Alternative Payment Methods (APMs): The Rise of New Payment Solutions in Europe! 📱

Alternative Payment Methods (APMs) refer to any payment method that does not involve cash or a major credit card. 

Cards have long been the default payment method, but the rise of Alternative Payment Methods (APMs) means this is no longer the case as they eat into the market share of traditional card payments. Alternative Payment Methods – wallets, account-to-account (A2A) payments with Open Banking and BNPL – are becoming the preferred payment methods for consumers. 

Alternative Payment Methods are increasingly commonplace and in many countries, they could be the most used payment method. German shoppers prefer to use Paypal for their online purchases. While in Netherlands, iDEAL, the Dutch bank transfer payment solution, has a 71% market share of the online payments market. This could increase even more with SaaS and subscription payments. To the point that to sell online to consumers and businesses without offering the payment methods customers prefer is tantamount to shutting down opportunities and leaving money on the table.

Why has the payments market seen such a shift?  🔍

Increasingly, consumers want to pay in a way that suits them. However, what they find easy and convenient can differ with every transaction. The pandemic has been a catalyst in the promotion and adoption of the many Alternative Payment Methods. 

Merchants are also feeling the pressure from existing payment rails – the Visa and Mastercard networks in particular – when it comes to transaction fees. In 2020, card payment charges totaled $61.6 billion, an increase of 137% from the previous year. Merchants and marketplaces are increasingly piling on the pressure for these costs to be reduced. Amazon and Visa recently ended their dispute over credit card charges. As well as direct charges, payment cards are subject to high levels of indirect costs as a result of fraud. There is also new Strong Card Authentication (SCA) European regulation that makes customers go through extra verification steps when paying by card. 

In light of this level of reliance, the European Commission and the CEB piled pressure on European Banks to create a new European card network as an alternative to Visa and Mastercard. Unfortunately, half of the members of the EPI (European Payments Initiative) left the project, abandoning the card network for a digital payment wallet instead. This means the need for alternatives is stronger than ever!

The appearance of these new APMs can be a determining factor in converting sales. Payment processors and providers have already jumped at the chance to grab an early advantage and attract new merchants as customers. These new options bring about the fragmentation of the market as geographical disparity and new payment infrastructures are needed for interoperability.

APM Characteristics 💡

Some of these Alternative Payment Methods are wallets that leverage existing payment card rails (for example, Paypal), while others use new payment infrastructures like account-to-account (A2A) bank transfers like iDEAL or Swish (used by 80% of the Swedish population for online purchases). The number of APMs in Europe continues to proliferate with most EU countries having at least one flourishing APM. 

Many European APMs originated as Peer-to-Peer (P2P) payment propositions before expanding into C2B payments. Many APMs also added value-added services (VAS) to increase customer usage and develop loyalty, including invoicing, loyalty programs, mobile phone subscriptions, parking payments, and payment collection, among others In general APMs: 

• are oriented towards remote payments;
• are focused on a P2P value proposition; 
• have limited traction for POS payments and cash withdrawals; 
• have a range of VAS services embedded into the payment offer.

Types of Alternative Payment Methods 📱

Cash payments (e-cash): When making a purchase online, customers can choose cash as a payment method and generate a QR code or a reference number to identify their payment. They use one of these when checking out to pay in cash. Once confirmed, the merchant mails the goods or credits the customer account in the case of a service. Boleto, Oxxo, and Fawry are examples of this payment method. 

Real-time bank transfers: This payment method allows consumers to pay for goods and services online using direct transfers from their bank account, also known as account-to-account payments (A2A). iDEAL and Sofort are examples of this payment method. Open Banking is a game-changer for A2A payments. Open Banking APIs overcome the fragmentation of payment rails and allow A2A payments to be integrated at the point of purchase. The quality and availability of these APIs is a critical element and has seen a marked improvement. In summary, A2A payments with Open Banking bring better reach (a simple bank account is all that is needed), rapidly improved conversion rates, extremely low transaction costs, and more available data. 

Direct debits: Direct debits are used for recurring payments. Consumers agree to merchants taking funds directly from their bank account for convenience (for example a payment to Netflix or a telephone operator). Examples of this payment method are Direct SEPA, ACH and BACS.

Domestic card schemes: Domestic card systems operate in the same way as global card systems like Visa and Mastercard. The difference is that these cards will only be accepted in one or a few markets. They are often popular where available as they are tailored to the unique needs of consumers and cost merchants less in processing costs. Examples include Bancontact, GIE Cartes Bancaires and Mada. 

Wallets (e-wallets): Payment wallets are a digital way to store funds. Customers top up their e-wallets with funds via bank transfer, card or cash and use them to make payments online, at points of sale and P2P. Examples of well-known e-cash methods include PayPal and Alipay. 

Mobile Wallets (m-wallets): Mobile wallets are another way of storing funds but on mobile devices. Customers top up their mobile wallet by bank transfer, credit card or through their mobile operator. Making purchases, making P2P money transfers and paying invoices can all be done electronically in-app or in-person through a contactless interface, QR code or SMS on mobile.

Pass-through Wallets: Pass-through wallets are a digital means of storing payment cards. They generate tokenized card numbers for each transaction. Many consumers see these as a secure and practical way of buying online, in-app or at points of sale without needing to reveal or type out payment card details each time. Apple Pay and Google Pay are the most well-known examples. They use existing payment networks and have similar or even higher fees for merchants. However, there is a potential accelerator on the market, the European Digital Identity Wallet, which will enable better penetration of this Alternative Payment Method in the next few years.

