How alternative payment methods can save merchants money

What merchants need to know about the benefits and use cases for pay by bank, crypto, BNPL, and digital wallets.

June 24, 2024

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Danielle Antosz

Danielle is a fintech industry writer who covers topics related to payments, identity verification, lending, and more. She's been writing about tech for over a decade and is passionate about the impact of tech on everyday life.

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. 

In a recent survey, we asked merchants about the pain points they face related to payments. 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 each method, and how to implement alternative online payment methods. 

What alternative payment methods are available?

Credit is the most common payment option, accounting for 77% of non-cash payments. However, it's also the most expensive for merchants. In 2023, U.S. merchants paid upwards of $100 billion in card fees. The good news is that 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.

It's clear that consumers are open to payment options outside of their cards. Let's explore the different options in detail. 

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 generally only push payments to another account. Until request for payment is enabled, RTP and FedNow won't be available to collect payments from consumers in the same way that ACH debit is used today.

Still, paying by bank is an attractive option for merchants who want to reduce payment costs without increasing liability.   

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 offering crypto payments a unique opportunity for merchants to reduce payment costs and expand their customer base. 

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. 

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. 

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 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. By streamlining the payment process, 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.

Plaid's 2023 Fintech Effect Survey

Navigate the latest consumer trends, create lifetime customers, and grow your business

Top use cases for alternative payment methods

Alternative payment methods 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.

How Plaid can help merchants get set up with alternative payment methods

Plaid offers several products that streamline 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 solution combines several established and newer Plaid products to create a seamless payment flow. 

  1. 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. 

  2. 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. 

  3. Move money: Plaid Transfer moves the money on the three bank payment rails (ACH, FedNow, and RTP). 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 alternative payment methods

The payment landscape is expanding. Nearly 70% of consumers say they are open to pay by bank, even when credit cards are an option. The crypto market is expanding, and embedded payments are becoming the norm.

This shift 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. A pending update to Dodd-Frank Act section 1033, expected by the end of 2024, will create standards for open banking in the U.S. This new regulation will require banks to make certain financial account data available via APIs, which will help facilitate access to pay by bank and other alternative payments use cases. 

A third factor impacting the shift to alternative payment rails is the release of FedNow, a Federal Reserve instant bank payments rail that 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.

Talk to Plaid about saving money with alternative payments

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