Has Payments Innovation Contributed to the Decline of Brick-and-Mortar Retail?

The decline of traditional brick-and-mortar retailers has been a gradual and distressing process. In 2023 alone, nearly 3,200 stores are poised to shutter in the U.S., leaving shopping malls resembling ghost towns. It led to ponder whether payment innovation played a role in the demise of physical stores.

The advent of credit and debit cards has revolutionised the way we conduct transactions. As consumers, we no longer need to fret about carrying sufficient cash or the risk of misplacing it. Cards offer us the convenience of making purchases both in-store and online, irrespective of our location worldwide. For retailers, card payments have opened doors to a broader customer base through e-commerce, lessening the necessity for physical retail spaces.

Yet, retailers harbour a complex relationship with card payments. The fees associated with card transactions, commonly known as swipe fees, have long been a bone of contention. While debit cards in the U.S. are subject to fee regulations, credit cards remain exempt. Merchants have been advocating for regulations to deny credit card fees to alleviate their operational expenses.

However, focusing solely on swipe fees fails to fully explain why retailers might opt to close physical stores and consolidate their operations online. Logically, it seems counterintuitive as card-not-present transactions typically incur higher fees compared to card-present transactions, which are considered lower risk. Hence, it's more economical for retailers to accept card payments at physical points of sale than through their websites.

Moreover, consumers still favour in-store shopping. According to the Federal Reserve’s Diary of Consumer Payment Choice, only 20% of purchases were made online in 2022, indicating that 80% of transactions continue to occur in person. Consequently, while swipe fees may influence retail decisions, they are not the sole determinants behind the closures of physical stores. Nevertheless, payment innovation remains a significant contributing factor.

The landscape of payment options has expanded significantly in recent years. The rise of mobile payments since the early 2010s, with the introduction of services like Apple Pay, Google Pay, and Samsung Pay, has revolutionised the way we transact. The proliferation of mobile payments coincided with the onset of the so-called "retail apocalypse," with numerous major retailers experiencing financial turmoil. However, one notable exception emerged in Starbucks, which adeptly harnessed mobile payments to support its business.

Starbucks integrated loyalty rewards and payments into its mobile app in 2011, witnessing a surge in mobile transactions within the first year. By 2015, it introduced mobile ordering, which swiftly garnered a significant portion of its transactions. Starbucks' mobile payments app stands as a paragon of a successful loyalty programme, showcasing unparalleled adoption rates among retailers.

The success of Starbucks highlights a vital lesson for other retailers: embracing payment innovation can enhance customer engagement and satisfaction. By leveraging mobile payments, Starbucks not only improved the customer experience but also cultivated a loyal customer base. Retailers must heed this example and utilise payment innovation to fortify customer relationships and drive business growth.