What are the latest trends in the world of online payments from a merchant's (seller) and consumer's (buyer) point of view?
Trends – From a merchant's point of view
Rise of alternative payment methods
Besides card and digital wallet payments, any other payment method or solution can be referred to as an Alternative Payment Method. The market share of alternative payment methods has grown the last couple of years and – in some countries – they are really catching up with the more traditional online payment methods like credit cards.
Most often these alternative payment methods have been developed by local industry players who honor local market conditions and consumer needs. These methods are often based on a countries' existing payment infrastructure and account for banking accessibility and payment culture. For example, unbanked Brazilians who do not have access to online banking or cards can pay online by using the local alternative method called Boleto.
Additional big drivers for the acceptance of alternative payment methods relate to transaction costs, risks, speed of settlement and the adoption, support and sponsoring by local players. Online sellers prefer low costs, guaranteed payments and swift settlement for better cash flow. Especially alternative payment methods that do rely on existing banking payment rails (bank transfers, direct debits) provide ease to mind for both sellers and buyers.
An important driver for the use of alternative payment methods is that those consumers who have access to cards are sometimes reluctant to use their cards online. They are scared by the fact that their card details can be stolen and used fraudulently. Consumers are therefore also looking for payment methods or solutions that provide confidence and a secure feeling when paying online.
Rise of the wallets
Besides alternative payment methods, digital wallets gain more and more traction around the globe. These digital wallets are often developed from a mobile-first angle. As smartphone and tablet penetration is growing, mobile purchases are also growing rapidly. Many digital wallets (MasterPass, V.me by Visa, PayPal) have been developed to answer to the need for swift and friction-less payments initiated on mobile devices.
More and more online sellers realize that their online checkout and offered payment options directly influence their conversion rates (converting shoppers into to buyers). If sellers do not offer the right set of payment methods, they might miss out on sales due to their shoppers' payment preferences. Therefore it is important to understand the different payment cultures and pick the right mix for the seller's audience.
Besides offering the right set of payment methods, more and more Payment Service Providers provide payment analytics tools enabling online sellers to improve their payment offering or checkout criteria. For example, sellers could decide to require 3D-secure authentication based upon shopper or transaction criteria (e.g. shopper's country or transaction amount). By being able to adjust the method offering per shopper and perform risk-based checks, sellers are able to make the most of every payment attempt by a shopper.
Interchange fees going down
Both in the US and in Europe, the interchange fees for four-party card schemes like MasterCard and Visa have been pushed down by regulators. Interchange fees relate to the fees to be paid by the card acquirer to the issuer for every processed transaction. These interchange fees represent a substantial share of the merchant service charge or merchant commission. Due to increased competition, it is expected that merchants will benefit from lower commission rates.
Increased competition between Payment Service Providers and acquirers
As markets are getting more and more mature, Payment Service Providers and merchant acquirers active in those markets need to develop new products and services, expand into other markets or seek strategic partnerships or acquisitions to remain competitive. Through merger and acquisitions, Payment Service Providers and acquiring entities try to profit from economies of scale and be able to remain competitive in terms of pricing. Increased competition seems to drive down transaction fees and commission rates charged to merchants.
Driven by scheme regulation, allowing Payment Service Providers to collect funds from acquirers and settle transactions to sellers, there is a trend that more and more Payment Service Providers tend towards an Aggregating Payment Service Model. This model allows them to sign up online sellers, offer one access point for online payment acceptance, settlement and reconciliation, and keep full control over the merchant relationship.
For many merchants, this makes life easier as they only have to deal with the Aggregator. There is no need for time-consuming contracts with the Payment Service Providers and the acquirers for individual payment methods.
Trends – Consumer Point of View
From a consumer's point of view we see the following trends:
Traditionally, payments were executed in one place, at one time. When shopping online, the buyer and seller are disconnected in time and place. This leads to changing perspectives on the risk involved in a transaction. Trust becomes a basic requirement for buyers and merchants to participate in ecommerce. Having an online identity, that is as strong as a real-world identity is the ultimate solution to establish trust. With this online identity the buyer identifies himself during the customer journey: towards the merchant, towards the payment provider and towards the delivery service provider.
When the consumer identifies himself early in the shopping process and authorizes the payment, this enables a seamless payments experience. Also, it enables the merchant to offer the customer personalized services, which are of value for that particular customer, increasing conversion rates. Examples of digital identity solutions are BankID in the Nordics, Personalausweis in Germany, .beID in Belgium and Idensys and iDIN in The Netherlands
Mobile shopping & payments
The share of smartphones of total mobile phone penetration in the world is increasing rapidly. 9 billion devices around the world are currently connected to the Internet, including computers and smartphones. The number is expected to increase dramatically within the next decade, with estimates ranging from 50 billion devices to reaching 1 trillion (Disruptive Technologies, McKinsey Global Institute, May 2013). Mobile devices are increasingly being used in different shopping contexts:
- In-store: to look up product information and to compare prices at competitors’ online shops
- On the go: mobile commerce enables users to visualize products and offers while not in front of a computer screen. Localized offers are also available thanks to proximity technologies such as Apple's iBeacon or Google's Eddystone, GPS functionalities or physical QR-Codes.
Existing payment methods should be adapted for the use with the mobile phone
- Mobile devices require different user interactions, due to the smaller screens and different input methods
- Users are asking for familiar online payment methods to be redesigned for the mobile screens
- Future expected developments will allow deeper integration between mobile phones and PoS terminals, with solutions that close the loop of advertising, payment and loyalty points. This will increase the need for payment methods that are able to seamlessly integrate in the integral shopping value chain
- Mobile devices will provide new opportunities for cheaper PoS payment terminals for acceptance of online and offline payment methods
Wearables and conversational interfaces
Wearables and Conversational Interfaces will bring changes in how we pay
- Conversational interfaces are changing the HCI landscape. Voice-activated devices require a new approach to UX and interaction in general
- As smart watches, wrist bands and smart glasses become more popular, payment methods should also be adapted for the use of simpler and faster transactions that don't necessarily require a mobile device, smartphone or the use of touch
Digital wallets and in-app payments
Digital wallets offer services for payment and loyalty, storing consumer and payment credentials. Wallets aim to:
- increase speed and convenience for consumers;
- provide conversion and customer retention for retailers
Currently there are many parties that are trying to offer wallets to consumers and retailers, resulting in a "war on the wallets". The current market shows diversified reach and acceptance and channels supported. There are Internet- and PoS-only wallets as well as omnichannel wallets. Wallets can be used in a variety of contexts and from a variety of consumer devices (PC, Tablet, mobiles). Many additional and innovative services are expected as wallets try to claim the primary customer and merchant interface. Examples are: MasterPass, V.me by Visa, PayPal
Convergence of channels
As the Internet maturity of the population continues to grow, consumers are by default considering both the online and offline channel to make purchases. On top of this, there is a growing possibility at merchants to go across channels during the shopping experience, creating a true omnichannel customer experience. Ordering online and picking up the delivery in the store or at a drop-off point is considered normal. Ordering online and returning the package at the store is something consumers use and value. Or, when the size of that jeans the consumer tried in the store is no longer available, he wishes to order it directly online (in-store) and get it delivered to its home.