Will direct bank transfers replace card payments online?
Sep 26, 2019
Consumers now expect to be offered more options at the checkout than purely card payments. One alternative payment method that is set for even greater adoption in eCommerce is direct bank transfer.
Traditionally credit and debit cards have been the preferred method of online payment for consumers, due to their convenience and ubiquitous presence at the checkout. But the reliance on card payments is in decline; the payment ecosystem is fragmenting, and alternative digital payment methods are being adopted rapidly.
Once such alternative payment method is direct bank transfer. This payment method is already the predominant payment methods in countries such as the Netherlands, and has the potential to overtake card payments in other markets soon.
Whether this becomes reality relies on the answer to two key questions.
Is the appetite for direct bank transfer payments increasing?
Direct bank transfer is already gaining traction as a payment method with consumers, but the appetite for eCommerce by bank transfer could be set to skyrocket. Here are three reasons we may see direct transfers overtake credit and debit cards payments for digital transactions.
The impact of Strong Customer Authentication
Although the original date for compliance with Strong Customer Authentication has been pushed back from September 14 2019, the implications of the regulation should still be at the forefront of merchants’ checkout considerations. While the majority of card payments will not need to be manually authenticated under the new 3DS2 protocols, every fifth payment will need to be authenticated regardless of the value as well as every payment when the value spent since the last authentication exceeds €100 within 24 hours.
For consumers, initially these new regulations will be confusing to say the least. Consumers might not be prompted for a manual payment authentication one day, they may be asked to verify a payment from to the same merchant for an equal or lower value the next. This lack of clarity may lead many consumers to turn to alternative payment methods that do not require Strong Customer Authentication; direct bank transfers provide a legitimate alternative for these types of payments.
And in addition to creating more confusion for consumers, the implementation of Strong Customer Authentication may also increase the percentage of issuer declined card transactions where the merchant and acquirer haven’t implemented 3DS2. If this is the case then consumers may turn to alternative payment methods such as direct bank transfer to prevent their transactions from being declined.
The growth of Open Banking
The primary objective of the Second Payment Services Directive (PSD2), introduced at the beginning of 2018, is to break the monopoly banks have held over how their customers make and receive payments. If given permission by the account holder, banks must allow third parties access to the customer’s account via Open APIs, including the ability to make payments directly to another account. This increase in competition for services should have a dramatic effect on consumer experience, not least direct bank transfers for eCommerce.
While we are yet to see the full benefits of PSD2 and Open Banking take shape in the UK and Europe, for reasons covered in a previous article, we are seeing some progress. For direct bank transfers, the consumer experience benefits of access via Open APIs that are on the horizon will make eCommerce via these payment methods preferable in many ways to card payments.
And financial services are clearly buying into the benefit of direct bank transfer payments, with many launching their own Open Banking-powered direct transfer services for eCommerce. As the number of similar systems increases, consumers will become more aware of direct transfers and this will have a positive influence on adoption rates.
A reduction in the dependency on credit cards
Developments in customer experience for alternatives to online card payments are swaying consumers, but this is occurring in tandem with a falling appetite for card payments generally, especially in younger consumers.
For our latest research report Lost in Transaction: Gen Z expectations at the checkout we asked consumers about methods they use to make payments online. One key takeaway was that less Generation Z consumers (aged 16-24) habitually make online payments with a credit or debit card than older consumers.
Only 39% of these consumers make online payments using a credit card, compared to 49% of consumers aged 25 and over. This difference in usage of credit cards isn’t counterbalanced by debit card usage; 41% of Generation Z consumers regularly make online payments with a debit card, compared to 42% of the rest of the population.
There could be several reasons for this, including the lack of appetite for the type of credit generated by a credit card, or a lack of trust of the security and privacy of online card payments generally. Financial inclusion may be a further contributor to the lower adoption rates of card payments; younger consumers may have less access to credit cards and so turn to alternative payment methods to make online purchases.
Whatever the combination of influencing factors, it is clear that younger consumers are relying on card payments less than other demographics. And as this group develops into the most influential consumers in the market, and is followed by future demographics of younger consumers that will be presented with even more alternatives to card payments, it will not be surprising to see card payments’ market share continue to fall.
How feasible is it for merchants to accept direct transfer?
Of course, it isn’t only consumer appetite to migrate away from a dependence on cards that will impact whether direct bank transfer will become the new norm for online payments. Merchants will also have to buy into accepting direct bank transfer as well; multiple factors will determine whether this is feasible.
For merchants that are considering adding a direct bank transfer to take advantage of a growing consumer preference for direct bank transfer, partnering with the right payment services provider will be critical. Here are some of the questions merchants should ask when comparing direct bank transfer services:
- How extensive are the banking relationships and how many international markets are covered?
- Do merchants receive their payment instantly and are payments guaranteed?
- How are pay outs and refunds to the consumer managed?
- Do merchants need to set up local bank accounts?
The future of direct bank transfer
It is unlikely that we will see online card payments disappear any time soon, but there is no doubt that consumers’ reliance on cards is subsiding.
This is why merchants are acknowledging that accepting more payment methods is vital for futureproofing their businesses. According to Lost in Transaction: The future of payments for SMBs 75% of online SMBs believe that increasing the number of payment methods they accept is essential for the success of their business.
Direct bank transfer is one such method. According to our research the number of SMBs that accept direct bank transfer is expected to rise by 37% before the end of 2020, to almost half of all online merchants (48%). With such compelling reasons to do so, it is easy to see why.
Paysafe’s Rapid Transfer allows consumers to make online payments instantly from their bank account, without leaving an operator or merchant’s website. Users receive instant confirmation of payment and benefit from a smooth user journey thanks to the familiarity of using their online banking credentials.
Rapid Transfer provides merchants with a cost effective, high converting and safe payment instrument while consumers enjoy an easy, instant and secure method of payment for their goods or service.
To find out more about Rapid Transfer, or to get touch and discover how Paysafe can help you accept direct bank transfer payments, visit our website.