Deep dive: global payment alternatives
Online retailers have never been under more pressure to tailor their services to consumers’ preferences than now. Delivering a flexible and seamless payments process is fundamental to achieving this, but merchants must be mindful of the hundreds of different payment methods favoured by shoppers around the world.
I met up with Kevin Dallas, chief product officer at Worldpay, to discuss how ambitious retailers must get ready to cater to the world of payment options if they want to keep growing. Worldpay is a provider of payment and risk services, processing millions of transactions every day. The company provides an end-to-end service, including card acquiring, treasury, gateway, alternative payments and risk management, all of which can be provided with a single integration to Worldpay. Dallas looks after the global ecommerce business and his responsibilities include product management across the value chain (gateway, ecommerce acquiring, alternative payment methods, fraud and treasury services), global marketing and demand generation and strategy. Prior to joining Worldpay in August 2013, Dallas was a partner at Bain & Company. For more information about WorldPay, visit: www.worldpay.com/global.
Key takeaway
It is vital to connect with consumers in a way that demonstrates value for money and provides an easy, quick, secure, shopping experience that will convert them and keep them coming back for more. When it comes to online sales, it has never been more important for retailers to match the payments process to consumers’ preferences.
However, with hundreds of payment methods in use around the world, this is not easy. Many online merchants assume that credit and debit cards are universally popular, and indeed they are in many markets, but their use varies substantially by region and by shopper, especially online.
In order to sell more goods and services to more consumers, online merchants must offer alternatives to card payments – such as bank transfers, digital wallets, pre- and post-pay options and, in some cases, even cash on delivery.
The insight
Alternative payment methods (APMs) are all of those payment options that do not belong to a global scheme card network, such as Visa, MasterCard, Discover, Diners or American Express. The use of APMs is on the rise. They accounted for 51 per cent of global ecommerce turnover in 2015 and it is expected that 55 per cent of global ecommerce sales will be made via alternative payments by 2019, driven by growth in emerging markets and the rise of mobile commerce.1
Of course, the split between cards and alternatives does vary substantially by market. For instance, the majority of Chinese shoppers have been using APMs for years, whilst card use has risen in popularity only recently. The majority of consumers buying goods online in China do so using eWallets like Alipay and, even when they do use a card, it is most likely issued by the country’s only national champion bank card organisation (China Union Pay). It is worth noting that China Union Pay is itself aspiring to become a global brand.
Even in Europe, where one might expect card dominance is a foregone conclusion, APM use is high in a number of nations and continues to rise. In Germany, currently the world’s fifth biggest ecommerce market, a widespread expectation for easy and simple ecommerce purchases has kept real-time bank transfers at the top of the payments totem pole. Tellingly, other non-credit card methods like Sofort Banking, SEPA Direct Debit and Giropay also have major buy-in among German shoppers who prefer these to cards.
The same goes for the Netherlands, where card payments account for only 13 per cent of the country’s ecommerce market. Instead, bank transfers via iDEAL, a real-time inter-bank payment method, lead the way. With many major Dutch banks also offering mobile versions of iDEAL, the platform has become available to more than 90 per cent of the population.2
In India, where the ecommerce market is expected to quadruple in size over the next four years, consumers (and the regulatory environment) favour online banking and cash on delivery when shopping online. Indeed, card payments among Indian shoppers are expected to account for just 27 per cent of the country’s ecommerce sales by 2019.3
When viewed as a whole, these regional trends indicate just how important it has become for multi-national retailers to cater to the specific needs of shoppers in each country to which they sell.
