"Alexa, buy me stuff!" – Amazon and the payments space

The evolution of commerce

Until the 1980’s, there were only three ways that consumers could engage in commerce with a merchant: in the store, on the phone, or with a catalog through the mail. This model has been around for over a century, and merchants have fine-tuned their capabilities to optimise sales through these channels with a good deal of success. Retail became the engine of the economy, providing consumers with previously unimagined choice and value in nearly every segment, from fashion to lumber. Even with the proliferation of choice, the fundamentals of commerce remained essentially unchanged:

1. The merchant displayed the merchandise in an appealing way to attract the customer.
2. The customer visited the merchant’s store (or catalog) to shop for the goods she needed.
3. The merchant offered the goods at a price, and the consumer decided whether to purchase the goods.

In every case, at every store, the merchant was in complete control of the process. The customer was guided by the merchant through merchandising, messaging, or a combination of the two, seeing what the merchant wanted him/her to see and in the context that the merchant deemed optimized sales. That is still the case today with in-store and catalog sales.

1984 CompuServe Mall Ad

Things changed in 1984 when the first online service provider, CompuServe, launched the CompuServe electronic mall, enabling online commerce for the first time. With this, the world of commerce changed forever. Suddenly, customers were given the ability to explore offerings in their own way whenever and wherever they chose if they could get to a connected computer.

Quoting from the ad, “… it gives you in-depth information on thousands of goods and services, and lets you buy even hard-to-find merchandise.”

The emergence of ecommerce exposed consumers to a global marketplace of products and services, but while the variety of offerings increased by a quantum, the process of purchasing was more cumbersome than an in-store purchase. In the early days of ecommerce, card entry was done for every purchase and at very low levels of bandwidth, so the transaction process was very slow. A new category of payment processors, payment gateways, emerged to address this issue, and, over time, the concept of card-on-file emerged to reduce friction at individual sites.

In 1994, ten years after the emergence of ecommerce, Amazon.com was launched. Since Amazon was launched at about the same time that browser based internet functionality started to explode, their growth was rapid, and, before long, Amazon was selling more things than books. Since then, it has become the largest online retailer in the world, with over 300 million customers globally. A key to their explosive growth has been their ongoing efforts to minimise the friction involved in an online transaction. While card-on-file was a good start, it still required additional log-on and verification steps that slowed the transaction and increased the likelihood that the customer would decide against the purchase. In 1997, Amazon launched 1-Click, an automated form of card-on-file that literally reduced the payment to one single click of a mouse. 1-Click not only revolutionised ecommerce and gave Amazon.com a competitive advantage, but it also launched them into the payments space.

As Amazon began to add outside merchants to their marketplace, they created an opportunity to expand their payment capabilities to new merchants and markets. 1-Click became available to those merchants in the form of Amazon Pay, the platform continuing to expand. While there is dissonance with some merchants who fear that Amazon will take their data and possibly their customers, Amazon Pay is becoming a new tender type in competition with PayPal and the payment networks, and many merchants will be willing to take that risk in order to gain an incremental sale.

With the emergence of the voice user interface embedded in Amazon’s Echo line of devices, a new payments challenge emerged. Voice interaction is terrific for information and entertainment delivery, but many of the protections built into an online transaction done on a computer or smart phone are not available. And while it’s pretty easy to ask Alexa - the avatar of Amazon Echo - to buy something, there is no way for Alexa or Amazon to be sure that the person ordering is the individual who owns or controls the relationship. Transaction information can be sent to the customer immediately after the purchase is made, but that adds friction to what was a nearly frictionless transaction online.

What is needed is a way for each individual consumer to be identified in a voice interaction with Amazon Echo. If the individual is recognised, then the device can enable a variety of different transactions and access a wealth of high-value information to enhance the experience. It would enable voice purchase from any organisation that offers Amazon Pay as a payment alternative, and, once again, it creates a significant competitive barrier and differentiator for Amazon.com. Voice authentication is not here yet, but it is close, and, when it arrives, the revolution that happened in 1997 with the launch of 1-Click could be seen as a precursor to universal, frictionless commerce through any medium or device.

About Thad Peterson:

Thad Peterson is a senior analyst with Aite Group, focusing on the evolution of the payment space, the customer payment experience, and merchant acquiring. Thad has a proven track record of identifying and developing new opportunities and technologies in payments and financial services. He has relevant expertise in applying customer behaviour to the payments ecosystem in both corporate and startup environments. Thad’s consulting background includes engagements on credit and debit cards, mobile payments, airline payment platforms, consumer and merchant loyalty, payment technology evolution, stored value, and product innovation.

About Aite Group:

Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. Headquartered in Boston, Aite Group works with its clients as a partner, advisor, and catalyst, challenging their basic assumptions and ensuring they remain at the forefront of industry trends
www.aitegroup.com

This editorial was first published in our Payment Methods Report 2018 – Innovations in the Way We Pay. The Payment Methods Report 2018 presents the key trends and developments in global and regional payment methods by highlighting the innovation, challenges, and developments in the use of the most important payment methods across geographies and verticals.