What are alternative payment methods and why do they matter?
‘Alternative’ generally means unconventional or outside the mainstream. It’s something niche, specialist or with a small yet devoted following. When it comes to payments, however, ‘alternative’ is a misnomer. In some markets, alternative payment methods are more mainstream than niche.
In this article, we go back to basics to explain:
- What are alternative payment methods?
- Why have alternative payment methods emerged?
- What are some examples of alternative payment methods worldwide?
- Why do alternative payment methods need to be a consideration in your payment strategy?
What are alternative payment methods?
Alternative payment methods — APMs for short — refer to any form of payment that isn’t cash or a major international credit card brand.
Domestic cards, cash-based vouchers, digital wallets — such as Apple Pay and Google Pay — or bank transfers, including iDEAL in the Netherlands, POLi in Australia and New Zealand, and Przelewy24 in Poland are all considered alternative payment methods.
However, alternative online payment options are often more mainstream than niche. In many countries, they are the de facto way to pay, particularly online. Take German shoppers, for example, 57% of them prefer to use PayPal when shopping online. Meanwhile, in the Netherlands, consumers make 60% of their online purchases with the local bank transfer payment, iDEAL. This becomes even more important for SaaS payments or subscription payments.
And that’s precisely the point for businesses looking to attract customers globally. Selling online to consumers without accepting their preferred payment method is akin to leaving money on the table.
Types of alternative payment methods
Cash-based payments (electronic cash or e-cash): When checking out online, customers choose a cash-based payment method and generate a barcode or unique reference number to identify their payment. The customer takes this printed out or on the screen of their mobile device to a participating retail location to pay in cash. Once payment is confirmed, the merchant ships the goods or credits the customer’s account in the case of a service. Examples of e-cash methods include Boleto, Oxxo and Fawry.
Realtime bank transfers: This payment method allows consumers to pay for goods and services online using direct online transfers from their bank account. iDEAL and Sofort are examples of this payment method.
Direct Debit: Direct debit payments are commonly used for recurring payments. Consumers consent to giving a merchant the ability to pull funds directly from their bank account for an agreed service. Consumers will get advance warning from the merchant that the transaction will happen. Examples of direct debit payments include SEPA Direct Debit, ACH and BACS.
Domestic card schemes: Domestic card schemes operate in a similar fashion to the global card schemes operated by Visa and Mastercard. The difference is that these cards will only be accepted in one or a few markets. These are often popular where available as they’re tailored to the unique needs of consumers in the market and can often provide merchants with lower processing costs. Bancontact, Carte Bancaire and mada are just a few examples of local card schemes.
Electronic wallets (e-wallets): E-wallets are a digital way to store funds. Customers load their e-wallets with funds via bank transfer, card or cash and use them to make payments online, offline, as well as person-to-person and cross-border in some cases. Examples of e-cash methods include PayPal and Alipay.
Mobile wallets: Mobile wallets are another electronic way to store funds, this time on a mobile device. Customers load their mobile wallets via bank transfer, card cash, or through their mobile carrier. Making purchases, transferring money person-to-person and paying bills can be done electronically online, in-app or in-person via the contactless interface, via QR code, or SMS on a feature phone.
Pass-through wallets: Pass-through wallets are a digital way to store payment cards. They generate tokenized card numbers for each transaction. Many consumers consider these a secure, convenient way to shop online, in-app or in-store without revealing or typing out card details each time. Apple Pay and Google Pay are examples of pass-through wallets.
Buy-now-pay-later (BNPL): BNPL later allows customers to either pay the whole amount later or spread an item’s cost over several installments. Purchases are mostly funded via a bank account, debit or credit card. Klarna, Affirm and Afterpay are a few examples of this service.
A whistle-stop tour of popular global alternative payment methods
There is no single, global way to pay. Every country has unique banking rails, payment methods, regulations, requirements and licensing. Payment habits also develop over time and are often formed by various cultural, political or economic and technological factors.
