We use old technology when we buy things.
Cash is a millennia-old form of payment, yet it’s still the way much of the world exchanges value. Credit cards allow for the easier flow of value online, but that technology is a half century old. Even payment methods like PayPal, which were built for the internet, are nearly 20 years old.
In the face of an increasingly sophisticated global eCommerce marketplace, can an old payment method like credit cards keep pace? Or will new payment methods (like cryptocurrencies) become the norm soon?
The answer, as with many things: It depends.
Credit Cards Are Still the Standard in America
Credit cards offer consumers a world of purchasing power, and they can be useful budgeting tools for tracking purchases and earning people cash back. They can also be dangerous for consumers who lack self-control. Regardless, they play a huge part in the US economy.
Jessica Dickler at CNBC writes that Americans collectively have about $1 trillion in credit card debt. The average American family owes $4,293. American families use their credit cards to make small and large purchases alike, which makes it so easy to rack up debt.
Because Americans use credit cards extensively, credit card companies have entered a race to gather more customers, but find it hard to win new customers. “Despite the buzz around new, flashy credit cards, many Americans are sticking to the same credit card they’ve had for 10 or more years,” Maria LaMagna at MarketWatch writes. Americans don’t seem to be motivated by new rewards, and they do not want to enter new credit card information into multiple online billing forms.
That said, industry analyst Jason Steele explains that credit cards are not people’s preferred payment option. He cites one survey found that more people prefer debit cards over credit; yet at the same time, the percentage of people who use their credit cards as their sole payment options has significantly increased. This disconnect lends to the idea that Americans don’t really like their credit cards — but, for the time being, they don’t feel they have better options.
So, for now, inertia wins. Credit cards are simply what Americans are used to. Alexandra Tachalova, Cofounder at Digital Olympus, writes that Americans expect, by default, to be able to shop online with their credit cards. As alternative payment options grow in popularity and trust, perhaps American consumers will begin to break old habits.
The Global Mix of Alternative Payment Methods
Though consumers expect to be able to shop online with a credit card, they are increasingly expecting other payment options, as well. Alternative payment methods (APMs) — digital wallets, real-time bank transfers, PayPal, etc. — allow more flexibility and convenience for shoppers.
When APMs started to emerge, some considered them fads. Now, however, these payment methods are proving to be some consumers’ preferred ways to make purchases. “In many countries, APMs have become the online payment method of choice compared to mainstream credit cards like Visa, MasterCard, or American Express,” Molly St. Louis at Benzinga writes. “For example, Sofort is now dominating payment transactions in Western Europe because of the way the product creates an easy and secure bank transfer to pay for goods online.”
Asia is also seeing widespread usage of new payment options. “In the world’s largest eCommerce market, China, for instance, e-wallets now [account] for 62 percent of overall payments,” writes Eileen Yu at ZDNet. “Credit cards, which was second-most popular, accounted for 10 percent, but this payment mode was expected to be outpaced by bank transfers in 2021, when the latter would grab a 14 percent market share.”
In other words, eCommerce brands expanding to new markets may also have to reexamine their payment preferences.
APMs are on the rise in the US, but they still only make up a small portion of the market. Ellen Sirull at Experian writes that while APMs currently only make up about 6 percent of purchases, mobile wallets and cryptocurrencies are gaining traction.
‘Buy Now, Pay Later’: Getting Rid of Interest
Millennials are not lured by credit cards as much as older generations were. Kristian Borglund at Klarna writes that millennials are just as human as any other generation — they want to make big purchases they can’t immediately afford, but they are deterred by high interest rates. This is why alternative credit solutions are emerging.
That’s why no-interest alternatives, like Klarna, are catching on. These payment options let consumers buy now and pay later or pay in increments.
Zero-interest payments seems like a big risk for companies to take on, but this actually creates a win-win for retailers and consumers, Borglund writes. “Removing a roadblock to selling you increase your revenue, while getting higher priced items in the hands of customers increases your average order value.” Retailers sell more products, especially higher-priced ticket items, and customers don’t have to pay interest to the bank.
Claire Gates, CEO of Paysafe, another company that facilitates pay-later options, writes that while post-recession consumers are more wary financially, they still have that generations-old desire to spend impulsively. “There’s a growing appetite for cheaper financing across the board,” she says. “And it’s an appetite that may be satisfied without forgoing the thrill of instant gratification.”
Afterpay is another such alternative. Jeff Kauflin at Forbes describes Afterpay as “layaway for millennials.” It allows consumers to purchase retail products by making four interest-free payments over the course of eight weeks. Traditional layaway programs let customers make steady payments on purchases before bringing them home. Modern layaway options like Afterpay let customers purchase their products immediately and then make payments later.
Cash, Credit and Beyond: Know What Your Customers Prefer
American consumers still largely prefer credit cards, but consumers elsewhere continue to seek out different payment methods. That puts brands — especially those that sell across borders — in a delicate position. US-based brands need to cater to Americans’ preference for plastic while also keeping tabs on alternative payment options and repayment plans.
Analyzing payment methods at a birds eye view is helpful for context, but when it comes to your bottom line, all that matters is your customers. They are the ones will tell you how they like to pay.