A recent report outlines the innovation gap currently facing merchants, who are falling behind in technology and innovation as compared to banks and fintechs.

Merchants have been transitioning to ecommerce for the past ten years, with newer merchants focusing solely on the online space. Digital displacement was happening prior to the pandemic, but COVID-19 has exacerbated the rift between brick-and-mortar and online stores. The lack of geographical confines 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 of those things require flexibility, speed, and agility to execute on strategic initiatives. In short, merchants have reached a point of reckoning with digital transformation. While there may be caution and hesitance to invest in digital transformation initiatives, that reluctance should be measured against the downsides of keeping up with other merchants, banks, and fintechs. The growing innovation gap between merchants and their more tech-led counterparts could have substantial impacts if merchants fail to keep up.

The Innovation Journey

According to a report by ACI Worldwide, 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 are behind the market when it comes to execution and delivery.

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 are behind the market when it comes to innovation in the customer experience.

Trailblazers — these organizations are strong in digital and structure the business around innovation. They lead in adopting technology and delivering new products.

Advanced — these organizations are strongly focused on making innovation an enterprise-wide endeavor. They have documented strategy around tech adoption and product innovation and are leaders in the latter.

Tech-Led — these organizations are weak in making innovation and enterprise-wide approach but strong when it comes to investing in technology. That said, they are rarely in the lead regarding product innovation and tend to have centrally-driven ideas and technology.

According to the ACI Worldwide report, most merchants fall into either the Emerging, Tech-led, or Laggard types. No merchant segments (telecoms, hospitality, digital goods, and retail) fall into the Trailblazer category and all lag behind retail banks, corporate banks, and fintech companies. Roughly 14% of merchants can be classified as “Emerging,” which is a nod at the effort these organizations are making towards tech-enabled innovation. That said, the focus on delivery and execution is wanting. On the other hand, 24% of merchants are more apt at investing in technology but lack the cross-team collaboration element or an innovation nucleus within the organization.

Perhaps more concerning is the number of large merchants ($10 billion + in revenue) that fall into the Laggard category. Currently, 37% of large merchants fall into this bucket, with very few appearing in the Advanced or Trailblazer categories. Alternatively, merchants in the $5-$10 billion realm have just 23% in Laggard territory, with 37% falling into Advanced or Trailblazer categories. This rift could spell major challenges for large merchants who continue to fall behind in innovation initiatives even as the marketplace becomes more competitive.

Closing the Gap With Technology

One major challenge that larger organizations may face in the journey to adopting emerging technologies, modernizing systems, and advancing innovation initiatives is that their sheer size makes it difficult to remain agile and flexible amidst 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.

Cloud Technologies

Of all merchant segments, 21% reported that they plan to invest more in the use of cloud technologies like serverless computing and containers. This drive for operational efficiency is meant to pave the way for fast innovation in a quickly evolving space. Eighty-one percent of merchants say they plan to move mission-critical workloads to the public cloud and the majority are telecoms (82%) and retailers (84%).

Security

Merchants are also focused on security as data breaches continue to rise and as consumers speak loudly through their wallets when they believe a merchant does not have the necessary security in place. Globally, 73% of merchants think they are at a higher risk for being breached than they were one year ago and 76% think security concerns hinder innovation efforts. That said, merchants who 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)

Artificial Intelligence (AI) is also on the table when merchants look at promising emerging technologies to support innovation. Telecom and hospitality sectors are especially focused on AI, with 42% of hospitality businesses reporting clear plans to increase use of bots and machine learning. Thirty-nine percent of telecoms report the same, positioning the use of data as a high priority across all areas of the enterprise.

Whether a Laggard or a 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 to 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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