’s like getting the entire $119 Amazon Prime membership for free, if someone orders more than one grocery delivery a month and wants it delivered in two hours or less. The Whole Foods sign-up inducement of $10 off a grocery purchase of $50 or more brings the annual fee to $109, or $9 a month.

That’s why Karen thinks Whole Foods plus Prime is just the first in a series of online/physical store mashups, which will use Prime as a lever to get consumers to download a store app and/or link their Prime membership to that store to get special deals and two-hour delivery of products.

4. “Consumers, not regulators, ultimately decide who wins and who loses” — Online Platforms: Why Consumers Rule And Regulators Don’t

The problem with regulators looking to protect the interests of consumers — now and in bygone eras — is that consumers are often not the ones with the problem. In the 1940s, when the country’s largest retailer The Great Atlantic & Pacific Tea Company (A&P) was hit with an antitrust ruling, it wasn’t because consumers were unhappy. They were thrilled to have a grocery shopping process become both faster and cheaper. A&P’s competitors, on the other hand, complained bitterly all the way to a court victory.

It is a reality that hasn’t changed much in the present day. When regulations in the U.S. and EU champion to protect “customer rights,” they usually have little to do with the will of customers who vote with their feet when they are happy or sad, but instead seem to protect competitors that “are feeling the pressure from innovation and complaining that the innovators are ‘unfair.’”

If that’s hard to believe, read almost any article now about how the online platforms need to be investigated, castigated, broken up, etc. The consumer will be missing in action (MIA) in the story.

Then look at who is going to the legislature and regulators looking for help in blunting the online platforms. It’s almost always a downtrodden competitor who can’t keep up.

FAANG — a reference to Facebook, Apple/Amazon, Netflix and Google — is the pejorative term some use to refer to the new “A&Ps.” Sometimes they are referred to as the frightful five (Amazon, Apple, Facebook, Google and Microsoft).

A&P kept drawing in customers for years after it got whacked by the antitrust courts. People didn’t want to go back to the high-priced, inefficient old ways. So online platforms can take their public flogging and keep moving on just like Google and Microsoft have done after their public shaming by Brussels.

It’s easy to lose those customers without continually innovating. However, even if companies do innovate, someone else might just come up with something new. A&P ultimately lost its edge and was overtaken by innovative companies. That’s what happened to Microsoft in smartphones and could happen to anyone else, too.

5. “The economy is definitely humming, but most people — even those earning big paychecks — still live paycheck to paycheck and face financial stress.” — Why Household Finances Under The Hood Don’t Look So Good

The summer of 2018 has been full of encouraging news on the economic front: retail sales have been booming (a reality reflected in the scores of retailers who beat earnings expectations in Q3), wages are on the increase, unemployment is on the decrease and consumers are reporting a high level of confidence in the economy. Time to break out the party hats, right?

Well, according to Karen Webster, we all might want to hold off on handing out the cake just yet. That’s because, for all the signs of strength in the economy, there are signs of concern — particularly among “Second Chances” consumers who have had financial troubles in the past and are now working to rebuild in their second act, financially speaking.

Second Chances, she noted, look financially healthy by many counts — the college educated, earning over $60K a year, who often own their own homes and have access to credit products. Half say their monthly bills outstrip their income; 79 percent say they live paycheck to paycheck.

Disturbing now, when the economy is strong. Perhaps, Webster noted, genuinely worrisome when the economy inevitably slows.

Most interesting about these Second Chances is that they don’t look like they’re in trouble. They have good jobs, they wear nice clothes, their kids probably go to summer camp and they take family vacations. Walking by them on the street or working in the cube next to them would never foreshadow the stress of their daily financial situation.

They are the Financial Invisibles in search of a solution, although they don’t appear, on the surface, to need much of one at all. The Second Chances are a big driver of the economy and a bellwether of our future economic prospects.

Some may say they’re living beyond their means, and maybe that is true for some. Most may be at the same point in their lives that their parents were at their age: married with kids and a house, car and dog. However, they may also be without some of the things that their parents had: the certainty of a steady job, pensions, guaranteed raises and bonuses year after year, savings, a house with equity that could be tapped into to pay for big expenses.

Unless we sort this out as a payments and financial services ecosystem, we’ll be talking about things that are much more serious than consumers feeling stressed about paying their bills, but still managing to pay them somehow, some way, even if they’re late in paying them.

The payments and commerce world, as Webster noted across several commentaries this summer, is a rapidly changing place — one where everything one thinks they know about consumers and commerce, winners and losers, is rapidly being rewritten.

Consumers like simple, friction-free and convenience more than they care about price alone. Innovators succeed only when they can see beyond the cool tech and use it to solve those problems, and in ways that might not seem all the ground-breaking on the surface, but in ways that move the industry forward in meaningful ways. The key to success is thinking outside the box, but not so far that the dots never get connected to anything relevant or enough to make those innovations a success.

When that happens, Karen will be here to take an outside-the-box look at them, to determine if they are the next big hope or just more big hype.



The pressure on banks to modernize their payments capabilities to support initiatives such as ISO 20022 and instant/real time payments has been exacerbated by the emergence of COVID-19 and the compelling need to quickly scale operations due to the rapid growth of contactless payments, and subsequent increase in digitization. Given this new normal, the need for agility and optimization across the payments processing value chain is imperative.