Clicks & Commerce: Digital and Physical Marketplaces Continue to Converge

The global internet economy is rapidly evolving as platforms adapt to consumers continuing to move their lives online. Omnichannel commerce, aiming to create seamless shopping experiences in-store, on mobile, and online, has become a dominant trend. This necessitates advancements in fulfillment, analytics, and merchant tools. Simultaneously, marketplaces are expanding their revenue strategies beyond commerce to capitalize on digital advertising and new consumer inclinations for digital payments and optimized lending practices. This integration of digital and physical commerce, alongside emerging FinTech behaviors, suggests a future of more efficient, personalized, and lucrative consumer interactions with retail and financial services.

This piece is part of a series that dives deeper into this year’s iteration of our flagship research piece, Charting Disruption.

Key Takeaways

• In 2023, e-commerce saw its highest contribution to retail sales since 2020, driven by increased spending in digital advertising.¹
• Major marketplaces are increasingly relying on advertising for revenue, especially as AI-driven advertising moves from experimental to commercial stages.
• Digital wallets, recognized for their convenience and security, are rapidly gaining global popularity, bolstered by integrated features such as buy-now-pay-later (BNPL) services.

Omnichannel Strategies Elevate Digital Marketplace Profitability

E-commerce emerged as a cornerstone of retail growth in 2023, accounting for 15.6% of the total market share in the retail sector.² Although still in a nascent phase, it is estimated that e-commerce was the driving force behind 41% of the revenue growth experienced by U.S. retailers during the year.³ This surge was fueled by rapid growth in the automotive & parts and food & beverage sectors.⁴ Despite the resurgence of in-store shopping post-pandemic, foot traffic lingers below pre-pandemic levels as e-commerce’s allure, marked by convenience and utility, continues to captivate consumers. Brick-and-mortar stores remain vital in the omnichannel mix, but a robust online presence is now essential for customer retention.

U.S. retail e-commerce is on track for consistent expansion, forecast to sustain over 10% annual growth from 2024 to 2027.⁵ Partially fueling this upward trend are budget-conscious consumers who go online to compare products and prices. For major retailers, these trends mean a push to prioritize digital sales as a key revenue driver, including via new advertising strategies.

Major marketplaces are experiencing a significant increase in advertising revenue, now a crucial part of their profitability. Amazon is a prime example, having utilized its extensive third-party commerce network effectively. This strategy has led to its advertising division emerging as the fastest-growing segment in the last three quarters up to Q3 2023.⁶ Similar trends are observed across the broader tech sector, with e-commerce merchants driving up ad revenues through performance marketing at key consumer transaction points.⁷ This is evident in Uber’s advertising revenue reaching a $650 million run-rate in Q2 2023, and Walmart’s global advertising revenues surpassing $2.7 billion in the last fiscal year.^8,9

In parallel, Generative AI is transforming the advertising landscape, aiding in the creation of more effective ads, budget optimization, and product listing enhancements. This technology is leveling the playing field for third-party merchants and is a key factor in the global advertising market’s projected 5.8% year-over-year growth to $889 billion in 2023.¹⁰ This growth is expected to accelerate in 2024 as AI-driven projects transition from experimentation to commercialization.

Digital Wallets Evolve Into Cost-Effective Super Apps

The 54% surge in mobile wallet usage in the United States during the 2023 holiday shopping season is evidence of the rapid digitization of payments and evolving consumer preferences.¹¹ Digital wallets now account for 32% of online transactions and 12% of all point-of-sale (PoS) transactions in the United States.¹²

Digital wallets streamline the checkout process, particularly on mobile devices, by eliminating the need for manual payment detail entry. Convenient and secure, digital wallets not only accelerate transaction completion but also reduce cart abandonment rates, thereby boosting e-conversion rates. Popular digital wallet platforms like Venmo and Cash App are capitalizing on this consumer trend by enhancing user experiences through scalable models. Their success increasingly hinges on strong network effects and the ability to offer value-added services, which includes expanding into complementary services and products.

Consumer lending in digital transactions, particularly through BNPL, is another emerging trend. In the U.S. 2023 online holiday spending reached a record $221 billion, with BNPL contributing $16.6 billion, a 14% increase from the previous holiday season.¹³ This surge benefits digital wallet apps that integrate BNPL, as well as digital commerce platforms, by positively influencing cart conversion rates.¹⁴ BNPL is also gaining traction in business-to-business (B2B) procurement, with Amazon partnering with Affirm to offer this service to its small business customers.¹⁵

Globally, the use of digital wallets within e-commerce is also soaring. In Asia, platforms like Alipay and WeChat Pay are integral to online and in-store transactions. In India, the rapid adoption of digital wallets such as PayTM, Google Pay, and PhonePe mirrors this trend. A key advantage in emerging markets is the lower transaction fees compared to traditional credit cards, enabling retailers to reduce costs and optimize their operations.¹⁶ In 2022, the transaction value via digital wallets surpassed that of credit cards in major emerging markets, indicating their growing dominance in PoS payments.¹⁷

Digital wallets present a cost-effective and simpler payment solution for merchants, particularly for small and medium-sized businesses. They offer an opportunity for these businesses to collect customer data, engage in digital marketing, and develop loyalty programs, further emphasizing their growing importance in the modern retail landscape.

Conclusion: The Internet Economy is Rewiring Commerce

As the lines between online and offline retail blur, the mix of commerce, advertising, and FinTech redefining business models, elevating consumer engagement, and integrating financial services in novel ways. Retailers are responding to this shift with a rise in e-commerce activities, embracing omnichannel strategies, and exploring new avenues for revenue generation. Simultaneously, the advent of AI is empowering third-party merchants to enhance ad creativity and expand their customer outreach. Additionally, the increasing use of digital wallets is streamlining payment processes, benefiting both consumers and businesses with efficient and seamless transactions.