November 17, 2015
If you are a frequent online shopper, you may have noticed that over the years, there are more and more options for you to make an online payment. The variety of payment options given to a customer can be one of the key factors of success in the online shopping industry nowadays. The reason behind the growing number of payment options is the trend of changing payments preferences among the customer base. Those preferences are being influenced and shaped by both financial institutions and disruptive FinTech startups. The variety of options improve a customer’s shopping experience, leading to a lower rate of abandoned carts and higher sales of a higher volume.
The US Commerce Department reported more than 15% growth in Web purchases in 2014 with Web sales volume reaching $305 billion. Along with the growth in e-commerce, the payment industry offers more and more services to gain share in the space. The variety of options are ensuring frictionless, secure and convenient shopping experience when shopping online. PayPal, gift cards, prepaid cards, Google checkout and a variety of other options led to the expansion of online purchases share in total sales volume and facilitated new players to enter the space as companies saw the increasing usage of different options.
Traditionally, credit and debit cards were the two primary ways to pay for the purchase online. However, with alternative payment options emerging in the market, e-commerce and retailers start expanding the list of payment options to follow customer preferences. Paying by credit or debit card is the most straightforward for customers and the most intimidating, as they have to provide sensitive information. Retail and e-commerce businesses, however, have more options to accept payments: Bitcoin, Dwolla, Amazon Payments, gift cards, reloadable prepaid cards, PayPal, Google checkout, Google Wallet, e-checks, etc. Worldpay provided an overview of alternative payments methods in the market demonstrating the opportunities for retailers and e-commerce players to diversify the payment methods for customer convenience:
The numbers shared by First Data Corporation indicated that online payment options were expected to grow 30% of purchase volume last year. The trend fostered the appearance of those new options you may see now on the checkout page of your favorite website.
Let’s take a closer look at the reasons a variety of payment options are highly beneficial and why retailers and e-commerce companies need to expand those options beyond credit/debit cards.
The security issue perception with using a credit/debit card online may be a reason not to shop online. Even though the vast majority of online shoppers have cards, part of that audience maybe averse of entering the card details on retailers’ websites.
The fact that cards are just not anywhere close may also be a reason to abandon a cart if there are no other options to pay without a card. Insufficient funds on the account is another barrier for completing a purchase. Among reasons related to the issues with the credit card option, there are also habitual ones. American consumers adopted credit cards as a usual payment instrument; hence, the habit of having a debt became something natural. However, the segment of consumers with high debts on credit accounts may prefer to use other options that will not increase the debt. Immediate payment with available funds in this case would be more preferable than to deepen debt on a credit card.
Moving to the other set of reasons, it is worth mentioning that more than 25% of the US population is either unbanked or underbanked, according to Goldman Sachs’ The Future of Finance report. It means that almost a quarter of the US population either do not have an account or have one but do not use it relying on check or cash payments. Gift cards, prepaid cards and other alternative instruments give those segments an opportunity to shop online. First Data found that 64% of consumers in those segments use reloadable prepaid cards to shop online.
The variety of payment options is also aimed to capture sales from those customers who do not wish to go through a signup process and prefer guest shopping. Unwillingness to provide personal information and fill out the profile with cards details is a barrier holding those customers back from completing the transaction. Retailers and e-commerce websites offering guest checkout with options rather than cards have a greater chance to increase the sales volume.
In addition to improving sales and customer experience, alternative payment options may reduce the cost of processing payments for retailers and e-commerce companies. Some of the options may have lower transaction fees than debit and credit, which can allow companies to balance the payments related to the processing. Low cost of some of the options also motivate retailers and e-commerce companies to promote those options in order to decrease the overall cost of serving a customer.
For retailers it is important to keep in mind the unique set of fees related to each option added at the checkout. Each option is associated with fees in a variety of schemes. There are also different levels of risks, different handling processes for each provider and charging mechanisms.
Some of the examples of e-commerce players offering various checkout options are Amazon, eBay and AliExpress. Among the options are traditional credit/debit cards (Visa, MasterCard, Maestro, Discover, AmEx) as well as branded gift cards, branded credit cards, PayPal (with the opportunity to have a PayPal credit), branded rewards certificates and WebMoney in the case of AliExpress. Brick-and-mortar retailers have widely adopted branded credit and gift cards, certificates along with other options. Here are more examples of the payment options offered by e-commerce websites and traditional brick-and-mortar stores: