You Should Definitely Offer These 5 Payment Methods for Online Shops

1. Internal effort & implementation of payment systems for online shops
2. When should which payment method be offered?
3. Effect of the payment methods on the conversion rate
4. Internal effort & implementation of payment systems for online shops
5. Overview: Advantages and Disadvantages of Payment Methods
6. Conclusion

The payment methods are essentially involved in how much turnover and profit are made in an online shop. Payment methods contribute to creating a good or bad customer experience, as e-commerce payments can either be heavily simplified or complicated. Therefore, to create the ideal customer experience, the ideal combination of payment methods should be offered.

If too few payment methods are offered in the online shop, there will be losses in turnover, if the wrong payment methods are offered, high return rates or costs of the payment providers can be the result.

In advance, you should always consider that certain payment methods can mean a high risk for incoming payments. To use payment methods as a lever for the conversion rate, a high degree of trust in the service providers, but also the customers is necessary. There are always different advantages and disadvantages of payment methods that have to be considered when choosing. This article shows you all the important online shop payment systems & payment methods in e-commerce in Germany and discusses the advantages & disadvantages from the perspective of the traders and customers.

Internal effort & implementation of payment systems for online shops

In Germany, popular online payment methods are PayPal (or similar), purchase on account, credit card, bank transfer and direct debit. These payment methods are offered by most online shops and enjoy a high level of trust among consumers, because they create a good and familiar customer experience. There are also other options such as instant bank transfer, Giropay, Amazon Pay and Apple Pay, which are offered depending on the shop and can make sense depending on the industry and target group.

Statista: Payment options that are preferred when ordering on the internet

When should which payment method be offered?

The short answer - a payment method should be offered that creates the best customer experience and is most common in your own industry. However, the payment method with the best customer experience can also have disadvantages for merchants. But which payment methods create the best customer experience and have the best advantages for customers.

Buy on account

The purchase on account is the payment method that has the strongest impact on the conversion rate, as it creates a good customer experience. The users can postpone the purchase pain of spending money by up to 14 days after receiving the goods. This takes away from the customers the risk of a wrong purchase. The merchants therefore have to make sure that the customers are creditworthy to accept a bank transfer on account. Therefore, a credit check is carried out once a customer has chosen to pay by invoice.

The purchase on account per se does not necessarily have to increase the conversion rate - the settings in risk management decide how this payment method affects the conversion rate. One advantage of the purchase on account is that customers who do not have sufficient funds can still shop through the purchase on account. There is a greater risk of payment defaults and invoice purchases can lead to a higher return rate. The purchase on account should be offered when the customers find it difficult to make the final decision online, because through this payment method, the control over the transaction still remains with the customers.

The advantages for merchants are:

1. Build trust: Customers who use the invoice purchase do not have to enter sensitive credit card information, which can contribute to them feeling safer buying from the merchants. So it depends on the popularity of the company whether an invoice purchase should be offered.
2. Customer loyalty: The invoice purchase is often also used to lead customers to registration by offering the invoice purchase as a service for registered users.

PayPal

Paypal offers customers a convenient and secure payment method that they are familiar with and soothes their concerns about the safety of their financial information. Similar to invoice purchase, no sensitive credit card information is needed here either. Customers have the option to pay immediately, in installments or in 30 days. PayPal is accepted worldwide as a payment method. The easy log-in logic creates an ideal customer experience for customers.

For e-commerce merchants, PayPal offers the following advantages:

1. Reach more customers: PayPal is available worldwide and allows merchants to reach a larger customer base. Currency conversions can also be easily managed.
2. More security: PayPal offers a secure payment platform that provides protection against fraud and abuse for both merchants and customers. (No payment guarantee - just mediators)
3. More efficient processing: PayPal automates many processes, which speeds up and simplifies payment processing in e-commerce by PayPal. E-commerce-Paypal
4. Detailed analysis: PayPal offers merchants access to detailed transaction data and insights to help them improve their business.
5. Integration capability: PayPal can easily be integrated into a variety of e-commerce platforms, making implementation easier and more trouble-free.
6. Fraud protection: PayPal offers a range of services that help to make online transactions more secure.
7. Transfers in other currencies: PayPal allows e-commerce merchants to accept payments from all over the world and make transfers in a variety of currencies.

