Alternative payments
Alternative payments refers to payment methods that are used as an alternative to credit card payments. Most alternative payment methods address a domestic economy or have been specifically developed for electronic commerce and the payment systems are generally supported and operated by local banks. Each alternative payment method has its own unique application and settlement process, language and currency support, and is subject to domestic rules and regulations.
Types
The most common alternative payment methods are debit cards, charge cards, prepaid cards, direct debit, bank transfers, phone and mobile payments, checks, money orders and cash payments.
A debit card (also known as a bank card or check card) is a plastic card that provides an alternative payment method to cash when making purchases. A charge card is a plastic card that provides an alternative to cash when making purchases in which the issuer and the cardholder enter into an agreement that the debt incurred on the charge account will be paid in full and by due date. Debit and charge cards are used and accepted in many countries and can be used at a point of sale location or online.
Prepaid or stored-value cards provide payment through a monetary value held on the actual card or on deposit in an account. One major difference between stored-value cards and prepaid cards is that prepaid cards are usually issued in the name of the individual account holders, while stored value cards are usually anonymous. In the United States, prepaid and stored-value cards typically can be processed on the credit card network, but this is not the case for all cards, especially those outside of the United States.
A direct debit or direct withdrawal is an instruction that a bank account holder gives to his or her bank to collect an amount directly from another account. It is similar to a direct deposit but initiated by the beneficiary. Direct debit is available in several countries including the United Kingdom, Germany, Austria and the Netherlands. It is scheduled to be available across the whole Single European Payments Area by the end of 2010. In the United States, where checks are more popular than bank transfers, a similar service is available through the Automated Clearing House network.
A bank transfer (also known as a wire transfer or credit transfer) is a method of transferring money from one person or institution (entity) to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office. A bank wire transfer is often the most expedient method for transferring funds between bank accounts. The transfer messages are sent via a secure system (such as SWIFT or Fedwire) utilizing IBAN and BIC codes. Online bank transfer systems in Europe are popular alternative payment methods, where the bank transfer is authorized by the consumer who logs onto his bank website and authorizes the funds transfer for payment to a merchant.
A giro transfer is a bank transfer payment, whereby order is given by the payer to his or her bank, which transfers funds into the payee's bank account; the receiving bank then notifies the payee. Giro is often used by post offices as well. The term is little used in the United States, although an ACH Transfer or direct deposit is the US electronic version of the giro transfer.
Online Banking ePayments (OBeP) are similar to giro transfers, but are designed specifically for use with online commerce. With OBeP, during the online checkout process, the merchant redirects the consumer to their financial institution’s online banking site where they login and authorize charges. After charges are authorized, the financial institution redirects the consumer back to the merchant site. All network communications are protected using industry standard encryption. Additionally, communications with the OBeP network take place on a virtual private network, not over the public Internet. OBeP systems protect consumer personal information by not requiring the disclosure of account numbers or other sensitive personal data to online merchants or other third parties.[1]
Electronic bill payment is a feature of online banking, similar in its effect to a bank transfer, allowing a depositor to send money from his demand account to a creditor or vendor such as a public utility or a department store to be credited against a specific account. The payment is optimally executed electronically in real-time, though some financial institutions or payment services will wait until the next business day to send out the payment. The bank can usually also generate and mail a paper check or banker's draft to a creditor who is not set up to receive electronic payments.
With phone payments, consumers are billed via their regular telephone number, whereby the charges are added to their phone bill. Premium-rate telephone numbers or 900 numbers are telephone numbers for telephone calls during which certain services are provided, and for which prices higher than normal are charged.
Mobile payments is a new and rapidly adopting alternative payment method – especially in Asia and Europe. Instead of paying with cash, check or credit cards, a consumer can use a mobile phone to pay for wide range of services and goods. The charges are then added to their phone bill.
A check or cheque is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified demand account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities.
An electronic check, often referred to as ACH or eCheck, allows United States and Canadian customers to make payments instantly using their checking accounts. Instead of a physical check, the payer provides the name, amount, routing and account number, and the transaction is then electronically processed and the funds are withdrawn from the checking account.
Electronic money refers to money which is exchanged only electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems. Electronic Funds Transfer (EFT) and direct deposit are all examples of electronic money.
