This article is provided by BRC Associate Member CMSPI.


Shaken by skyrocketing inflation and finally free of two years of Coronavirus restrictions, a peak season like no other is quickly approaching, and it’s vital that the UK’s retailers can be confident in their payments arrangements. But what exactly makes payments so distinct this winter, and what can merchants do now to prepare for the crunch?

1.   The rise of the omnichannel high street

Online retail saw a veritable explosion in the months following the onset of Covid-19. So significant was the impact that even seven months on from the end of restrictions in the UK, online volumes haven’t fallen back to pre-Covid levels.[1]

This increase in online volumes brings with it myriad payments challenges, including card acceptance fees that can be significantly higher and a greater likelihood of falsely declined transactions, alongside numerous, rapidly-evolving fraud techniques for merchants to evade.

As if that weren’t enough, with lockdown restrictions lifted, the high street is back on the menu as consumers continue to check goods out before they buy, or order items to collect in-store. While the 2021 peak season represented for many retailers the significant growth of omnichannel solutions, some for the first time, this year consumers will already be expecting a coherent and frictionless online-to-in-store experience when buying their Christmas gifts – so it’s vital that merchants are preparing their tokenisation strategies, returns policies, and more long before they start stacking the shelves.

2.   Christmas Shoppers, Meet SCA

Following its introduction in March this year, along with high ecommerce spend comes a higher likelihood that Strong Customer Authentication will cause friction for Christmas shoppers.

With UK merchants losing almost €3.1 billion in 2021 to incorrectly-declined transactions alone[2], even before the introduction of SCA, the impact of friction at the online checkout can’t be understated. And, as the UK’s first peak season following full implementation fast approaches, British retailers will soon be facing unprecedented volumes under the new regulation.

The risk of failed transactions and cart abandonment is bad news for merchants, particularly given that 58% of consumers now say they would abandon a merchant following a negative online experience.[3] With competitors now just a few clicks away, it’s more important than ever that retailers optimise the ecommerce experience to retain loyal customers – and their revenue.

One way merchants can do this is by implementing a strong SCA strategy – but what exactly this looks like varies significantly between retailers, especially with the changes to SCA-related fees UK merchants saw in March and April this year.[4] Ultimately, the answer lies in the development of a data-driven business case for SCA exemptions – one that is bespoke to your payments mix and customer demands, and holds your payments partners to account.

3.   Inflation Squeezes Retailers Further

These first two points are both exacerbated by the topic on everybody’s mind: inflation.

Amidst reports of looming recession[5], UK inflation is currently hitting levels not seen in over thirty years[6] – and merchants are feeling the heat.

With many elements of the Merchant Service Charge – the fee paid to accept every card payment - charged on an ad-valorem basis, increasing prices to recoup rising supply chain costs can leave merchants with an increased budget for card payments. This vicious cycle could be further exacerbated over peak season as 51% of consumers say they plan to buy fewer gifts this year[7], meaning that volumes could decrease while Average Transaction Values rise.

In contrast, the international card schemes have previously acknowledged that inflation is a net win for their businesses[8] – so, as retail margins are squeezed ever tighter, it’s increasingly vital that merchants are able to identify every penny of value being left on the table by their payments arrangements.

4.   Gift Now, Pay Later?

Last year, one in five UK shoppers were planning a Buy Now Pay Later Christmas.[9] But while these solutions may be seen as a way to maintain revenue in the short-term, many BNPL providers are also impacted by the current economic environment – and the outlook is shaky.

BNPL providers across the globe are facing a drastic drop in market value compared with 2021.[10] With some providers laying off staff or facing significant financial difficulties as a result,[11] and many struggling with bad debts,[12] this is leading to marked instability in the global BNPL market. The stability of any partner is a core component of a successful payments strategy, and so arrangements such as settlement timescales and returns policies are rapidly coming into focus.

This is especially so given that BNPL can cost merchants between 2% to 8% of the transaction value, [13] whereas the majority of card transactions see interchange fees – often the most significant portion of the MSC for large merchants - capped at 0.2% or 0.3%. With inflationary pressures rising, these ad-valorem rates could represent a significant cost increase to merchants with a high proportion of BNPL purchases.

With this in mind, it’s more important than ever that merchants are engaging directly with their BNPL suppliers to make sure they’re receiving those all-important incremental benefits, such as increased an consumer base and revenue uplift – especially when research suggests consumers paying via BNPL are three times more likely to switch to another payment method if their preferred option isn’t available.[14]

Preparing for Peak Season 2022

Payments is an increasingly complex landscape for retailers to navigate; with transaction approval rates, costs, and fraud risk so often interlinked, it’s vital that merchants are able to find the delicate balance ahead of peak season. Through its work with the UK’s leading merchants, CMSPI knows that the payments-savvy are therefore looking to their data in advance, ensuring that the perfect storm of SCA, emerging payment methods, and in-store growth generates opportunities for – rather than limitations to – retail success.

[2] CMSPI Estimates and Analysis
[3] Survey Finds UK Shoppers are Frustrated with SCA and Merchants are Missing Out
[6] Consumer price inflation rates​
[11] Klarna To Cut 10% Of Its Staff In Latest Sign Of Tech Sector Squeeze​​
[14] Developments in the Buy Now, Pay Later Market

Kate Evans is an Economist as part of CMSPI’s Insights and Advocacy Team, Kate’s role is to analyse the payments industry from the macroeconomic perspective, providing strategic insights to merchants across Europe.