Coming out of April 2020 with the peak of COVID-19 past in most parts of the United States, we can start to assess the current merchant and payments landscape and better understand some key implications for the near future. As of May 1, at least 30 states began to unwind restrictions on social interaction and commerce that were mandated to prevent spread of the coronavirus. The most far-reaching reopening of the shutdowns are taking place in Georgia, Florida, Tennessee, and South Carolina. These states will be the templates for government officials and households to watch to determine the right balance of measures to end the shutdown.

If health conditions improve and more businesses are permitted to reopen without threat to the health of their patrons and workers, consumers will be able to visit merchants other than grocery stores and pharmacies, especially personal services such as barbers, hair salons, and gyms. If number of COVID-19 cases begins to rise again, then all bets are off and shutdown 2.0 will bring more social and economic distress. Very early signs appear to show that shop owners and their customers are adhering to safety precautions with masks and as much social distancing as possible. Right now, there is light at the end of the tunnel, and it’s not necessarily from an oncoming locomotive bearing down on us.

XXShutdown as the Real Black Swan

Since mid-March, when ‘stay-at-home’ and ‘social distancing’ became part of the U.S. lexicon, consumers and businesses have endured weeks, going on months, of sacrifice, fear, and uncertainty. Initially COVID-19 was identified as a black swan, an unpredictable event with disastrous consequences. But there have been other pandemics in history. Even future pandemics have been predicted by some in health and science. It has turned out that the real black swan is the shutdown itself. Never in U.S. history has any event or catastrophe closed about 75% of the nation’s $22 trillion economy.

Merchants and payments stakeholders will face severe headwinds, but there will be opportunities and ways for many to get back in business. Economic recovery will not be a steady upward-sloping curve. All sorts of letters and symbols being used to describe the curve of economic recovery from this public health crisis, including U, V, W, square root symbol, and hockey stick. What matters and what is hoped is that the expected recession does not go far into next year, the virus does not return in large numbers of cases and deaths in the fall, and consumers regain confidence to return to mostly familiar lifestyles. That said, residual effects of the shutdown’s shock and awe to the economy and way of life could very well be felt even beyond 2021.

Initial Economic Data Are Daunting

There’s no getting around it. Recent numbers for GDP, unemployment, consumer spending-you name it-are terrible. Some have not been seen since the Great Depression. With the likes of a minus 4.8% annual rate drop in Q1 GDP, 30 million unemployment filings through April, and a 7.5% monthly drop in consumer spending reported in March in the United States, red warning lights are flashing everywhere. The Federal Reserve has tried to come to the rescue with a momentous monetary and fiscal stimulus package. More bad numbers are expected, including an upcoming unemployment rate possibly between 15% and 20%. Yet equity markets, such as the Dow, S&P, and NASDAQ, which by nature reflect future expectations, saw big bounce-backs in April after days of unrelenting losses. Go figure. This does not mean another bull market in the making, but rather continued days of high volatility.

COVID-19 Hits Most Retail Verticals Hard

This table lists some examples of the shutdown’s impact on various vertical markets’ recent results:

Severe Merchant Distress 1_IMAGE
Sources: Fitch Ratings, Customer Growth Partners, International Air Transport Association, Oxford Economics, National Restaurant Association, Ahold Delhaize, Kroger, Edison Trends

Many Merchants Will Never Reopen

For merchants, fallout from the pandemic is severe and will continue even as the economy starts a phased reopening. Social distancing restrictions plus health and safety concerns of retail employees will pose challenges for both store operators and customers. The restaurant industry, especially independents, has been particularly hard hit. Some restaurant owners have already closed for good because they could not survive with just takeout or delivery orders. Even as some states’ restaurants are being allowed to open, mandated seating limitations of 25-50% of normal capacity will dent a restaurant’s already thin profit margins. One hope is that dining al fresco on expansive sidewalks and parking lots may help restaurants utilize more space. Key questions remain: When will customers come back, and how long will it take?

As 2020 began, the U.S. retail industry had completed an impressive multiyear run thriving on expansive consumer confidence and spending. But store closings were becoming routine due to rising e-commerce sales and too many stores for the size of the market. Now the results of COVID-19 will accelerate store closings. Many legacy department and apparel stores are teetering on the edge of bankruptcy and will fall. This will trigger a domino effect for malls, which will lose smaller tenants that cannot survive in half-empty shopping venues. On May 4, J.Crew filed for Chapter 11 bankruptcy, a protection from creditors that allows more time for corporations to restructure their debt with the aim of reopening.

