Making the Consumer Connection

How today’s digital consumers will influence merchants and the future of payments

By Christine Umbrell

Succeeding as a payments professional in today’s digital society requires going above and beyond simply facilitating transactions. It entails assisting merchants in getting to know their customers—and potential customers—and communicating why investment in technology is critical. Understanding today’s “connected consumers”—consumers who have access to the internet via mobile devices, wearable technology, and the Internet of Things (IoT)—and their spending habits can help payments professionals educate merchants and help position them for success by the products and services they offer as well as their payments solutions.

Nielsen and the Demand Institute, a division of the Conference Board and operated by Nielsen that focuses specifically on consumer behavior, recently took the concept of 
connected consumers one step further, studying a demographic they call “Connected Spenders”: consumers who have access to the internet and earn enough income to make discretionary choices in their spending. In addition, Connected Spenders are omnichannel shoppers who “punch above their income class in spending,” prefer premium products, and are on the cutting edge of consumer trends, according to the Demand Institute’s analyses of Nielsen data. This demographic is forecasted to spend $262 trillion over the next decade, accounting for 46 percent of total aggregate consumer spending.

“The Connected Spenders are a group of consumers who are the most digitally engaged and the most engaged in the consumer economy in general,” says Louise Keely, EVP,  global retail practice leader at Nielsen and a board member of the Demand Institute who led a session on the subject at the 2017 ETA Strategic Leadership Forum this fall. This demographic tends to be early adopters of new technologies and new services. “As we think about the payments space, and how that’s changing the way people are paying for goods and services,” Keely explains, “the Connected Spenders provide an early indication of what consumers are looking for.”

More Devices, More Opportunities

Most estimates put the percentage of Americans who have access to the internet at more than 75 percent. “That’s a very large chunk of individuals,” says Casey Bullock, general manager for North America at WorldPay. Granted, that doesn’t mean that everybody is a Connected Spender, but “most people do have a mobile device, and, through that mobile device, they’re able to make purchases. And they may have connections through other types of wearables or other connected devices that allow them to buy things through the internet.”

Because we live in a technology-driven society, Dinesh Kumar, author of The Connected Consumer, suggests companies should prioritize meeting the shopping needs of connected consumers. Smartphones have caused a fundamental change in consumers’ behavior, Kumar says. He cites compulsive use of connected devices and a migration to social media, prompting a need for retailers to integrate sales channels, reinvent “the store,” and “bring back the fun” to the consumer shopping experience.

Kumar also points to “smartphonatics”—a term coined by Time—as people who use their phones for mobile banking and mobile payments. “They use their devices to check out prices and order even as they are on the move,” he explains. “Such consumers photograph objects and bar codes as they go about doing other things, and check out products, seek opinions, check prices and deals, and order online. … Success in the new economy will go to those who can execute clicks-and-mortar strategies that bridge the physical and virtual worlds.”

Today’s consumers are accessing the internet in increasingly new and inventive ways, often moving beyond computers and smartphones to wearables and IoT devices. A recent report on “The Connected Consumer” from WorldPay found that more consumers are ready to embrace automation and convenience delivered by IoT technologies: Nearly half of U.S. consumers (48 percent) would feel comfortable with a connected device, such as a refrigerator, ordering items on their behalf.

“Merchants need to think about what connected devices they’re providing, what those access points will look like, and, ultimately, how that data is being consumed and how that messaging is delivered back to the consumer in question,” says Bullock.

Targeting Spenders

Looking not just at the consumers who have access to connected devices, but to those specific internet users who also have discretionary income, offers insight into how current and future consumers are making their purchasing decisions. The Connected Spender concept takes into account many different factors are influencing consumer spending, and some consumers are going to be more important than others for boosting growth over the next decade. This information can help companies adjust their business models to get ahead of that change, according to Keely.

Connected Spenders numbered 1.4 billion worldwide in 2015, but, according to Nielsen data, they are expected to reach 3 billion by 2025. The population “rivals that of the global middle class, but the Connected Spender cohort is growing faster than the middle class and spending more. By 2025, these consumers will account for half of global consumption. For marketers coping with a sluggish global economic environment and middle-class malaise, tapping into the Connected Spenders can help generate healthy growth,” according to the Demand Institute.

Connected Spenders span all age groups, according to the research. As would be expected, the highest percentages of internet users who are Connected Spenders are between ages 21 and 39 (62 percent), but another 20 percent are between 40 and 54, and 9 percent are 55 or older. Connected Spenders also tend to be urban, with 78 percent living in urban areas.

Connected Spenders in developed markets like the United States, Japan, and Germany will contribute the most to sales growth, according to the research—so tapping into this market can be beneficial. In addition, significant international sales growth is expected in emerging markets, particularly in Indonesia, Pakistan, and Nigeria, where the greatest increases in number of Connected Spenders are expected. “Though the number of Connected Spenders will grow faster in emerging markets, the new Connected Spenders in those economies will have far less spending power than Connected Spenders in mature economies,” reports the Demand Institute. “We expect that in 2025, Connected Spenders in mature markets will still be spending 10 times as much per year as their counterparts in emerging economies.”

Consumers in mature markets, such as the United States, “have the ability and the willingness to spend in discretionary ways. That’s the reason why, in countries like the U.S., the focus needs to be on engaging with consumers and addressing their needs,” Keely says.

In fact, consumer-facing businesses should look to Connected Spenders as “a first lens” in making decisions about which markets to invest in, how to communicate with and reach customers, and what conditions they should be monitoring across markets, according to Keely. “New product investments should be aligned with the demand of Connected Spenders. They’re the ones who will be willing to pay for higher quality. They’re the ones who are going to be willing to be early adopters of new products and services.”

