Financial institutions are witnessing increasing competition from alternative payment methods (APMs), which have become a major rival to credit card payments.
There are two main types of APM: online and mobile. Online payments fall into two main categories, which are credit-based and value-added payment gateways. The former extends credit to consumers for whom the benefit is deferred payment; examples include Bill Me Later and PayPal Pay Later.
Value-added propriety gateways such as PayPal and Google Checkout allow consumers to create an account with the APM, which then takes the payment from the customer’s credit card or selected account.
$127 billion by 2015
The APM market in the US is valued at $62 billion and is set to reach $127 billion by 2015 according to Packaged Facts. Market growth in this sector is largely fuelled by mobile payments. Mobile payment/banking works on the same principle as Internet payment/banking, allowing customers to pay for goods and services using their mobile to charge goods and services to their online wallet or phone bill.
According to eweek, the next few years will see one third of checkout terminals adapted to facilitate mobile payments. Google wallet allows customers to use their mobile phones as a wallet to pay for goods and services by a system of near field communication, which allows sensors to communicate through close-range wireless technology. Eweek stated that this technology is already available in more than 70 million phones in Japan. The US is poised to follow a similar trend in APMs, with PayPal seeing $750 million profits in mobile payments according to Packaged Facts.
Google has teamed up with point-of-sale mobile device makers and NFC payment providers VIVOtech and Verifone to test Google Checkout at retail outlet checkouts in major cities such as New York and San Francisco this summer. Google’s latest offering might allow customers to split payment for a single transaction between gift-cards, private account, and coupons all through their mobile phones.
Mobile Payment for Retail Outlets
AT&T, Verizon and T-Mobile joined together with Barclays Bank and Discovery Financial to form the Isis partnership, which should come on line in the US in April or May of next year. This payment system will allow customers to pay for services at retail outlets using their mobile phones. Similarly to Google’s initiative, the consortium will make use of near field communication technology.
Apple may also be getting in on the mobile payments action, with a custom platform that would allow iPhone and iPad users to avail of this alternative payment system. This could mean profit for Apple as it would do away with charges for credit card processing which Apple has paid up to now on iTunes transactions.
The APM market will grow in terms of the number of people opening active accounts and by spending per account as consumer spending rises. As mobile payments continue to challenge traditional forms of payment, financial institutions are obliged to get onboard as consumers look set to ditch their paper and cards in favor of their mobiles.
The transition is already well underway in China and Japan, with the US set to follow suit.
Key Statistics - Alternative Payment Market (source: Packaged Facts)
- The total U.S. alternative payment market is expected to reach $127 billion by 2015.
- PayPal alone announced $750 million in total mobile payment volume worldwide in 2010 and expects to reach $2 billion for 2011.