As the European eCommerce market continues its meteoric rise, we spend an increasing proportion of our time looking at how to accommodate the diverse payment preferences of European consumers. Our merchant clients raise questions like: “How do German consumers pay online, which payment types should I accept in The Netherlands, and can Italians use their debit cards online?”  As we have immersed ourselves in the online payments world, three unrecognised truths have become increasingly apparent:

1. In Northern Europe there is an active consumer preference for “alternative” payments, rather than just being constrained by a lack of access to internationally branded schemes.
2. Although complex, the number of payment types used in Europe is highly concentrated.  There is a danger in getting lost implementing the long tail of “alternatives” which generate very little incremental customer reach. 
3. Accepting multiple online alternatives is very complex and doesn’t easily fit card centric operational processes.

First, the issue of consumer preferences for “alternative” payments. In 2015 67% of payments in Germany - Europe’s second largest online market - are non-card. In fact, only about 11% of online spend by German consumers is on a card, a share which is gradually declining.

Consumers in Germany actively prefer to use bank transfers and direct debits to make eCommerce payments. Their choice does not reflect lack of access to cards.  On the contrary, credit spend in face to face is growing at 3% per annum (in the UK credit share of spend is falling by 1% per annum) and there are 38m cards in the German market. This picture is repeated in other Northern European markets. For example, in The Netherlands iDeal, the credit transfer scheme, has achieved almost a 58% share, reflecting consumers’ preference to pay directly from their bank accounts. 

Active consumer and merchant preference makes the use of the term “alternative” payments somewhat misleading in specific (mainly northern European) markets. While in aggregate cards are still the dominant form of payment across Europe, in specific markets a clearer term would be “preferred” payments. These preferences are rational and appear very stable.  It seems unlikely that consumers in many Northern European countries are about to become card centric.  With the arrival of the PSD2 and SCTinst scheme services across Europe, we are likely to see a standardisation of processing of these preferred payment types and a move to match card functionality. 

The second truth is concentration, not diversity.  Although there may be 200+ different payment options available to consumers, PSE’s research suggests consumer preferences are restricted and consistent.  

The top 10 payments types account for 99% of electronic online spend (ie excluding COD) in Europe. There is little point adding more payment types as outside this top 10 as no method adds more than 0.1% in spend at a European level, nor 2% in spend for any individual market. Analysis such as this allows us to make some pretty strong statements to our merchant customers: If you offer the top 10 payment types, you cover 99% of spend and allow your consumers to pay with their nation’s preferred payment type everywhere in Europe.

Cards remain European consumers preferred way of paying online, with 58% of spend. However, as discussed above, it is important to recognise the role played by preferred payment schemes in specific countries. For example, if a merchant wishes to sell in The Netherlands iDeal is essential, because it accounts for such a large share of domestic online spend. Accepting credit transfers, either as vanilla SEPA Credit Transfers, or via schemes such as Sofort also enables merchants to address a wider segment of the online shopping community in markets such as Germany.

The third truth is that accepting local online payment schemes is NOT just the same as accepting Visa and MasterCard. Card acquirers and the international card schemes have been in the online business longer than anyone. They have robust processes in place for merchant risk assessment, authorisation, funds guarantee, fraud management, settlement, reconciliation, and most importantly (from a consumer perspective) chargebacks and dispute processing.  Moving from cards products into accepting other preferred payment types requires significant investment in building specific operational frameworks and delivery services. 

While most online payment gateways simplify the process of technical connectivity to multiple payment types through a standard API, commercial processes are not always as well integrated. This means that merchants have to undertake a whole range of activities for every single new payment type they accept. These can include: setting up local bank accounts and complying with local KYC and AML requirements, negotiating separate commercial contracts, managing separate settlement transactions and creating new dispute processes. It is also worth noting that few of the preferred payment types have the same transaction characteristics as cards – they often have no unique transaction references, no dispute processes, or even guarantees that funds will arrive (eg SEPA Direct Debits). As well as higher set-up costs, all of these differences create significant operational overheads in customer contact centres as customers generate queries, and back office overheads for reconciliation and exception management.

Gateway providers are increasingly recognising this issue, and offer transaction collection services which simplify and integrate merchant settlement. They do this by creating single merchant settlement accounts into which all payments are settled, pre-negotiating scheme contracts, and by creating end to end transaction tracking which allows front and back office operations to treat local preferred payment types with similar processes to cards.

To round up, what can we say about these online payment truths? In Northern Europe, local payments schemes are preferred, not just an alternative to cards, and this is likely to remain stable. Most merchants should focus on the top 10 payment schemes, and not worry about accepting smaller volume products. Finally, merchants need to recognise that technical integration needs to be complemented by commercial integration to lighten the load on front and back office operations.