Portrait of a Connected Spender

Many of today’s merchants and advertisers focus on middle- and high-income Americans as they develop products and messaging. But such strategies may need to be adjusted to meet the diverse demands of Connected Spenders, says Keely.

Focusing too narrowly on the middle class is “inadequate” because it is primarily an income-based approach, Keely says, and it doesn’t take into account the technological changes that are impacting consumer behavior across different markets. In fact, Connected Spenders are the most engaged consumers from each income group, and there are low-, middle-, and high-income Connected Spenders, according to the Nielsen research. The research also found that Connected Spenders are more likely not only to participate in consumerism but also to spend more than might be expected based on their income.

“Middle-aged consumers in the U.S.—Gen X or even the younger baby boomers—these are people at the height of their spending power, the height of their earning power, and they are some of the early adopters of some new services,” says Keely. Looking at how this sector chooses to spend on new products and services offers insight into growth opportunities for merchants. Keely cites the rapid rise of meal kits—freshly prepped meal-in-box delivery services—among this group. “It’s growing like gangbusters and getting a lot of attention because it’s a new business model, and a new way of providing food and meals to families,” she says. “And actually it’s the Gen X consumers who are the biggest users of that, because they’re the ones with kids, and they’re the ones with the time crunch and the discretionary income to spend on something like that.” Forward-thinking merchants and payments professionals can study how payments are integrated into such services and build on this model for future endeavors.

But Keely also notes that merchants should not be overlooking the lower-income sector of online consumers. “If you think about the definition of Connected Spenders, these are people who say that they have the ability and the willingness to spend in discretionary ways,” says Keely. “Just because someone isn’t high income doesn’t mean that they’re not looking for ways to indulge and ways to make their lives easier and more convenient, and to have luxuries and amenities in their lives.” The needs and wants of this demographic may be different from those of Connected Spenders who are high income, “so then the challenge and the opportunity is to meet those needs of [lower-income consumers seeking amenities], with maybe a different service or a different type of price point than someone who is high income. But there’s still opportunity there.”

Keely suggests that retailers tailor their offerings toward the different types of Connected Spenders. “For retailers, there’s a need for focus,” she says. “You can’t be all things to all people. There needs to be a decision about, ‘Here’s our position in the market, here are the consumers whose needs we’re going to meet. We’re going to do a great job of that—and yes, that means there are going to be other opportunities that we have to pass up, but we’re going to do what we do really, really well, and we’re going to focus there.’ And there’s lots of places you can focus.”

Opportunities in the Payments Space

Looking closely at the connected consumer phenomenon can offer clues as to how payments may be leveraged in innovative ways in conjunction with new products and services. “If you think about payments, specifically, the approach in general needs to be that you need to understand what consumers are looking for and how their needs are being met or not met today. And then innovation in products and services should be focused on meeting those needs in new ways,” says Keely.
One of the challenges in the U.S. payments space in mature markets, according to Keely, is that people already have access to credit cards and other noncash payment technologies that are convenient, and easy to access and to use. “So things like mobile payments haven’t taken off necessarily in a way that people were kind of hoping or expecting several years ago.

“The challenge for the payments industry in terms of new products and services is to really identify what people’s pain points are, and [determine in what ways] consumers’ lives can be made easier in an environment in which things are actually pretty convenient to start with,” she says.

Keely points to recent successes in linking loyalty programs to payments as one area to study and learn from in the digital age. “There are a few specific companies that have done a really nice job of this. Starbucks is probably the most famous example, but there are others as well,” she says. “Linking the payment to another type of service [as in the Starbucks model] is one method.” Other examples, which have had varying success, involve “helping consumers with managing their overall financial lives through their payments, or companies that offer access to peer-to-peer [P2P] payments that help people to send money and share money or divide bills in ways that are easy and that haven’t been available before.

“It’s been interesting to me that consumers are using P2P payments as well as B2B [business–to-business] payments,” Keely continues. “You think about Venmo and PayPal, they’re using those platforms for more than one purpose. These platforms want to build a kind of stickiness and engagement with consumers—they’re willing to let them do that, and be very creative with the business models to allow for that.”

Keely also cites the Uber model as an example of linking payments to a service in a novel way. This model “takes out the hassle of paying somebody at the end of a taxi ride,” she says, and can serve as an example to other categories of spending—“be it restaurants or other types of services.” Such a model integrates a payment with “another pain point or another service, and, through that linkage, gets people to start to use different types of payment technologies.”

Capturing Connected Consumers

With the WorldPay research predicting there will be 25 billion connected devices by 2020, and the Nielsen research forecasting that Connected Spenders will spend more than $260 trillion over the next decade, merchants will need to tailor not only their products and services but also their payment offerings to meet the needs of increasingly tech-savvy consumers. Retailers and payments professionals will need to be “in tune with the different types of connected devices they’re going to be looking at by 2020. The writing’s on the wall,” says Bullock.

Merchants also will need to adjust their offerings to meet the needs of consumers who are seeking new products and who may be willing to pay a premium for new products. “Connected Spenders love innovative products,” says Keely. They are engaged online shoppers, for whom “it’s not just about purchasing online, but it’s about the whole shopping process, and moving between channels, whether it be using their phone and an app in a store, or researching online before they go to a store, or making a purchase online.”

Those payments professionals who understand the Connected Spender concept and follow the latest trends in connected devices will be best positioned to help merchants adapt their products and services in an increasingly digital society.

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