When bank-account funded payments, real-time payments, mobile and other digital payments are actually the default way to pay in many countries, the term ‘alternative’ seems a misnomer. We examine current and future trends in how the world chooses to pay and be paid, and the implications for customer value propositions and legacy infrastructure.
Payment habits are strongly national. Germans love direct debit whereas Russians do not. 48% of cashless payments in Germany are via direct debit according to the European Payment Cards Statistical Yearbook 2015-16, yet in Russia it is less than one percent. When they are not paying cash, Scandinavians pay by card more than 70% of the time. Meanwhile the Maltese love writing cheques. Around one-in-four non-cash payments in Malta is made this way. Yet with the exception of France and Cyprus, most of mainland Europe is seemingly unacquainted with a cheque book.
Payment habits have developed over time and are formed by various cultural, political, economic and technological factors. Consumers and businesses rarely go out of their way to pay in a new way. Behaviour becomes entrenched for face- to-face payments. It is the same online as the growth of e-commerce is driving take-up of local alternative payment methods (APMs).
THE MORE DIGITAL, THE MORE LOCAL?
There are currently more than 300 APMs worldwide. They range from real-time bank transfers, e-wallets and mobile wallets to direct debits, cash on delivery and e-invoices. According to a Worldpay global payments report, APMs not running on international card scheme networks overtook card payments in 2015, claiming 51% of global e-commerce turnover. APMs are actually the default way to pay in many countries, so much so the term ‘alternative’ seems a misnomer.
“Countries that were the home of e-commerce, such as the US and the UK, are countries where cards were used and people were willing to use them online,” says Ralf Ohlhausen, business development director, at e-payment specialist, PPRO.
“As e-commerce grows internationally, merchants who want to sell abroad have realised that in most countries, cards are not the dominant payment form. If you want to sell in multiple countries, you need to offer the local, preferred payment methods so that you can reach the majority of people willing and able to buy from you online.”
Merchants selling online in Brazil have to accept the post-pay Boleto Bancário option, which accounts for around 15% of online payments. Merchant selling into the Netherlands have to accept iDEAL.
The Dutch make 56% of their payments online (€18.1 billion) using this real-time bank transfer method. In Russia, acceptance of e-wallets such as Qiwi, WebMoney and Yandex are a must. Generally there are certain regional characteristics of APMs. In Europe with a high banked population, APMs tend to be based on online banking.
Users are either redirected to their online banking facility, or select their bank from the provider’s page to complete a payment. In Africa, mobile wallets are popular, e-wallets in Asia and e-cash in Latin America.
THE PUSH AND PULL OF PAYMENT
APM growth is set to continue. APMs are expected to account for 55% of e-commerce turnover by 2019, with North America showing the biggest shift towards these methods, says Worldpay. But aside from the growth in e-commerce volumes, why are APMs capturing a greater share of payment volume and value?
For Ohlhausen, it has much to do with the inherent advantages and disadvantages of cards and more traditional systems. Apart from growing levels of fraud on cards, there is also the vexed issue of chargebacks. “It’s something that is very annoying from a merchant’s perspective — it always has been,” contends Ohlhausen.
“This is linked to pull payments, meaning that it is the merchant who initiates payment by pulling the money from the customer. In return and in most countries and with most schemes, the customer is granted the right to pull the money back, more or less at their discretion. From a merchant’s perspective, that is a huge risk and a huge cost. Since APMs are, more often than not, push payments, there is no chargeback right. For a merchant, they are much more secure.”
Instant payment is another factor driving interest in APMs. This removes the middleman from the payment exchange. “If you want to shift money from the customer to the merchants, the vehicle in-between becomes less necessary with the advance of technology,” says Ohlhausen.
“If instant payments are introduced where the money is moved within seconds, what you really need is the technology enabling that transfer. There is no need to go through any other quasi- instant payment system, such as card networks.”
Consequently cards as a payment instrument become less and less of a necessity. Payment credentials could equally be held elsewhere or on another form factor, such as a mobile handset. However the trend towards mobile payments may yet revive interest in cards and pull payments in general. This is because mobile payments tend to work with stored data that is retrieved, activated and executed via a single click.
“In the matter of one-click payments, they are only possible if data has been stored previously so that one click can retrieve it to execute the transaction,” explains Ohlhausen. “Most push payments have a user interaction that needs to happen at that point. That’s why it is a push. The customer has to do something, and usually one click is not enough.”
In the short-term, APMs and indeed all payment methods are seeing a changing, rather than a new, lease of life. As payment becomes more digital, it becomes more local. Both in terms of national payment habits, but also local to the customer’s online account or device. The battle to become the embedded card or stored payment method will become ever-more important.
Looking further into the future, a number of trends could drive the next 10-20% growth in APMs. Mobile and increasing m-commerce will undoubtedly continue to be significant. Global e-commerce is expected to hit $2.4 trillion in 2019 according to Worldpay, with 23% of this being exclusively from mobile devices.
