Brands need to provide their customers with a frictionless checkout and payments experience in order to optimize conversion and meet shopper expectations of being able to use their preferred payment method – regardless of where they live.
Not doing so can mean turning away business and consequently, limiting a brand’s growth potential. Providing the right blend of alternative payment methods (APMs) can mean the difference between accelerated growth and stagnant performance.
In this guide, we cover what an APM is, the different types available and how to know which to offer in a variety of markets, based on data from our payments platform, and insight from Conor Walsh, Head of Payments at ESW.
What are APMs?
Alternative payments (APMs) refer to payment methods that are used instead of credit and debit cards. Most of these methods address a domestic economy or have been developed specifically for ecommerce and are supported and operated by local banks, to give shoppers the ability to pay easily.
Types of APMS
- Online Bank Payments
Online bank payments are an attractive option for ecommerce retailers due to their low acceptance costs in mature markets (although in developing markets with lower credit availability, online bank transfers can be expensive from a Merchant Services Cost perspective), convenience for online shoppers, and fewer chargebacks for merchants. It is predicted that this payment method will exceed credit and debit cards globally by 2023. Some online banking ePayment schemes include Incasso Machtigen (Netherlands), iDeal (which in 2018 had a market share of 57% in the Netherlands), MyBank (Italy), and Giropay (Germany). This type of payment method is particularly popular in the Nordic countries and the Netherlands.
Additionally, according to a report by Trustly, “…many Europeans (68% of Spaniards, 66% of Italians, 61% of French, 55% of Germans, 55% of Dutch, 51% of Swedes) would more likely shop from international websites if they did not have to disclose credit or debit card information to obscure or unknown foreign merchants. People would shop on foreign sites more often if online banking was offered as a payment method (59% of Spaniards, 59% of Italians, 55% of Dutch, 47% of French, 44% of Germans, 35% of Swedes).”
- Pay later solutions – Klarna, AfterPay
There are two main types of ‘buy now, pay later’ solutions. The first, ‘pay later’ is where the consumer pays no fees upfront (although they will pay fees for missed payments), but the merchant does. This includes methods such as Klarna and Afterpay where shoppers can pay in installments.
The second method is ‘consumer credit’ where instant credit is offered, often with 0% APR for 12-24 months depending on the merchant. This allows the customer to spread payments over a number of months or years, depending on the terms.
- Digital Wallets
Digital wallets are digital versions of credit or debit cards stored on an app or mobile device. Prominent players include PayPal, GooglePay and ApplePay. The Global Payments Report predicts that digital or mobile wallets will overtake credit cards as the leading payment method for ecommerce, accounting for 37% of North American online spend by 2023. According to the report, this growth is not only being seen online:
- Cash on Delivery
Cash on delivery (COD) is when shoppers order online but only pay on delivery. It is a popular method in Slovakia where 72% of purchases are made this. In Russia the COD accounts for 9% of orders.
Cash on delivery has obvious benefits for shoppers, such as not having to pay or even provide payment details upfront. Merchants, particularly cross-border merchants, can be badly exposed on cost if COD is not carefully researched and planned. It is advisable to apply a cash surcharge to orders to offset the cost of returns, undeliverables and refusals, to understand the shoppers in these markets and work very closely with the carriers (who ultimately collect the payment) to understand their experiences with COD.
If it can be avoided, don’t include COD as an option in an initial go-live in a new market, add it in if needed after a baseline view of shopper behavior in the market has been established.
Oxxo would be regarded as a Cash/OTC (Over The Counter) payment method unique to Mexico, where the shopper places an order online, receives a token or QR code, then proceeds to some affiliated retail (bricks and mortar) outlet, scans the code/token and pays for the order. Once notified of receipt of payment the retailer would then allow the order to proceed into the logistics processes/workflow (pick and pack, shipping, delivery).
OTC differs from both COD (in that the retailer doesn’t incur any shipping costs before receipt of payment) and Invoice (where a PSP, e.g. Klarna, settle up front with the retailer and take the risk related to collections) but does have some key limitations including:
- Poor conversion – 50% of Oxxo orders are never paid for
- Inventory must be reserved for 7 days while waiting for notification of payment, and during this time cannot be sold to another shopper
- Longer delivery times
Most Popular APMs for Top 10 Markets on the ESW Platform
Top 10 Markets with Highest Percentage of APMs
Why Should Ecommerce Retailers Offer APMs?
According to PPRO Group research, 67% of UK consumers have abandoned an online retail transaction due to an unsatisfactory payment process.
While retailers cannot possibly offer all APMs in all markets, evolving consumer demand requires them to have a partner who can help them continually adapt and optimize their payments offering. Brands need to know that it is possible fora newly added APM to take volume from an existing payment method, such as credit card, without increasing sales.
The point of offering APMs is to increase reach to customers who may not have a credit card, for example. APMs typically cost more to the retailer than a more traditional payment card method, so it’s important to optimise the blend of penetration and convenience on the one hand, and cost on the other. According to Conor Walsh,
‘Retailers should be just as willing to quickly remove APMs from a checkout if they’re not performing as they would be to add one.’
Which APMs Should Ecommerce Retailers Offer?
Different markets often require different payment offerings. For example, credit cards are popular in the UK, but in Germany it is more common to pay an invoice or by bank transfer. Other countries such as Mexico use unique solutions like Oxxo, where shoppers place the order online but pay at a local convenience store.
Retailers need to be able to dig deep into their data and understand market expectations when deciding which payment methods to offer. Each retailer must consider their customer demographic and how it aligns with payment method usage. Like many other elements of the customer journey, testing and iterating to develop a deep understanding of each method’s acceptance will ultimately lead to an optimized blend of penetration, performance, and cost.
While offering APMs can increase conversions, retailers need to be careful and considered in their choices. Understanding customer demographics and how they relate to the market’s payment preferences can help determine the best to offer – but be ready to remove underperforming options.
Through our experience in over 200 markets, ESW has learned that offering an optimized, blended approach to payments that maximizes conversion, while improving the shopper experience is possible in every market. To learn more about how to optimize your payments in cross-border markets, contact us.