Alternative Payment Methods

Table of Contents

1. Why Are Alternative Payment Methods Growing in Popularity?
2. What Are Common Alternative Payment Methods?
3. Why Should Merchants Accept Alternative Payment Methods?
4. How Do Alternative Payment Methods Handle Disputes?

Online shopping transactions are typically paid for using a credit or debit card—but their reign may not last forever. Increasingly, younger customers and international markets are turning to alternative payment methods that aren’t built around a plastic card with numbers on it.

As these alternative payment methods grow in popularity, merchants are faced with important choices about which new methods to accept. What are merchants to make of the many alternative payment methods available to customers, and how can they be sure that expanding their payment options won’t leave them vulnerable to new forms of fraud and disputes?

Any method of payment that doesn’t involve cash, a written check, or a straightforward credit or debit card transaction can be considered an alternative payment method.

While many alternative payment methods are funded by traditional financial instruments, the merchant only interacts with the alternative method itself, not any of the accounts funding it.

In other words, a customer can fund a digital wallet with a credit card, or add funds to a prepaid card with your checking account, but when they use those methods to make a payment, the merchant doesn’t receive any details about the credit card or checking account.

Thanks to new technologies, a variety of new methods for making digital payments have entered the market. Using digital wallets, banking apps, and third-party payment services, customers these days have numerous options for making payments from their phones without the need for cash or cards.

Some customers don't have credit cards at all, whether due to concerns about debt, lack of credit history, or lack of access to banking services in their area. Others may avoid credit cards due to fears of fraud or identity theft, opting instead for alternative payment methods that are more secure, or at least appear to be.

Globally speaking, more than half of all online transactions are believed to be made with alternative payment methods. Merchants who don’t accept these payment methods are missing out on potential sales and leaving revenue on the table, especially if their target customers are younger or located in markets with high rates of alternative payment method adoption.

At the same time, it is important for merchants to understand the ins and outs of the new payment methods they’re implementing.

Digital Wallets

For merchants in the United States, digital wallets are the most frequently seen form of alternative payments. Many retailers already accept popular platforms like PayPal, Apple Pay, and Google Pay.

Digital wallet apps allow users to link a bank account or payment card to the app, which can interface with merchant terminals for immediate touchless payments that don't transmit any sensitive data.

Bank Transfers

Many customers prefer to make payments directly from their bank accounts to avoid the risk of incurring credit card debt. In the Netherlands, 60% of all eCommerce purchases are made via bank transfer. Most of those use the local iDEAL payment app, which connects to the customer's banking app to facilitate transfers.

In the United States, many customers use ACH transfers to pay for bills like utilities, leading some e-commerce merchants to offer ACH as a payment option.

In some countries, open banking regulations have created opportunities for financial institutions to offer fund transfers directly via API. This offers greater security than simply entering bank account information, which can be easily used to make online transfers if compromised.

Cryptocurrency

Bitcoin and other cryptocurrencies have grown in popularity among customers who want to keep some of their funds completely outside of traditional financial systems. Cryptocurrency holdings are instead accounted for on a shared, distributed digital ledger known as a blockchain.

Many payment and investment apps now include functionality for transferring cryptocurrency, making it easier for customers to use it as a source of funding for alternative payment methods. Of course, some enterprising merchants allow customers to make direct cryptocurrency transfers as payment.

BNPL

Stores have offered layaway plans and installment payments since long before the dawn of e-commerce, but these tools have been adapted and revitalized for the digital age by apps like Klarna, a service based in Sweden that allows users to buy now, pay later (BNPL).

These apps typically provide payment upfront to the merchant and offer a short-term loan to the customer.

P2P Payment Apps

P2P payment apps like Venmo and Cash App have gained massive popularity in the United States over the past decade.

Like digital wallets, they can be linked to bank accounts or payment cards to provide funds. Unlike digital wallets, however, these apps are a financial platform in and of themselves rather than simply facilitating card payments. Received funds are stored in the user's account by default, and can be used to make payments to other users. These transfers are immediate and permanent, with no avenue for chargebacks.

While they're usually used to transfer funds between friends, customer demand has led these companies to explore ways of making these payment apps a viable method of payment for in-store and online purchases as well.

For example, a merchant expanding into the Netherlands would be well advised to start accepting iDEAL payments, and if you find that some of your customers are shying away from big-ticket purchases due to a lack of financing options, it might make a lot of sense to start working with Klarna.

In general, it pays to be forward-thinking. While it doesn’t pay to hop on bandwagons that your customers are ignoring, merchants should be aware of trends in the payment industry and consider the benefits of adopting new payment methods sooner rather than later.

Merchants should always research how dispute resolution is handled on any new platform they’re considering and think about how it will tie in to their existing strategy for preventing disputes and chargebacks.

While credit cards aren’t going anywhere, the day when they are just one of many widely-used options for online payment may be coming sooner than anticipated.

Merchants should keep an eye on trends, listen to their customers, and be ready to embrace the new alternative payment methods that will help them grow their business.

Fraud and disputes will follow wherever they can get a foothold, but if you educate yourself ahead of time about the risks and carefully track your fraud and dispute activity, you should be able to develop an informed plan to protect yourself and your customers.

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