Popular APMs: a few definitions
Whilst there are hundreds of alternative payment methods available to consumers, and even more being developed, APMs broadly fall into six main buckets:
- Digital wallets
Also known as eWallets, digital wallets allow shoppers to make ecommerce transactions directly from a connected device. Consumers can choose to pay using stored value uploaded to their digital wallet from a credit card or with funds from any APM linked to their eWallet. - Real-time bank transfers
Real-time bank transfers require consumers to pay for goods using their online banking facility, after which they either are redirected to their bank’s payment page or they select its name from a list on a retailer’s checkout page before finalising their purchase. Authorisations for bank transfers are immediate in most cases, which means merchants can settle their funds quickly and shoppers get instant confirmation that their payment has been accepted. - Offline bank transfers
In the case of offline bank transfers, consumers are given a reference number during the purchasing process, which they subsequently share with their online banking facility to complete their payment. Because shoppers can do this at their leisure, however, authorisation is not immediate and, in some cases, the payment is never made. This not only complicates the settlement of funds for a retailer, it also makes it difficult to automate inventory and shipping models if merchants want to avoid sending goods to customers that have not paid for their order. - Pre-pay options
Pre-payment options allow consumers to upload a predefined value onto a voucher that can then be used to pay for goods, much like cash but without the need to actually carry cash around. The popularity of pre-payment vouchers is rising, especially among shoppers who are uncomfortable sharing their personal details or who do not have a bank account. - Cash on delivery
Cash on delivery (COD) is the practice by which shoppers pay for products or services only once they have been delivered. Uber, whilst not a retailer, is the example, par excellence, of this approach in many developing markets.
When it comes to retail, COD continues to thrive in countries like China, Russia, the Philippines and Indonesia, due to a cultural preference for cash and the rapid climb of online commerce. The Lazada Group, the aspirational ‘Amazon of Southeast Asia’, counts COD as its most popular payment method in Indonesia. Amazon itself also supports cash on delivery in China for the large proportion of Chinese consumers who favour this payment method. - Carrier billing
Predominantly used in countries where mobile penetration is high, consumers are under-banked and security concerns deter people from carrying large amounts of cash, carrier billing allows shoppers to make purchases that are charged directly to their mobile phone account. These transactions are relatively quick and simple as carriers can provide user data directly to merchants, although they are also often more expensive to process. It is worth noting that some carrier billing services are also evolving into mobile eWallets; for example, people in Kenya that use M-Pesa can opt to have their salaries paid via their carrier.
Offering a tailored range of payment options
Operating a successful ecommerce site on a global scale requires a more localised approach to paying online. To ensure they never miss a sale, retailers need to support transactions in multiple currencies, accept each region’s most popular card and alternative payment methods, and tailor their offering to local purchasing habits.
It is not uncommon for leading online retailers to boast a tailored cashier service, sites in multiple languages and the ability to support dozens of local currencies and alternative payment methods. Not only does this improve the user experience, it also helps ensure online merchants maintain high acceptance levels for the payments they process.
Wondershare, the number one exporter in the Chinese software industry, raised its acceptance rates by 30 per cent by tailoring its ecommerce and fraud policies according to the needs of each market in which it operates. The company is currently looking to build its presence in Japan, Brazil and Russia whilst bolstering its already strong foothold in both the USA and Europe.
As Mr Sun, CFO at Wondershare, puts it:
‘Online customers have little patience for an inefficient shopping experience, and the changes we’ve made will help ensure that their interactions with us are as simple and convenient as possible. With our sights set on expanding into a number of new markets, our improved acceptance rates will help solidify our position as a leading software provider on the global stage.’
Etsy, the leading online marketplace for handcrafted vintage goods, has the added challenge of bringing together buyers and sellers from different countries who often transact in their own currencies. The company continues successfully to process hundreds of thousands of transactions, and pay thousands of sellers each year because it has the ability to seamlessly reconcile currency conversions and accommodate its members’ preferred payment methods, no matter where they live.
Managing shopper expectations
Online merchants also need to ensure they can deliver on the expectations they set for shoppers in terms of which payment methods they can support. A recent Worldpay study revealed that 60 per cent of consumers would drop out of a purchase if their preferred payment type was displayed on a retailer’s homepage but was then not available at checkout.4 In France and the UK, more than 75 per cent felt this way.
