‘Alternative’ often means unconventional or outside the mainstream. It means something that is niche, specialized or having a small but dedicated fan base. However, when it comes to payments, the term ‘alternative payment methods’ is not quite accurate in this sense.
In some markets, alternative payment methods are much more mainstream than the definition would suggest.
What are alternative payment methods?
It is accepted to say that alternative payment methods – APMs for short – refer to any form of payment that is not cash or a payment card payment branded with the logo of one of the leading card brands.
Thus, alternative payment methods include domestic cards, cash vouchers, systems a’la Blik, digital wallets/e-wallets – such as Apple Pay or Google Pay, for example – or bank transfers, including iDEAL in the Netherlands, POLi in Australia and New Zealand, and pay-by-links in Poland.
But as you can easily guess, alternative online payment options are often more mainstream than niche. In many countries, they are the de facto way to pay, especially online. Take German shoppers, for example – 57% of them prefer to use PayPal when shopping online. Meanwhile, in the Netherlands, consumers make 60% of their online purchases using the local bank transfer payment, iDEAL. The situation is similar in Poland, where pay-by-links, or Blik, are more popular than cards in most segments.
And this is something to keep in mind when building a business to attract customers globally. They will often demand that you allow them to pay using their preferred payment method. If you don’t, there’s a good chance they’ll just walk away.
Alternative payment methods and their types
Let’s take a look at some of the most popular types of alternative payment methods.
“E-cash” payments
An interesting hybrid of cash payment and online payment.
In most cases, customers generate a barcode, unique reference number or QR code to identify their order. The customer takes this code (printed or on a mobile device) to a participating merchant (post office, store, service provider) to pay for the order in cash. Once payment is confirmed, the merchant ships the goods or credits the customer’s account in its system.
Real-time/instant bank transfers
This payment method allows customers to pay for goods and services online via automated transfers, directly from their bank accounts. Examples of this type of method are Polish pay-by-links (or now also the PIS service from open banking), iDEAL, or Sofort.
Direct debit
Direct debit payments are often used for recurring payments (e.g. subscriptions). Customers agree to allow the seller to withdraw funds directly from their bank account for the agreed service. A payment method very similar to recurring credit card payments (except that the money comes from the bank account, not the card).
Examples of direct debit payments include SEPA Direct Debit, ACH, and BACS.
Domestic card schemes
Domestic card schemes work in a similar way to the global card schemes operated by Visa and Mastercard. The difference is that these cards are only accepted in one or a few specific markets. They are often popular where they are available because they are tailored to the unique needs of consumers in a particular market and can often offer merchants lower processing costs.
In many cases, domestic card schemes are acquired over time by one of the major international players and join their network, becoming de facto part of their system (and thus ceasing to be alternative payment methods).
Electronic wallets / electronic purses
E-wallets are a digital way of storing money (usually in the form of technical accounts with the provider of this payment method). Customers load their e-wallets with funds via bank transfer, card or cash and use them to make online or offline payments. These methods can be used for payments within an ecosystem (e.g. mPay in Poland) as well as outside it, including internationally (PayPal or Alipay are good examples).
Pass-through wallets / digital wallets
Pass-through wallets are a digital way to store payment cards or other payment instruments (typically on mobile devices or computers). They generate tokenized numbers for each transaction. Many consumers find them a secure, convenient way to store money online, in an app, or in a store without having to reveal or enter their card information each time.
The most popular wallets of this type are Apple Pay and Google Pay.
Buy-now-pay-later (BNPL) / deferred payments
BNPL allows customers to pay the entire amount later or to spread the cost of an item over several installments. It is also often used for larger purchases (e.g., lots of clothes in different sizes), with the goal of receiving them all, checking which ones fit us, and sending back the unwanted ones (while also paying only for the ones we want to keep).
Klarna, PayPo, Affirm and Afterpay are some examples of such services.
Why should alternative payment methods be part of any online merchant’s payment strategy?
Failure to offer the customer’s preferred payment method will result in the customer not paying. In fact, many studies show that if a customer cannot use his or her preferred payment method in a store, he or she will not return to that store.
Alternative payment methods should be a key part of the payment strategy for any business selling online. Customers like what they know. If they usually pay one way, why should they suddenly start paying differently? They should be able to pay the way they want and the way they like.
It’s often a challenge for merchants to figure out what’s popular and what’s not in a given market – and how that will change over time. The nuances are subtle and not always obvious. And that’s where it helps to work with FinTech experts like us (yes, self-promotion 😎) who have a deep understanding of local markets and can help develop a strategy tailored to your specific business.
Technology can be another challenge – not all technology allows for the rapid addition of new payment methods without further integrations or changes to those already in place. Not all payment providers are able to offer the payment methods needed in a given market. In such cases, it is also worth considering implementing a payment orchestration system. These systems can greatly simplify the process of implementing more payment methods, especially from different markets.
