|
The Search-to-Purchase Challenge
BY FRANK SUI
Traditional payments companies must learn to co-exist with search-to-purchase players.
The search-to-purchase business model threatens to chip away at the franchise of traditional payments companies unless they learn to leverage their merchant relationships to work with the upstarts.
Clicking is replacing swiping as the preferred business model in the retail payments space. Consumers are going online in ever greater numbers to find and purchase everything from electronics to household goods. And search engines, which make their money from advertising rather than transaction fees, are changing the competitive framework of the industry.
The traditional payments companies are underestimating the long-term impact of e-commerce and the vitality of what Deloitte Consulting has come to call the “search-to-purchase” business model of companies such as Google, MSN and Yahoo. Within 10 years, we project that one out of every three dollars spent by consumers on retail purchases, either online or locally, could begin with an online search.
Consider the economic structural advantage of search, whose players make their money primarily from merchant advertising fees, at a rate of 7% to 9% of the closed sale, rather than on the traditional payments model of transactions, which only pay out 2.5%. Over the long run, if the search-to-purchase checkout option becomes widely accepted by merchants, who in turn sign up tens of millions of customers, retail payments players could see ongoing pressure on the interchange rate. The dominance of search-to-purchase in the e-commerce arena could also chip away at retail payments companies’ growth.
But there can also be coexistence, collaboration and opportunity. The question for retail payments companies is how they will leverage their tremendous assets in brand recognition, consumer trust and merchant relationships. Their proverbial trump card is the millions of merchants in their networks. It is expensive for them to identify and recruit new merchants. Yet identifying new merchants across the spectrum—especially in the lucrative area of small local businesses—is integral to improving the search-to-purchase experience. So this gives the payment companies some leverage over the upstarts.
For the approximately 800,000 online advertisers, there are at least 15 million eligible small merchants who do not use search-based advertising. Most of these small businesses are already associated with the major retail payments companies. Search-to-purchase players struggle to sign up these small merchants in their move into the lucrative local search market, which is growing 39% per year.
Traditional players need to view the online payment experience through a different lens. In order to obtain a larger share of the 7% to 9% that merchants will pay for a sale, they should be examining their own business models to see where they have a strategic advantage and how it could be leveraged in the online platform. Retail payments companies should also consider broadening bank/merchant relationships to address additional hard-to-solve problems such as helping find new customers, not just enabling payments convenience.
The ability to deliver millions of merchants is worth tens of billions of dollars to the search-to-purchase players. The retail payments companies should capitalize on those relationships in their efforts to lift growth back to the high double-digit rates experienced ten years ago rather than face the prospects of slowing growth from envelopment by the search-to-purchase players.
|
