In a recent episode of Game of Thrones—HBO’s TV series about competing kingdoms vying for power in a highly competitive and uncertain world—one of the protagonists speaks of both the uncertainty and the possibilities that coexist when chaos reigns supreme. Connected commerce, omni-commerce, connected retail and omni-channel—to name a few—are all terms being used to describe an increasingly digital ecosystem that  is reshaping the “commerce” experience and creating a wide range of value creation opportunities. While comparing  connected commerce dynamics  to the chaos described in Game of Thrones may seem overly dramatic, there is no doubt that significant value is being created and destroyed, and predicting winners will continue to prove elusive. For CFOs operating in this highly dynamic space, balancing a company’s need to enter new markets and rapidly evolve existing capabilities—while satisfying close-in financial and shareholder requirements—is proving to be a significant challenge.

The traditional commerce landscape is in a dynamic stage of evolution, with markets demonstrating fundamentally different characteristics in terms of size, consumer preferences, growth, stakeholder roles and competition. While this ecosystem exhibits a variety of “tipping point” behaviors characterized by triple digit CAGRs frequently attached to revenue denominators that may be considered  nascent to large scale players, we see a range of addressable market opportunities. Not surprisingly, there is increasing interest in separating the hype around the multitude of new solutions from those that will demonstrate tangible levels of economic value over time.

Our experience in the connected commerce ecosystem ranges from working with large payment players and multinational technology providers to private equity firms actively making investments in this space. In addition, over the past six months, we have reviewed over 100 articles, white papers, thought pieces and analyst reports that delve into a range of issues within this constantly evolving sector. These lenses cover a myriad of insights ranging from assessing global trends around consumer behavior, mobile device proliferation and alternative payments to deep dives into emerging markets, POS evolution and the convergence of digital-physical commerce—just to name a few of the more prominent threads.

The following focus areas are not meant to be comprehensive, but rather a selection of observations that we find particularly relevant. These issues should be particularly relevant to CFOs of non-venture backed companies playing in this ecosystem.

 

All markets are not created equal.While there are a number of trends around mobile payment adoption, including alternative payments, smart phone usage/penetration and next generation retail, the reality is that geographic markets are at fundamentally different stages of evolution. Somewhat juxtaposed with this macro market view, we see an increasing prevalence of connected consumers in almost every country.

While macro-level dynamics vary considerably, a technology savvy group of consumers can be found in most major metro areas regardless of a country’s economic development level. Accordingly, the nature of opportunities and the associated growth trajectories vary considerably. For example, at the overall market level the issue of inclusion and financial access is driving a range of new mobile and alternative payments opportunities in countries like India and Vietnam, while in Scandinavia and Japan, the focus is more around next-generation commerce.

Globally, there remain significant differences in banking, retail and mobile ecosystem dynamics. Consumer preferences vary considerably by market. From an investment POV, we believe it is overly simplistic to develop strategies at the regional level, and macro level analyses of trends, consumer expectations and other drivers often provide limited insight. Our takeaway is that the most actionable unit of analysis when evaluating opportunities is at the country level.

 

War on cash and checks is still alive and well.While specifics vary considerably by country, the reality is that trillions of dollars in cash and check transactions are processed annually. MasterCard estimates that over 85% of retail payments were made in cash, and similar analyses indicate that over 715 billion cash transactions were made in 2012. While check usage has declined significantly in most countries, there still is a large opportunity to move to other forms of payments in both B2C and B2B environments.

Clearly electronification has come a long way and new solutions are being targeted towards the displacement of checks across all use cases. That being said, over a trillion cash/check transactions annually represents a target rich opportunity for continued innovation.

 

From an opportunity POV, it’s not a matter of how many new business models and value creation opportunities will develop but more around how quickly these markets will become “addressable” (both in terms of size and profitability).We see a lot of discussion around triple digit CAGRs and hyper growth solution areas—but without adequate overall market context. There is still a lot of hype in this space and for larger investors there remain a significant number of nascent markets. CFOs need to be aware that there is considerable uncertainty around growth trajectories, solution/platform shelf life, and the best approach to both targeting and/or pacing investments.

 

Balancing investments in profitable core businesses while migrating to and/or creating new ones represents a significant challenge.For many companies that are evaluating opportunities and/or launching new products/solutions in this space, the incremental “close-in” revenue may be relatively small. In addition, the capabilities required to execute are often different than those resident in core businesses. We see some parallels to challenges around moving to SaaS or cloud-based solutions, but possibly more complex given that multiple factors need to come together to create addressable markets (e.g., retailers adopting new POS technology, consumer adoption of new mobile commerce solutions, broadband connectivity pricing). For CFOs, this complicates business case modeling given the uncertainty around predicting future revenue streams, let alone profitability.

 

There are multiple investment views within this space.It is not surprising that risk/return profiles and investment pacing options within this space are highly variable. For established players, the issue of investment pacing and business model migration may be the dominant issue. Venture capitalists obviously have a much different perspective and related set of investment criteria, and perhaps the largest aperture when it comes to close-in plays. Private equity investors appear—in the near term—to have more limited options within the emerging solutions space, but are finding opportunities in select areas, including processing value chain businesses that focus on acquiring/processing, merchant enablement, online payment gateways, analytics and next-generation POS solutions.

 

While perhaps not all incumbents or new participants see chaos in the connected commerce ecosystem, the uncertainties within this fast changing space are undeniable. But with dynamic markets comes opportunity, and it would appear that most experts agree that this is one of the most exciting technology-centric value creation opportunities in recent history.

 

Scott Haug is the managing partner for Waterstone’s San Francisco office. He has over 20 years of strategy consulting, executive management and business development experience working with companies to develop growth, value creation, acquisition and performance improvement strategies, particularly in complex, technology-enabled environments and within the payments industry.

Laura Green is a principal in Waterstone’s San Francisco office and is focused on the connected commerce and payments ecosystems, with particular emphasis on growth and customer insight strategy development.