Additionally, almost 40 per cent of consumers globally admitted they would not take the time to look for their preferred payment method at checkout, and would drop out of a purchase as a result. This sentiment is particularly strong in Japan, where 62 per cent of consumers would not spend time seeking their preferred payment method if it was not clearly indicated.
Put simply, consumers want to know exactly how they can pay online and be assured the process will go smoothly. They do not want to have to search for information or choose a plan B scenario at checkout after a certain expectation was set on a retailer’s homepage. Retailers should provide easily visible and consistent information throughout the buying process – from the homepage through to the confirmation email.
‘The world of online retail is extremely competitive. If you turn a customer away over a poor experience, including a declined payment, it’s unlikely they will come back to shop with you again. Our ambition isn’t just to grow as a company; it is to deliver the best online shopping experience for the people who use our website globally.’
Steven McKiernan, financial controller, Missguided5
Adopting new APMs – what to keep in mind
Before integrating any new alternative payment methods, online retailers need to understand all the ways in which these differ from a standard global card scheme and ensure they can deliver on customers’ high expectations for service regardless of which platform they choose.
Pricing – consumers expect to pay the same amount at checkout as the value that was indicated to them on a retailer’s product pages. Merchants must, therefore, ensure the price and currency they debit a shopper for match the figure that customer has anticipated paying.
User experience – many alternative payment methods redirect shoppers to a separate page to enter their personal details, occasionally placing a time limit on the process. Online retailers must clearly explain each stage of the payment process to customers so they know what to expect and are not confused or turned off when redirected to a third-party website.
Payment capture – for some APMs, the point at which a payment is authorised, and therefore at which funds are settled, comes later after a shopper confirms their purchase than for traditional card payments. As such, merchants must have a consistent and transparent practice in place when choosing at which stage to ship orders to customers.
Refunds – when using cards, refunds are automated in so much as a merchant simply can return a payment to the card used for the purchase. Not all APMs can handle automated refunds and, for those that do not, a bank transfer is required to give back the customer their money.
Fraud and chargebacks – in many cases, APMs result in fewer fraudulent transactions than card payments, as consumers often are required to provide more personal credentials at the time of payment. Whilst this certainly benefits retailers and shoppers alike, it also means customers should be made aware of why they are sharing more information up front so they are not turned off by the added requirement. Another benefit for merchants is that many APM providers do not honour chargebacks, therefore lowering risk. Again, shoppers should be made aware of these policies.
Recommendations
Choosing which payment methods to support in each market is a strategic exercise for retailers. It is neither time- or cost-efficient to simply support every payment method everywhere, nor is it desirable for consumers who may be overwhelmed by too much choice. Merchants not only need to establish their customers’ preferences by region, they then need to compare the potential return on investment for each payment method available to select those that will help them achieve their local ambitions.
New payment methods also require new commercial arrangements, as acceptance fees often differ from interchange fees for credit and debit card transactions.
In addition, retailers must be tactical about how they process card payments in foreign markets. In the interest of speed and complexity, many companies will choose to process payments ‘cross-border’, outside the country they are selling in. However, there are usually – although not always – benefits to processing payments in the same country where a transaction has taken place. These include lower processing costs and higher acceptance rates, as payments processed across borders are more likely to be declined by issuers.
A retailer’s ability to process payments locally depends on its operating model. For instance, to process payments domestically in Europe, a business needs a domestic entity in at least one EU nation. In addition to the cost of establishing a local entity, retailers should also weigh the associated tax and regulatory compliance issues for each market carefully before proceeding.
Once these elements have been addressed, retailers must then integrate the right APMs into their websites. This process can take from two months to two years, depending on the size and complexity of the site, the types of payment methods being added, and whether hosted payment pages are being used.
It is worth noting that merchants who use global payment processors, such as Worldpay, Elavon or Cybersource (versus going direct to each payment method supplier), or ecommerce business platforms like Demandware, Oracle, IBM, Hybris or Magento, often find it easier to switch on new payment methods, as these platforms come with pre-integrated payment processing functionality.
