The phygital phenomenon: How the digital revolution is being fueled by physical

Retailers who succeed in the future will be those who create a compelling customer experience that flows seamlessly between their online sites and physical stores.

There is no doubt: digital is here to stay and will dominate almost every aspect of business and life in the near future. The only question is how long will it take? And how can the pace of digital expansion and adoption be increased? Surprising as it may seem, the answer lies in the physical.

Some years ago, the ecommerce wave revolutionised the shopping experience for the customer. Around that time, trending stats were about how ecommerce was snatching the retail market away from brick-and-mortar stores.

Today’s retail industry outlook reflects that consumer shopping preferences and behaviors are not static. As per industry estimates in 2017, e-tail accounted for approximately 2.5 percent of the US$ 672 billion Indian retail market. Even in the US, e-tail contributes less than 10 percent to the retail market.

In the future, the retailers that succeed will be those who create a compelling customer experience that flows seamlessly between their online sites and physical stores. The Walmart-Flipkart deal further forces us to look for similar trends across the globe.

Amazon’s move into the brick-and-mortar retail world (Whole Foods acquisition, Bookstore) has shown us that digital companies are making the move to physical retail to create the same in-store experience for customers. At the same time, all-digital brands like Facebook and Google are going physical, using traditional, offline media like press and outdoors to facilitate the adoption of a digital habit and lifestyle.

Prime Minister Narendra Modi’s demonetisation drive in November 2016 was aimed at shifting billions of hard cash transactions to online banking channels. However, 18 months later almost 17 trillion of physical cash is back in the market, leading to one question. Why?

Content is king, but distribution is God

Leveraging opportunities in the service industry ultimately boils down to the success of its distribution architecture. The perfect example for this - backed by the stats furnished above - is the retail commerce industry.

However, the rapidly rising financial services industry has still not been able to adequately own the market despite having a captive audience. While products and services evolving for the better, the absence of an effective distribution network has been a stumbling block in building last-mile connectivity. With fintech being the go-to solution for a market like India with its hugely diverse socio-economic silhouette, the distribution strategy has to be an omnichannel approach powered with lateral technology to ensure effective servicing of customers across segments and deriving customer value.

More than two decades ago, an FMCG brand innovated by introducing shampoo sachets. The aim was to initiate rural consumers to acquire the shampoo habit while increasing sales volumes and offering affordability, hence reaching the last mile. The lower-priced, small SKU size also ensured that the sachets gained acceptance in smaller retail outlets. The sachet strategy was a “smash hit”. According to ORG Marg data, sachets account for 95 percent of total shampoo sales in rural India. The idea was simple. Clearly, there’s no one-size-fits-all solution.

The financial ecosystem of the country is currently at an inflection point, which has forced legacy banks to rethink their strategy, reorient business models, and redesign their technological capabilities.

An underlying difficulty, however, relates to the extent to which providers can match customer profitability to channel cost. In reality, high-value customers often use low-cost channels while low-value customers remain dependent on higher-cost channels such as branch networks. This creates a major challenge for the future in terms of the process of matching customers to channels.

Insurance is a huge use-case. Despite hosting more than 30 insurance providers, insurance penetration in the country stands at a meager 3.4 percent. Most two-wheeler owners today do not renew their motor insurance because they are either not aware of where to go, or are not able to access such outlets easily.

That’s why distribution has been the key differentiator. The financial services industry needs to conceive “out-of-the-box” business models while leveraging technology to deliver services in a cost-effective, swift, and convenient manner. This can potentially enable last-mile reach through alternative channels, which is more scalable than the legacy high-touch model of traditional banking, making these companies the more engaging go-to platforms.

Allies, not adversaries

In a country where more than four-fifths of the transactions are still in hard cash, the financial services industry is realising that somebody has to hand-hold most of the population to make the shift from physical to digital. This is where the “phygital” strategy comes into play. Fintech enterprises are scaling technology infrastructure to help the “unconnected” make the necessary transition— without losing any of the experience of traditional in-store services.

So while the customer pays with physical cash at the franchise outlet, the purchase is carried out in digital mode, be it buying a phone through Flipkart or a movie ticket from BookMyShow.

The coming together of the once fiercely competitive offline and online retail is encouraging businesses to deliver the best outcomes and improve the overall shopping experience for their customers. Multi- or omnichannel financial enterprises are meshing the best of digital and ecommerce with brick-and-mortar stores to provide a novel combination of entertainment and utility services, attracting more customers to the phygital side. This thinking is fast gaining currency because the future is neither exclusively digital nor is it physical – it is phygital.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)