alternative payment methods

So Many Ways to Pay: Alternative Payment Methods

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What are Alternative Payments?

Alternative payments simply refer to any form of payment that involves a major credit or debit card scheme. There are a wide variety of alternative payment methods (APMs), including mobile wallets, such as Apple Pay and Samsung Pay; buy now, pay later options, such as Klarna and Affirm; and blockchain-based digital currencies, such as Bitcoin and Ethereum. Let’s take a closer look at some of these APMs.

The founding of PayPal in 1998 ushered in a new era in payments history, giving banks, merchants and consumers alike the opportunity to break free from the constraints associated with traditional payment methods. In the more than 20 years since, countless alternative payment methods and providers have come into existence, fueled by automation, encryption, blockchain, mobile point-of-sale systems and other related technologies.

Today, alternative payment methods not only enable merchants and banks to provide customers with a variety of options and a frictionless payments experience — they’ve also become essential for businesses looking to compete in the digital economy. With this guide page, we’ll provide an overview of some of the leading alternative payment methods, explore the benefits of implementing alternative payments and offer a look at the future of the ever-changing payments landscape.

Popular Alternative Payment Methods

Online Banking

 Online banking — also known as internet banking, web banking or electronic banking — enables customers to make transactions, such as money transfers, bill payments and check deposits, without entering credit card information.

In order to complete an online banking transaction, customers only require an internet connection, a device with a web browser, a bank account number and identity verification information. Online banking is often praised for its expediency — funds can typically be transferred from one account to another in a matter of minutes, if not less.

In terms of online banking options, there are numerous online-only institutions to choose from, such as Ally, GoBank and Axos. Many traditional banks, including TD Bank, Chase Bank and Bank of America, also offer online banking options.

Bank Transfer

Bank transfers refer to the direct transfer of funds from one bank account to another — for example, from one person’s checking account to their savings account; from one person’s account to another person’s account; or from one person’s account to a business’ account.

With a bank transfer, the person or company receiving the funds (the payee) provides their account details to the person initiating the transfer (the payer); in some instances, the payee might also supply a unique transaction reference code. The payer would then instruct their bank to initiate the transfer, entering any relevant details, and the payer’s bank would complete the transfer.

Most online banking providers offer bank transfers as a service.

Wire Transfer

Wire transfers refer to the electronic transfer of funds from one person or entity to another through a bank or nonbank provider, such as a transfer agency. Wire transfers, which are so called because they were originally conducted over telegraph wires, can take place both domestically and internationally.

Wire transfers work in much the same way as bank transfers, where the person or entity receiving funds (the payee) provides account details to the person or entity initiating the transfer (the payer). From there, the payer contacts their bank or a transfer agency and provides relevant details, including the amount they wish to send, where they want to withdraw the money from and the payee’s account details, to initiate the transaction. The bank or transfer agency then completes the transfer on the payer’s behalf.

Direct Transfers

Although the term “direct transfer” is sometimes used interchangeably with “wire transfer,” it typically refers to the direct transfer of assets from one retirement account to another. Perhaps the best example of this is when an employee leaves one company and transfers funds from the 401(k) retirement plan to an individual retirement account (IRA) with their new employer. For this reason, direct transfers are sometimes referred to as IRA rollovers. Since this specific transaction is facilitated by two financial institutions on behalf of employees, it’s also known as a trustee-to-trustee transfer.

Electronic Funds Transfer

Electronic funds transfer, or EFT, describes the transfer of funds from one account to another. The entire transaction is completed electronically, typically between two financial institutions or between two separate accounts within the same financial institution. Direct deposit is, perhaps, the most common example of EFT; however, many alternative payments, including bank transfers and direct transfers, are also a form of EFT.

Digital Wallets

Digital wallets, or e-wallets, are software programs that store users’ payment information — typically debit or credit card information — and enable users to make purchases and track their payment history using any device with a web browser. Most digital wallets, including PayPal, Venmo and Zelle, use some form of encryption to secure payment information; they also require users to authorize or authenticate transactions using a password, PIN or other identify verification information.

Mobile Wallets

Mobile wallets are a subcategory of digital wallets; therefore, they operate in much the same way as digital wallets. The key distinction between digital wallets and mobile wallets is that all payment credentials, authentication information and funds are stored on a mobile phone. In addition to making online purchases, mobile wallets such as Apple Pay and Samsung Pay are often used for in-person, contactless payments.

