Should DTC Brands Accept Alternative Payment Methods?

The landscape for web and proximity payments has heavily evolved over the last few years. New digital payment, mobile banking, and alternative credit channels have sprung up to grab a share of the purchase volume and lending activity typically controlled by the traditional banking and merchant payment industry.

In fact, the last twelve months have seen sizable deals in the space. Checkout.com reached a $40 billion valuation in its latest share sale. The company’s valuation has risen 20x since 2019 as purchase volume tripled in 2020 and 2021. Square agreed to acquire Afterpay for $29 billion, noting that a key reason for the deal (its biggest ever) was a growing wariness toward traditional credit among younger consumers, and point of sale lender Affirm’s stock skyrocketed after the company’s IPO. 

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In the midst of so much action in the space, online retailers and service providers of all sizes have determined that offering customers their preferred payment and financing options can drive higher conversion rates, a stickier customer base, and offer brands more potential to target certain geographic and age segments. 

The Banking Industry vs. Alternative Payment Methods

It is hard to overstate the amount of capital flowing into this area in private and public markets. On a Q3 2021 earnings call, Capital One CEO Richard Fairbank said, “Investment in fintechs throughout the first three quarters of this year (2021) have been more than $90 billion…on an annualized basis that’s $120 billion, and that’s more than double last year's total.” He continued, “Those are just breathtaking investment numbers. And that’s a huge assault on our industry”

Most of the large US banks derive the majority of their consumer banking revenue from credit card interest income and interchange fees on card purchase volume. Both of these revenue streams are targets of the companies like Affirm, Afterpay, and Paypal (Venmo). Additionally, at the macro level, cryptocurrency (crypto) payments continue to grow and also pose a threat to banks that typically do not have the same flexibility to offer financial services structured around crypto at scale.

Alternative Payment Methods for DTC Brands to Consider

With all this competition going on in payments, DTC founders and managers should take note of opportunities to align with customers on their desired method of payment. Accepting Buy Now Pay later solutions, digital wallets, and crypto payments could offer an edge for DTC companies to meet new consumer preferences.

Buy Now Pay Later (BNPL)

The Federal Reserve Bank of Kansas City describes BNPL as a type of short term loan that allows consumers to make purchases and pay for them at a future date over a series of installments. Loan terms typically range from six weeks to 60 months, with many loans three months and under carrying 0% APR. Merchants typically pay a fee of around 3-4%, which is above the average 1.5-2.5% range you see with cards from Mastercard and Visa. There are approximately two dozen BNPL providers in the US with the most familiar services being Paypal Credit, Affirm, Afterpay, and Klarna. These firms tout their services to merchants as (among other things) attributing to significant gains in Average Order Value (AOV) (Affirm +85%, Klarna +41%).

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💡 PYMNTS.com found that 29 million Americans have used BNPL for at least one transaction in the past year. This sizable base of consumers is seeing double digit annual growth and is an opportunity for DTC online businesses to make inroads with Gen Z, unbanked individuals, and those outside the credit box of traditional credit card companies. 

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In the table below — comparing charges from BNPL payments, credit cards, and layaway options — it’s easy to see why consumers like BNPL:

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Recent data published by C+R Research found that the average amount of debt owed for BNPL purchases is $883, with an average number of installments per plan at 3.8. The research also found that 56% of consumers preferred using BNPL services over credit cards, with the top reason being the ease of making payments.

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The clear advantage of these services for DTC online businesses is they are cheaper to use for the consumer in terms of interest paid on balances, and simpler given their very concise payment terms. In many instances BNPL deals are interest free for loans under six months. In addition to the AOV gains, some businesses have found lower cart abandonment rates and higher conversion upon offering BNPL. 

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There are also risks involved for a brand that offers BNPL, including increasing levels of regulator scrutiny and credit risk held by the BNPL firms jeopardizing their ability to continue extending credit.

Stored Value Digital Wallets

Some DTC brands are also considering allowing consumers to pay with stored value digital wallets like Venmo and Cash App (note that these are different from pass thru wallets like Apple Pay). 