Buy Now Pay Later (BNPL): BNPL lets customers defer the whole amount or spread the cost of an item over several installments. Purchases are usually paid from a bank account with a debit or credit card. Klarna, Affirm and Afterpay are some examples of the service. Merchants have been quick to adopt BNPL to stimulate sales and improve sales conversions, even if the charges associated with BNPL are a lot higher than any other means of payment. However, there are big questions about the regulatory aspects of BNPL and the definition of BNPL as a credit instrument.

Drivers for the adoption of APMs in Europe 🚀

Key characteristics to encourage adoption by consumers: 

• Universal acceptance – ideally across the whole of the Eurozone by all physical and online merchants of all sizes. 
• Instant, contactless and P2P payments – through a wallet that allows payments independent of the platform and the equipment used by payers and recipients. 
• A One-Stop-Shop solution – combining several payment methods into one so reducing the need to use several different payment cards. More practical than traditional account-to-account bank transfers; 
• Easy to use, secure, reliable and quick – security involves more than the confidentiality of personal data and protection against fraud and hacking. It also involves secure and reliable authentication for payment; 
• Profitability – wallets must be able to provide and optimize all these functions without charges or with very low charges. 
• Easy access to the wallet – consumers do not want to buy a new device or learn to use new equipment. They simply want a wallet to be available in a transparent way across a large range of devices and systems.
• Privacy – having flexible privacy settings available for payments could be an extra feature to encourage adoption. Many people would like to be able to adjust privacy levels according to the context and circumstances of payment. 
• Loading the wallet – most consumers would prefer manual loading with automatic payment reminders or automatic loading when a defined threshold has been crossed.
• Embedding new features – cashback, loyalty and discount programs.

Key factors to encourage merchant adoption: 

• Customer demand – even higher charges are not a deterring factor if a payment method is very popular. Merchants feel obliged to accept them. 
• Cost of acceptance – lower costs compared to payment cards for example could convince merchants to accept a new payment method if a customer group wants it. 
• Transaction speed – merchants want quick or instant payments and access to funds as they make cash management easier and improve the buying experience. 
• A good level of integration – with the business activity as well as with existing payment and accounting systems. The capacity to integrate with the various SaaS platforms of a business’s activity is highly valued. 
• The importance of offering a wide range of payment methods like cash, credit and debit cards, online payment methods, P2P payments, banking applications, bank transfers, etc. The need to satisfy customer preferences.is the motivating factor here. 
• Payment methods need to be quick, convenient, reliable and intuitive. Customers should find payments easy and money needs to circulate as quickly as possible. 
• Charges – in particular from credit card suppliers and payment service providers are a problem for merchants who feel they don’t have a choice. Merchants would prefer the less expensive payment methods. 
• The most significant improvement for merchants is improved technical robustness, good customer service from payment service providers, low costs and embedded value-added services (accounting tools, CRM, etc.).

Structural influences also play a role in the growth of Alternative Payment Methods:

• An emphasis on regulation to reduce the barriers to payments market entry, deregulation of cross-border payments, reduction in the cost of accepting payment and the harmonisation of payments in Euros (e.g. PSD2, exchange regulation, etc.). 
• A convergence of digital identity and the payment card networks; 
• And improved political position and proactive regulation on alternatives to Visa and Mastercard. 

Open Banking as a growth driver for Alternative Payment Methods  👨‍💻

Alternative Payment Methods will proliferate over the next four years, even with the continuing presence of payment cards in most European markets. 

Open Banking is key to much of the innovation in the payments industry innovations. By granting fintechs and third-party providers direct access to bank accounts via secure, regulated APIs, Open Banking has created new pan-European banking payment methods and a framework for payments innovation.

Payments via Open Banking payments could become the dominant bank transfer Alternative Payment Method for e-commerce over the next five years, while also serving underlying payment rails like BNPL and wallets. There are several advantages to this new infrastructure: 

• Consumers pay directly from their bank account rather than using a payment card, with authentication through Face ID or a fingerprint. 
• Payment to the merchant is instant or semi-instant, helping with cash management and allowing an immediate dispatch of the goods. 
• It is a more cost-effective payment method as it eliminates card processing costs. 
• Pan-European coverage as EU banks must have APIs. 
• They can be embedded into the payment system. This usually means that payment begins and ends in-app or on the merchant’s website, which is more convenient for consumers.

Although Open Banking may be a relatively new concept it is already proving revolutionary for the banking and payments sector. 

Conclusion

Cashless payments will reach over 80% by 2025. While payment cards are the main payment method for now, an ecosystem of Alternative Payment Methods is flourishing as it meets the unsatisfied needs of e-commerce. They are adapting to domestic market opportunities, enriching applications with value-added services while facilitating the emergence of new use cases. Energized by aggressive financial support, APMs are set to develop and grow. 

Payments are anything but an industry in stasis. Innovation is everywhere. The way people pay today is not necessarily how they will be paying tomorrow. Just consider the growth of the BNPL market. It has gone from being a niche payment method to a $100 billion-plus industry in a few years populated by players who want to become super-apps with a large range of embedded financial services. 

In a constantly developing environment, Skaleet’s SaaS banking solution lets you build payment platforms to transparently and confidently participate, collaborate and focus on this innovative payment ecosystem as the volume of transactions rises. These payment hubs allow the orchestration of your merchant payments while facilitating the processing/acquisition of the card, A2A and any other payment alternatives. They are not only built with the latest architecture but offer the flexibility to gradually add new features and the features required to meet the regulatory demands and new expectations of consumers. Ultimately they have the potential to reduce transaction costs considerably while reconsidering existing IT infrastructures and charging structures to generate more revenue.