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Online banking e-payments: How preference shifts when payment methods advance

Blog post   •   Jul 14, 2016 13:55 UTC

One hundred years ago, people got paid in cash. They had cash in their pockets and paid for goods in cash at their local store. Cash was king. Payment was easy. Oh, how the times have changed! 

In some countries, you can get by for months without seeing cash, let alone paying with it. In Sweden, for example, cash and coins comprise just 2% of the country’s economy, compared with 7.7% in the US and 10% in the euro area. In 2015, only about 20% of all consumer payments in Sweden were made in cash, compared with an average of 75% in the rest of the world, according to data from Euromonitor International. Upping the ante, Denmark recently made a goal of “eradicating cash” by 2030.

While the Nordics may be leading the way, the world as a whole is spinning towards a cashless society. Developing countries that may be seemingly far behind have the opportunity to skip traditional steps towards cashlessness thanks to emerging financial technologies. 

We’ve come a long way in those 100 years. Today, people receive their salaries directly deposited into their bank accounts. People shop online, often from other countries. A society built around cash doesn’t make sense in the 21st century. But a society built around the bank account certainly does. Hence, the rise of online banking e-payments (OBeP), which let consumers pay directly from their bank accounts.

A land of cross-border opportunities

Countries with good online banking infrastructure naturally show the largest preference for this type of payment. In the Netherlands, for example, iDeal, a bank-owned e-commerce payment system, is far more popular than credit card. In 2006, just a year after it was founded, iDeal processed 4.5 million transactions. However, in 2015 it processed 222.1 million transfers, or more than half of all e-commerce transactions in the country. This hockey-stick growth shows how preference shifts when innovative payment methods become available. Taking a step back, we see that, in Europe, cross-border e-commerce is growing year over year. Given that 93% of Europeans already use their bank account regularly, there’s clearly an eager audience ready to use a cross-border online banking payment technology when it becomes available.

Trustly, founded in 2008, is building that cross-border solution. Covering 29 European countries and connecting more than 100 banks, it has seen growth similar to iDeal’s. (In the Netherlands, Trustly actually works with iDeal to let Dutch consumers pay across borders.) 

So what drives adoption then? Any innovative payment method must benefit consumers and merchants alike. For consumers, successful adoption of OBeP is due to simplicity, security and convenience. For merchants, there’s an opportunity for higher conversion rates, simplified administration and limited chargeback risk.

Benefits for consumers

Simplicity: A consumer is less likely to buy something if doing so requires too much effort, like creating an account. In fact, 25% of shoppers abandon their purchases because they are forced to create an account, according to an E-consulting survey. When shopping online with a bank transfer solution like Trustly, consumers don’t need to register an account and can make a purchase simply by entering their familiar online banking credentials from their existing bank.

Security: Online banking e-payments use two-factor strong authentication, which consists of “something you have” (for example, a smartphone) and “something you know” (for example, a PIN code), making it the safest form of online payment. 

Convenience: With m-commerce expected to grow by 60% over the next 3 years in Western Europe, according to Verdict Financial, convenience is also becoming more of a factor. Having a mobile experience that is responsive to different screen sizes will make the checkout process much more convenient and consumer-friendly.

Benefits for merchants

More options drive higher conversion: Consumers frequently abandon their online shopping cart when their preferred payment method isn’t available in the checkout. The cart abandonment rate for this reason is as high as 50% in Germany, according to data from a DIBS survey. Catering to European consumers’ preferences drives higher conversion rates.

Simplified administration: With Trustly, merchants only have to sign one agreement with one partner, they can reconcile in one format and they only need one legal entity to reach all banks and markets combined. 

Limited chargeback risk: With online banking e-payments, chargeback risk is minimized, which is what gives this method a major edge over credit card payments.

As global e-commerce grows, so does the potential of alternative payment methods, and online banking e-payments might just have the biggest opportunity of them all. 

This article was originally published as part of The Paypers' "Ecommerce Payment Methods Report 2016."