Online shopping has become a driving force in the world economy. Between January 1st and April 30th of 2024, online shoppers spent $331.6 billion, a 7% increase from the previous year.
The rise in e-commerce spending is a boon for merchants, but challenges remain. Processing payments, for example, has become more expensive. As younger consumers enter the market, the types of payments they prefer to use have also shifted.
This article examines the current state of e-commerce payments and explores opportunities for e-commerce merchants to stay competitive by reducing payment processing fees and embracing the options that consumers are shifting to.
The current state of e-commerce payments
In recent years, "add to cart" has been quickly followed by "enter credit card number." Credit cards have long been the preferred payment option for U.S. consumers. However, that is changing. Let's look at current payment trends and how they impact e-commerce businesses.
E-commerce payment processing costs are at an all-time high
We've already discussed the increase in online spending. When it comes to paying to process those payments, however, merchants are left footing the bills—to the tune of $100 billion in 2023. In fact, a Plaid poll found that payment costs are a top pain point for merchants.
High costs make it difficult for merchants to set competitive prices and invest in long-term growth strategies. Raising prices is the obvious solution; however, record-breaking inflation means consumers are more cost-conscious than ever.
Changes in the payment landscape have created opportunities for merchants to expand e-commerce payment options, save money, and convert more customers simultaneously.
Credit cards are losing traction
Worldwide, the majority of shoppers use digital wallets (50%) or credit cards (22%) for their online purchases. While credit cards offer convenience and consumer protection, their higher processing fees pose a significant challenge for e-commerce merchants.
However, younger consumers are moving away from credit cards. Gen Z consumers born between 1997 and 2013 are much less likely to use credit cards, with 69% reporting daily or weekly debit card use, compared to only 39% for credit.
Alternative e-commerce payments are gaining traction
Alternative payment options, such as Buy Now, Pay Later (BNPL) services and pay by bank, are gaining traction among consumers for their convenience and flexibility. BNPL options, including services like Afterpay and Klarna, allow customers to split their payments into interest-free installments, making high-ticket items more accessible.
Pay by bank, which we'll discuss in more detail in further sections, allows consumers to transfer money directly from their bank account to a merchant for payments. Merchants can save significantly on fees by encouraging customers to use pay by bank rather than credit and debit cards.
Offering more payment options improves conversions
PayPal research found that 59% of consumers will abandon their cart if their preferred payment options are unavailable. This means merchants that limit their payment processors to credit cards pay higher transaction fees and exclude customers who prefer or need alternative payment methods. Offering additional payment options can reduce cart abandonment and drive conversions.
Pay by bank: An e-commerce payment solution
Pay by bank is a direct payment from a consumer’s bank account to a business’s account without using a credit or debit card. These payments are typically used for utility bills, subscription services, or loan payments. However, recent developments, such as the 46.6% growth of same-day ACH volume in Q2 2024, have opened the door to using pay-by-bank in e-commerce.
Pay by bank benefits and consumer willingness to use it
Pay by bank creates several benefits for e-commerce merchants. For starters, processing bank payments costs between 20% and 70% less than credit cards in the U.S., offering merchants a much cheaper option. And, as we've already discussed, offering more payment options increases overall payment acceptance rates.
Consumers have shown a willingness to pay with their bank accounts. Plaid’s Fintech Effect 2023 reported that 86% of fintech users see the benefits of pay-by-bank options and are open to using them to purchase. Half of consumers already use pay by bank more often than they use cards, and 67% of consumers are open to using pay by bank, even when paying by card is an option.
Additionally, Gen Z and Millennial consumers are more likely to adopt alternative payment solutions like pay by bank. According to a survey by CoreSight Research, Gen Z and Millennials used alternative payment methods like digital wallets, BNPL, and prepaid cards at a higher rate than all respondents, indicating that they would be more likely to use pay by bank as an alternative to cards.
Pay by bank is already an established consumer behavior in bill payments, rent, mortgage, peer-to-peer transfers, and other regularly occurring payments. With new technology such as Plaid’s Pay By Bank solution, it's becoming more popular for ecommerce payments as well.
Reducing ACH returns for ecommerce payments
Speedier ACH settlement times from same-day ACH can reduce insufficient funds returns because the shorter settlement time reduces the possibility for bank accounts to be emptied. Additionally, fraud risk tools like Plaid Signal can provide insights indicating whether a transaction will be returned, which opens the door for an instant ACH checkout experience for safe transactions—while requiring further steps for riskier transactions. Signal has helped companies reduce ACH return rates by as much as 75%.
Additionally, the launches of instant bank payment rails RTP and FedNow have the potential to reduce returns because instant payments are irrevocable, unlike ACH. For now, however, they are ‘credit only’, meaning that they are not typically used to accept payments. Request for Payment (RfP) is available in limited form for RTP and is being developed for FedNow, which would make real-time settlement for e-commerce a reality.
Plaid's 2023 Fintech Effect Survey
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How to encourage pay by bank in ecommerce payments
While many consumers are willing to use pay by bank for ecommerce, several data-backed strategies, such as offering a small discount and improving UX, can encourage less-keen consumers to switch payment methods.
Plaid internal research found that offering just a 1% discount at checkout for high-value e-commerce purchases increases pay-by-bank adoption from 20% to 67%. Considering the cost savings of paying by bank averages 40% over credit cards, the ROI on the 1% incentive should be compelling.
Switching from credit cards to pay by bank saves merchants an average of 40% on payment costs
Plaid internal research also revealed that an improved user interface design can lift pay-by-bank selection during a bill pay check-out flow from 39% to 72%. Plaid is a leader in user experience, with a payment flow that allows consumers to connect their bank accounts and pay by bank in just three steps.
Using Plaid as an e-commerce payment processing solution
By making paying by bank easy and secure, Plaid helps e-commerce merchants offer consumers more payment options and save on credit card processing fees. Here's how it works:
Connect user’s bank account: The Plaid Link account connection experience is familiar and fast. Over 100 million people have used Plaid to connect to an app or service.
Assess fraud risk before payment: Plaid’s fraud risk engine enables customers to speed up to 90% of low-risk payments to an instant experience—while lowering fraud losses by up to 25%.
Initiate payment: Plaid offers a safe and quick way to transfer money between accounts, with a 23% higher conversion rate than the nearest competitor.
Guarantee settlement: Plaid will provide an option to guarantee settlement for low-risk transactions, so merchants can expect reliable settlement just like debit and credit cards.
This checkout experience using Plaid’s Pay By Bank solution can be completed in as little as three clicks. It can easily be integrated into your existing payment stack alongside credit cards and other payment options, and can even integrate with your existing payment processor.
E-commerce payment processing is ready for change
Innovation is paving the way for a more efficient, flexible, and customer-focused e-commerce payment process. With processing fees for traditional payment methods rising, exploring cost-effective alternatives like pay-by-bank can protect profit margins and increase access to a larger customer base.