What are alternative payment methods?

To understand alternative payment methods (APMs), you first need to know how they differ from traditional payment methods.

Everyone knows Mastercard and Visa - they have been around for fifty years or more. Other traditional payment types have been around for much longer - thousands of years in the case of cash.

But technology, customer expectations, and the world has changed so much in the last few decades. This has created the opportunity for dynamic new alternative payment methods into the global payments landscape.

An alternative payment method is one made digitally, so does not tend to offer a direct alternative to a cash payment. These can enable consumers to shop online or used at a payment terminal for in person transactions.

Common reasons for the emergence of alternative payment methods include new technologies or regional variations in customer preference. Because alternative payment methods are provided electronically, they can often be tailored to create a customer experience that is closely aligned to specific demographic needs and expectations.

These factors continue to change at an unprecedented rate.

Merchants looking to grow into new markets are well advised to evaluate which alternative payment type is need to address the needs of their target demographic:

You have to, to serve these markets, re-imagine how money can be managed and moved because there’s going to be more change in the next five years in financial services than happened in the past 30.‍

– Dan Schulma, President of PayPal

As Dan puts it, the financial services space is moving at a space where offerings such as alternative payment methods are not really a new thing. They are very much here and now.

In this article, we look at the most popular alternative payment methods and why they are so important in accelerating the growth of your business.

What is an alternative payment method?

An alternative payment method is any way to pay for goods or services that doesn't involve traditional payment methods such as cash, cheques or through major card networks like Visa, Mastercard, or American Express.

They include Direct Debits, digital wallets (apps such as Google Pay, Apple Pay, Samsung Pay, PayPal), mobile payments, P2P platforms, cryptocurrency, bank transfer, and 'buy now, pay later' (BNPL) options like Klarna.

Payment methods have developed significantly over millennia. From bartering in 3000 BC to the introduction of coins in 1100 BC, followed by paper money in the 11th-17th centuries, and credit cards in the 19th century.

Today, alternative payment methods have emerged with the rise of online payments and e-commerce.

Research by EY stated that alternative payment methods volumes reached $19t globally in 2022. It also found that more than 85% of merchants are planning to accept new APMs in the next one to three years.

Alternative payment methods were popularized by services like PayPal, which enabled low-cost international transfers.

The surge is due to evolving customer preferences and expectations. Customers seek convenient and hassle-free payment experiences, shifting away from traditional methods. Merchants that offer alternative payment methods are providing greater customer choice to their customer base, which can be a strong competitive advantage.

Advancements in checkout technology has also accelerated adoption. The process of integrating alternative payment methods has been greatly simplified so accepting alternative payment methods is far easier than ever before.

Popular alternative payment methods

Some popular examples of alternative payment methods are as follows:

Buy Now Pay Later (BNPL)

BNPL lets customers purchase their good or services and pay later in instalments. Payments come from a bank account, debit, or credit card.

Big players in the BNPL space include Klarna and Afterpay. An example is Klarna's "Pay in 3" option, charging interest-free payments every 30 days.

Bank transfers

Bank-transfer apps move funds from the customer's bank account to the merchant's. These are typically push payments. The customer reviews and authorises the amount in their online or mobile banking app.

While transfers can take a couple of business days, now real-time interbank payment systems often allow funds to transfer in seconds.

Digital wallets

Digital wallets store payment cards and generate tokenized card numbers for each transaction.

Consumers find them secure and convenient for online, in-app, or in-store shopping without typing card details every time.

It is often an umbrella term used for electronic and digital wallets and electronic cash rather than those containing physical cash.

Amazon Pay

Amazon Pay lets customers use payment methods saved in their Amazon accounts, eliminating the need to enter card information every time. This gateway is known for its high security.

By integrating Amazon Pay, businesses can align with a major global brands, which adds an extra layer of trust.

Electronic wallets (eWallets)

An eWallet stores money loaded from bank transfers, credit cards, or in-store payments. It enables online or in-store transactions, requiring internet access via a device. Some of these popular alternative payment methods include Alipay, PayPal and WeChat Pay.

