The Alternative Payment Methods (APM) ecosystem & bank-based payments
The last 5 years have seen a flood of innovation in payments. Customers are choosing to do more of their shopping online, and this increasingly means on a mobile device. Newer payment methods reflect this changing reality.
‘Alternative Payment Method’ used to mean anything that wasn’t cash or a credit card. Now it’s used to mean anything that doesn’t use traditional payments infrastructure — specifically, credit card companies like VISA and MasterCard.
Customers now have more choice over how to pay than ever before, and this is clearest online. Companies can offer multiple payment methods for their customers, who expect their preference to be available.
PayPal ushered in the era of internet-based payment methods. The company started out as Coinfinity, a low-cost transfer service letting people send money between countries. This was a huge change for people sending remittance payments, who were used to slow and expensive intermediaries.
Over the last few years, payment ‘gateways’ like PayVision, Adyen and Worldpay have seen tremendous growth. This has been driven by the introduction of so many APMs to market.
Apple have been very active in payments since the introduction of Apple Pay in 2015. Recently, Apple announced their ‘Apple Card’ in collaboration with Goldman Sachs.
Real time payments to grow in 2020
Real-time payments (RTP) are high-security payments that settle instantly with minimal friction for the customer. They depend on collaboration between the leading banks in a market to be a viable APM for consumers.
Customers paying with this method just approve the payment in their mobile banking app, with no need to enter card information.
RTP systems have seen increased growth and adoption in recent years. Perhaps the best established of these is the Netherlands’ iDEAL, which was created in 2005 and had grown to a 57% market share by 2018.
In 2019, the EU’s PSD2 legislation came into effect, laying the foundations for a universal RTP ecosystem. Banks operating in Europe must let regulated fintechs move payments between their customers’ accounts and the accounts of other European banks.
PSD2 also makes biometric authentication a standard for payments, virtually eliminating the possibility for fraud and grounds for chargebacks.
While Direct Debit is a well-established payment method, it has still evolved with the changing payments landscape. Companies can connect with specialised debit providers via APIs, instead of relying on Direct Debit bureaus or banks.
Direct Debits suit recurring payments like subscriptions and bills, but not one-time purchases or those with variable amounts.
The main benefits offered by providers like SlimPay and GoCardless are simplification of the existing systems, for consumers and businesses.
Digital wallets (eWallets) are prepaid accounts that let users store money for a future transaction. Access to the stored money is typically protected by a password or biometrics.
While they hold money for their customers, digital wallets only require an e-money license and not a banking license. Banking licenses secure the customers’ money up to a certain amount if the company goes bankrupt or the money is stolen. E-money licenses do not offer this protection.
Wallet providers are moving beyond traditional credit options to include alternatives like financing. This is convenient for consumers since their bank accounts are already linked.
Paysafe, PayPal, Skrill and Neteller are examples of digital wallet providers.
Buy now, pay later: delayed payments and installments
Delaying payments or paying in a series of instalments are be attractive options for customers making a one-time purchase. Financing options are being extended to a greater range of products than ever before. Companies like Klarna are leading this innovation, with their ‘buy now, pay later’ system.
Creditworthiness assessments have been made easier by technologies like machine learning. This helps lenders check and approve loans with more confidence.
Cryptocurrencies and stablecoins
Cryptocurrencies have been a wellspring of innovation and controversy. The first, Bitcoin, has experienced massive growth over the last decade.
Cryptocurrencies haven’t been adopted as media of exchange to the level expected by enthusiasts. Regulators are still figuring out how to regulate this new asset class.
Central banks and even FAANG companies are exploring creating their own cryptocurrencies. Their aim is to create a stablecoin, a cryptocurrency linked to fiat currencies or government bonds. This would reduce volatility and make it easier to transact.
Comparison of APMs: processing times & fees
The table above compares APM services with credit card providers. Remember that these fees vary depending on the market. APMs can be more expensive than card schemes.
In high risk markets like crypto trading, forex and gambling, payments regularly incur charges as high as 3% for card payments.
Percentages of online stores using different payment methods
Card schemes and eWallets dominate, but acceptance varies greatly between countries. The Netherlands is led by iDEAL, which sees 80% acceptance. Germany is an outlier as a market with very low credit card acceptance. Only 25% of people in Germany have a credit card.
Introducing cardless payment acceptance
PSD2 and Open Banking have made universal real-time payments viable across Europe. Citizen lets businesses access this functionality, to reduce their operational and payments costs as well as to decrease friction in their payment flows.