Setting up a business may be both exciting and challenging, but there are important steps that cannot be missed. One of them is choosing payment methods to offer to clients. This decision may increase conversion rates, boost sales, and help generate more revenue. However, it may also have the opposite effect if chosen recklessly.
Companies and third-party payment service providers must think about which payment methods are most appealing to the end-users and make sure these options are available when consumers get to the checkout.
This guide will explain what payment methods are, list the main forms of payment, review the most popular online payment methods, and suggest how to choose the best payment methods for a business.
What is a payment method?
A payment method is a way to pay for goods or services. Payment options can differ depending on whether the business is based online or in a physical store.
In-store payment methods include cash, bank cards, and paying with mobile devices. Online payment options cover card payments, bank transfers, e-wallets, and account-to-account (A2A) payments.
What are the main forms of payment?
There are two main forms of payment: in-store and online. Each of these forms covers various payment methods. Here are the main ones:
In-store payment methods
- Cash payments — cash was the most common form of payment for a long time. However, the global pandemic and other factors have reduced its popularity.
- Credit or debit card payments — many people own and use bank cards. Their usage varies between countries, but they’re one of the primary in-store payment methods. The new trends show that currently used payment cards aren’t necessarily issued by banks. Non-banking companies now offer loans, Buy Now, Pay Later (BNPL) functionalities and other benefits.
- Bank transfers — manual bank transactions aren't the most convenient payment method, but merchants often use them to avoid card processing fees.
- Mobile or Near Field Communication (NFC) payments — more and more stores use point-of-sale (POS) terminals to accept card or mobile payments. Mobile payments don't have to be done specifically by using ApplePay or GooglePay and tokenized payment cards. There are also multiple platforms using QR code payments.
- Checks — one of the least used forms of in-store payments.
Online payment methods
- Debit, credit or prepaid cards — since many people own bank cards, they also use them to pay for goods and services online.
- Direct bank transfers — consumers can receive an invoice via email and make a manual bank transfer to the service provider.
- E-wallets — consumers attach their bank cards to a digital wallet and use their mobile devices to pay for goods or services online. The market sees an increasing focus on BNPL services, which is a form of a short-term loan provided to the end-user. This type of payment method is pushing out the usage of credit cards, which is decreasing yearly.
- A2A payments — account-to-account payments are safe and convenient for merchants and consumers. A2A enables paying directly from a bank account, bypassing card processing fees for businesses and improving security for consumers. If the bank allows instant or SEPA instant payments, A2A payments also enable instant fund transfers from the customer to the merchant.
Most popular online payment methods
The most popular online payment methods vary by country. According to the statistics, the most popular payment method among global consumers in 2021 was digital or mobile wallets. They made up 49% of e-commerce expenditure worldwide. Their popularity is set to rise to 53% by 2025.
Credit and debit cards were the second most popular online payment method in 2021 and made up 34% of global e-commerce transactions. Their popularity is expected to fall to 32% in 2025.
Bank transfers are the third most popular payment option, accounting for 7% of e-commerce spending. This payment method is primarily used in Europe.
The Central and Eastern Europe (CEE) region still tends to favour paying cash on delivery. For example, this payment method holds around 30% of the market share in Czech Republic.
What are the alternative online payment methods?
Alternative payment methods are a way of paying for goods or services with other methods than cash or using the largest card schemes. Major card schemes include Visa, MasterCard, and AmericanExpress.
The main alternative payment methods are:
- Online banking
- Direct debits
- Mobile payments
- Digital wallets
- Buy Now, Pay Later (BNPL) financing
Alternative payment methods are on the rise, especially after open banking has paved the way for new companies offering innovative solutions to step into the market.
The most popular payment service providers (PSPs) offering alternative payment methods are:
- GooglePay (using tokenized VISA or MasterCard payment card)
- ApplePay (using tokenized VISA or MasterCard payment card)
The popularity of alternative payment methods varies from country to country. Different payment service providers have settled into various markets, with Alipay taking 55% of the mobile payment market share in China and Klarna holding more than 50% of the global BNPL market.
What are the most secure online payment methods?
The most secure online payment methods are direct bank account payments, bank cards (credit and debit), and digital wallets. These are their main security features:
Bank account payments — Paying directly from your bank account is one of the most secure payment methods. This is partly due to the PSD2 security standards, including strong customer authentication (SCA), that ensure bank payments can only be initiated by identified users.
Bank cards — Credit and debit cards use 3D secure protocol for online payment security. Cardholders receive a code via SMS or a mobile application that is used to authenticate the payer. This way, 3D secure reduces card payment fraud. However, card payment fraud is still a common issue.
Digital wallets — E-wallets such as Apple Pay or Google Pay allow paying for goods or services via a mobile device and a bank card connected to the device. With the appropriate security measures set on a mobile device, digital wallets are one of the most secure payment methods.
How to choose the best payment method for your businesses
When choosing payment methods for your business, you should consider a few factors and find the answer to the question of how your consumers prefer to pay. Most consumers will abandon their carts if they can’t find their preferred payment method at the checkout.
Here are the factors to consider when comparing the best online payment providers:
- Price — depending on the payment method, businesses can pay significant amounts for every transaction. For example, the largest card schemes may charge a percentage of the transaction and a fixed price per payment. This may amount to a large part of the total payment.
- Features — various country coverage and bank account linking are some of the features that different services or payment gateways may offer. Consider what features would be most beneficial for your business.
- Flexibility — how soon will the funds be deposited into your business account? What is the refund policy? If these questions are relevant to your business, find out the answers before committing to a payment service provider.
- Security — is one of the most important factors to consider when choosing the best payment method. For example, in the case of payment fraud, who will be responsible for the damage, your company or the payment service provider?
What is the future of digital e-commerce payments?
Different sources predict various future scenarios, but most share one vision - digital payments will continue growing. The pandemic has already accelerated the growth of digital e-commerce payments, and they’re not stopping here.
Juniper Research announced that the value of e-commerce payment transactions around the world will exceed $7.5 trillion by 2026. In 2021, its value was $4.8 trillion, which means a 55% growth rate over five years.
Digital payment service providers will have to find ways to meet the demand and offer payment methods that serve the needs of their customers. Open banking has already shifted the landscape of the payment industry by enabling innovations and creating a more competitive environment for traditional payment methods. To stay in the market, companies will need to address the shift in demand for payment methods.
How can kevin. help?
kevin. offers innovative payment methods with the highest security standards. Merchants and PSPs can utilise kevin. features to provide their clients with the benefits of open banking.
With kevin., companies and PSPs can integrate advanced A2A payments that cover most EU and EEA countries and significantly reduce transaction costs. To learn more about what kevin. has to offer, get in touch with our team.