The rise of alternative payment methods

The advance of FinTech has led to the evolution of online payments, which in turn has led to the improvement of eCommerce and banking experiences for consumers. It’s impressive stuff. But with all tech advances, regular consumers of this tech expect a lightning-speed service and a variety of choices. Their expectations likewise fuel change. In our field of securing payments and transactions, we’ve witnessed the rise of alternative payment methods (APMs) and a growing expectation that they should be offered alongside standard options for eCommerce stores and online banking. Failure by companies or financial institutions to recognise the popularity of APMs can be detrimental. To ignore APMs entirely is very risky indeed.

Thankfully, the answer to this question is in the name itself - alternative payment methods are any type of payment that isn’t based on traditional payment options such as cash or the use of major brand credit or debit cards. Despite the ‘alternative’ tag in the title, APMs have become quite mainstream, allowing people to make faster and more convenient online payments and also transactions between family and friends.

The rise of alternative payment methods has been closely associated with the evolution of the internet as banking and shopping experiences progressed from brick-and-mortar points of contact to desktop browsing experiences. And today, naturally, things are going mobile. With global smartphone ownership growing, the total no. of global online payments and transactions being made with mobile devices and apps will soon account for more than 50% of all eCommerce transactions. The whole process was forecast to grow steadily up until 2020 but was sped up by COVID-19 pandemic lockdowns, moving more people online via desktops and mobile devices to continue shopping, banking and seeking entertainment. So how do people use APMs?

Bank Transfers

What can be deemed a natural progression for regular banking customers to take their first steps to use APMs, bank transfers allow customers to make quick payments directly from their bank accounts. This is usually completed through online payment methods, such as iDEAL, which works through a customer’s mobile banking app - this is one of the most popular eCommerce payment methods in the Netherlands, for example.

Buy Now, Pay Later (BNPL)

Payments made via instalments have been around for decades, but BNPL has gained a big boost in popularity, taking advantage of the transformation of the online payments landscape to incorporate mobile app payments. Klarna is recognised as a global leader in this market, offering interest-free repayments to customers in a choice of instalments. Most importantly, BNPL is seen as an alternative payment method that can be accessed by people without a credit history - especially popular among Gen-Z and Millennials.

There has been growing scrutiny of this model, which has been often unregulated, causing some consumers to rack up debt due to a lack of credit checks, and signing up to numerous BNPL providers. Recently, there have been steps taken to begin the process of introducing regulation for the industry and prevent the spiral of debt experienced by some consumers.

Cryptocurrencies

In terms of alternative payment methods, cryptocurrencies are as alternative as they come! Crypto is popular among consumers who wish to bypass intermediaries, which are a common feature in traditional financial systems. Cryptocurrencies are based on holdings that are accounted for on a highly secure shared digital ledger, or blockchain, which cannot be altered.

Many payment and investment apps now include functionality for transferring cryptocurrency, making it easier for customers to use it as a source of funding. Of course, some enterprising merchants allow customers to make direct cryptocurrency transfers as payment, with Bitcoin being particularly popular (and the most well-known crypto).

Digital Wallets (e-wallets)

Hugely popular amongst mobile device users (smartphones, tablets, smartwatches), digital wallets allow consumers to preload money to their accounts and store their credit/debit card or bank details in an app (such as Apple Pay, Google Pay, Pay Pal or AliPay) to make payments in-store without the need to use a physical card. Digital wallets use the in-built capabilities of mobile devices to make contactless payments via QR codes, Bluetooth, WIFI and magnetic signals at a point-of-sale device. Payments then go through processors, gateways, acquirers and credit card networks and banks to make a payment.

Mobile Wallets

These are pre-paid wallets that are on offer to users that often do not have a bank account, signing up for services at mobile shops with transactions carried out via SMS messages and PIN codes through regular mobile networks. Although existing bank customers can opt for this payment method too, it has proven particularly popular in Africa where many people still have either no bank account or limited access to traditional financial services. There is also a more general problem of rural communities being far away from their nearest bank and limited mobile internet signal to perform online payments and transactions. Kenya’s M-Pesa mobile money service is the market leader for this service in Africa.

It’s all down to the fast pace of tech innovations that make our lives easier. And the world is going mobile. There is an expectation that the same online experiences that have been standard on desktop computers for decades should now be standard on mobile devices, if not better - and should also be easy to sign up for and use.

Younger generations are also leading the migration from traditional cash and cred/debit card use, being more adaptable to change and innovation. But it’s not just the convenience of APMs that leads younger people away from traditional payment methods, but also financial worries and lack of credit history, leaving them unable to obtain credit cards, for example. This is a generation that witnessed the financial crisis of 2008 and the effects it had on their families, leading to an understandable aversion to traditional financial institutions and lines of credit that could lead to debt.

There is also the aspect of financial inclusion to consider. Alternative payment methods open up lines of finance and online shopping experiences to those that are on the fringes of society. We have mentioned that in regions where mobile internet connections are sparse or non-existent and banking services may be difficult to reach for rural communities, the offer of payment for products and services (even via eCommerce merchants) is still possible with mobile wallets, for example.