Direct Debit

Direct debit — also known as ACH debit or bank debit — refers to any transaction in which one person or company withdraws money from another person’s bank account. Many subscription services and membership programs use direct debit because it makes it easy for customers to set up automated recurring payments; direct debit is also a popular option for bill payments for this same reason. Some of the most well-known direct debit providers include SmartDebit, FastPay and WorldPay.

Buy Now, Pay Later

Also known as point of sale installment loans, buy now, pay later (BNPL) is a form of short-term financing that consumers can leverage when making purchases both in person and online. As its name implies, BNPL enables consumers to pay a small portion of a product’s total price at checkout while paying off the remainder at a later time, usually through a series of installments.

In order to receive approval for a BNPL payment, the consumer must fill out a short application form; in most instances, BNPL providers will use this information to perform a soft credit check. Most BNPL providers, such as Klarna, Affirm and Afterpay, utilize a “Pay in 4” model, in which consumers make payments in four installments. Though most BNPL models do not charge interest, some do; additionally, if a consumer fails to pay off the loan within the allotted time, they may be subject to late fees.

Cash-Based Payments

Certain merchants may offer customers the option to pay for online purchases in cash. With this alternative payment method, customers select a nationwide payments network and generate an invoice with a barcode when they go to check out online. The customer would then bring that invoice to a local brick-and-mortar location, where a cashier would scan the barcode and the customer would make the final payment in cash. The payments network would then confirm the payment with the merchant, and the customer would receive the product they purchased.

Cash-based payments are an exceedingly popular alternative payment method in regions such as Latin America, where 85 percent of all transactions are cash-based, because they enable consumers to shop eCommerce brands without having to make electronic payments.

Prepaid Cards

Prepaid cards — also known as stored-value cards or pay-as-you-go cards — are similar to gift cards in that they permit the user to spend however much money loaded onto the card. They’re also similar to debit cards in that they can be continually reloaded once the initial balance on the card is spent. Prepaid cards also enable users to make online payments and withdraw money from ATMs, and they typically do not require credit checks. For these reasons, prepaid cards are a popular alternative payment option amongst unbanked individuals, individuals on fixed incomes and those just looking to budget.

Despite these benefits, prepaid cards do come with limitations. For example, many cards require individuals to pay an initial activation fee. Some prepaid card providers also restrict how much money a user can add to their card or how much money they can withdraw from an ATM using their card. Finally, certain cards only enable users to access ATMs from specific branded bank networks.

Most major card schemes, including Visa, MasterCard and American Express, offer prepaid cards.

Digital Currencies

Digital currency refers to any form of currency that exists in purely electronic form and is, therefore, only accessible via computer or mobile phone. Much like physical currencies, digital currencies can be used to purchase goods and pay for services, although certain merchants may restrict their use.

The three primary categories of digital currency are as follows:

  • As their name implies, central bank digital currencies (CBDC) are issued by the central bank of a country; as such, they’re heavily regulated and centralized. To date, the Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, St. Lucia and Grenada are the only countries to have officially launched a CBDC. Anguilla, Monserrat, Dominica, Saint Vincent and the Grenadines, Sweden, Lithuania, Ukraine, Saudi Arabia, the United Arab Emirates, China, Hong Kong, South Korea, Thailand and Singapore are currently conducting CBDC pilot programs.  
  • Virtual currency refers to any unregulated digital currency controlled by either its developer(s), its founding organization or a defined network protocol.  
  • Cryptocurrency is a form of decentralized digital currency based on blockchain technology and secured using cryptography. Bitcoin and Ethereum are the most commonly cited examples of cryptocurrencies, however, there are reportedly more than 4,000 cryptocurrencies in existence.

Digital currency in all its forms has become popular in recent years due to the fact that it allows for seamless cross-border payments, lowers transaction costs, offers greater transparency, and makes payments exceptionally fast. That said, digital currency is susceptible to hacking, and cryptocurrencies, in particular, are known for being volatile. 

Digital Money Transfers

“Digital money transfer” is a sort of catch-all term used to describe the transfer of digital money — that is, any funds that exist in purely electronic form — from one individual to another via digital platforms. To that end, some of the alternative payment methods listed here, including digital wallets and mobile wallets, could be considered digital money transfers.

Alternative Payment Methods at a Glance

The Business Case for Alternative Payment Methods

Although the term remains in use, there’s nothing truly “alternative” about alternative payments — at least, not anymore. APMs are well on their way to becoming standard for businesses around the world, with younger generations driving adoption.

