Over the past 12 months, the world has seen a dramatic shift in the way consumers shop and pay.
COVID-19 saw spend move rapidly online as some consumers were forced into lockdown, while those still out and about sought to avoid traditional payment methods, such as cash and even cards, due to fears of virus transference. This shift has created an upsurge in the use of Alternative Payment Methods (APMs), both online as well as at physical points of sale (POS), providing consumers with a greater choice of secure and touchless payment options.
But it isn’t just the consumer who benefits. As card fees go up, and the challenges with online card payments are brought into focus, merchants are seeing the significant rewards from leveraging new alternative payment technologies and switching more businesses to APMs.
The rise of online and mobile payments
While consumers were already moving online, the rapid growth in online commerce over the last 12 months has been unprecedented. Online retail sales in the UK grew from 19.1% of total retail sales in February 2020, in the month immediately prior to lockdown, up to as high as 36.2% during November 2020.
As consumers came out of lockdown, mobile ordering has also seen a massive boom as an alternative for in-person payments. Hospitality and retail solution providers, such as Zotto, Thyngs and Orderpay, have had success deploying mobile ordering solutions that enable customers to order, track and pay for food and drinks on their mobile, without leaving their seats. A necessity in a socially distanced world, these changes are likely here to stay as consumers and restauranteurs alike realise the benefits of not needing to flag down a waiter or waitress to take their order.
Quick Response (QR) codes were another unexpected success across Europe in 2020. QR codes are like multi-dimensional barcodes. They can be decoded by a smartphone and converted into different commands, such as opening a browser to display information or confirm a payment.
According to recent research, customers across the UK and Europe are relying more on QR codes, with 80% of smartphone users saying they had scanned a QR code at least once in their lifetime, and 72% adding that they scanned one in the last month. This, crucially, is not limited to track and trace – more than half of all respondents said they expected to use QR codes for payments in the near future.
The advantages to merchants of using mobile or QR solutions for in-person payments are numerous. Firstly, they enable consumers to shop at a safe distance during the pandemic, with completely touchless payment options.
Secondly, they can be deployed on any device with a screen, meaning QR code payment acceptance can be set up by merchants quickly, easily, and without purchasing expensive dedicated hardware like chip and PIN machines. QR codes, like mobile ordering solutions, enable merchants to accept a range of APMs for in-person POS payments when traditionally only cash or card options were available.
Do we still need cards?
These trends represent a dramatic change in the overall alternative payment landscape, reducing our dependency on cash and card payments in all environments as more APMs move into this space.
PayPal, for example, recently launched QR based POS acceptance solutions to enable small merchants to get paid by PayPal. Customer scans the QR code, authorise the payment on their mobile, and funds are transferred directly from their PayPal wallet to the merchant.
Buy-now-pay-later services, a rapidly growing form of APM, have seen significant online growth, as an increasing number of merchants adopt their solutions. Through the period of prolonged economic uncertainty, they’ve helped keep cash flowing for retailers, whilst helping consumers to finance and spread out their outgoing payments. Initially focused online, some providers, such as Laybuy, now offer in-store based solutions too, helping to move POS payments away from traditional credit card solutions.
Open Banking based alternative payment methods have also seen rapid growth in 2020. While still relatively new, an increase in providers entering the market, growing number of merchant deployments, and shift to online and mobile payments, has seen Open Banking payments grow by more than 23% per month throughout 2020, with payments online, in-store / POS, and even across remote solutions.
Open Banking: The new APM
Open Banking payments enable payers to seamlessly make a payment via bank transfer to the merchant, sending the payment over the account-based network rather than the card rails.
For consumers, the payment checkout experience on their mobile device is seamless. Consumers initiate the payment on their mobile by clicking a link or scanning a QR code, and then they simply need to authorise that payment in their mobile banking app biometrically. For platforms like Zotto, which have integrated Open Banking payments into their mobile ordering solutions, consumers can pay immediately using their mobile app from any major bank, without needing to sign up to the service or save card details into the platform. This makes it faster and easier for customers to pay, particularly the first time, and reduces check-out abandonment.
For merchants, the payments that are made through Open Banking are received in real-time. This provides significant cash flow benefits, important in the current environment, where acquirers are increasing holdbacks or delaying the payment of funds to merchants.
To help merchants realise these benefits, providers like Beam and Cocoon Pay offer SME merchants QR based payment solutions, where the merchant generates a QR code on their device for the payer to complete via Open Banking. Because the payment is made via bank transfer, the merchant has the funds available in their account within seconds, with full access to the account to use as required. This is something that merchants accepting cards payments could only dream of. Beam and Cocoon Pay also have plug-ins available to merchants, enabling them to accept Open Banking payments online if they are using WooCommerce or Shopify.
Another advantage is the fraud protection that Open-Banking-enabled APMs provide. Gala Technology’s ‘pay-by-link’ solution, for example, enables merchants accepting payments over the phone to fight back against the ever-growing risk of card fraud by ensuring that transactions are authenticated, while removing chargeback risk and lowering acquiring processing costs.
Here, consumers authorise the payment in their mobile banking app using Strong Customer Authentication, eliminating the risk of fraudulent payments created by consumers sharing their card details over the phone. Additionally, as no consumer card or account details are disclosed to the merchant or payment processor, there is no risk of card details being compromised with the merchant, and hence no PCI compliance to manage.
With all of these benefits to consumers and merchants, it’s no surprise that Open Banking has increased in popularity. The global pandemic and rapid move to e-commerce has only accelerated an existing trend in alternative payment: a move away from traditional payment methods to those far more convenient, secure, and cost-effective.
By Nick Raper, Head of UK, Nuapay