For merchants, PayPal is exciting because PayPal intervenes in the event of a conflict between buyer and seller, ensuring that a fair solution is found.

If, for example, a buyer makes a payment via PayPal and the purchased product is not received or does not meet the described specifications, he can submit a request for a refund. PayPal will then review whether the request is justified and, if necessary, approve the refund. Similarly, a seller who has a legitimate claim but does not receive payment from a buyer can submit a request for a payment guarantee. PayPal will then also review whether the request is justified and, if appropriate, approve a refund.

It is important to note that there are certain conditions and limitations for a payment guarantee at PayPal. For example, the range of transactions and the required documentation is a critical factor for the payment guarantee.

You can find information on the Pricing of PayPal at OMR Reviews.

Klarna

Klarna as a payment method offers separate products as payment methods, which merchants can add to their check-out to create a good customer experience. E-commerce operators can choose between instant purchase (card payments, Klarna direct and immediate), pay later (invoice) and installment payment (installment plan 6, 12, 24 and 36 months and flexible payments) and combine these methods as desired.

Like PayPal, Klarna also offers a payment guarantee for the merchants. However, Klarna does not act as a mediator between the two parties, but takes over the demand from the merchants and takes care of the entire dunning management. The merchant and the customer have no touch points, because Klarna pays the merchants.

To create an ideal customer experience, e-commerce merchants often ask themselves whether Klarna should also be implemented in addition to PayPal? Compared to PayPal, Klarna offers the following advantages and disadvantages:

The advantages of Klarna over PayPal:

1. Longer payment period for customers: Klarna often offers longer payment periods than PayPal, giving customers more time to pay their bills.
2. Better integration with the online shop: Klarna is often more closely integrated with online shops than PayPal and offers a smooth user experience. PayPal can often be integrated separately and not via the payment service provider.

Disadvantages of Klarna compared to PayPal:

• Lower awareness and image: Klarna is not as well-known as PayPal, which means that it can be less trustworthy for some customers. Klarna, for example, got a bad reputation through various posts on TikTok, in which users bragged about their high debts. These cases are of course only individual cases, and the majority of customers handle their high credit limit responsibly.
• Higher costs: Klarna can cause higher costs than PayPal, as it often charges a higher fee per transaction. At PayPal, 2.49 % of the sale price plus €0.35 is due per transaction. With Klarna, according to the provider, it can be up to 3 % of the sale price plus €0.35.
• Weaker security measures: Klarna may not offer the same robust security measures as PayPal, which can concern customers.
• Longer verification time: Klarna may have a longer verification time than PayPal, which means that customers have to wait longer until their payment has been confirmed.

Information about the Prices of Klarna you can find at OMR Reviews.

Express Check-outs

The ability to pay with just a few clicks allows customers to complete their purchase faster, thus increasing the conversion rate. The purchasing process is greatly simplified as customers no longer have to enter detailed address and payment information. Due to the simple payment processes, customers are less deterred and stay on the website to complete the purchase. Shopify therefore strongly prioritizes these options. There are cases where the introduction of express check-outs has achieved up to 30% more conversion.

The best-known Express Check-outs are: PayPal, Klarna, and AmazonPay. But which Express Check-out should you as a shop operator use? The most important evaluation factors are the integration possibilities in the shop, the incurred costs, the functions (e.g., handling of vouchers), the target group of the provider, and the own brand understanding.

The Express Check-out should offer all the functions you need. For example, multilingual support, customizable payment pages, integrated coupons, and discounts are not given for all check-outs. The target group of the providers does not always fit your brand image. AmazonPay, for example, targets a very wide mass  and especially premium providers try to differentiate themselves from this mass through their brand image. Therefore, this one is often avoided in this niche. Express Check-outs are thus the payment methods that create the best customer experience.

Direct debit

Direct debit as a payment method is probably the most reliable and cost-effective payment method for merchants. The payment is made automatically, so no manual monitoring is required once the customer has provided his or her data. For example, compared to credit card payments, no fees are incurred, as merchants can book directly.

From the customer's perspective, direct debit is often used for regular payments, such as for subscriptions. The disadvantage from the customer's view is that the transfer takes a few days until the money has arrived. The delivery time can therefore be delayed by some providers. Since the payment with direct debit is directly debited from the bank account and no further provider is switched in between, customers have a better overview of the payments.