With the thirst for alternative payment methods growing, the competition to offer them is fierce, partly to provide customers with an additional payment option but also to improve the user experience. Every eCommerce merchant and financial institution must also take into consideration that ignoring APMs can lead to a loss of custom. The service choices on offer today are so vast, that it’s very easy for consumers to forego one particular brand or service in favour of another that can meet their expectations. Conversions can be gained or lost in a heartbeat, which is why anyone involved in online payments must keep their thumbs on the pulse of evolving technology and general consumer trends or risk losing out.

Providing consumers with a choice of options is not limited to domestic consumers. International shoppers may find an item they wish to purchase an item online but may abandon checkout carts when they realise their preferred payment method is not available. But not to worry (if you’re a customer), there’s always another eCommerce store just a quick search away ready to steal customers away. And herein lies the dilemma - failure to implement a varied choice of APMs can inevitably lead to a negative impact on financial growth.

The same dilemma applies to banks. With open banking, numerous startups are offering financial services to rival the major banks, all down to understanding the rise in popularity of mobile banking and shopping and the payment trends associated with going mobile. Offering consumers the next-generation payment methods can prevent losing them to competitors. Happy customers with improved experience and choice can lead to improved conversation rates.

Every region tends to favour a particular APM, and even within those regions, certain APMs are favoured over others from country to country. In part, this is down to the choices made by banks and eCommerce merchants in whichever APM they choose to provide. Although the choice of APMs is vast, it is not feasible to offer them all, especially if the costs of implementing and maintaining them outweigh the benefit of a limited number of consumers taking advantage of them.

It is important to note that there are quite literally hundreds of alternative payment methods available today. Despite the global nature of the internet, local preferences still tend to dominate, and this is no different when it comes to APMs. Mobile contactless payments (digital wallets) already account for 80%+ of payments in Asia. As for Europe, there is no one favoured APM, the preferences only becoming apparent when comparing countries. In Germany, for example, PayPal accounts for 51% of all online payments. As for the United Kingdom, more traditional credit/debit card options remain popular with 54% of all transactions (although eCommerce uptake is generally quite high here), with bank transfers coming in 2nd place with 23%. Look at Brazil and you will find that BNPL is the most popular APM, partly down to its popularity over the decades in aiding financial inclusion for those that otherwise would not be able to access lines of credit.

Every payment method, in fact, every online user experience, is as safe as it can be, based on several factors. Firstly, every online payment process must be backed up by advanced fraud solutions. Likewise, internal company security procedures must also be an important factor. And every user must ensure they play their part in maintaining good digital hygiene by keeping operating systems, antivirus software and apps up to date to have the latest security features in place. A slip-up in any of these steps can lead to dire and costly consequences.

But let’s look at alternative payment methods, which are often performed without the need to fill out credit or debit card details or even use a physical card which can be skimmed by fraudsters or details compromised. This alone makes APMs safer, as credit card fraud is the most lucrative form of cybercrime for fraudsters who value stolen accounts, but most importantly, your personally identifiable information (PII) associated with them.

Making contactless mobile payments using digital wallets is also relatively safe - the process is secured by tokenisation (encryption) and the networks and institutions the payments go through usually have advanced fraud systems in place. Of course, physical theft of a smartphone is always a potential risk, which can lead opportunistic thieves to make unauthorised purchases. Thankfully, the total amount per transaction is usually limited to a certain amount. As for mobile wallets based on SIM card use, again, physical theft of devices can be an issue.

With APMs that make direct payments using mobile apps, there is always the risk of fraudsters being able to use social engineering attacks that can directly target mobile device users via their email accounts. This is already happening, and we find that many smartphone users, and even eCommerce merchants and financial institutions, take it for granted that mobile platforms can become a lucrative target for cybercriminals.

In our line of business, we know that online payments and transactions can be made convenient and improve overall customer experiences. This is why we are so interested in alternative payment methods. But we also know that to ensure both customers and companies don’t lose out to fraudsters, advanced fraud detection and prevention are necessary to ensure all online payments remain secure. This is why it is essential to know your user™ (KYU) making a payment or transaction.

By using machine learning models to power analysis that delves into behavioral biometrics and digital fingerprints, it is possible to understand how each user is behaving during their use of service and also determine their device setups. Doing this automatically, passively and in real-time allows for genuine fraudsters to be detected and prevented from succeeding in their fraud attempts while ensuring a smooth online payment for genuine users.

Alternative payment methods are here to stay and will continue to grow and be popular. This is why ensuring the best possible customer experience is in the best interest of any eCommerce merchant or financial institution dealing in online payments and transactions. To underestimate the popularity of APMs is definitely risky and can inevitably lead to a dent in the popularity of companies that choose not to offer them. Are you willing the take that risk?

If you wish to learn more about how advanced fraud solutions can complement and secure alternative payment methods, get in touch and we’ll show you how. Click 'book a call' at the top of this page or contact Neil directly via email at neil.smith@nethone.com or via LinkedIn.