North America
In North America, cards are the most popular form of payment online, accounting for 53% of ecommerce transaction value in 2019, according to GlobalData,. In the United States, this is mostly via Visa and Mastercard. Canada meanwhile has a robust domestic debit card, Interac, which is used in-store via card and online as a bank transfer payment method. LPMs are becoming more popular, though, especially amongst the younger generation using services Apple Pay, Google Pay, PayPal and Venmo — the mobile wallet service from PayPal. According to GlobalData, APMs such as these account for 30% of ecommerce transaction value.
South America
More than 50% of consumers prefer using cards when shopping online, according to the 2019 Latin America Online Payment Methods report. This accounts for the international card schemes, as well as local schemes like Elo and Hipercard. Cash on delivery is also popular given the region’s large unbanked population. Increasingly the use of alternative online payment solutions, such as e-cash solutions is becoming more widespread. This is an offline way to make online purchases and is particularly suited to a region with a high unbanked population. Popular examples of e-cash in South America include Boleto Bancário in Brazil and OXXO in Mexico.
Europe
The landscape is similar in Europe to that in the US. Cards are by far the most popular method of online payment, with 53% of consumers saying they’d prefer to use debit and credit cards when shopping online, according to a 2019 Payments Europe report. Some popular domestic debit cards that sit alongside the global brands include Bancontact in Belgium and Cartes Bancaires in France. The same study found that 16% of consumers prefer using bank transfer methods, especially in Austria, giropay, Sofort and PayNow in Germany, iDEAL in the Netherlands and Przelewy24 in Poland. Other alternative online payment options, like Apple Pay, were preferred by 6% of online shoppers.
Africa
In Africa, mobile wallets are attractive due to the lack of bank branch infrastructure and a large rural population. Customers can load their mobile wallets in various ways, including cash, carrier billing, or bank transfer. Mobile networks, not banks, run many of the largest country and regional mobile money schemes. M-Pesa, MTN Mobile Money and Orange Money are all examples of mobile wallets owned and operated by mobile networks. Sub-Saharan Africa accounts for around 45.6% of the world’s total number of mobile money transactions.
Middle East
In the Middle East, cash has reigned supreme until recently. Our data finds that in several markets, such as Bahrain, Qatar, and Saudi Arabia, cards are the favored alternative online payment solution. This is driven by deeper penetration from the international brands, as well as the development of government-backed payment networks. Examples include KNet in Kuwait, Oman Net in Oman, QPay in Qatar and mada in Saudi Arabia.
Asia Pacific
China has a robust domestic card scheme, UnionPay, which accounts for 45% of global card spending. Mobile payments are also popular in China. And it's anticipated that transactions totally $120 trillion were made using mobile wallets by consumers across China in 2020. Alipay and WeChat Pay dominate, with more than 90% market share between them. There is a large variety of popular alternative payment methods used by consumers across the rest of the region also. Some examples include GrabPay in Singapore, OVO Wallet in Indonesia and True Money in Thailand.
Why do alternative payment methods need to be a consideration in your payment strategy?
Not accepting customers’ preferred payment method is a conversion killer. Our research, conducted in partnership with Oxford Economics showed that 56% of consumers said that if they couldn’t use their payment method of choice, it would permanently put them off shopping on a site.
Alternative payment methods must be a key part of your payment strategy. Customers like what is familiar. If they usually pay a certain way, why would they do something new to shop with you? When convenience is key to closing sales, why add extra payment friction and hassle? Let them pay their way, wherever they are.
And it’s not enough to be reactive. You're too late if you only start offering APMs when they reach critical mass. By this point, your potential customers will already be spending money with your competitors that catered to their needs sooner. Instead, you must be proactive and work to get a deep understanding of the direction local trends are heading so you go beyond their expectations, delivering frictionless, first-class payment experiences.
The challenge for merchants is knowing where to start getting this information. Nuances in the way people pay are subtle and not always apparent at first glance. And that’s where it helps to partner with experts who have that deep understanding of the local markets you operate in and work with you to understand and develop strategies to capture opportunities ahead of your competitors.
You also need to make sure that your payments technology stack is suited for your business — allowing you to add new payment methods at speed and without creating additional complexity. Not all payment providers can do that. So make sure that you’re working with a provider that gives you the international coverage you need, as well as capabilities to adapt and evolve as your business develops.