Payments in 2021: What Lies Ahead After the Digital Boom
It’s been a year of momentous changes for the payments industry. Previously, emerging trends have accelerated massively as a result of the pandemic. In just a few months, years of change took place with rapid changes in both consumer behavior and retailers’ expectations of e-commerce.
For example, cash use declined even further this year due to pandemic fears, leading to a coin shortage across the country, with many merchants referring consumers to digital payments when they lack accurate change. According to McKinsey’s Global Payments Report 2020, the share of global cash transactions is expected to decline by four to five percentage points by the end of 2020.
The pandemic – though undoubtedly terrible – has been rocket fuel for digital transformation and provides an opportunity for the payments industry to innovate. This year, for example, online bank transfer payments have become more widespread, while installment payment systems are cited as one of the fastest growing online payment methods in the world.
So what can we expect in 2021 after a year of rapid transformation? And how will the permanently changing consumer behavior shape online payment preferences?
Installment payments change attitudes towards credit
It’s safe to say that local payment methods that non-traditional payments like bank transfers, e-wallets, cash-based digital payments, and local credit cards have seen tremendous growth in recent years. Today they are the dominant payment methods worldwide and are used in more than 70% of all online transactions. Local payment methods (LPMs) continue to play a key role in accelerating digital adoption, especially in emerging regions. In China, for example, LPMs had sales of $ 43 billion in 2019.
In 2020, consumers were more inclined than ever to try different payment methods for greater convenience and security during national lockouts. According to Paysafe’s LiT study, 56% of global consumers said they used a new local payment method 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 fees. During the previous holiday season, 44% of US consumers said the availability of Buy Now, Pay Later is very important in determining how much they are spending at retailers. On the Black Friday weekend, Afterpay saw sales increase by 186%, while Klarna processed an amazing five times more transactions than in the first four years of operation combined.
Research by Kaleido predicts that BNPL will reach more than 12% of total global e-commerce spending on physical goods by 2025, demonstrating the persistence of this trend.
Ongoing vacation and job losses have placed consumers under unprecedented financial stress this year, leading them to rely on ‘pay later’ systems over traditional payment methods for their flexibility and lack of fines. With the economy not expected to recover to pre-COVID-19 levels for some time, this is a trend that will continue through 2021. Hence, this is certainly a payment method that online merchants must now offer.
Staying competitive in an increasingly digital age is becoming more difficult
No wonder the 2020 numbers reflect a massive boom in global e-commerce. The “accelerating” effect, as coined by McKinsey, describes a 10-year shift in e-commerce in just 90 days. In June 2020, at the height of the strictest lockdowns for many countries, e-commerce sales rose 34% year-over-year – the highest growth rate since March 2008. And consumers were not turning to their trusted brands during this critical time. Many buyers have expanded to new retailers.
Disruptions in brand loyalty have opened up an abundance of opportunities for businesses large and small, leading them to do business online and across borders. Facebook even launched its own shopping feature to enable growing businesses to sell to customers.
Ecommerce is now king, with online sales up 37% in the US in the third quarter alone, while experts predict Amazon will get 42 cents for every dollar spent this holiday season. This digital surge will continue to multiply as shoppers redirect to online channels even after the blocking restrictions are lifted. In 2021, it will not be enough for merchants to just support card transactions online if they want to stand out in a crowded market.
According to PPRO’s own research, 42% of US consumers will abandon their shopping cart if their preferred payment method is not available at checkout. While recent results show that the global average shopping cart abandonment rate is up to 75.6%, causing brands to lose up to $ 18 million a year in sales. We expect this demand to continue, which is putting pressure on retailers to expand their current payment offerings.
Payments should prepare for hypergrowth
The pandemic was not an evolution, it was a revolution. It has accelerated digital payments and changed customer expectations and behaviors overnight.
More and more customers are online today and are looking for products or services that meet their very specific needs. A buyer may be looking for what they want across borders: higher quality products, more accepted payment methods, higher brand loyalty, and more. Merchants could reach untapped markets by offering the right mix of goods, user experience (UX), local payment methods and delivery options.
With over 500 major local payment methods around the world, each country will have different payment preferences. To scale and thrive in the new normal, merchants need to work with payment service providers to enable as many payment methods as possible on the checkout page.
2020 has changed a lot in terms of consumer payment preferences, but 2021 will be about addressing that change and capitalizing on the opportunities that arise. Traders need to prepare now or they risk losing to the competition.
While 2021 is sure to be another challenging year for the economy, the future is sure to be very bright for local payment methods (and savvy retailers who offer them).
Of Stefan Merz, Chief Operating Officer at PPRO