Learn How APMs Work In Less Than 15 Minutes

Research shows almost 50% of Asian consumers use an APM in their daily transactions.

A 2021 study revealed that consumers used digital wallets to pay for 42% of all e-commerce transactions in Europe.

So, it's clear that alternative payment methods or APMs are the way forward. But to leverage APMs, we first need to understand how these systems work.

Alternative payment methods are a fast and easy way for individuals to transfer and receive funds.

Instead of cash or cards, APMs use direct bank transfers, e-wallets, cryptocurrencies, and even reward points, thus allowing merchants to provide customers with a much greater degree of flexibility and convenience.

And with rising internet and smartphone penetration around the world, it will only be a matter of time before APMs become the predominant medium of transaction.

So, let's now take a look at:

The Different Types of Alternative Payment Methods

1. Real-Time Payments

Also known as RTPs, real-time payments allow customers to transfer funds instantly to a merchant's bank account or e-wallet.

Customers only need to scan the QR code provided by the vendor, input the amount to be paid, confirm the transaction, and then they're good to go.

It's that simple, and this is why RTPs are so popular with both merchants and customers worldwide.

RTPs are powered by real-time rails - digital infrastructure that facilitates the movement of money from a payer to a payee. Real-time rails operate 24/7, all year round, which is why funds can be received instantly.

Although RTPs have been around since 2017, these payment methods only became popular during the COVID pandemic when merchants and customers began switching to contactless payment.

2. E-Wallets

And speaking of contactless payments, e-wallets are another APM that has gained prominence in recent times. Easy-to-use and compatible with various mobile devices, e-wallets make it possible to transfer and receive funds digitally.

To do this, users can either display their automatically-generated QR code or scan the one provided by the merchant.

And because e-wallets enable users without a bank account to access the digital payments network.

The Malaysian government, for example, has used e-wallets to drive the digitalization of small businesses and provide financial assistance to unbanked communities.

Some real-time payment platforms even support popular local e-wallets to facilitate a smoother payment process. E-wallets are so well-integrated in Malaysia that citizens can even pay for government services using e-wallets.

3. Direct Bank Transfers

Direct bank transfers may appear to be somewhat similar to real-time payments - but this couldn't be further from the truth.

First of all, when you send money with a direct bank transfer, the funds will not be made available instantly, i.e., not in real-time.

Instead, it often takes 1 - 3 working days to deposit the funds into your recipient's account. And that's because the participating bank has to perform several security checks and ensure that all due diligence is done.

So, while direct bank transfers are nowhere near as fast as RTPs, why are they still used?

For one straightforward reason - direct bank transfers or an interbank GIRO allows businesses to perform bulk transactions, i.e., crediting salaries to staff. At the same time, real-time payments do not provide such facilities.

4. Cryptocurrencies

One of the more controversial APMs on this list, cryptocurrencies are a type of digital asset.

Unlike fiat currencies, cryptos are not issued by a central monetary authority. Instead, they exist in a decentralized ecosystem where their use and distribution are unregulated.

While cryptocurrencies are notorious for their extreme volatility, that hasn't stopped them from being used as a medium of exchange.

There are instances where decentralization can be a good thing, with the African continent being one such example.

In a country where citizens often have limited access to financial services, cryptocurrencies have made it possible for unbanked communities to participate in the global digital payments network.

And with a marked lack of trust in local governments and fiat currency, switching over to cryptocurrencies has ironically given some African communities some measure of stability.

5. Buy Now, Pay Later (BNPL)

Buy Now, Pay Later or BNPL is an option offered by some e-wallets or businesses that allow customers to split their initial purchase over 4 payments.

Aside from being interest-free, the BNPL model allows otherwise unqualified individuals to access essential financial services.

BNPL is an excellent way for businesses to boost sales as short-term credit for customers encourages them to make additional purchases.

Types of Payment Parties in the Ecosystem

And now that we've covered the different types of alternative payment methods, let's look at the various parties who make it all possible.

Payment Gateways

A payment gateway works by bridging the gap between the merchant and their customer.

It works by receiving the customer's payment data and passing it to your bank/e-wallet for processing.

After processing, the payment status, i.e., accepted or rejected, is passed back to the payment gateway.

And from here, the payment gateway notifies the customer and merchant whether the payment is accepted or rejected.

Payment gateways are required for any business that accepts cashless or alternative payment methods. Without one, it's simply impossible for any cashless transactions to be processed.

Financial Institutions

The payments ecosystem makes it possible for customers and merchants to send and receive money. Behind the scenes, there’s a complex network of different actors who all have their own unique roles to play.

And they can be broken down into 4 distinct groups which are:

• Credit cards
• Acquiring bank
• Clearing house
• Settlement bank

Besides supporting the payments ecosystem, banks have also invested heavily in new infrastructure known internationally as the National Payments System. Some examples of a National Payments System include Singapore’s PayNow, Malaysia’s DuitNow, and the Philippine's PESONet.

These systems allow users to send and receive funds almost instantaneously and have opened up a whole new world of opportunities. Hence, this has allowed the Fintech sector to grow and encouraged the adoption of e-wallets amongst consumers while also providing financial services to unbanked populations.

E-Wallets

E-Wallets work with both banks and credit cards to facilitate payments as they still make use of the bank’s financial infrastructure (afterall, it has been constructed over decades).

But the difference is that e-wallets are much better at providing more personalized offerings to consumers based on their preference for food, groceries, and shopping needs to increase their reliance.

Additionally, e-wallets have provided unbanked individuals with financial services while also opening up new payment channels for microenterprises. As such, e-wallets have now become an integral part of life in Asia.

Closing Thoughts

From facilitating cross-border transactions to supporting the growth of the cashless economy, alternative payment methods will only become more popular in the days to come.

If businesses are to leverage this, they have to either develop their payment infrastructure or use an existing system.

And this is where XanPay comes into play.

From the extensive support for various payment platforms to its user-friendly interface, XanPay is uniquely positioned to propel businesses into the future.