Money orders, postal money orders, certified checks, cashier’s checks and traveler’s checks are all alternative payment types that are used in commerce in place of cash.
Usage
The number of Alternative Payments has grown exponentially in the last few years due to the need for billing solutions on the Internet. Limited credit card penetration and customary local payment habits, combined with tight credit and security fears to use credit cards for online payments has increased the usage of Alternative Payments on a worldwide level.
Alternative payments are offered by domestic banks and payment processors that offer merchants a variety of billing solutions. Most Alternative Payments have online applications and are integrated into electronic shopping carts used by online merchants.
Several billing solutions have been devised specifically for web-based merchants to accept alternative payments online and to support and access distant markets. Alternative payments are used throughout North America, Europe and Asia, and have penetration levels of sixty percent or more in various countries. Language, currency and support, including trust and familiarity, often contribute to the success of a domestic alternative payment solution.
Debit cards and charge cards are accepted worldwide as alternative payment and in some cases, debit cards are designed exclusively for use on the Internet, and there is no physical card only a virtual card. Certain systems also require the use of a PIN when a debit is used for online purchases.
European online direct debit solutions are particularly popular due to the lower use of credit cards in Europe as compared to other countries like the United States. Transactions can be approved in real-time and funds in 1 to 3 business days. Chargebacks remain a risk inherently when debiting a consumer’s bank account, however, using additional verification systems reduces the risk significantly and many payment processors maintain an extensive fraud database that mitigates the risks.
Using bank transfers to accept payments does not carry any inherent risk to the merchant, which makes it particularly attractive to both high and low risk merchants seeking to reduce chargebacks. The drawback to this approach from a merchant’s perspective are that re-billing cannot be made automatic and billing does not occur quickly, as their customers must manually transfer the funds.
Electronic checks allow funds to be withdrawn directly from the consumer’s account. Recurring payments can be set up and the consumer’s personal information can be verified instantly. Merchants that opt to accept electronic checks enjoy convenient processing that reaches a large number of consumers that do not own credit cards or do not wish to use credit cards to make payments. Electronic checks are known to have long clearing times of up to five business days and carry an inherent risk of charge-backs. Checks that have been verified may come back after the clearing time as “insufficient funds”, meaning that the consumer does not have sufficient funds in their account to pay the balance of the transaction.
Phone payments describe a system of allowing consumers to purchase products or services using their phone number. In most cases, the charge is verified via phone or SMS messaging before the transaction is approved. The resulting charge is then added to the customer’s phone bill.
Phone billing is accepted in many countries and offers a flexible way for merchants to accept payment, especially online, where the risk of fraud is elevated. While convenient for the consumer, phone billing has several inherent issues for merchants. Payment processors that support phone billing typically charge a higher rate because the payments must go through an additional party, the phone provider, before reaching the merchant. The clearing time on funds is also exceptionally high because the funds are not collected until the consumer pays their phone bill.
Merchant advantages
Alternative Payments have increasingly become more popular with merchants, as more options means more sales, and because nearly all Alternative Payments offer a variety of service specific features that addresses a global online marketplace. Geolocation software, automatic language translations, instant currency exchange and worldwide support are generally included to allow foreign buyers to make use of their domestic payment solution, while shopping outside of their country at a foreign based web merchant.
Unlike traditional credit card transactions, many alternative payments often provide additional security features that protect the merchant from fraud and returned transactions, because the funds availability is verified and payment is made directly from a bank account. The banks guarantee the funds and because there are no chargebacks, merchants are often not required to provide collateral or keep a reserve. Furthermore, accounts are validated in real-time and fraud modules scrub transactions, similar to the approval process with credit cards.
Consumer advantages
Alternative Payments have, in many areas, become the dominant form of online payment for consumers. Alternative payments gives consumers more options to pay and allows them to select payment methods that they are comfortable with. Language, domestic applications and familiarity with the payment method, coupled with the trust they place in their own bank, increases usage. Furthermore, consumers may simply elect to use alternative payment methods due to security concerns with credit card purchases. Many alternative payments often require additional security steps, such as a user name, password or personal identification number (PIN) to further protect the consumer.
References
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