In a world that thrives on 'add-to-cart' and next-day delivery, accepting online payments shouldn't be a pain point. For many merchants, however, it is. With more payment rails than ever, rising fraud risks, and high payment processing costs, many merchants are struggling.
We recently asked merchants about their payment-related pain points. Unsurprisingly, the cost of accepting payments ranked the highest. Merchants also struggle to understand the different payment rails, manage authentication, and deal with ACH returns.
Source: Plaid LinkedIn Survey
As payment options expand, alternatives are available to solve these challenges. This article explores newer payment options, the benefits and drawbacks of alternative payments, and how businesses can move beyond "cash or card."
What are alternative forms of payment?
Alternative payment methods refer to any method other than credit, debit, or cash-based payments. These methods include mobile wallets, bank transfers, Apple Pay, Google Pay, ACH, crypto, or recurring payment methods like Buy-Now-Pay-Later.
There is a wide variety of alternative payments, and they can vary depending on location and customer preference. For example, Alipay, a digital wallet from the company Alibaba, is a widely popular local payment method in China.
Credit is the most common payment method in the U.S., accounting for 77% of non-cash payments. However, it's also the most expensive for merchants, with U.S. merchants paying upwards of $100 billion in card fees per year. But there's good news: while many consumers appreciate the convenience and points earned from credit cards, most are open to alternative payment options.
Plaid’s Fintech Effect 2023 report found more than half of consumers paid via bank account more often than they used cards, and two-thirds (67%) of consumers are open to pay-by-bank, even when credit and debit cards are an option.
What types of alternative payment methods are available?
It's clear that consumers are open to payment options outside of cash and cards. Let's explore popular alternative payment methods in detail.
Digital wallets/embedded payments
Embedded payments and digital wallets allow consumers to make purchases without leaving a merchant's website or app, facilitating a fast, seamless checkout experience. There are two main types of embedded payments:
Ubiquitous embedded payments: Also called digital wallets, these are embedded mobile payments that can be used anywhere. Examples include Apple Pay and Google Pay.
Merchant embedded payments: Merchants offer these within their apps to save money on card processing fees. In exchange, consumers are offered discounts and loyalty points. Examples include Target RedCard and Starbucks Card.
Digital wallets and embedded payments offer several benefits. Because customers don't have to provide card details, they reduce friction and increase conversions. They also pair well with loyalty programs by making it easier to track when consumers make purchases and offer relevant rewards. With 7 in 10 US consumers stating that loyalty programs influence their likelihood of continuing to do business with a brand, loyalty programs can have a significant impact on revenue.
Pay by bank (ACH, FedNow, RTP)
Pay by bank allows for the direct transfer of funds between bank accounts. Three payment rails fall under this umbrella: ACH (Automated Clearing House), FedNow, and RTP (Real-Time Payments). ACH is a network used for electronic money transfers and payments in the U.S., processing transactions in batches. FedNow and RTP provide instant payment services, enabling settlement between banks in real time.
Pay by bank is generally more cost-effective than credit cards, with fees ranging between a few cents and a few dollars. This chart breaks down the average costs per transfer, though there can be some variation.
The authentication process for each payment rail is similar and can be managed using Plaid Transfer and Auth, which reduces the technology cost of offering all three options. Plaid Link helps improve the user interface of pay by bank, making it easier for consumers to navigate. Consumers are also familiar with it—65% of consumers between the ages of 18 and 44 have used their bank account to make a payment.
However, there are some disadvantages to paying by bank. ACH, for example, can take several days to process (though same-day ACH is available at a higher rate), and ACH returns can present a fraud risk. RTP and FedNow are instant and irrevocable, but the costs can add up.
FedNow and RTP are not as universally accepted as ACH and are generally only used to push payments to another account. Still, paying by bank is an attractive option for merchants who want to reduce payment costs without increasing liability.
Buy Now Pay Later (BNPL)
BNPL is a financing option that allows consumers to purchase goods or services immediately and pay for them through weekly or monthly installments, often without interest. After a quick approval process at the point of sale, consumers can purchase using this short-term loan.
BNPL is a popular option with consumers, with nearly half of Americans reporting using it to make a purchase. Credit card approval can take several days, while BNPL approval happens in minutes. This makes it easy for consumers to access credit to make large purchases and preserve liquidity.
