Addressing the cost dilemma of alternative payment methods

In addition to traditional payment methods, such as cash, direct debit, credit or bank transfers, alternative payment methods (APMs) are becoming more prevalent in the market. These include digital wallets, mobile payments, wireless payments, and more. APMs are becoming a necessity for any retailer who wants to grow its business and create the best possible shopping experience. According to the 2020 CGI Client Global Insights, improving the end-to-end customer experience is the top business priority of retailers. Customers want more options when it comes to how they pay for their purchases, and the failure to offer them preferred payment methods can result in a poor customer experience and the loss of business.

A cost dilemma for retailers and payment processors

As a result, retailers are under pressure to offer APMs to meet their customers' expectations, but this poses a dilemma. APMs typically are not profit generating; they are simply a service for customers. However, they result in additional transaction fees for the retailer.

Likewise, the cost of APMs affect payment processors such as banks or payment service providers (PSPs). Due to the prevailing business models of alternative payment providers, which collect the majority of retailer transaction fees, PSPs are left without any share, or only a marginal share, of these transaction fees. Further, the integration of APMs into existing payment infrastructures is costly, and the cost can be very difficult or slow to amortize.

The cost of integrating and providing APMs for both PSPs and retailers can be more of a “loss avoidance exercise” rather than a profitable business opportunity. Ultimately, the dilemma leads to a call for new payment infrastructures that enable payment service providers (PSPs) and retailers to offer APMs more cost-effectively.

New revenue opportunities through APMs

For now, as PSPs work with existing payment infrastructures and plan for new infrastructures, is it possible to turn the cost dilemma of APMs into an opportunity? Value-added service offerings specifically tailored to the retailer hold promise. In concrete terms, PSPs could generate this value add through detailed APM transaction evaluations using data analytics, including real-time monitoring, that generate rich customer and business insights for the retailer. The value add also could be generated through risk management services tailored to the respective APM, or through customer-loyalty financing options, which the customer can opt for at point-of-sale. Retailers would benefit themselves from the new value-added services and, at the same time, better serve their customers.

For PSPs, there also are promising monetization opportunities. By integrating optional value-added services for retailers, they can retain and draw more retailers. Offering APMs is especially important for attracting start-ups, which typically lead their established counterparts in terms of technology and service offering innovation. Ultimately, PSPs can serve as an infrastructural intermediary between APM providers, retailers and end customers, which, in turn, can lead to the development of more profitable business models and services.

Looking ahead

The future for APMs is promising. As younger generations, in particular, increasingly reject traditional payment methods, the growth of APMs will continue to accelerate. Soon, we will no longer view APMs as "alternative” payment methods. Consumers are attracted to the concept of choice because they feel they have more control and power over their purchases. As a result, they are more likely to buy from a company that offers various payment choices.

Another factor that contributes to the promising future of APMs is their omni-channel capabilities. An omni-channel retail experience is highly desirable for many customers who long for the convenience of shopping by any means and at any time. We see this reflected already in the high acceptance and market penetration of APMs.

Given the rapid pace of change in the payment industry, leading PSPs and retailers will keep pace by investing in APMs. If you want to make your company future proof, APMs have become a business necessity.

CGI has extensive expertise in providing end-to-end support for the integration of APMs. For more information on our work, feel free to reach out to me.