Shopper preferences continue to dictate the direction retail is headed in, both instore and online, and the changing way in which people pay for goods is, arguably, the most fundamental element of this shift. In countries everywhere, from China to Germany to Kenya, alternative payment methods have become, or are quickly becoming, more popular than card transaction and online merchants are taking note.
However, they must also be mindful of the many factors that dictate people’s buying behaviour. A mixture of cultural, geographical and economic considerations combined with varying levels of internet and mobile access add up to different needs among different people in different places.
A modern ecommerce approach that allows merchants to address this level of diversity comes down to three things: making sure shoppers have a variety of options to choose from, ensuring they can pay the way they want to and providing them with an equally seamless purchasing journey, regardless of which payment method they use.
Recommended actions
- Short term/quick win
Establish where you have the most international customers and research what payment options the market leaders in that region are offering their local customers to get an idea of what options you would like to offer. - Medium
Replace your current payment provider with one that can cater for your local markets more effectively. - Long term
Offer customers local language versions of your website for at least the most critical sections of your site, e.g. the checkout and payments page.
8.1 Payment checklist
For many online retailers, accepting payments is considered as an afterthought of the shopper journey. In fact, many opportunities exist to take advantage of the payment functionality in order to actively drive revenue. The key to this lies in data. In this section, I will provide a number of metrics and examples of best practices that merchants can adopt to optimise their payments, transforming them from a cost into a revenue-generator.
To get some real data, without disclosing the financial details of a single company, we looked at research undertaken into three different companies that all work with the same payment provider, Adyen. We will call this new entity the ecommerce organisation.
By merging data from these three merchants, we have an ecommerce organisation that is a US-based company with a global footprint and annual revenues of $1.5 billion, roughly half of which is from the US market. Payments accepted by this merchant include debit and credit cards (accounting for around 60 per cent of transactions overall) and a wide range of local payment methods, such as e-wallets, online banking, cash-based methods, and so on (accounting for the remaining 40 per cent). Furthermore, the ecommerce is rapidly expanding and intends to grow market share in the domestic market as well in new markets internationally.
General online retail strategy
The ecommerce organisation is growing rapidly, and has an expansion plan that includes North America, Europe, Latin America and Asia. In order to fuel its growth and increase its efficiency and profitability, the organisation has the following payments-related objectives:
- To optimise its payments and grow revenue.
- To optimise its approach to fraud management. Fraud, in particular, was an issue in areas outside of the USA, with chargeback rates often double those of domestic chargeback rates.
In order to achieve these goals, it has adopted a data-driven approach, focusing on six payments areas in order to evaluate its performance and drive optimisation.
1. Payment method conversion
The right mix of payment methods will drive conversions at checkout.
In most English-speaking markets, credit cards are the most popular ways to make online purchases. But, across Europe, Asia and Latin America, they are far less popular. And, in fact, large sections of potential shoppers in these markets may not even possess an international credit card. Instead, they use a range of e-wallet, online banking and even cash-based payment methods such as Alipay (around 50 per cent of online purchases in China), iDEAL (60 per cent of online transactions in the Netherlands) or Boleto Bançario (15 per cent of online transactions in Brazil).
To reach local shoppers, the ecommerce organisation offers over 40 payment methods around the world besides the major credit cards, including e-wallets and cash-based payment methods in markets where cash still accounts for the vast majority of transaction volume. This is helping it launch fast and provide a localised experience to a critical mass of global consumers – crucial to maintain its hyper-growth curve into new markets.
However, one thing to note is that, somewhat counter-intuitively, offering too many payment methods may also have a negative impact on conversion, for several reasons. A long list of payment methods can create confusion for the shopper, leading them to drop off at the checkout. Also, some payment methods may work well on desktop, but not on mobile. And, finally, some payment methods are more popular for certain industries.
So, rather than simply adding all popular local payment methods for each new market, a better approach is to A/B test a mix of payment methods for the market and, in some cases, even per device type, product line, and so on.