The rise of chat bots could potentially drive m-commerce figures higher still. Chat bots are natural language programmes which allow businesses and customers to communicate directly via messenger chat platforms. They facilitate quick and convenient contextual exchanges, and integrating payments is a natural next step.
One only has to look to China where Tencent-owned WeChat (or Weixin as it is known locally) has long been a stalwart of social networking, messaging and e/m- commerce. The WeChat app, which also includes payment, is ubiquitous in Chinese social and business life with around 697 million monthly users.
Western technology companies are playing catch-up. Facebook launched developer tools for its Messenger service in April this year and Apple for its Siri voice assistant in September. These tools allow developers to design integrations for payments into messaging apps. Conversational and contextual commerce will take off and drive m-commerce and potentially APM-style wallets. The question is when and how, not if.
The revised Directive on Payment Services (PSD2) is another driver of APM growth, particularly in Europe. The regulation has the potential to drive more bank-to-bank payments, rather than credit or debit card payments.
It also lays the foundation for new entrants and payment behaviour change. In the future, large retailers could consider becoming payment initiation service providers (PISPs) under PSD2. This allows them to initiate payments from a customer’s account via a SEPA credit transfer or similar push payment. This would be preferable to retailers over SEPA direct debits, card or other pull payments, which carry a chargeback risk.
The changing culture around data protection and privacy could also provide a boost for APMs. As above, this draws on the inherent advantage of APMs as push rather than pull payment methods.
“From a data privacy and protection point-of-view, another big advantage of push payments is that as the customer, I do not have to disclose any information,” explains Ohlhausen. For a pull payment, the customer has to provide their bank account or card details to enable the merchant to pull the payment. For a push payment, it is the opposite. The merchant has to provide their account information to enable the payment.
THE OPERATIONAL NITTY- GRITTY
Merchants, payment service providers and acquirers want and need to localise their offering to close sales and compete effectively. Of course, payments is only part of localisation, alongside language, currency, in-country logistics, tax requirements, fraud prevention and so on. However with regard to localising payment, considerations include integration, contractual requirements, statement and settlement dates, and back-office reconciliation.
A solution provider should be able to offer international card and local schemes, bank transfers, e-wallets and instalment options via a single integration. If they can do this on a single contract, so much the better. Back-office reconciliation should also be as streamlined as possible with a single statement and settlement date for all payments, irrespective of country, currency or acceptance channel. This helps cut the operational cost, time and resources required to manage payment-related admin.
On the technical side, the integration of APMs brings with it a number of considerations, as Ali Mentesh, sales director at payment integration firm Volante Technologies, explains. The APM payment cycle consists of two very different worlds. The APMs themselves are typically based on modern technologies, and therefore tend to be modular, system-agnostic and flexible. The systems that do the payments processing are typically complex legacy systems.
“Although these back-end payment processing systems are highly scalable and proven in reliability, they lack the nimbleness and flexibility necessary to adapt to change quickly and economically,” he says. “Volante contributes to the APM/legacy systems environment by offering an ‘insulation’ layer around these critical core payment processing systems. No matter what APM emerges, the core systems can quickly and easily integrate with them. An example of this is the recent Volante Ripple API that enables any modern or legacy payment processing hub to integrate with Ripple.”
There is no such thing as a simple payments system. The depth of integration for each APM is significant, in addition to the number of payments integrated and how this is achieved technically. “There is a lot more devil in the detail than you see on the face of it — that goes for every payment method, even the most popular ones,” says Ohlhausen.
“There are details, such as lack of a refund or particular payment statuses to map. If a particular payment method has the risk of missing funds, you need to look at a more granular level at the different stages of how a payment is done to circumvent that risk.” The operational nitty-gritty of APMs is not merely a question of integrating as many as possible, but exploiting all the functionality provided to integrate them as deeply as possible.
Not for the first time in business or payments, the internet changed everything. It conflated distance, bringing the world to the user’s home, office or wherever they were via their mobile device. At the same time, it also brought the user and their particular local payment habits to the world. It has become good business — as well as good manners — to offer a customised shopping experience, including localising language, currency, delivery and payment options.
APMs are on the rise and set to capture an ever-greater share of digital payment volume and value. While the downward pressure on interchange globally has triggered renewed interest in cards from the acquirer/merchant side. The price of payment acceptance is coming down across the board, including for APMs. Therefore, the advantages or disadvantages of cards versus APMs, pull versus push payments, remain.
The growth of m-commerce, particularly conversational and contextual commerce via chat bots, as well as new regulation around payments, and data protection and privacy is driving interest in the APM proposition.
Providing solution vendors and those wishing to deploy APMs can address technical integration, contractual and back-office reconciliation issues, the future for payments looks as bright as it does alternative.