Retailers are embracing alternative payment methods, though cards are still king

As consumers look for new ways to spend their money, merchants are making sure they can receive it
Geoff Williams
NRF Contributor

“Will that be cash or credit?” Those familiar words have probably been uttered at stores and restaurants billions of times over the last 50 years or so.

But today, cashiers could ask, “Will that be cash or credit … or Apple Pay or Google Pay or Venmo or PayPal?” And if they aren’t saying it already, they might soon tell customers, “You can also participate in a buy now, pay later service — we offer Affirm, Afterpay and Klarna. And if you prefer to pay with cryptocurrency, we accept bitcoin, Ethereum, Tether …”

A new world of payment systems

In recent years, alternative payment methods have been gaining currency with both consumers and retailers. In 2021, the five biggest BNPL firms (Affirm, Afterpay, Klarna, PayPal and Zip) handled $24 billion in purchases made by over 180 million consumers, a tenfold increase from 2019, according to the Consumer Financial Protection Bureau.

Meanwhile, Apple Pay and other digital wallets have gained wide acceptance among retailers while many take PayPal. And Venmo — originally intended for “peer to peer” payments among individuals — is now accepted by CVS, Abercrombie & Fitch, Uber Eats, Hulu and Foot Locker, among others.

State of Retail Payments

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In addition, cryptocurrency is making a slow march toward acceptance. Big brands that currently accept crypto include Chipotle, Regal Cinemas, Whole Foods Market, Baskin-Robbins and GameStop. And Subway is experimenting with accepting bitcoin at three of its restaurants in Berlin.

It’s enough to give any business owner pause. Is there a risk to being too accommodating when accepting payments? And is there a risk to not being accommodating enough? The answer to both questions is yes.

Where is the demand coming from?

Even if you aren’t fazed by the world of alternative payments, the choices retailers and consumers have are dizzying.

“Consumers have more payment options than ever,” says Zachary Aron, banking and capital markets paying leader with Deloitte Consulting. And as one retailer accepts a new form of payment, the public demands that other retailers do the same. “It’s really a competitive advantage for merchants to personalize the payment experience.”

In some ways, the variety in methods of payment is a natural outgrowth of changes in how employers pay their workers, according to Kimberlee Josephson, associate professor of business administration at Lebanon Valley College.

“Given that alternative forms of compensation have been sprouting up in the workplace for quite some time — it is no longer about just the salary, but also the perks of the position and benefits packages — it is only natural for consumers to desire alternative forms in the marketplace as well,” Josephson says.

In other words, the very notion of wealth is continually changing. Customers are willing to pay for merchandise and services rendered, but they may not be willing to part with their money right now — or even give that money to a retailer in the forms we traditionally know.

There is little choice but to give customers what they want, Aron says. “Merchants need to work with technology and payments partners to look for opportunities to cater to their customers’ payments needs because consumers are demanding it,” he says.

How strong is the demand?

Given the growing popularity of alternative payments, they are widely accepted by retailers. Among merchants surveyed by Forrester for NRF’s 2022 State of Retail Payments report, 80% take Apple Pay or plan to do so within 18 months, followed by 65% for Google Pay. Online, 78% accept Apple Pay and 74% take PayPal or plan to do so. Nearly half (43%) accept at least one BNPL option online.

Nonetheless, alternative payments account for only a small percentage of transactions and are no threat to credit and debit cards’ dominance of the payments market. According to the Federal Reserve, 76% of in-person purchases were made with credit or debit cards in 2021 while 19% were made with cash. Digital wallets made up only 2.6% of card payments — not overall payments — in 2020, according to the Fed.

Credit Card Competition Act

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Digital wallet use has grown in the past two years but Apple Pay — which handles three times as many transactions as No. 2 digital wallet Google Pay — still accounts for only 2.4% of overall in-store transactions, according to a 2022 survey for Percentages for other alternative payments are even smaller.

And BNPL’s $24 billion in transactions? That compares with $9.4 trillion for credit and debit cards last year, according to the Nilson Report.

In contrast to other alternative payments, just 4% of retailers have implemented bitcoin online while only 2% offer another crypto payment option, according to the NRF payments study. And 65% have no plans to do so in the next three to five years, citing lack of consumer demand and concerns ranging from lack of stability to money laundering.

Retailers like the idea of alternative payments because they might someday provide relief from the high “swipe” fees banks and card networks charge to process credit and debit card transactions, says Leon Buck, NRF vice president for government relations, banking and financial services. Those fees soared 25% last year to a record $138 billion and have doubled over the past decade. But as long as cards control the market, retailers’ focus will be on bringing swipe fees under control, he says.

“Alternative payments are a welcome innovation but are a long way from providing true competition in the payments market,” Buck says. “Keep in mind that a digital wallet isn’t really an alternative. It’s just an electronic way of holding your credit and debit cards, and most digital wallet transactions are still just card transactions, complete with swipe fees. Other methods like Venmo are true alternatives but haven’t made a big enough dent in the market to make a difference yet.”

What’s next for alternative payments?

If you’re an overwhelmed retailer wondering what the future of alternative payments looks like, the crystal ball is hazy, but there are several scenarios that will likely play out.

Some retailers will opt for creating their own installment plans

Rakesh Gupta, an associate professor of decision sciences and marketing at Adelphi University, points out that BNPL programs offered by companies like Klarna and Afterpay charge merchants about 5% of the transaction amount. That’s double the average credit card “swipe” fee, making BNPL much more expensive for retailers to accept than an ordinary credit card. But if a retailer sets up its own installment payment plan, that “may marginally improve revenues and profits,” he says.

Most retailers aren’t likely to want to spend resources creating their own program, though some that have say it has been a success.

There are benefits to working out payment arrangements with customers, according to Larry Sutton, founder and CEO of RNR Tire Express, a tire retailer with 173 locations that lets customers buy tires outright or pay for them monthly, biweekly or weekly.

Sutton was offering the BNPL-like installment program long before BNPL came on the scene and says it has helped foster stronger relationships with his customers.

“They pay us directly and not a third party,” Sutton says. “When these traditional tire dealerships use the BNPL programs, they are handing over the relationship to a third party and may never see or hear from that customer again.”

Some of the wrinkles with using alternative payment systems will be ironed out

Retailers might eventually have no choice but to get on the cryptocurrency bandwagon, but that doesn’t mean they won’t be able to dictate the terms of how they get paid.

“One concern merchants may have with bitcoin transactions is the price volatility,” says Joowon Park, an assistant professor of marketing at the University of Utah. “What if I get paid in bitcoin, and then bitcoin price crashes the next day?”

But Park says bitcoin facilitators such as Strike address such concerns by allowing merchants to settle payments in any currency they want. If you run a coffeeshop and somebody pays you $3 for a cup of coffee, you might choose to receive the payment as three U.S. dollars or, if you prefer, receive the payment in bitcoin. (After all, maybe the price of bitcoin will go up.)

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And while BNPL transactions tend to cost merchants more than credit card processing fees, Park points out that fees for bitcoin transactions can be significantly lower than credit card transactions.

While the NRF/Forrester study found little retailer interest in cryptocurrency, a separate survey by Deloitte said 75% of merchants plan to accept stablecoin – which is tied to the U.S. dollar – within the next two years and that nearly as many will take other crypto.

Retailers might use BNPL to pay other businesses

Aron says there has been “an explosion” of demand for business-to-business BNPL services as a substitute for supply chain financing and “float” payment term schemes.

So as consumers get more choices on how to pay for goods and services, retailers will, too. But one thing is for sure: The words “Will that be cash or credit?” already sound like a relic of the past.

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