No Longer Alternative: The Rapidly Approaching Future of Local Payment Methods

Customer retention requires a well-balanced blend of gilt-edge experience and customization. While merchants cannot control offline challenges like supply chain disruption or last-mile delivery issues, they can (and must) shape the digital environment and ensure a seamless checkout process.

Merchants serving a global audience need an added layer of personalization, tailoring their payment method offering to consumers in each market. Because, as surprising as this might be for U.S.-based businesses, global consumers rarely prefer to use credit and debit cards to pay online.

In Asia, consumers typically prefer mobile e-wallets. Various bank transfer methods are popular across Europe. And in Latin America, many consumers rely on cash to pay for online shopping. These local payment methods (LPMs) have been previously referred to by the industry as alternative payment methods (APMs), but the reality is that they're — globally speaking — no longer the alternative. These LPMs facilitate the needs of different geographies, cultures and domestic economies across the globe.

Yet despite the fact that most consumers across the globe rely on LPMs, we’re still seeing a lack of adoption of these payment methods by online merchants in the U.S. and U.K. However, as we dive further into the digital age, it's a matter of when, not if, the trend will need to shift. Let’s explore the unique factors driving consumer behavior, payment preferences, and how merchants can best position themselves for the future of commerce.

What Influences Consumer Behavior?

A recent study from PPRO found that 42 percent of U.S. consumers will stop a purchase if their preferred payment method isn’t available. Consumer preferences are inherently tied to individuals' local environments. Their access to resources, economic status, geography, age and cultural identifiers all influence how they want to shop and the methods they prefer to use to take part in commerce. Therefore, merchants must take these factors into account when designing any checkout experience. For example, PPRO’s recent survey reveals 78 percent of consumers agree the most important factor in choosing a payment method for shoppers is trust in the security of their data and money.

Transparency and trust are highly valued in the payment process, but there are other elements in play that vary. Half of U.S. consumers value the speed of checkout most in choosing a payment method. Furthermore, 52 percent of consumers will stop a purchase if the checkout process is too complicated. Making the payment process frictionless could be a game changer for many retailers, as the average rates of cart abandonment range between a whopping 60 percent and 80 percent.

For example, a shopper in China may come across a new U.S. clothing line they wish to purchase from. They're accustomed to rapid transactions enabled by the wildly popular mobile e-wallets like Alipay or WeChat Pay. Typically, in a few swipes on their mobile device, their order will be on its way and they can go along with their day. However, if the merchant only offers traditional card payments, the transaction could be in jeopardy.

This Chinese shopper won't likely have an international branded credit card. By not offering multiple ways to pay and catering to a global audience, online merchants are missing out on a vast audience. According to research by the United Nations Conference on Trade and Development (UNCTAD), the U.S. is the main driver of the growth in cross-border e-commerce. UNCTAD calculates that the U.S. sends $102 billion worth of e-commerce sales abroad every year, the most of any nation it surveyed. 

Global Payment Adoption

The rest of the world is much further along in the adoption of LPMs than the U.S., as US consumers are largely still card centric. However, LPMs such as bank transfers, e-wallets, cash-based digital payments, and local cards are the dominant payment methods globally, used in more than 70 percent of global e-commerce transactions. For example, in Asia, 46 percent of online purchases are made via e-wallet, while cash and card payments only comprise 37 percent of transaction volume.

Currently, only 18 percent of U.S. consumers have used LPMs when purchasing online goods, but this figure jumps to 28 percent for millennials. These figures highlight the massive growth potential for LPMs and the opportunity for merchants to expand their businesses.

LPMs can offer consumers more flexibility in e-commerce and increase the ease and speed of payments via the use of mobile payments, QR codes and other methods that are more seamless, as opposed to typing in a lengthy card number for every purchase. And American consumers are starting to catch on: the U.S. is already seeing increased adoption of mobile e-wallets like Apple Pay and Google Pay, as 44 percent of shoppers use them on a routine basis.

A Look to the Future

While the U.S. may be slower than the rest of the world in the adoption of local payments, many recent determinants will help change this rather quickly. While merchants won't be ditching card terminals anytime soon, they should take notice of the growing adoption of digital payments. The current COVID-19 pandemic could serve as the inflection point away from traditional payments towards digital methods. Because of social distancing, many baby boomer and Generation X consumers have been forced to embrace e-commerce along with contactless payments or e-wallets. Younger demographics are proven to be early adopters of new payment methods, and their usage will steadily increase over time.

Sooner rather than later, LPMs will not be a nice-to-have, but a necessity.

Steve Villegas is the vice president of payment partnerships, North America, at PPRO, a company that works with payment service providers and local payment methods to help merchants optimize the payment experience for their customers.