Trend Watch: Exploring the rise of alternative payment methods

As the world turns, so do our habits, adapting to the rhythm of societal progress.

Moving from paper-based to card-based payments and then from physical to digital transactions mirrors society's evolution. Nevertheless, the influence of cultural and customary factors on payment methods is often overlooked, leading to a gradual uptake of new payment systems that eventually gain momentum. With many payment options available to consumers today, the question arises: Which payment method will emerge victorious?

The rise of open banking

While traditional payment methods like cards, ACH, or cash are unlikely to vanish anytime soon, the widespread success of open banking in the UK and Europe, along with the emergence of real-time payment rails, has piqued global interest. As a result, more countries are considering adopting alternative payment systems to digitize their economies.

According to findings from the report by research firm Omdia, over a third of payment issuers and acquirers have prioritized alternative payments—such as instant payments, digital wallets, and cryptocurrencies—in their top three IT projects for the next 18 months. This underscores the growing importance of diversifying payment options in the evolving landscape.

The surge in consumer demand for many payment methods has underscored the necessity for modern payment orchestration platforms. These platforms play a crucial role in ensuring smooth routing and processing of payments. In fact, a significant 58% of issuers and acquirers intend to ramp up their investment in payment orchestration and payment hubs. Among them, 25% plan to increase their spending by 6% or more, highlighting the urgency to adapt to changing payment dynamics.

Yet, payments are deeply ingrained habits, so persuading consumers to embrace alternative methods requires the entire payment ecosystem to prioritize education and awareness. Ensuring consumers feel comfortable and familiar with these new options is crucial.

For newer payment methods to gain traction, they must offer a notably superior user experience compared to traditional options. This entails increased convenience and the maintenance and bolstering of security measures.

Digital wallets: Once complementary, now primary

Originally designed to mirror physical wallets in the digital realm, digital wallets initially complemented existing payment methods such as debit and credit cards. The introduction of QR codes in Asia and NFC technology in Europe and North America then propelled the uptake of mobile digital wallets for in-store transactions.

According to a Worldpay report, digital wallets are the preferred payment method for both online and in-store transactions today. Projections suggest they will take up to 54% of e-commerce payments and 43% of POS transactions by 2026.

In response to the competitive threat posed by non-traditional players, issuer banks have leveraged digital wallets as a catalyst for accelerating customer acquisition. While integrating third-party digital wallets remains crucial for merchants and acquirers, issuer banks increasingly aim to challenge big tech firms directly at the point of sale.

This strategic shift underscores the importance of technological agility and customer-centric approaches.

For example, İnnova developed Payflex mWallet to offer secure and swift credit card and money transfer functionalities. This digital wallet streamlines all payment transactions onto a single platform, including money transfers and merchant transactions, simplifying processes for merchants and users. Thanks to this product, users can execute money transfers, redeem loyalty points, and pay for goods and services with a single click.

With the emergence of new payment technologies like central bank digital currencies (CBDCs) and "pay by bank," a need for a unified platform to thrive arises. Digital wallets, boasting already high adoption rates, naturally fit the bill. Moreover, as sovereign governments increasingly prioritize digital identity, digital wallets can serve as the conduit for a successful rollout.

The adoption of digital identity is poised to be accelerated by open banking. Despite being around for nearly six years, open banking has predominantly focused on rolling out new payment services. Interestingly, markets initially driven by regulatory forces are now venturing into innovative services built upon established infrastructure, indicating a shift towards experimentation and expansion.

The importance of convincing the consumer

Despite numerous innovative payment methods emerging as alternatives to traditional ones, their adoption has been slower than expected. This can be attributed, in part, to a lack of consistent and reliable CX that fails to incentivize consumers to change their behavior.

While open banking payments are still in their infancy, their adoption by consumers has been hindered by a disjointed user experience. Variability in the user experience across different banks, merchants, and open banking providers has posed complexities. However, we maintain an optimistic outlook on the future of open banking payments.

As contactless technology and digital wallets took time to establish themselves as standard practices, we anticipate a similar trajectory for open banking payments in certain scenarios. Moreover, we anticipate the emergence of additional payment methods. Those that endure and flourish will do so by aligning with society's present and future needs.