Understanding and implementing alternative payments

(Excerpted from the Guide to Alternative Payments - view the web version, download the full PDF)

Defined: Alternative payments typically mean non-card payments, and include pay-by-bank, or direct bank payments (via ACH), P2P, and account-to-account payments.

Alternative payment methods allow consumers and partners to pay using accounts and digital wallets funded through direct deposits and bank transfers. Money movement that bypasses card networks is attractive for both payers and receivers. As traditional payment methods incur effort and cost, there are compelling reasons to pursue alternative means of payment. 

McKinsey, in its Rise of Alternative Payments report, states:

“85 percent of merchants are planning to accept new alternative payment methods — defined as nontraditional payments, like digital wallets, account-to-account (A2A) bank transfers and buy now pay later (BNPL) — in the next one to three years.”

Payments innovation

Easing the burden for payers and payees is the fuel for payments innovations, and also gives each more options. Previously, recipients were paid the way the business dictated. With more options available, employees, partners, and suppliers now choose the payment that benefits them the most. For example, online marketplaces may offer sellers an account-based payment option, where deposits are made to the branded account, with sellers then able to manage their own earnings, expenses, and purchases in one account without incurring bank fees.

Consumers want (and expect)...

Fast: Instant payments

Real-time everything, driven by broad access and technology, has lifted expectations for payments, including payouts and payroll. Giving faster access to funds for marketplace sellers & hosts, freelance workers, and employees drives retention and satisfaction. For employees, providing access to wages earned at any given point in time avoids payday loans and their excessive interest and high fees.

Convenient: Meet me where I am (on a smartphone)

Commensurate with growth in smartphone ownership, forty-six percent of U.S. consumers report having made a mobile payment. It follows that paying bills, moving funds, and checking digital wallet balances would be part of that phone use, offering more engagement and mindshare for business.

Secure: Digital payments

McKinsey reports that nine out of 10 consumers say they have used some form of digital payment last year. Sixty-nine percent of respondents ranked trust and security among their top criteria. Trust is an interesting attribute for digital payments, effectively measuring the offering brand’s overall trustworthiness, perhaps a reflection of past consumer experience and service. That trust, coupled with relevant regulatory compliance and payment security monitoring, assures users of ongoing diligence.

Businesses benefit from more revenue at lower cost

Cash and checks no longer dominate the payments landscape for consumers, and increasingly for B2B payments. Pay-by-bank, or direct payments, bypass more costly routes for both payers and payees. 

Consumers prefer card payments for ease of use and the ability to pay with digital wallets. Tap-to-pay has never been easier, and recent advances in technology will continue to reduce buyer friction.

For the business, removing card networks from transactions is a powerful incentive. Each swipe incurs transaction fees, which can be particularly expensive for high-volume, lower dollar transactions. That is, four purchases of $15 each will be more costly to the merchant than one transaction of $60. As consumers increasingly opt for digital wallets, offering the ability to pre-fund for their next purchase is extremely compelling for merchants, with lower transaction cost.

Reducing the cost of payments

In its Top 5 Payments Trends Shaping the Payments Landscape in 2024 report, LexisNexis says reducing payments cost is an imperative for businesses. Automating more of the internal processes solves a significant portion of this problem, but payment fees will be persistent. Account-to-account (A2A) payments can lessen the fees associated with existing payments. 

A B2B payments eco-system is when funds flow seamlessly from one account to another within the same infrastructure. In a traditional bank model, this could be described as money movement between two accounts at the same bank. Applied to a B2B scenario, a large distributor or franchisor would provision accounts for all retailers or franchisees. These accounts would house all payments and expenses without requiring bank-to-bank transactions.

Designing a financial product program

Assess: Start with what you have

The obvious place to start is with the existing solution. Even if a full reinvention is warranted, it’s important to take a close look at why the current (or previous) payments infrastructure is insufficient. Effort, cost and experience are the three facets of the exploration.

Dream: Unleash innovation

If we were creating our payments solution from scratch for our most valuable and desired customers, what would it look like? Too often processes of the past, while justifiable, become limiting to pure innovation.  Understanding and balancing the true requirements with the nice-to-haves is a powerful exercise across all disciplines.

Assure safety: Apply a compliance mindset

The amount of risk a company is willing to accept to accept various payment types is a critical foundational element for existing and new payment strategies. This is where applying external knowledge from fraud and compliance experts can shape what is possible — and acceptable — for the company to offer. 

Architect: Understand the existing technology stack

As with any initiative that involves technology, understanding the implementation and implications for existing systems is paramount. Key systems include point-of-sale (POS), customer relationship management (CRM), accounting, and loyalty management platforms all play a role in processing payments from customers.

Go time: Launch, manage, and support teams

Launching a new payments method requires enrolling customer facing teams as well as a thoughtful approach to launch. There are myriad elements to oversee during design, development, launch, and optimization phases. Allocating a cross-functional or dedicated team at the outset will better drive success.

The new imperative: Alternative payments

Alternative payments is a set of options to offer to customers and partners. It’s the perfect marriage of how they want to pay, and how and when the business wants to manage payments. Adding more options can remove resistance and obstacles, speeding payments and lowering the cost of processing. 

Direct bank or account-to-account transfers bypass expensive networks, and offer the same ease and convenience to buyers. Stored value wallets retain customer funds for next purchases, and hold rewards along the way. Meeting customers throughout the buying journey with convenience, speed, and security rewards the business with more revenue, lower costs, and a path to the future.

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