Cash or card? It’s not a question that we hear so often anymore. Digital payments have become the new normal, with increasing numbers of people ditching both card and cash, at least the physical versions, in favour of new, easier ways to pay.

But as consumer habits shift, businesses are faced with the challenge of adapting to these changes while still meeting customer needs and keeping growth on track. 

The transition to digital payments isn’t just about convenience, it’s about ensuring trust, security, and loyalty. So how can chain stores and supermarkets keep up with the latest innovations, use them to drive growth, yet still meet customer’s expectations?

At today’s Payment Innovation event, as part of this year’s FinTech Festival Scotland, Jake Bailey, head of innovation and loyalty at Tesco Bank, and his colleague Ryan Mason, senior manager of group payments and open banking, explored how the UK’s largest supermarket chain has navigated the shift to digital payments, driven innovation at Tesco Bank, and kept loyalty strong.

The Earliest Form of Digital Currency?

The first thing to remember, according to Bailey, is that Tesco has already been something of a disruptor in the payment space.

“We have a digital currency, and it’s one of the most popular digital currencies in the UK,” he said.

Bailey is referring, of course, to Tesco’s Clubcard and points system, first rolled out in 1995 and now counting as many as 23.7 million households among its members. To put that in perspective, the latest Office for National Statistics estimates from 2023 put the number of total UK households at 28.4 million.

On top of that, there are the 16.3 million individual app users, and with 82% of in-store shoppers using the Clubcard, it turns out that a huge number of us have been using a ‘digital currency’ without even realising it.

According to Bailey, Tesco processes something around 2.5 billion payments annually, with more customers turning to digital payments every year, and the company is feeling the brunt of that shift, as Ryan Mason explained.

“Processing issues come at quite a significant cost,” he said, referring to the fact that the costs of running digital and card payments is double that of operating in cash. 

For example, if a customer chooses to pay with a digital wallet like Apple Pay, they won’t pay any more than a customer who uses cash, but businesses are forced to pay a percentage back to Apple through the interchange for using the service.

That’s led Tesco to the creation of the Clubcard+, its own payments platform where customers can pay and collect points using a card stored on the app, even when shopping elsewhere, making things more efficient for customers, and cheaper for the company. 

“The monopoly of NFC payments is slowly breaking,” said Mason, “so Apple won’t be able to extract all those fees by hijacking NFC, and we can break free from payments to Visa and MasterCard too.”

As technology continues to take greater hold of customers’ wallets, however, trying to stay on top of spiralling costs isn’t enough. Instead, companies have to find new ways to engage with, even excite, their customer base.

Keep Customers Bouncing Back – The ‘Loyalty Bungee Cord’

At Tesco Bank, the team have been using decades worth of Clubcard data along with advancements in AI to find ways of tailoring experiences to drive growth and keep customers happy. One idea they’ve hit on is the gamification of the weekly shop.

“One of the things we’ve tested recently is club card challenges,” said Bailey. “That’s essentially where, within the app, we’ll show you a set of challenges. So if you buy these 10 products over this period of time, you get all of these points. It’s a way of driving engagement, and it’s been really successful for us.”

Bailey describes such measures as a ‘loyalty bungee cord’, something that will keep customers coming back again and again, even if they might stray elsewhere once in a while. 

Finding new avenues for growth is a constant struggle, said Bailey, but things could soon be looking up.

As Bailey explained, Tesco Bank this year entered into a partnership with Barclays in a £600 million deal, under which Barclays will market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand.

“We’ve entered into a 10 year strategic partnership,” said Bailey. “For years, I’ve been coming up with ideas, with teams of people, of exciting things we want to do, but not having the money to get it done, because the retail business is focused on groceries. So we found a partner who was willing to put some capital behind it and drive innovation with us.”

That innovation will take the form of combining Barclay’s 21 million UK banking clients with Tesco’s own customer base, utilising Clubcard data, and finding new opportunities for financial services.

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As the payment landscape continues to evolve, businesses like Tesco must stay agile, embracing both technological advances and changing consumer preferences. The move to digital payments is more than just a shift in convenience, it’s a transformation that demands innovative solutions to enhance customer experience while managing operational costs.

Shining through everything Bailey and Mason discussed was the idea that innovation and customer loyalty should go hand in hand in this fast-changing environment, because that’s the only way a company can sustainably grow. 

Digital payments seems like a sector most ripe for startups and cutting edge entrepreneurs, but it turns out they might be able to learn a thing or two from an old hand.