The disadvantage is that customers can reverse the direct debit, which results in additional costs and administrative effort for the merchants. Moreover, it can take a few days until the transfer has been made, which can lead to liquidity problems. The merchants therefore have no control over the time when the money has been received.

Installment payment

Installment payment can be a great lever for the conversion rate and revenue. Especially for high-priced products, this payment method makes sense. It directly affects the Average Order Value, because if customers can spread a higher price over a longer period of time, they are more ready to buy more, larger, or more expensive items. For the customers, the benefits of installment payment are clear. For merchants, however, there can also be many disadvantages.

Installment payments can be associated with additional costs for merchants, e.g., through fees for the service provider offering the installment payments. If, for example, installment payments are processed via Klarna and Mollie it costs PayNow, for example, 1.45% of the shopping cart sum and the installment payment 2.99% of the shopping cart sum. These higher fees are accompanied by a higher risk of default and a higher administrative effort and a complicated bookkeeping that goes along with it. Since each open position has to be checked multiple times for its correctness. In addition, the risk of non-payment is higher.

As customers settle their debts over a longer period of time, there is a higher risk that they will not pay their installments on time and the merchants may be confronted with unpaid debts. If, for example, an invoice purchase or the option of PayPal payment in 30 days is already offered, installment payment will hardly lead to an increase in the conversion rate, as only a redistribution from other payment methods to this takes place.

Credit cards

E-commerce credit card payments offer some advantages from the perspective of e-commerce merchants, which primarily affect the liquidity of the company. Compared to other payment methods, such as purchase on account or Klarna and Paypal, credit card payments are usually credited to the merchants faster. Credit card payments typically offer protection against fraudulent activities and can help merchants minimize losses.

On the other hand, there are also various disadvantages for merchants. The processing of the credit card payment in the online shop can be associated with high fees, such as transaction fees or monthly fees, for e-commerce merchants. The credit card payment requires a special level of data security, as sensitive data is exchanged between the customers and the merchants. Therefore, it is important from the customer's perspective to provide maximum trust to the customers. Because if the customers do not trust the brand and the shop, then they will not provide their details.

The disadvantages are that a credit card payment can become complex for merchants, if it is, for example, a payment from a credit card fraud case. Processing credit card payments can be complex for merchants, especially when monitoring fraud and reviewing transactions. In addition, there is a risk that customers can revoke their credit card payments, which can lead to additional administrative costs and possible losses for merchants. The credit card payment is certainly sensible for most shops, however, this is the payment method that requires the most trust and effort from the users.

Wallets

Wallets, like Apple or Google Pay, are an extension of credit card payments and take away the downsides of this payment method for the users. Wallets are used mainly on mobile devices - as they essentially represent a digitalization of a physical wallet. The credit card details are usually stored in the wallets and the users can then pay via fingerprint or face ID. They offer a lot of convenience, speed and security in payments.

The great advantage is that the credit card is debited, but the users do not have to remember or enter any details. Also for payments in other currencies, these payment methods are easy to use. Wallets are very modern payment methods. Whether wallets make sense, however, depends strongly on the target group, since this payment method is not yet widespread despite its easy handling.

it-finanzmagazin.de: Use Digital Wallets

Cryptocurrencies

The most modern payment methods are cryptocurrencies. Some shops already offer these among their many payment methods. There are currently about 9,000 cryptocurrencies, which means that this payment method can be very cumbersome.

The shop of the fashion brand Philipp Plein, for example, offers 24 of these payment methods. The advantage of these payment methods is that they have a very innovative, but also nerdy image and can therefore have a positive effect on the own image of the provider.

Cryptocurrencies are also difficult for purchasing, because the currencies are very volatile and subject to strong price fluctuations. It is therefore difficult for the users to understand or calculate whether the purchase price has been correctly converted, moreover, for example, the strongly fluctuating course price of Bitcoins due to the high conversion value leads to a high conversion expenditure for the users.

For example, a Bitcoin is worth €22,351.21 (as of 18.02.2023). These values make conversion extremely difficult and can overwhelm the users during the acquisition process. Another disadvantage is that Bitcoin transactions are not reversible: the customers can no longer claim back the amount – unlike with direct debit payments. This provides more security for the merchants.

