With the rise of the Internet of Things (IoT) and artificial intelligence (AI), transactions initiated by smart devices and platforms will increase exponentially over the next years. An appealing example is Smart Home, which connects customers digitally through smart devices and allows them to share data and transact from home 24/7.
As research shows that already 33% of the Dutch population expects to start purchasing products and services via Smart Home devices within five years, we believe this is the next level commerce.
In such a "connected" environment, customers behave differently compared to the traditional on- and offline channels. Not only customers, but also platforms or devices will buy and pay for products and services applying smart algorithms to data gathered. This will particularly impact retailers, but also affect producers and payment service providers (PSP).
|For the sixth year in a row, INNOPAY has contributed to the ShoppingTomorrow research program. Together with equensWorldline we hosted the expert group ‘Payments in Smart Home'. In this collaborative project a group of experts researched the effects of Smart Home on Retailers, Producers and Payment Service Providers. This blog provides the main insights of this project. Please download the full research* paper here.|
In Smart Home, visibility to the customer decreases, the competitive landscape shifts due to new competitors and current propositions and business models no longer suffice to support and deliver a ‘connected’ customer journey. Time to start acting, do things differently and seek for new collaborative ways to address these challenges and leverage the opportunities that come with Smart Home.
Smart Home significantly impacts visibility to customers
Retailers struggle with the growing popularity of Smart Home. Where they are now the main purchasing channel for customers, in Smart Home their position is very likely to be disintermediated by platforms and devices.
In Smart Home or a ‘connected’ environment, platforms and/or smart devices determine on behalf of customers what products or services are offered. With IoT and AI personal data is gathered and analysed to proactively anticipate on customers’ needs. As the concentration curve of customers in Smart Home shortens – it has to be instant and personalized - the number of offerings is limited to roughly three out of the current ten offered online*. As a consequence, the visibility of retailers not only depends on the Smart Home platform or device, it is also crucial to make sure their products or services are included in the Smart Home spot list offering.
Further complicating the matter, the spot list will be shared with new competitors; producers and tech-giants. In Smart Home producers are offered the opportunity to envelop the retailer and directly offer their products and services to customers via Smart Home. Additionally, tech-giants like Amazon and Google, are also moving up the value chain using their own platforms (e.g. Alexa and Google Home) to sell their products. So, disintermediation of retailers, decrease of available spots, and new competition significantly impacts the visibility to customers.
Propositions no longer suffice in the Smart Home context
Smart Home is all about offering instant tailor-made convenience to customers, resulting in a different customer journey. An ideal Smart Home proposition offers an end-2-end seamless customer experience from orientation to delivery, integrating the purchase and payment journey. Smart Home platforms and devices primarily aim to take over customer orientation by using for instance AI and voice. They identify awareness, offer personalized offerings and finally help customers choose and pay for the product or service in a seamless way. Current Smart Home offerings, however, are still fragmented, lack interoperability and focus primarily on the purchasing journey.
To stay visible and relevant, it is pivotal for retailers and producers to ‘merge’ their propositions with Smart Home. To become visible in Smart Home via an existing platform both retailer and producer need to pursue a competitive pricing and/or distinguishing branding strategy. A producer with a strong brand or a retailer with the best pricing is more likely to be selected by the platform as conversion rates are higher. To become relevant in Smart Home, propositions need to integrate the full customer journey. We already see examples where retailers collaborate with suppliers and service providers to offer a ‘device and delivery integrated’ offering (e.g. smart lock for delivery groceries based on customer consent) or experiment with voice to increase convenience.
The payment experience is an important element to further improve convenience. A good example is Uber, who has seamlessly integrated the payment into the purchasing journey. In Smart Home, customers expect a similar experience. However, in Smart Home different customer profiles, products and services come together and the range of payment methods offered expands. Interoperability and ease of use will be key. Groceries for example are often paid post or at-delivery via an instant payment, whereas an insurance service product can be a mix of pre-payment (direct debit) for basic insurance needs and pay-per-use (instant payment) for occasional insurance needs (e.g travel insurance). During onboarding the customer will select their preferred payment method per product or service, which in all subsequent transactions merges with purchasing journey save for the authorization of the payment. For merchants it is important to incorporate these payment requirements into their propositions. For PSPs it is an opportunity to increase their relevance for merchants and offer an integrated wallet offering and onboarding services to both meet the needs of merchants and the Smart Home customer.
In short, propositions will need to be adjusted to the Smart Home context and on top create an end-2-end seamless customer experience through collaboration.
Adapting business and operating model to Smart Home
Finally, it will be difficult for retailers to maintain their pole position as purchasing channel in Smart Home. Retailers will have to change their business and operating models to create relevance in different parts of the value chain. Some supermarkets are already rebranding stores to ‘experience and fulfillment’ centres to influence customer preferences. They aim to surpass the Smart Home algorithms that have a tendency of locking in customers and not offer them “new” experiences. Other retailers are for instance differentiating to offering last-mile delivery services and create new customer touch points in the Smart Home journey.
For producers, the impact of Smart Home on their business and operating model is significantly smaller as they ‘simply’ can replace current retail channels and distribute their products and services via the Smart Home platforms. However, increased competition and deviating customer orientation, forces them to use pricing and branding as dominant unique selling points.
20 IoT connected devices x 5 transactions per day x 365 x 13 million households in the Netherlands = 474.5 billion transactions per year (current volume of payment traffic in NL = 7.2 billion electronic transactions per year)
Source: Dutch Payments Association, 2017 Annual Report.
Smart Home is still very much a fragmented environment and as such PSPs have a role to play. It is more than ever essential for PSPs to create scale on the one hand and offer tailor made payment services that meet the Smart Home experience on the other hand. With IoT, scale should not be an issue as the number of transactions will increase exponentially as smart devices continuously initiate micro (data) transactions on behalf of the customer. Managing this growth in a compliant and secure way, however, is a different matter as existing payment and transaction infrastructures are not ready to process these transactional volumes (see calculation). Additionally, current pricing models are mostly transaction based, which in this context challenges PSPs to rethink their pricing strategy. New solutions that match the needs of customers and merchants whilst taking note of the current infrastructure capabilities offer new opportunities.
Collaboration key for success
Smart Home offers the opportunity to fully unburden the customer and increase relevancy. Tech-giants are already positioning themselves by experimenting with Smart Home platforms and devices and offering payment services to get even more close to customers and become part of their daily lives.
Regardless of how Smart Home will evolve, the wide variety of challenges that need to be addressed by retailers, producers and PSPs are thus complex that solving them in isolation is risky and costly. And with tech-giants moving up the value chain, there is little chance of success. It is therefore imperative to offer personalized end-2-end Smart Home propositions through cooperation in order to create visibility, the necessary scale and become and stay relevant to customers and business partners. The quality of the collaboration between the customer, merchant, producer, PSP and other relevant parties, will ultimately determine success in the long run. And here lies the opportunity for retailers. They are still in pole position to take the lead, organize collaboration within the value chain and amongst retailers, and face the platform competition, but the time to act is now!
Interested in the full research? Download the paper here.
Written in collaboration with Esther Groen