Fashion Is The Next Battleground For Payment Companies

The payments industry is the center of a multi-billion dollar war. Over the last 18 months more capital than ever before flowed into the space with massive funding rounds and large acquisitions. In May 2018 PayPal acquired iZettle, a mobile payments company offering small businesses with portable point-of-sale solutions, for $2.2 billion, attempting to strengthen its business solutions. In August 2019 Klarna, a payment provider with credit card-alternative payment methods, raised $460 million at a post-money valuation of $5.5 billion. And then there is Stripe, offering a wide range of payment tools for internet businesses, announcing a new financing round this September, bringing its valuation to $35 billion.

In this highly-competitive space, it’s not enough for payment companies to be just that — a payment provider, a payment gateway, a facilitator of payments. The only way forward is in reinventing themselves, expanding their offerings and adding extra value to merchants and consumers. For payment companies this transformation is not optional, it’s a matter of survival in the long term.

The future of payments is about knowing implicit and explicit wants and needs of consumers and merchants, and the next battleground is fashion.

The current and future spending powerhouse

Millennials and Gen Z make up more than 60% of the world’s population. They are going to shape and influence the economy for decades to come and their habits are different from those of previous generations. For one, the majority of U.S. millennials don’t even own a credit card (66%). These consumers are still spending but prefer to pay cash, use prepaid cards or rely on digital credit-card alternatives.

So where do they choose to spend their money? It might not come as a surprise that 47% of millennials and 41% Gen Z-ers purchase a fashion item each week, according to a survey conducted by Afterpay, a provider of buy-now-pay-later solutions.

Fashion’s unique challenges

Indeed, fashion is the perfect vertical for these consumers. Fashion is dynamic with constantly changing trends and styles, it is accessible and it allows to show one’s unique style. One of the fastest-growing verticals online with a compound annual growth rate of 10.6%, global fashion e-commerce is projected to reach $713 billion by 2022. This is a massive market opportunity, especially when coupled with the spending preferences of the millennials and Gen Z.

However, fashion e-commerce comes with its own unique challenges.

One of them is high return rates, that on average reach 30% and can go as high as 50%, according to Shopify’s industry report. It hurts retailers’ margins and increases their carbon footprint. For payment companies, every return means a chargeback and lost revenue.

On the consumer side, there is an expectation of personalisation and curated experiences. According to one survey, 63% of them expect personalisation as a standard service — especially in fashion where product offerings are quite broad and the entire experience might feel too crowded and overwhelming.

Achieving that is often a challenge, largely due to fashion taxonomy being so complex and consumer preferences being so unpredictable. To put it simply — it’s a lot harder to anticipate which dress a given customer will buy and why, compared to which iPhone they might end up with. This is a unique problem that can only be solved with a deep understanding of how people make decisions in fashion: what they’ll like, what’s trendy this season, and what they’re likely to return.

The personalisation trend is echoed by some of the payment companies launching stand-alone direct-to-consumer shopping apps. For example, Klarna’s consumer app saw 25,000 downloads every day in the month of October, and LayBuy, their New Zealand counterpart, has recently announced the launch of their own similar app.

Reinventing payments

The desire to connect with consumers directly and become an all-in-one shopping destination is clear and understandable. After all, for a very long time payment companies remained just that — payment facilitators — but building a direct and long-lasting relationship with consumers opens up so many opportunities. It’s not only a way to help consumers manage their payments but more importantly, it’s a way to become their shopping destination of choice. In the world of Amazon dominating e-commerce getting a piece of the pie is attractive.

Payment companies are bound to reinvent themselves in order to be relevant and survive in the future, and this transformation is going to be tightly connected with fashion. That’s what millennials and Gen Z-ers spend their money on. The company that manages to address the industry’s issues, like high returns and sustainability, while delivering a personalised and curated experience to shoppers, will be the winner of this war.

This post was originally published on Forbes.com.