The pandemic accelerated not just ecommerce but also digital payment methods: digital wallets reached 29.3% of U.S. ecommerce share in 2020, up from 23.7% in 2019. The wallets are expected to unseat credit cards as the preferred online payment method in the coming years, according to the FIS Global Payments Report 2021. Buy now, pay later (BNPL) also thrived over the past year, rising nearly 78% to account for 1.6% of ecommerce spend.
Unsurprisingly, this shift in payment preferences is being driven by millennials and Gen Z shoppers who have long embraced digital options due to their speed and ease of use. However, retailers themselves also are playing an important part in the growth: as more and more companies accept and advertise these options, it becomes more convenient for customers to utilize them.
“Most businesses now have the ability to accept a wallet, whether that’s Apple Pay or Amazon Pay or whatever it might be,” said Dan Brames, Head of North America Merchant at FIS in an interview with Retail TouchPoints. “I think more consumers, particularly millennials and Gen Z, are aware of the ability to pay with their wallet, so those two are big drivers. The benefit is wallets definitely streamline the checkout process, particularly on ecommerce, because there’s no manual entry of the information. It’s pretty much just enter and go.”
More streamlined online checkout processes positions digital wallets for explosive ecommerce growth in the coming years. Digital wallet usage is expected to account for 40.5% of North American ecommerce payment volume by 2024, eclipsing credit cards’ 26.7% share of ecommerce payments.
Digital Wallets Growing In-Store, but Credit’s Convenience Helps it Hold Strong
Digital wallets’ expansion is fastest online, but they’re still growing impressively fast at brick-and-mortar POS. Mobile wallets surged 60% to account for 9.6% of 2020 North American POS spend, and FIS doesn’t expect that pace to slow down in the coming years. The expansion comes at the expense of cash, which, unsurprisingly during a pandemic, fell from 21.9% of brick-and-mortar transactions in 2019 to 11.4% in 2020 due to demand for contactless payment methods.
Digital wallet adoption is forecasted to reach 15.5% of POS payment volumes by 2024. Brick-and-mortar growth can be partially attributed to digital wallets’ usage online, which is making more shoppers familiar with the payment process across channels.
“I think it’s about the comfort level,” said Brames. “People largely got used to using mobile wallets online for ecommerce during the pandemic when they couldn’t get out, and now they realize ‘Huh, I can also use this at a lot of places.’ Those places already accepted it prior, the consumer just never thought of using it, but now that they’re thinking about it you’ll see more and more adoption.”
By 2024, cash will fall to just 8.7% of North American POS payments, while credit card usage is expected to hold steady and remain the most popular physical payment method, at 38.4%. Convenience will be key to why credit cards will hold the top spot in brick-and-mortar despite the growth of digital wallets. In-store, paying with plastic is nearly as easy as using digital methods, and demand for contactless payments is expected to fade as shoppers begin to feel safer post-pandemic.
“I think you’re going to have a whole host of people that are going to return to their, for lack of a better term, normal buying patterns coming out of COVID,” said Brames. “I think some folks didn’t use a physical POS during COVID because they didn’t want to touch it. Once they’re comfortable that we’re fully vaccinated and so forth, they will feel much more comfortable using their plastic again.”
BNPL is Slow in Some Ways, but Offers Convenience Through Flexibility
Like digital wallets, BNPL is poised for explosive online growth in the near future. The option is expected to be selected for 4.5% of online transactions in 2024, which would represent 181% growth in just four years. Shoppers see BNPL as a safe way to spread out interest-free payments, and its growth is expected to come at the expense of bank transfers, charge cards, cash on delivery and other similar services.
“When you look at millennials and Gen Z, they think about credit differently than the generations before them,” said Brames. “They still want it now, but they don’t want to use traditional credit card debt. BNPL kind of offers them a vehicle that meets their demand for getting the goods or services now, but provides them a new way to do so versus stacking up credit card debt.”
While BNPL is still a fairly unique proposition, it is expected to become table stakes in the near future as more retailers adopt the service and it becomes available for smaller purchases. Brames compared this trajectory to loyalty rewards: in the early days point systems encouraged shoppers to make big purchases, but as the practice evolved they more often rewarded smaller, more regular shopping trips.
Adoption of BNPL will be slightly slower at the physical POS, accounting for 3.9% of transactions by 2024. The option can actually cause friction at checkout by taking up additional transaction time, but offering BNPL at every touch point offers a very significant benefit: flexibility. Nothing is more convenient to a shopper than being able to pay how they want, when they want, and having a BNPL option can mean the difference between a conversion and a walkout.
“There’s the potential to slow down the transaction at the point of sale in terms of the interaction with the customer, so I think BNPL adoption is going to take a little bit longer there,” said Brames. “But I also think that, whether it’s online or it’s actually in the POS lane, retailers are going to have to offer more flexible options.”