Despite its popularity, BNPL has some drawbacks. Consumers who fail to make on-time payments can face large fees or penalties. Returns can be tricky, as the BNPL provider must issue the refund rather than the store. Returning the funds may take several days, which may frustrate consumers.
Crypto
The crypto market has expanded in recent years. BTC, Stablecoins, Ripple, and other altcoins allow consumers to make secure payments in seconds. There are several benefits to accepting crypto, including:
Lower transaction fees, especially for international payments.
Access to a wider consumer base, as some consumers prefer to pay with crypto.
Crypto payments cannot be reversed, reducing the risk of return fraud.
Less risk of misuse of sensitive data because merchants don’t need to hold buyers’ personal information.
Nearly 40% of Americans report they own crypto, making accepting crypto payments a unique opportunity for merchants to reduce payment costs and expand their customer base.
However, accepting crypto has some drawbacks. The crypto industry is volatile, which may lead to losses if the value fluctuates after payment processes but before converting it to fiat currency. However, stablecoins such as USDC address this by pegging their value to the US Dollar.
Regulatory uncertainty may also pose a risk for merchants, for example, if new laws impact aspects of crypto processing. Implementing a crypto payment rail is more complicated than other rails; however, advances in fintech are making the process easier.
→ Learn how Plaid can make funding crypto wallets faster and more secure.
Plaid's Fintech Effect Survey
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Top use cases for alternative forms of payment
Alternative payments offer merchants an opportunity to streamline the payment process, save money on credit card fees, and reduce the risk of fraud. New uses for alternative payments continue to emerge, but currently, there are four main use cases:
Bill pay: Allows customers to easily onboard and set up automatic payments for phone bills, utilities, insurance, and similar monthly payments. This reduces credit card fees and ensures payments are made on time.
Marketplace payouts: Marketplace platforms, like eBay and similar platforms, can use alternative payment rails to verify ownership of a seller's account and process payments quickly.
Payroll: Companies that process payroll can onboard customers faster and deliver payroll quickly using alternative payment methods.
E-commerce: Allows consumers to make payments online, which is especially useful for saving fees for high-value or high-volume purchases.
Plaid helps merchants set up alternative online payment methods
Plaid offers several products that streamline the process of accepting alternative payment methods. With Plaid, merchants can use an all-in-one payment solution to onboard, verify, and transfer money securely. This all-in-one payment strategy combines several established and newer Plaid products to create a seamless payment flow.
Onboard new customers: Using Plaid Auth, merchants allow customers to connect their bank accounts in seconds. The streamlined process reduces friction and boosts conversions. Plaid Link, a user interface platform, streamlines the clunky UI of pay by bank.
Verify: Based on the payment rail, use Plaid Signal, Balance, Identity, and/or Identity Verification to verify identity data or ownership of bank account, confirm sufficient funds, and look for fraud signals. This reduces the risk of account or identity theft and helps avoid overdrafts or returned payments.
Move money: Plaid Transfer moves money on the three bank payment rails (ACH, FedNow, and RTP). There is no need to build separate platforms for different alternative payment rails. Based on your preference, Plaid will automatically route payments to the most compatible or best available rail (e.g., ACH for lower costs, RTP/FedNow for instant settlement).
Watch the video below to learn how Plaid's pay-by-bank solution saves customers 40% when compared to credit cards.
The future of alternate payment methods
The payment landscape is expanding beyond credit cards and cash-based payments. Nearly 70% of consumers say they are open to paying by bank, even when credit cards are an option. The crypto market is expanding, and embedded payments on mobile devices are becoming the norm.
This shift in the payment system is due to several factors, including the evolution of payment technology, which makes alternative payment methods, like pay by bank, more accessible to both merchants and consumers.
Regulatory changes are also supporting the shift to alternative payments. An update to Dodd-Frank Act section 1033 was announced in 2024. This new regulation created standards for open banking in the U.S. that require banks to make certain financial account data available via APIs. This will help facilitate access to pay by bank and other alternative payment use cases.
A third factor impacting the shift to alternative payment rails is the release of FedNow. This instant bank payments rail from the Federal Reserve makes it easier for thousands of banks to offer same-day payments at a lower cost.
Which alternative payment method will win the hearts and wallets of consumers? While only time will tell, pay by bank is positioned as a clear leader in the alternative payment landscape. With lower merchant fees and forthcoming regulatory support, pay by bank is poised to reimagine what happens when consumers hit the "Buy Now" button.