2. False positives
Risk settings must be carefully managed to avoid blocking legitimate customers.
Once a shopper types in and confirms their purchase, the payment journey is far from over – in fact, it has just begun. The next thing that happens is that the payment is captured by the gateway and sent through a security screening – an important part in the fight against online fraud.
For many merchants, stopping fraud is a priority, particularly as they expand to new markets and add potentially risky new payment methods, and the temptation to raise risk checks in these situations can be strong. However, simply raising risk check thresholds can also lead to an increase in ‘false positives’ – legitimate transactions that are wrongly identified as fraud and blocked, leading to frustrated shoppers as well as lost conversions.
To combat false positives, many merchants have a manual review process in place. But, inevitably, a significant portion of false positives will not be identified as genuine and, thus, will be a lost conversion for the merchant. Further, for rapidly expanding companies like the ecommerce organisation, the workload associated with manually reviewing every high-risk transaction means a significant drain on resources.
To reduce false positives and minimise manual reviews, the ecommerce organisation adopted a flexible and iterative approach to risk rules, collecting, linking and checking data to implement a sophisticated approach to stopping high-risk transactions. This is an ongoing process – it constantly monitors and fine-tunes these rules based on a wealth of accumulated data making incremental improvements in order to optimise the balance between stopping fraudulent transactions and approving legitimate transactions.
With this approach, the ecommerce organisation saw an overall reduction of fraud by 27 per cent, and it conversely saw a decrease in write-off loss attributed to fraud. Overall savings in this area were nearly $6 million for the three-year study period.
3. 3D Secure impact on conversion
Dynamic 3D Secure will boost authorisations without damaging conversions.
A potentially valuable part of risk management process is 3D Secure, which is an additional security filter aimed at verifying the identity of the shopper.
3D Secure has been dismissed by many as a ‘conversion-killer’, because it interrupts the payment flow to redirect the customer to an external site that they may not know. This perception has been strengthened by the fact that, over time, many merchants have taken an on/off approach – meaning they either route all transactions through 3D Secure or none at all.
However, there are, in fact, multiple factors that impact the success or otherwise of 3D Secure and, in fact, implementing it on certain transactions can have a positive impact on conversion. These factors include market, card type, order amount, day or time of order, and so on.
With this in mind, the ecommerce organisation took a rules-based approach to 3D Secure, applying it selectively to transactions for which data showed it would have a net positive impact. This included specific markets (including the UK, France, Hungary and Sweden), and other risk and card characteristics to secure the optimal balance between user experience and the reduction in chargebacks. As a result, the organisation saw revenue gains equating to nearly $2.5 million over three years.
It should also be noted that the landscape for 3D Secure is changing dramatically. More and more issuing banks are using risk-based authentication, and the card schemes are leading initiatives to improve the experience for consumers. This means that merchants need not fear the ‘conversion killer’ as much as before. Further, applying 3D Secure shifts the liability for the transaction to the issuer, meaning merchants are not responsible if the transaction results in a chargeback.
4. Authorisation rates
One-third of declined transactions could be converted into approvals.
A significant pain point for ecommerce businesses is that, on average, 15 per cent of payments are rejected by the issuing bank (that is, the bank that issues the shopper’s card). Whilst the majority are refused for legitimate reasons, such as fraud, there remains a proportion which are declined simply because the format of the transaction does not match up with what the issuing bank expects. This, therefore, presents another opportunity to optimise, measure and incrementally improve on payments success rates.
In order to grow its revenue, the ecommerce organisation identified potential areas for improvement by comparing authorisation rates between issuing banks and implemented logic to route transactions through to banks that give the highest authorisation rates. On a small subset of low-performing cards, this approach resulted in an authorisation uplift of 39 per cent and, overall, a 1.5 per cent transaction approval improvement, resulting in an overall revenue uplift of $1.5 million over a three-year analysis period.
