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Does the Rise of Alternative Payments Spell the End of ‘Cash or Credit’?

Credit cards might still be the No. 1 payment method in the U.S., but younger demographics don’t have the same affinity for them that their older counterparts do. The result is a rise in alternative payment methods.

While only 17 percent of U.S. consumers reported they had shopped via a mobile device in the six months leading up to GfK’s 2018 FutureBuy Study, interest in this form of payment is on the rise. The market data firm found that 28 percent of shoppers are looking forward to having more options more often. That number is up from 17 percent in 2015.

As affinity for mobile pay increases, consumers are coming to expect retailers to keep up. And increasingly, stores from Target to Rebecca Minkoff are racing to do just that.

While it’s commonplace to see Apple Pay and Google Pay options at relatively new chains, traditional retailers have been slower to accept payment beyond the usual cash, credit and debit. That’s starting to change as the benefits of alternative payment methods—like mobile wallets or try-before-you-buy services—have become more well known. Beyond offering a lower friction experience for shoppers, they also allow retailers to tap into younger demographics, gather more customer data and boost sales.

“Mobile wallets are definitely the future,” said Ray Hartjen, marketing director and customer behavior analyst at RetailNext. “But the current implementation in retail is rather clunky.”

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Hartjen said alternative payment methods are all about giving customers the ease of online one-click shopping when they check out in physical stores. Yet most retailers are still falling short of the ideal friction-free in-store experience.

“Friction-free, of course, is not always cashier-less, like Amazon Go,” Hartjen tells Sourcing Journal. “But its principles are the same and C-stores, especially those with petroleum, are very much leading the charge.” He also credits the big mass players like Walmart for getting traction in this area.

Ultimately, Hartjen said, “the retail industry can expect younger shopper generations—Gen X and Millennials—to drive adoption across all categories and segments.”

In order for alternative payments to really take off, they need better PR.

Consumers and retailers alike also have concerns about the security of using mobile payments. A 2017 U.S. Consumer Payments Report by payments firm TSYS found that “Security remains a leading concern for consumers (when doing in-app mobile shopping) and high-profile breaches most likely reinforce this concern when shopping online.”

While issues like these can dominate the headlines, it doesn’t mean these payment methods are flawed, according to Jordan McKee, analyst at 451 Research LLC.

“It’s not that mobile payments are inherently insecure,” McKee told Digital Transactions. “It’s a matter of messaging. There needs to be strong messaging about the security that mobile payments provide.”

While security concerns might give some consumers pause, it’s actually the younger demographic’s fear of going into debt that makes them primed for alternative payment methods. Millennials are less likely than their predecessors to use credit cards for their purchases. And according to financial services research company Aite Group, less than half of Millennials use their credit cards weekly, which means retailers need to look for new ways to inspire young consumers to spend.

To encourage credit card-shy consumers to spend on big-ticket items, Danny Choi, founder of Payment Depot, a membership-based payment processing company, suggests that retailers keep a close eye on ‘buy now, pay later’ platforms. “’Buy now, pay later’ serves consumers’ need for instant gratification without hitting them too hard financially,” Choi says. “That’s a winning combination, and one that’s sure to be popular—particularly with Millennials and Gen Z. Any retailer selling high-ticket items should look into it.”

Offering shoppers the option of deferring or splitting payments can make splashing out on a luxury item much more palatable. “Retailers know that allowing consumers to delay payment can dramatically increase their readiness to buy,” Shahram Heshmat, Ph.D, associate professor emeritus at the Univeristy of Illinois at Springfield, told Addiction magazine.

It comes as no surprise, then, that retailers geared towards older Gen Z consumers and affluent Millennials already offer ‘buy now, pay later’ options. Urban Outfitters began offering customers the option to choose zero interest installment payments at checkout in 2018, and Anthropologie, Steve Madden and Rebecca Minkoff have also recently added installments to their offerings.

In addition to providing shoppers with an array of ways to pay, retailers are also starting to find ways to tie perks to payments.

“Starbucks is a prime example of a business that’s done well with mobile payments,” Choi said. “Tying in their payment system with their rewards program was a smart move because it allowed them to increase repeat spending while at the same time giving shoppers a convenient way to pay.”

Starbucks was an early adopter of mobile payment technology, having partnered with Square to bring mobile payments to the masses back in 2012. Many retailers in the fashion sector, however, are a bit behind the curve on mobile payment adoption. Case in point: Macy’s just got on board as recently as spring of last year.

On the other hand, Nordstrom launched mobile payments in 2012. The department store chain’s recent acquisitions of data-based clienteling and personal shopping tools BevyUp and MessageYes indicate it’s moving toward creating a single platform for conversational commerce, customer relationship management and payment processing.

Brian Gill, technology senior vice president at Nordstrom, summed up the evolution of payment processing within the retail industry perfectly in a recent press release:

“The retail environment is changing faster than ever, but the value of service, speed, convenience and newness remain constant,” Gill said. “To continue to be successful into the future, we need to invest in technologies that will enable us to deliver on those qualities and better serve customers in a digitally-connected world.”

To read more about how retailers are removing friction at checkout, read Sourcing Journal’s Consumers, Checkout & Creating Experiences That Resonate report.