Effect of the payment methods on the conversion rate

The payment methods essentially influence the conversion rate through three factors. These three factors describe how you create the ideal customer experience.

The first aspect is how accessible the payment details are, the second is what trust & control the users have in the payment method and the third is when the users feel the "purchase pain" of the payment. These factors should be considered when choosing payment methods. In general, it can be said that not every additional payment method also brings a conversion increase. Depending on the target group and the spread of the payment method in the target group and the sector. Therefore, it should also be strongly considered to follow the industry standards.

The second aspect is trust (e.g., the image of online merchants and the payment provider) and control over when the money is debited. The users will prefer the payment method in which they have control over the purchasing process. In the case of a purchase on account, the users have full control over when the money is transferred, while with a direct debit they give this control away.

If the users are rather insecure in the purchase process, then they will choose the payment method with the most control over the payment. If, as a merchant, you offer products that suggest a high return rate due to online purchasing behavior, then a purchase on account can be a major lever for the conversion rate. For products that are optimized for online purchase (e.g., for a download), the purchase on account is not a big lever for the conversion rate.

The third aspect is when the users experience the "purchase pain". A purchase process is always a reward, but also a "loss through spending money", so a purchase pain. If users can postpone this purchase pain from the purchase process into the future through certain payment methods, then this payment method will have a significant effect on the conversion rate, as users only experience the reward of the purchase in the purchase process. Online there is always a purchase risk.

The customers want to keep this risk as low as possible by paying later. The instant purchase & the credit card suggest to the users that the money is debited immediately, the purchase on account, Paypal, installment payment, PayPal paying in 30 days delay the payment to after the purchase process. However, it is important to consider which products are involved and what impact on returns can be expected for these products.

Internal effort & implementation of payment systems for online shops

A not insignificant factor in the selection of payment methods is the associated internal effort. In case of online shop payment processing, there is a not insignificant effort due to the implementation of payment methods and in finance. Especially payment methods like purchase on account, which are very susceptible to fraud, can involve a high internal effort due to a multilevel and cost-intensive dunning system.

To avoid this, it makes sense, for example, to process the purchase on account via Klarna. Many payment methods are also predestined for returns. Therefore, it is important to offer good customer service. In order to keep this effort in the company as low as possible, a payment service provider like Mollie, Ayden or Stripe Billing should therefore be used. These can, for example, set up online shop credit card payments that can be added to existing code systems.

Novalnet.de: Value chain

These payment service providers are usually easy to implement and can be connected to your shop's system via an API or standard plug-ins. As an online shop, you save a lot of work and costs when integrating payment systems in the online shop. Contracts and technical connections are bundled and a variety of services are combined under one roof. For example, there is no need to coordinate between banks, credit card acquirers, providers of fraud prevention modules like Creditreform, collection companies or affiliate platforms.

These contracts are often associated with different contract terms and fees. The advantage is, therefore, to get all services from one hand and to have to keep track of only one contract. As an online shop merchant, you can map all payment systems of the online shop under one roof, and you can quickly expand these. The merchants profit from fraud prevention, payment guarantee, and outsourced accounts receivable management.

Overview: Advantages and Disadvantages of Payment Methods

The following table compares the payment methods according to their advantages and disadvantages. The payment methods described in detail above for online shops in e-commerce are compared to create the best customer experience:

Table of Advantages and Disadvantages of Payment Methods

Conclusion

The article shows all major online shop payment systems & payment methods in e-commerce in Germany and discusses the advantages & disadvantages from the perspectives of the merchants and customers, which can be contrasting in some cases. From the customer's perspective, it is important to create an ideal customer experience in the sense of the customers and the merchants, in order to increase the conversion rate and thus the revenues. From the customer's point of view, it is important to minimize the risk of purchase and to have the best control over the money spent.

The invoice purchase is indispensable from this point of view. The customer experience is also greatly improved by PayPal, Klarna, and their Express Check-outs. These providers are responsible for the liquidity and the image of the brand through their payment guarantees and the outsourced dunning system. Credit card purchase and direct debit are also unavoidable due to their prevalence. However, it is always necessary to decide individually on the basis of the sector, the product, and the target group, and the company's own philosophy, whether a payment method makes sense.