Small Business Is Critical to the U.S. Economy and Will Affect Any Recovery Efforts

Small businesses make up about one- third of the U.S. economy (as illustrated below), and many will not make it through recovery from the shutdown. Most of these are retailers and restaurants whose cash flow is strained even in the best of times. Much of the federal stimulus money via the SBA’s Payroll Protection Program was not sufficient or did not reach them in time.

Severe Merchant Distress 2_IMAGE

Source: Dun & Bradstreet


Merchants with the 3 Ds Can Prove to Be the Most Resilient

So how can merchants survive the pandemic recovery despite seemingly insurmountable odds against them? Surprisingly, the pandemic’s shutdown environment itself reveals the path to sustainable and expanding business as the recovery begins. That would be the 3 Ds:

  • Digital
  • Delivery
  • Drive-up

Retailers that have one or more these three functions built into their business models have the best chance of success. While the technologies underlying these features are most available to large retailers (especially franchise chains) with deep pockets and resources, small merchants can usually find independent software vendor (ISV) developers with white label or off-the-shelf solutions.

Digital order-and-pay. Mobile order-and-pay apps are a key solution for online ordering or the e-commerce channel. E-commerce sales in the U.S. during the pandemic are estimated to be as high as 20% of total retail sales. It’s important for merchants to have integrated, cross-channel ordering available for home computers as well as mobile devices. Consumers are gravitating to digital ordering and especially like the seamless and contactless payment method. Digital ordering then triggers fulfillment options of either delivery or curbside pickup at stores, options that work well in social distancing conditions. All retail verticals can benefit from digital ordering, but surges are now being seen in the grocery sector. QSR and fast casual restaurants are another vertical that can capitalize on a high volume of digital ordering.

Delivery network. Stay-at-home lifestyle thrives on delivery of goods and services ordered online, which plays into the wheelhouse of Amazon. Now other big retailers, including Costco, Target, and Walmart, have built up delivery networks. Department stores, electronics, and other retailers can take advantage of delivery as well. Even when the pandemic passes, delivery will continue to be a major sales channel. Third-party delivery companies such as DoorDash, Grubhub, Instacart, Postmates, and Shipt will expand services beyond their main verticals of grocery and restaurants.

Drive-Up (or Drive-Through). Before the pandemic, drive-through windows, accounted for at least 50% of sales for many QSRs and fast casual restaurants. Now with restrictions on inside dining, restaurants such as Chick-fil-A, Chipotle, McDonald’s, and Taco Bell are doing over 90% of their business via drive-through. This method also includes curbside pickup, which has become popular for consumers who order online but want their order faster or do not want to pay delivery charges. Grocery stores and general merchandise stores like Target and Walmart are doing significant drive-up business as well. Store operators also like drive-up or drive-through via mobile order-and-pay since it easily enables contactless payment, which addresses employees’ health and safety concerns.

Implications for Payment Providers as the Shutdown Recovery Begins

For the short term of May-June leading into 1st half of 2020, here are some expectations for how payment providers and some stakeholders will fare. More definitive results will be revealed during this time that will help to frame the merchant and payments landscape for the third and fourth quarters this year.

  • Legacy merchant acquirers First Data (now Fiserv), Worldpay (now FIS), Chase, Global Payments, and US Bank’s Elavon will be most affected by physical store closings. Independent sales organizations (ISO) acting as agents of these acquirers will also experience a significant negative impact, especially from small business closings.
  • Payment gateways will not escape despite taking advantage of the shift into e-commerce sales. Leading payment gateways such as Adyen, Braintree, and Stripe have major clients in the hard-hit verticals of air travel, hotels, ticketed events, and on-demand services including ride hailing and accommodation rentals.
  • Independent software vendors (ISVs) that have a large base of merchant and restaurants will be greatly affected since these verticals will suffer the most business closings.
  • E-commerce business will increase to fill some of the vacuum resulting from the lack of point-of-sale (POS) transactions at closed stores. Online sales will not be enough to avert an anticipated recession as consumers expect to curtail their spending, especially on apparel, electronics, and other discretionary items.
  • Self-service shopping will gain wider adoption not only because customers enjoy the convenience, but because it avoids or eliminates checkout lanes (and lines).
  • Face-mask wearing and gloved customers will look to contactless cards and universal pay apps for proximity payments at the point of sale to avoid physical contact with checkout terminals.


As always, we welcome any of your comments or thoughts-you can reach me