High Risks, High Rewards – How Zalandos Investment in Payments Paid Out

This editorial was first published in our Online Payments and Ecommerce Market Guide launched on 1 November 2017. The guide features several important thought leadership editorials from ecommerce and payments industry professionals, which makes it a top-reference source for anyone involved in the payments ecosystem.

In the business of disruption, there is little room for doubt and much room for innovation. Fortune favours the brave, and when companies make strides into the unknown, the rewards can be high. This can be said for Zalando, Europe’s leading online fashion platform. The goal is to create the same convenience in online shopping as for the in-shop experience: trying things for free and paying only for what you keep.

Free delivery and return

Zalando was the first ecommerce player in Europe to offer services like free delivery and returns, setting standards for an entire industry. For one year and a half, Zalando heavily invested in extending its payment department. This resulted in Zalando Payments GmbH, an own entity within Zalando that is 180 people strong. The subsidiary has plans to disrupt how payments in fashion e-commerce work and sees innovation as a success enabler.

For us, deferred payment solutions, such as invoice or “pay later” schemes, were the biggest game-changer.

Introducing deferred payment methods changed consumers’ purchase behaviour rapidly. It shifted towards bigger basket sizes, higher conversion and retention rates, higher customer satisfaction, but also higher returns. The impact was instantly positive, but not without risk.

For one, absorbing the cost of returns is an expensive business, but in the long term, it helped us build trust with our customers. However, separating legitimate customers from those that do not have an intent to pay is a challenge and we take the risk of losing money on a daily basis. All over, we were able to convert payments from being a cost centre to being a profit centre – with offering deferred payments we are able to create a huge boost in revenue.

The expansion of the payment methods offering as an essential ingredient for going global
Being able to make bold moves and find solutions that break down barriers means satisfying purchasers. Expanding the range of payment options available is a natural way to do this. Today, we take a localised approach and offer more than 20 payment methods to our more than 21 million active customers across 15 markets.

We keep asking ourselves if it is always the most convenient solution to make customers pay before their items arrive at home and realised that it is a valuable option only to some extent. For German, Austrian and Swiss customers or those from Sweden, Norway and Finland, deferred payments are heavily preferred, whereas Danish customers are more likely to pay with a credit card. It is therefore key to understand customer habits and preferences when paying online.

How to define the optimal payment mix

The easiest way to identify the perfect domestic payment mix is a trial-and-error approach, which sometimes sees more error, but in the end, those challenges add the most value. For example, when we activated deferred payments, we didn’t have the risk mechanism that we have today. After we gained first insights in terms of risk, we invested into a new team to develop algorithms that can predict whether an order is fraudulent or not. Today, we can detect fraud on a level that defines new market standards, and can further predict if a customer is solvent or not.

It is all about convenience

By focusing on convenience for our customers, we see higher rewards. We figured out quickly that any payment solution with an easy user experience is popular; customers do not tend to follow a certain brand, but rather adapt to the most convenient payment options.

We know that the acceptance differs from market to market, but in the case of France, a country where paying by invoice is rather unknown, we learned that even a scheme like “pay later” (combining deferred payments with credit card), can be adopted quickly. The payment market is in the middle of disruption, not only in terms of new payment methods coming onto the market, but also with regards to consumers being more open towards new, innovative payment methods.

Taking the chance to reinvent your payments strategy can bring unforeseen rewards and results. The customer’s convenience should be a company’s primary focus and broadening the payments offering, as risky as it may seem at first, is an essential part of that.

About Benjamin Pannier:

Benjamin Pannier joined Zalando Payments GmbH 2016, taking on the consolidation of tech capabilities and operations expertise under one roof. He is now one of two Managing Directors of Zalando Payments and steers the strategy, development and research in close cooperation with business development and operations.

About Zalando Payments:

Zalando Payments builds the technologies for all financial transactions in the Zalando fashion store and our other consumer facing apps. We work to deliver a flawless user experience in the Zalando checkout, as well as processing of payments and reconciliation in the backend.