5. Local versus cross-border acquiring networks
Dynamically routing payments via different networks will drive authorisation rates.
An acquirer is a financial institution that processes credit or debit card payments and routes them to the issuing bank. Acquiring networks are either international or local. Deciding the network through which to route the payment can have a significant impact on the response of the issuing bank.
In some countries, for example, routing the transaction via a local network will deliver higher authorisation rates. This is the case in Brazil, where a local acquiring network can result in an authorisation rate increase of over 30 per cent, and in India, where the impact can be as much as 40 per cent.
It is worth noting, however, that, whilst local networks often generate the highest authorisation rates, it is not always the most practical option. Sometimes, a local entity is required in order to make use of local network, which has other implications around cost and logistics.
When evaluating cross-border or local acquiring, merchants should consider the following:
- Does the customer have to pay tax on cross-border transactions?
- Is there a need to set up a local entity in order to process via local networks?
- What is the difference in interchange fees for domestic and cross-border transactions?
In the case of the ecommerce organisation, it used real-time data to evaluate market conditions and dynamically routed transactions via whichever network would produce the best possible result at that moment. The result was an authorisation rate increase of 1.5 per cent, leading to a revenue uplift of $1,463,071 over a three-year period.
Businesses operating in multiple countries are likely to find that a mix of both local and cross-border acquiring will generate the best results overall. This all depends on specific merchant business models and the markets in which they operate.
6. Chargeback rates
Prevention is better than cure.
A chargeback occurs when a customer disputes a transaction and secures a refund from the merchant’s bank. The most common reason for this is fraud.
The impact on the merchant is threefold. Not only is the payment lost, but the merchant must pay the associated fees and runs the risk of being black-listed by issuing banks, thereby impacting future authorisation rates.
The ecommerce organisation found itself faced with a fraud rate of 3 per cent when operating outside the USA. This was because credit card verification code validation and address verification are not as widely used in other regions. Therefore, other measures were needed in order to bring down the rate of fraud.
As with most things, when it comes to chargebacks, prevention is better than cure. Merchants should devise means of stopping chargebacks before they occur. This can be done by identifying the attributes of a high-risk transaction and either declining it on the spot, routing it via an additional security filter like 3D Secure, or holding it for manual review.
What these attributes are will depend on numerous factors, including the merchant’s business model, and industry. It is important, therefore, to benchmark against similar businesses. Here are some metrics to consider:
- Average transaction value: merchants should be wary of transactions that have a value that is significantly above average.
- Transaction velocity: a series of rapid transactions made using the same data elements, such as card number, email or delivery address may indicate a fraudster testing one or a number of cards.
- BIN (bank identifying number): in some cases, merchants have identified a higher rate of fraudulent chargebacks from specific banks.
- Countries: some countries are known to have higher rates of card fraud and merchants can reduce chargebacks by routing transactions from these countries via additional security filters.
Of course, as fraud evolves, new methods are developed to circumnavigate risk settings and merchants must, somehow, keep pace. It is recommended, therefore, that merchants use their own payment data to establish rules, monitor trends and adapt settings accordingly. In the case of the ecommerce organisation, it made use of advanced machine learning and multiple data sources to identify and track fraudsters, resulting in a chargeback reduction of 27 per cent.
Recommended actions
Payments are an untapped resource of additional revenue. To unlock this, merchants should:
- identify the key drop-off points in a payment journey.
Did the customer abandon the payment process halfway through? Was the payment blocked by risk settings that set too high? Or was the payment wrongly declined by the issuer? Understanding why the payment failed is half the battle won. - make incremental changes based on the findings.
Once problem areas have been identified, merchants can make adjustments. This might include adding or removing payment methods, altering risk settings or routing transactions via a different acquiring network. - measure the outcome and continuously grow revenue through incremental changes.
Of course, nothing stands still. Regulations change, new payment methods emerge and fraud evolves. In order to stay ahead of the game, merchants must constantly measure and evaluate their settings to ensure their processes remain optimal.