Alternative payment methods are those used to buy goods and services that fall outside the traditional use of major credit and debit card networks (such as Visa, Mastercard, or American Express), cash, or checks. Alternative and digital solutions such as digital wallets, Buy Now Pay Later (BNPL), bank payments, and cryptocurrencies, are now becoming so commonplace that, in many regions, they are more widely used than traditional methods.
The use of alternative and digital payment methods began with the rise of the Internet in the mid-1990s, when companies recognized the enormous potential for selling online. Merchants and buyers alike quickly found that traditional payment methods were ill-suited for ecommerce. Not only did they make the checkout process slow and complicated, but they also came with a heightened risk of fraud. Additionally, traditional methods could not cover all geographic regions, preventing businesses from expanding internationally.
Global alternative payment methods evolved to answer these specific needs and to simplify the buying process. The first digital solution in the alternative payment industry was PayPal, developed in 1998 to enable people to make payments via an email address. This led to an explosion of alternative online payment methods, and – with BNPL payments, cryptocurrencies, and local solutions – the landscape continues to evolve rapidly in response to consumers’ ever-changing needs.
For businesses to remain competitive, it pays to understand both the history and the future trends of this fast-moving sector.
Credit cards and consumer spending
Credit cards first came into common usage during the post-World War II consumer spending boom. Both bank and store-issued cards exploded in popularity in the 1980s and 1990s, as income gaps widened and credit became a necessity rather than a luxury for middle-income families. However, as a share of all debt, traditional credit card usage has leveled off and even fallen in recent years due to the growth of the alternative and digital payment landscape1. In fact, nearly 60% of consumers say they prefer to use BNPL options over credit cards, according to a PYMNTS survey2.
Debit cards and financial inclusion
One reason for the waning popularity of credit cards is that consumers now have a greater choice of payment methods at their fingertips. One of those methods? Debit cards. By deducting funds directly from a bank account, debit cards are inclusive, as they allow customers the convenience of a card without low credit scores or an unstable income being a barrier.
E-wallets: Convenience in online transactions
The first online payment systems were not at all user-friendly. All that changed in 1998 when PayPal developed the first e-wallet. Customers shared their email, banking, and credit card information in return for fast and low-cost online payments. Although alternative e-wallets were available, customers loved PayPal for its user-friendly interface and its collaboration with major banks and credit card processors.
Contactless payments and seamless transactions
Contactless cards come with a chip that can be tapped or waved over a payment terminal, using near-field communication (NFC) to transfer the data wirelessly. Their use surged considerably during the Coronavirus pandemic due to fears of touching contaminated surfaces, and customers quickly embraced the ease of this practical and seamless payment experience3.
P2P payment platforms and efficient person-to-person transactions
With P2P payment platforms, people can transfer funds from a digital wallet or account instantly. It was PayPal who first initiated peer-to-peer transfers in the late 1990s, allowing users to make safe online transactions by sending payments through its third-party system that protected consumers’ bank account information.
Online banking and electronic fund transfers
From 1980 to 1983, several banks decided to try out computerized banking in a bid to revolutionize the financial industry. Since then, online banking has grown to offer almost any service available in traditional bank branches. Then came electronic fund transfers: payment solutions that allow consumers to pay for goods and services online using direct online transfers from their bank account. iDEAL in the Netherlands and Canada’s Interac are popular examples of this payment method.
Mobile banking applications and financial accessibility
Improving access to financial services is important because it can facilitate economic growth. Mobile banking apps have allowed formerly excluded and underserved customers to move from exclusively cash-based transactions to formal financial services, revolutionizing the way people in middle- and low-income countries are accessing the financial system.
QR code payments and scan-and-pay solutions
Quick Response (or QR) codes have a two-dimensional design that can hold more data and be read ten times faster than barcodes. They were invented in 1995 for inventory management, but were given a new lease of life when scan-and-pay solutions became more popular during the pandemic. QR code payments are now a feature of everyday life, allowing consumers to make safe, contact-free payments.
Cryptocurrencies and blockchain technology
A cryptocurrency is a virtual currency that uses cryptography for security; once sold, it is then converted to Fiat to pay the merchant. Crypto can be considered volatile and can rise and fall quickly. Decentralized, it operates using blockchain technology, which works similarly to a global spreadsheet or ledger. As cryptocurrencies become increasingly widespread, blockchain technology is increasingly used in check out, as it offers benefits such as increased security, reduced costs, and faster transaction times.
AI and ML in payment processing for enhanced security
Artificial intelligence (AI) and machine learning (ML) can quickly analyze large amounts of data to identify patterns and detect potential cybersecurity issues in real-time, helping prevent fraud and improve the overall payment experience.
Biometric authentication for a password-free future
Biometric authentication uses unique physical features such as fingerprints or facial recognition to verify identity. This makes it incredibly important for payment processing, as it offers enhanced security and convenience compared to traditional passwords.
IoT and smart payment devices expanding possibilities
From smart home devices and wearables to connected cars, Internet of Things (IoT) devices are increasingly being used to facilitate financial transactions. IoT and smart payment devices offer a convenient and secure way to process transactions between devices automatically, with limited to no user interaction.
5G and faster, seamless transactions
The fifth generation of wireless technology, 5G, will allow consumers to make digital payments more quickly and easily than ever before. Faster speeds and greater capacity will also mean that 5G networks can support more robust security protocols and encryption measures.
Cross-border payments and global digital commerce growth
Crucial for global trade and international ecommerce, cross-border payments allow for the seamless transfer of money between parties located in different countries. Enhancing cross-border payments to make them frictionless will make an enormous difference to digital commerce growth worldwide4.
As alternative and digital payment methods continue to advance, several trends will be important for the future. Interoperability between diverse payment systems will be crucial to global business growth and ongoing competitiveness. This will allow consumers to easily and securely make and receive payments, regardless of the payment system or network utilized.
There will also be an increased need for large enterprises to enhance their cybersecurity measures to safeguard consumers’ sensitive data, while greater collaboration with fintech vendors will create protocols and infrastructure that allow for greater innovation. Consumers will demand user-friendly interfaces for an enhanced and seamless payment experience, while regulators will strive to develop new, clear norms and robust standards.
Today’s customers have more payment choices than ever before. Meeting these new consumer expectations is clearly important for growth, as it helps businesses to acquire customers and stay competitive. But without the correct infrastructure, accepting alternative payments can add complexity and cost to operations. Choosing payment infrastructures such as PayPal allows for flexibility of integration and seamless transactions, both of which can be strong assets for companies large and small.
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