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While these options have made moving money between individuals easier, it is not so clear if there is value in accepting digital wallets as a payment option for online retail. Many of these services still sit on top of the traditional banking system and do not offer cheaper merchant fees for business customers.

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Fragmented market share amongst these apps also makes it difficult to focus on accepting any single wallet, and some wallets do not offer an online merchant option. Paypal’s Venmo charges merchants a whopping 3.49% + $0.49 for mobile online shopping checkout capability, which is more expensive than direct merchant accounts with Visa or Mastercard. No single digital wallet has wide enough usage to warrant centering your suite of payment options around a single option, so your strategy should be focused simply on meeting the needs of your specific customer base.

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If you are targeting a consumer segment that tends to use digital wallets — like younger consumers or tourists/expats — you should focus your alternative payment strategy on the digital wallet that has the highest acceptance rate among your target audience.

Additionally If you are expanding internationally, consider offering a digital wallet option that fits the geography (i.e. Alipay in China or Giropay in Germany). Taking this type of opportunistic approach seems right for businesses that want to gain more traction in a new country or sell to a segment that has a high adoption rate of a certain wallet.

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Although not all digital wallets offer a merchant program for online shopping, this alternative payment method presents less risk than onboarding BNPL or crypto payments. As your company considers various options, stay updated about how popular wallets are evolving. Specifically, check out their web and mobile capabilities, merchant program offerings, and adoption among certain key consumer groups.  

Cryptocurrency (Crypto) Payments

The surge in crypto prices over the last two years have undoubtedly shifted the financial landscape. As crypto begins to proliferate on Wall Street, corporate balance sheets, and digital wallets, smaller businesses are taking note. Growth in retail trading and potential use for consumer payments is reflected in Blockchain Wallet’s growth, increasing from 41 million users in January of 2020 to 81 million users in January 2022.

A survey completed by Visa In January 2022 noted that nearly a quarter of (2,250 sample size) small businesses across nine countries plan to begin accepting crypto payments in 2021. On a by-country basis, the data showed:

• 19% of businesses located in the USA plan to accept crypto payments
• More than 30% of businesses in the UAE, Hong Kong, Singapore, and Brazil plan to accept crypto payments.

Another solid clue that crypto payments are on the rise? Bitpay Inc., one of the largest crypto payment service providers, currently does $1 billion in annual processing volume, has 80 employees, and saw 57% growth in payment processing volumes in 2021.

Accepting crypto allows DTC businesses to get around the “establishment” banks and payments structure that charge the typical 1.5-2.5% merchant fees. Outfits like Bitpay enable merchants to accept Bitcoin for a flat 1% merchant fee and no exchange rate (crypto price) risk. That 1% price point is offered by several players in the crypto space, and is a clear undercut of the Mastercard/Visa duopoly. There are no chargebacks with bitcoin payments, which is also a potential boost to margins for any DTC company (less fraud).

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This type of growth cannot be ignored by anyone, especially given the opportunities to increase variable margins by accepting crypto. From a risk standpoint, your decision to accept crypto payments should come only after understanding that crypto is obviously less developed than the traditional banking system. Look for established providers with strong reputations that guarantee you no volatility risk. You’ll also want to be aware of growing regulation in the space and competitive actions from establishment players that work to protect the 2%+ merchant fee market structure.

The Takeaway for DTC Brands

Selecting the right alternative payment method(s) requires you to strike a balance between pleasing your customers and properly executing on your company’s growth strategy. Some DTC operators may prefer to accept Bitcoin payments to save on variable costs like merchant fees and fraud losses. Others may be willing to spend more on merchant fees to offer Venmo as a payment option to boost mobile business. As long as your offerings don’t confuse buyers or degrade the user experience, there’s no reason you can’t seek to offer multiple alternative payment options. 

Before diving into alternative payments, make sure you understand the financial opportunity that this could provide for your business. It all starts with organizing your data to get a clear picture of how the business is performing, and what impact any changes could have on your bottom line. 

Bainbridge’s tools can help DTC founder’s get a clear picture of a brand’s financial health. Schedule a demo today.