The new recourse of paying your dues: Alternative payment methods in retail

by Noyanika Dixit

18-December-2019  |  11 mins read

The New RecourseWith the world of retailing becoming increasingly customer-centric, new propositions to make shoppers’ lives easier are taking shape every day. Shopping is no more the laborious process of scouring racks endlessly in search of the right fit or the right style. Everything is available at the click of a button from the comfort of your couch.

As it turns out, brands are not ready to stop here. E-commerce players are pushing the envelope to help customers buy even more than their pockets allow. Alternative payment methods (APMs) are becoming integrated from the top to the bottom of fashion and accessories so that the modern customer can ‘buy now, pay later’.

Once a concept becomes mainstream, it transpires from fad to norm. The same can be seen with alternative payment methods, a phenomenon that is rapidly merging into the conventional world of e-tailing.

According to industry data, in 2019, 55 per cent of all online transactions will be made using APMs. A major growth driver is that customers are drawn to such shopping experiences that let them decide their mode of payments. As APMs become more commonplace around the world, the online payment method ecosystem will continue to develop.

What encompasses APMs?

The app- based solutions

Credit cards were a staple method of payment for a long time but as opposed to popular thinking, credit cards’ penetration worldwide is only 17.6 per cent. Hence, innovative new methods came into place to replace them. It will be surprising to know that methods we have all gotten well-versed with in the recent years of e-commerce are also considered alternatives to traditional payment methods like credit cards or an immediate exchange of funds.

Online shopping has embraced every method offered to it but an innovative concept introduced to market will have two likely outcomes: it either gains widespread acceptance from the masses and becomes an acceptable norm or it fades into obscurity. There are many methods customers can use while shopping for their favourite brands.

First, according to the World Global Payment Report, online banking is gaining traction in the world of shopping. It is a method where customers approve funds using an online banking method after making the purchase online. This mode is likely to become the most acceptable after-card payment throughout the world.

Secondly, digital wallets are an easy method to transfer funds without having to go through the process of remembering or entering passwords or card numbers. The app- based solutions are linked to credit or debit cards and the customers can keep on adding money for their shopping needs from anywhere.

Third, instant financing itself has increased in popularity due to the flexibility in payment terms. Unlike traditional credit applications, there are way lesser details required from the customers to process their application from the convenience of their mobiles. It allows shoppers to pay for purchases over time. Instead of being constrained to strict terms, shoppers can choose to pay in installments just like an EMI. This has given access to customers who may not have the budget for a purchase but can have it deferred over time.

Lastly, the fashion customer is longing for a tangible dressing room experience but still wants the ease and convenience of buying online. Despite the advent of virtual trial rooms, there is nothing better than trying on garments from the comfort of your home. The try before you buy method makes it easy for customers to order whatever they’d like and however much they’d like, decide what to keep, and then pay only for those items without burning a huge hole in their pockets. This shopping experience makes so much sense; it’s kind of a wonder that it isn’t already the norm.

What’s driving the market?

The app- based

With a plethora of options available now, more and more brands and e-tailers are willing to incorporate the growing trends to enable more conversions. One might think how this can be lucrative when the risk of non-payment is added to the game. Klarna is a name that resonates with APMs in the fashion industry. The Swedish fintech company, which raised US $ 460 million in equity funding this August, has announced a series of fashion partnerships over the last six months, including that of Toms, Man Repeller, Superdry, Quiz, rue21 and Abercrombie & Fitch, along with the expansion of its global contract with H&M. Additionally, Klarna became a patron of the British Fashion Council in April. The company does not accept each customer trying to use its service, being a risk-based engine. A lot goes into gauging the customer’s profile.

The reasons for the success of Klarna and its competitors are many but the biggest one is that the millennials are highly indebted but continue to be fashion aficionados. “A pay-later Klarna customer typically spends between 10 and 20 percent more than a credit card customer. Because of the convenience of the method, they’re more inclined to return to the retailer as well; we see a 20 percent increase in purchase frequency on an average,” Luke Griffiths, General Manager at Klarna UK told FashionUnited.

Card payments have also seen a decline. As of 2012, 57 percent of online shoppers used these methods to pay for their purchases. By 2017, that number had fallen to 41 percent, which constitutes a 16 percent decline. Obviously, this drop isn’t precipitous enough to rule out card-based payments altogether. However, it signals that these methods aren’t as popular as they used to be.

Lack of novelty in this area had stalled the industry with customers who were uncertain of trusting their credit card numbers with unknown online portals. APMs have eliminated the need for providing card details and all transactions may be routed through banks or trusted digital wallets. “Payment options haven’t changed much in the last 40 years. When I joined the company 3.5 years ago, there were only cards and PayPal. We don’t really think of ourselves as a payment business, we actually just want to offer a really nice experience for the customer. If you’re using the pay later option, for instance, you literally just type in your email address, date of birth and postcode. You don’t have to fiddle around with card numbers or be redirected away from the merchant’s site; it’s all really quick,” affirms Griffith.

Major players and the road ahead

When customers are faced with the availability of their chosen products on multiple portals, they are bound to be drawn to the one with ease of purchase. APMs have been known to entice users looking for safer payment options which can give business an edge in the market.

Businesses that operate internationally will also benefit from the inclusion of alternative payments in their portfolio. Knowledge of local preferences will allow merchants to pre-empt their customers’ demand for certain APMs.

The future for APMs is looking optimistic as millennials grow to disregard traditional payment methods like credit cards and cash. Another factor that works for APMs is their ability to work across channels; omnichannel functionality is highly desirable for many consumers who crave the convenience of shopping across any of their devices.

There are new players entering the field so often. They have given e-tailers and customers the ease of APMs, as both parties look to dip their toes in this new era of payments.

Klarna is the name that is heard the loudest, mainly due to its collaboration with H&M but there is another player making the lives of customers easier. Affirm, a San Francisco-based fintech company founded in 2012, is valued at US $ 2.9 billion. Its fashion partners include Warby Parker, The RealReal, Tradesy, Good American, Tamara Mellon, La Garconne, StockX, and Pat McGrath Labs.

In Russia, e-wallets are gaining popularity with WebMoney carrying the baton. Despite operating internationally, they have their largest market presence in Eastern Europe and Russia being responsible for the largest share of revenue. With WebMoney, customers can top-up, pay, withdraw and raise funds.

Another popular APM is NeoSurf, a prepaid card with high levels of market penetration in industries such as gambling and entertainment. It is available in over 40 countries across the world, including Canada, Australia and multiple countries in Africa. Prepaid cards are a great way of reaching an audience looking to branch out into alternative payment methods or control their spending

In terms of bank transfers, iDEAL is a Dutch APM offering real-time transfer of funds between accounts. If merchants are looking to crack the Netherland’s eCommerce scene, offering iDEAL is a great place to start as bank transfers make up a large percentage of payments in this territory.

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