For evidence of this, look no further than mobile wallet adoption data. According to the 2021 ACI Speedpay Pulse Report, 48.2 percent of Generation Z and 42.6 percent of Millennials reported using mobile wallets, compared to just 23.7 percent of Generation X and 13.3 percent of Baby Boomers. With that said, mobile wallet adoption is on the rise across all age groups, with 25 percent of consumers saying that they expect to use mobile wallets somewhat or much more frequently in the next year than they do now.

Digital and mobile wallets may be some of the fastest-growing alternative payment options, but they’re far from alone.

According to research from PYMNTS, there was a 162 percent increase in buy now, pay later downloads between 2018 and 2019. The COVID-19 pandemic has accelerated this growth, with 44 percent of consumers in the U.S. reporting to having used BNPL services to purchase an item in the past two years. Of these consumers, 75 percent said that they have used BNPL at least twice, and 80 percent stated that using BNPL was easy and convenient. Despite its popularity, BNPL isn’t without its drawbacks: Nearly 40 percent of U.S. consumers who have used a BNPL service have missed more than one payment, and 72 percent of those have seen their credit scores decline as a result.

Finally, digital currencies are quickly gaining momentum, with cryptocurrencies leading the way. The cryptocurrency market is projected to reach $4.49 billion by 2030, at a compound annual growth rate of 12.8 percent from 2021 to 2030. Major drivers for this exponential growth include demand for international remittances and increased transparency in global payment systems.

Although users have near-unanimous confidence in cryptocurrencies, not everyone is so certain. Cryptocurrencies have earned a reputation for their volatility; this is largely due to the fact that cryptocurrency still an emerging market — one that thrives on speculation. Cryptocurrencies are also based on developing technology, such as blockchain, making scalability a real question. Finally, there’s the issue of sustainability: Data from the Cambridge Center for Alternative Finance shows that Bitcoin alone consumes roughly 110 Terawatt Hours per year, which accounts for 0.55% of global electricity consumption.

Despite these factors, cryptocurrencies continue to gain popularity as an alternative payment method, which means merchants can’t afford to ignore them. El Salvador has even recognized cryptocurrency as legal tender, and other nations are likely to follow suit.

The right payments software provider should make it easy to implement and configure these and other emerging alternative payment methods, as well as automatically adapt to differences between one global region and the next. Whether it’s cryptocurrency, digital wallets, BNPL or any other alternative payment method, ACI Worldwide’s platform is dedicated to evolving your organization’s APM strategy while delivering a truly seamless experience. Contact us today for more information.

What Does the Future of Alternative Payments Look Like?

Alternative payment methods are more convenient than traditional payments because they enable consumers to select the payment method with which they’re most comfortable when making online purchases and are able to process transactions in real or near-real time. This flexibility and efficiency help create a frictionless payments experience for customers across channels and even borders; merchants, in turn, are better able to capitalize on omnichannel opportunities and grow operations on a global scale. Certain alternative payment methods are more popular in some regions than others — for example, cash-based payments in Latin America — so it is important that companies offer the right options for their target market.

Many APMs leverage the latest security technologies, such as end-to-end encryption, two-factor authentication and Secure Sockets Layer (SSL) certificates, to prevent unauthorized parties from accessing payments information. This additional layer of security not only provides consumers with much-needed peace of mind, knowing that their online transactions are secure, it also protects merchants from potential reputational damage associated with fraudulent activity and data breaches.

Over time, merchants can use transactional data gathered from alternative payment platforms to enhance customer segmentation and personalize the customer experience. For example, PayPal’s Smart Payment Buttons are designed to dynamically present customers with relevant payment options based on their payment preferences. Transactional data can also be used to identify behavioral patterns across different demographics and regions, forecast trends and identify potential growth opportunities.

Alternative Payments FAQs

What are alternative payment methods?

Alternative payment methods, or APMs, refer to any form of payment that does not involve cash or a major credit/debit card scheme.

What are some of the most popular alternative payment methods?

There are a wide variety of APMs available, including, but not limited to:
Online banking
Bank transfers
Direct transfers
Electronic funds transfers
Digital wallets
Mobile wallets
Direct debit
Buy now, pay later
Cash-based payments
Prepaid cards
Digital currencies
Digital money transfers

Why are alternative payments important for merchants?

APMs are more convenient, efficient and secure than traditional payment methods, which enhances the overall customer experience. Merchants can even tailor alternative payment options to the individual, allowing for a more customized experience. APM platforms also enable merchants to collect and analyze transactional data, which they can use to identify trends and growth opportunities. Finally, APMs support seamless cross-border payments, enabling merchants to compete on a global scale.

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