2020 was a year of momentous change for the payments industry. Previously, emerging trends have seen a massive acceleration as a result of the pandemic. Years of transformation transpired in just a few months with rapid shifts in both consumer behaviors and merchant expectations for e-commerce.
For instance, cash usage waned even further this year amongst fears around the pandemic, leading to a coin shortage across the country, with many merchants pointing consumers to digital payments if they lack exact change. According to McKinsey’s 2020 Global Payments Report, a drop of four to five percentage points in the share of global cash transactions was anticipated.
The pandemic — while undoubtedly awful — has been rocket fuel for digital transformation, providing an opportunity for the payments industry to innovate. For example, online payments via bank transfer have continued to proliferate, while installment schemes have been named as one of the fastest growing online payment methods worldwide.
Therefore, after a year of such rapid transformation, what can we expect to see in 2021? And how will permanently altered consumer behaviors shape online payment preferences?
Installment Payments Are Changing Mindsets on Credit
It's safe to say local payment methods (LPMs), the nontraditional payments such as bank transfers, e-wallets, cash-based digital payments, and local credit cards, have seen huge growth over the last couple of years. They're now actually the dominant payment methods globally, used in more than 70 percent of all online transactions. LPMs continue to play a key role in accelerating digital adoption, particularly in emerging regions. In China, for example, LPMs generated $43 billion in revenue in 2019.
In 2020, consumers were more inclined than ever to try different payment methods in a search for greater convenience and heightened security during national lockdowns. According to Paysafe’s LiT research, 56 percent of global consumers said they used a new LPM in the first month of the pandemic.
The payment method that has taken the world by storm is the interest-free "buy now pay later" (BNPL) concept, with payment providers such as Klarna, Afterpay, and Affirm leading the charge. Over this past holiday season, 44 percent of U.S. consumers mentioned the availability of buy now, pay later is very important in determining how much they spend with retailers. Over the Black Friday weekend, Afterpay saw a 186 percent increase in sales, while Klarna processed an astonishing five times more transactions than in the first four years of its operation combined.
Research from Kaleido predicts that BNPL value will reach over 12 percent of total global e-commerce spend on physical goods by 2025, showcasing the staying power of this trend.
Ongoing furlough measures and job losses have seen consumers face unprecedented financial strain, resulting in a reliance on "pay later" tools over traditional payment methods due to their flexible nature and lack of financial penalties. With the economy not expected to recover to pre-COVID-19 levels for some time, this is a trend we see continuing into 2021. As such, this is certainly a payment method online merchants need to offer, now.
Staying Competitive in an Increasingly Digital Age Will Be Harder
It’s no surprise that the figures from 2020 reflect a massive boom for global e-commerce. The "quickening effect," as coined by McKinsey, describes a 10-year shift in e-commerce experienced in just 90 days. During June 2020, during the height of the strictest lockdowns for many countries, e-commerce sales grew 34 percent year-over-year, the highest growth rate reported since March 2008. And consumers weren't turning to their trusted brands during this critical period. Many shoppers branched out to new retailers.
Disruptions in brand loyalty have created a wealth of opportunities for businesses big and small, pushing them to take their operations online and across borders. Facebook even launched its own shopping feature to enable growing businesses to sell to consumers.
E-commerce is now king as U.S. online sales jumped 37 percent in Q3 alone, while experts predict Amazon.com will capture 42 cents of every dollar spent this holiday season. This digital surge will continue to proliferate as shoppers will turn to online channels even after the lockdown restrictions start to lift. In 2021, it won’t be adequate for merchants to only support card transactions online if they want to stand out in a crowded market.
According to PPRO’s own research, 42 percent of U.S. consumers will abandon their baskets if their preferred payment method isn't available at checkout. In fact, recent findings reveal the global average rate of cart abandonment is as high as 75.6 percent, causing brands to lose up to $18 million a year in revenue. We expect this demand to continue, putting pressure on retailers to expand current payment offerings.
Payments Should Prepare for Hypergrowth
Rather than an evolution, the pandemic has been a revolution. It’s turbocharged digital payments and changed customer expectations and behaviors overnight.
More and more customers are now online, looking for products or services that suit their very specific needs. A shopper might look across borders for what they want: better quality products, more payment methods accepted, stronger brand loyalty, and more. Merchants could reach untapped markets by offering the right mix of goods, user experience (UX), LPMs, and delivery options.
With over 500 significant LPMs across the globe, each country will have different payment preferences. To be able to scale up and succeed in the new normal, merchants must work with payment service providers to activate as many payment methods as possible at the checkout page.
2020 saw a huge change in relation to consumer payment preferences, but 2021 will be all about addressing that change and seizing the opportunities that have emerged. Merchants must get ready now, or else risk losing out to the competition.
While 2021 will certainly be another challenging year for the economy, the future for LPMs (and savvy retailers that offer them) will certainly be very bright.
Stefan Merz is the chief operating officer at PPRO, a company that works with payment service providers and local payment methods to help merchants optimize the payment experience for their customers.
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February 03, 2021 at 08:09AM
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Payments in 2021: What Lies Ahead After the Digital Boom - Total Retail
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