Postponing digitalization is no longer an option for merchants. They need to urgently close the gap with their technologically advanced counterparts or face a threat to their survival.
Merchants have been transitioning to ecommerce for over a decade, with newer entrants focusing solely on the online space. Although this digital displacement began long before the coronavirus outbreak, the divide between brick-and-mortar and online stores was exacerbated by the pandemic lockdowns. The elimination of geographical barriers has made the online space hypercompetitive and has reshaped how merchants do business.
Differentiation and a clear focus on enhancing customer experience are critical to surviving in a crowded market. Both these require flexibility, speed, and agility to execute strategic initiatives. In short, merchants have reached a point where digital transformation has become a necessity. Despite some initial hesitation, companies are now investing heavily in digital technologies to reap the benefits of an omni-channel presence. As a result, global IT spending is expected to reach $4.5 trillion in 2023, a 2.4% increase from 2022.
Organizations can be divided into five different categories that reflect their approach to business transformation and innovation:
Emerging — These organizations have a strong emphasis on innovation but lag the market in execution and delivery. As per a report from 2021, 90% of companies that experienced revenue growth had innovation as a leadership priority. However, several difficulties may arise in execution and delivery, due to which not all companies that focus on innovation are able to generate growth.
Laggards — These organizations are behind the curve in innovation and often outsource services. They are aware of their challenges but not actively engaged in improving them, and they are behind the market especially in innovation supporting customer experience.
Trailblazers — These organizations are strong in digital flexibility and structure their businesses around innovation. They lead in adopting technology and delivering new products. According to recent reports, 89% of board members say digital accessibility is now integrated into all business growth, which has the potential to make them more competitive and profitable.
Advanced — These organizations are strongly focused on making innovation an enterprise-wide endeavor. They have documented strategies around tech adoption and product innovation and are leaders both.
Tech-Led — These organizations are weak in innovation and enterprise-wide approaches but invest heavily in technology. They are rarely in the lead in product innovation.
Most merchants fall into the Emerging, Tech-led, or Laggard categories. No merchant segments (telecoms, hospitality, digital goods, or retail) fall into the Trailblazer category and tend to lag retail banks, corporate banks, and fintech companies. In more advanced markets, the number of retail payment transactions grew at a 13% CAGR between 2018 and 2021 globally, whereas in emerging markets, this rate was a whopping 25%. Despite this robust growth, the focus on delivery and execution is lacking. While merchants do invest in technology, they lack cross-team collaboration or an innovation nucleus within the organization.
Perhaps more concerning is the number of large merchants that are in the Laggard category. Currently, 16% of large merchants fall into this bucket, with very few appearing in the Advanced or Trailblazer categories. This rift could spell major challenges for large merchants that continue to lag behind in innovation initiatives even as the marketplace becomes more competitive.
One major challenge that larger organizations may face in the journey to adopting emerging technologies, modernizing systems, and advancing innovation initiatives is their sheer company size that makes it difficult to remain agile and flexible amid rapidly changing market demands. Infrastructure management should be a primary focus, and these organizations must aim to balance existing infrastructure alongside the necessary transformation to stay ahead of the curve.
Of all merchant segments, the global cloud computing industry had a market size of $480.04 billion in 2022, and 94% of enterprises used cloud services successfully. This drive for operational efficiency is meant to pave the way for fast innovation in a rapidly evolving space. Most merchants say they plan to move mission-critical workloads to the public cloud, and a significant portion of those are telecoms and retailers.
Merchants are also focused on security as data breaches continue to rise. Globally, the biggest concern for managers working on business continuity and operational efficiency is the threat of a breach, given that there is a new data breach every 11 seconds, and 28% of breaches occur in small businesses, which becomes the reason for shutting down operations within 6 months of the breach. Also, merchants that fall into the Trailblazer category are less concerned about security, which may be a reflection of the effectiveness of previous investments around fraud and risk mitigation.
Artificial Intelligence (AI) is also on the table when merchants look at promising emerging technologies to support innovation. The telecom and hospitality sectors are especially focused on AI, and around one-third of organizations use AI across multiple businesses.
Whether a Laggard or Trailblazer, one thing is clear: innovation must remain a top priority to differentiate and remain competitive in a rapidly changing and hypercompetitive marketplace. Companies must be diligent in balancing technology and financial resources with the future needs of consumers. Taking action now to implement new technologies and focus on digital transformation will pay dividends in the organization’s ability to weather new entrants and serve customers at the highest level.
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