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Expert opinion

(Alternative) payment methods in focus – trends and developments – Part 2

Friday 5 October 2018 | 08:20 AM CET

As the payment methods used for purchases change yearly, tracking down the factors that determine their growth is key for understanding the payments landscape

Online Banking ePayments (OBeP)

Online Banking ePayments (OBeP) is one of the most popular payment methods in Europe and PSD2 and instant payments may give it a big push. PSD2 makes it easier for payments providers (TPPs) to create an overlay between different banks, allowing the user to quickly authenticate and share her banking credentials to initiate payments. Furthermore, PSD2 mandates that banks have to develop APIs in order to provide a secure method for third-party providers to access the consumer’s account and initiate payments on their behalf.

The integration of instant payments infrastructure reduces settlement times from hours to seconds and enables instant settlement of refunds to consumer bank accounts, drastically improving the shopping experience. In countries like Netherlands and Germany, where OBeP is already a dominant payment method, the migration to an instant payments infrastructure will be more accelerated.

In a research paper conducted by Ovum, it is estimated that by the early 2020s, instant payments will have become a mainstream method for online payments and by 2024, they would have overtaken payment cards for online purchases. In this context, we believe that instant payments will facilitate the growth of OBeP as a payment method across Europe.

These two factors (PSD2 and instant payments) make Online Banking ePayments a convenient and safe payment method that appeals to both consumers and merchants. Consumers will benefit from a superior user experience when making online purchases and merchants can instantly accept payments from different banks with one connection.

When it comes to cross-border transactions, merchants may also see OBeP as more advantageous. Instead of integrating with multiple local banks, merchants can support cross-border payments by connecting with a single provider who can handle foreign exchange and refunds. Since initiatives in Europe like PSD2 and SCT Inst aim to create a common and unified payments infrastructure, Online Banking e-Payments may be the easiest way to connect merchants, banks and consumers.

Aided by PSD2 and the SEPA Instant Credit Transfers, OBeP has the potential to compete as an alternative payment method with credit cards.

In the US, payments providers and associations have noted the success iDeal, Trustly and Sofort. Bypassing the card networks and enabling ACH payments will reduce costs and increase competition for efficiency. Companies like Walmart and Amazon encourage the use of ACH-funded payments by providing cash rewards. If payments providers offer a convenient way to initiate Online Banking e-Payments, the effects could be disruptive for the card networks whose payments processing fees are much higher. PayWithMyBank, for example, is one of the best-known providers of ACH payments in the US.

Direct debit

As more and more consumers shift towards subscription, direct debit may also become a more relevant payment method. Direct debit schemes such as SEPA Direct Debit allows merchants to initiate recurring payments directly from the customer’s account. Direct debit is a great payment method for recurring payments (e.g. bill payments) or for small-value purchases.

Providers of direct debit such as SlimPay, GoCardless and AcceptEasy have made accepting direct debits easier. Instead of connecting with a bank or Direct Debit bureau (which usually involves high set-up fees and a lot of paperwork) merchants choose a direct debit provider and connect with the direct debit scheme via an API. Set-up fees are usually lower and the offering is more competitive, as different direct debit providers try to capture a bigger share of the market by charging lower fees or by providing value-added services.

Invoice and Pay Later Solutions

According to the Lost in Transaction report by Paysafe, invoice payments continue to be a dominant payment method in Austria (38% of Austrians now use payment by invoice, compared to just 18% using debit) and Germany (29%, compared to 20% for debit cards and 25% for credit cards. Consumers find paying by invoice to be safer, as the product has already been dispatched before payment is due and delivery is guaranteed.

In Germany, payments providers work to make paying by invoice as simple as possible. BillPay (part of Klarna), for example, only requires customers to enter their name, address and email to pay by invoice, while offering 100% payment guarantee to the merchant. RatePay, another German fintech, also offers open instalments and checkout lending solutions for ecommerce, handling the entire payment process and carrying the risk for payment default.

In recent years, we have also noticed an increasing number of startups offering pay later solutions Pay later options allow consumers to spread payments over a longer period of time and helps merchants convert shoppers who would otherwise be unable to make a full payment for a product or service. These credit-based instalments schemes work by either aggregating different lenders on a single platform and letting the consumer choose the most competitive credit for their purchase (Divido) or by guaranteeing the credit for the purchase (Klarna).

Pay later providers can compete with credit cards by offering added value services like convenience (with Klarna, for example, the user doesn’t have to provide payment details at the checkout), lower interest fees, faster processing times and fees (for the merchant) and increased security (pay later providers may guarantee the credit in full, thus protecting the merchant against bad credit).

Instalment plans at the checkout can help merchants differentiate from other competitors. For them, the biggest advantage is offering an additional service to the customer. It also helps with conversion as many shoppers abandon the shopping cart if the payment amount is too high.

As consumers’ appetite for credit and demand for more flexible payment option is growing, several after pay solution providers have appeared on the market. In Europe, mash, Divido, CreditClick and AfterPay are all competing for the highly lucrative Western market. In the US, Splitit, Future Pay and Affirm.

Pay later solutions are also growing in Asia Pacific, according to intelligence from GlobalData, who noticed a link between the growth of ecommerce (driven by a growing middle-class population, widespread smartphone adoption, and rising internet penetration) and demand for pay later solutions.

In China, Ant Financial is the leading provider of pay later options. In Australia, PSPs like AfterPay and zipPay, are becoming popular. The market in New Zeeland has also seen payments providers offering instalments plans, such as PartPay, Oxipay, and Laybuy. Finally, in India, where credit card penetration is low and funding options limited, LazyPay offers pay-later options to more than 250,000 customers in collaboration with major online merchants, including Zomato, Swiggy, Foodpanda, Redbus, and Faasos.

It is interesting to note that many pay later providers do not stick to online commerce, but through partnerships, move to offline retail. Such examples include the partnership between mash and Verifone or Klarna and Nets, which allows users to pay by instalments at the POS. Also, of note is the launch of Mastercard Instalments, in partnership with BRD, which is an example of pay later solutions suited for offline purchases and one designed by a card scheme.

Improvements in machine learning technology can be beneficial for pay later plans as it allows lenders to accurately determine the creditworthiness of the applicant. Using artificial intelligence, lenders can perform background checks faster and approve loans at a lower-risk. Artificial intelligence may also lower entry-barriers for those who do not have a good credit score. As financing becomes easier and more secure, lenders will be more interested in joining pay later schemes to reach more and more consumers.

This editorial was first published in our Payment Methods Report 2018 – Innovations in the Way We Pay. The Payment Methods Report 2018 presents the key trends and developments in global and regional payment methods by highlighting the innovation, challenges, and developments in the use of the most important payment methods across geographies and verticals.

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