PayPal

PayPal is one of the most popular payment method for its convenience. Customers can maintain a cash balance or add funds from a different source for purchases. PayPal also has a financing option known as PayPal Credit.

PayPal is quick, convenient, and secure, eliminating the need to enter credit card numbers for transactions with unfamiliar merchants.

Mobile wallets

Mobile wallets store funds electronically on a mobile device, funded through bank transfers, card cash, or mobile carriers.

They enable purchases, money transfers, and bill payments online, in-app, or in-person using contactless interfaces like QR codes or SMS.

Google Pay

Google Pay is also a top alternative payment method for its convenience and popularity among online transactions.

It allows secure checkout on third-party sites using saved information.

Direct debit payments

Direct debits allow for recurring automated payments, processed almost instantly for user convenience. A direct debit is slightly different from a bank transfer as the latter is usually a one-off payment method.

With a direct debit, customers benefit from the ease of not having to remember payment dates, as the money is automatically deducted once it is established.

Cash-based payments

While alternative payment methods are generally digital, they can encompass cash payment too.

When making online purchases, customers can select a cash-based payment option and receive a barcode or unique reference number.

The customer then presents this at a retail location to pay in cash. Once payment is made, the merchant fulfils the order or provides the service. Popular e-cash methods include Boleto, Fawry, and Oxxo.

Some alternative payment types are more geographically orientated. Local card schemes such as China Union Pay is an especially popular alternative payment method and essential for merchants seeking to serve this customer base.

Benefits of alternative payment methods

Reducing cart abandonment

Cart abandonment poses a significant risk for merchants with limited payment options. Potential customers may abandon their purchase if they perceive the available options are unfamiliar.

Customer choice and convenience

For merchants to increase their sales, making the payment process simple and familiar is essential. If they do not see their preferred payment method available, they are likely to abandon their cart.

Good payment service providers can offer merchants a full suite of popular payment methods from digital wallets including Apple Pay and others to eWallets and many more.

Being aware of alternative payments and responsive to customer demand will always be essential to growth and success.

Merchant may also find that using alternative payment methods can help them lower processing costs as they can avoid legacy payment systems.

Fraud detection and security

Any electronic method enabling consumers to send money to a business is likely to be a target for fraud. But just because these are alternative payment methods, it does not mean there is any less focus on fraud detection.

These transactions are subject to the same or higher levels of scrutiny than traditional payment methods.

Why alternative payments methods are important

Merchants who enable customers to complete transactions using their preferred payment method are likely to gain a significant advantage and build a reputation for customer service.

To efficiently target customers, it's essential to gain a comprehensive understanding of trends and surpass customer expectations. This involves providing seamless, top-tier payment experiences that anticipate their preferences.

Choosing the best alternative payments methods for businesses

Before finalizing the top alternative payment methods for your business, thoroughly understand the payment preferences of your customers. Consider location and their readiness to adopt new payment technologies. Different countries will have different payment preferences.

Merchants must also evaluate which APMs align with their business requirements and needs. Consider factors such as the cost per transaction and ease of setup and management. Ensure compliance with relevant regulations.

Offering every APM isn't necessary for maximizing conversions. Rather, focus on offering the most preferred APMs for the target market. Some payment methods may even have adverse effects on a business.

Conclusion

Alternative payment methods (APMs) are modern ways to pay for goods or services beyond traditional forms of payment such as cash or major card schemes.

Merchants that integrate alternative payment methods in their payment strategy can reduce cart abandonment while meeting customer preferences. This is essential for creating a familiar and convenient payment experience.

Being proactive in understanding local payment methods, trends and customer needs is key to staying ahead of the competition.

When selecting APMs for your business, consider customer preferences, regulatory compliance, and the impact on your bottom line to offer the most effective payment solutions.

Ready to take your payment strategy to the next level? With Nuvei, you can seamlessly integrate a wide range of alternative payment methods tailored to your customers' preferences.

Stay ahead of the curve, optimize your checkout experience, and drive conversion rates like never before.