What is driving the adoption of digital payouts?

One of the many ramifications of the pandemic is the rise of digital payments across the world. 

Nearly nine in ten Americans are now using some form of digital payments. From e-commerce websites, mobile payment apps, digital wallets, and checkouts using a QR code, or person-to-person (P2P) payments, to paying with a smile — digital methods in payments are gaining momentum across the globe. 

As digital payment technology continues to evolve, more alternative payment methods are expected to grow in popularity in the years to follow. Changing consumer expectations have forever changed the payments flow – driving innovation for businesses with high volumes of B2C payments.

When it comes to receiving funds, consumers want convenient and speedy digital payouts while getting more choices. For merchants, offering digital payout options saves money and increases customer satisfaction. According to Carat by Fiserv’s data, digital payouts are up to 60% less expensive than traditional checks and wires and drive up to a 25% reduction in payment status inquiries.

Historically, banks have been considered the safe haven to park capital and receive funds. That is why receiving a payout to a bank account is a familiar and trusted experience that consumers are comfortable with – especially among older generations who have relied on bank accounts to manage inflows and outflows for most of their lives. However, many younger consumers, who tend to be more familiar with digital wallets, increasingly prefer non-bank payouts.

Source: Carat

According to the Carat Insights study, 40% of Americans’ primary payout concern is ensuring the security of payment followed by 29% who prefer the speed of funds transfer. Older age groups prioritize security at higher levels, while Millennials are looking for payout options that get them paid more quickly.
In addition to this, more than two-thirds of Americans expect to have a digital wallet within two years, and it’s likely that many will hold multiple wallets.

Source: McKinsey

Looking at wallet selection criteria, consumers are in pursuit of a multifunctional wallet that offers a variety of financial services – loans, credit and debit cards, and wealth management aside from payments functionality. 

Moreover, 43% of consumers seek the integration of potential loyalty/rewards, and 23% look for compatibility with their existing apps, according to a McKinsey report. These additional features provide a competitive advantage to retailers’ wallets compared to bank-provided wallets.

Driven by the likes of digital wallets offered by Apple Pay, Google Pay, PayPal, and Venmo, and payments options by Square, with integration of “pay later” and buy now pay later (BNPL)  functionalities – a growing number of consumers – and consequently – businesses, vendors, and merchants are no longer inclined toward dealing with cash.

Digital payments are picking up steam across various verticals, from insurance claims – condensing the claims process down to a matter of minutes, to SMBs – for which getting funds faster is always a priority, as well as gig work compensation. 

The Carat study shows emerging consumer preference for digital payout methods across a broad range of vertical markets and found: 

• Digital wallet payouts are particularly popular among younger Americans, and among businesses in the gaming vertical
• Only 17% of consumers would still prefer to receive an insurance claim payment via a check
• In the future, consumers may also want payouts to land in digital asset wallets, such as a crypto account

The question then becomes, how can merchants keep up with customers’ increasingly dynamic needs?

“Understanding who your customers are and how they like to interact is imperative. For instance, how a consumer uses an insurance claim is often very different from how a delivery driver might use the money earned from a day’s work,” said Naomi Donaldson, Director of Digital Payouts, Fiserv.

As US consumers are increasing digital payments use in a variety of ways, businesses looking to compete in a digital-first world must look for opportunities to integrate customer choices to create loyalty-building experiences. 

Hiccups on the way

Along with convenience, digital payouts bring their fair share of challenges for payment processors, including establishing all the connection points to various payout destinations. 

“To simplify the implementation and orchestration of digital payouts, we have established these connection points to facilitate payouts via a push to credit or debit card on file, prepaid card, ACH, digital check, digital wallets, and soon-to-select crypto wallets,” Donaldson told Tearsheet.

Moreover, fraud remains a key challenge facing the payments industry leading to a slightly eroding consumer trust in digital payments. With consumers becoming more reliant on digital experiences, it has become essential to implement security practices throughout the digital payout process that keep merchants/businesses a step ahead of fraudsters and their tactics.

Cash vs. digital payments – the future king?

As the interest in digital payments continues to grow, including in relatively newer areas like BNPL and cryptocurrency, it is presumed that the use of cash is unlikely to ever return to its pre-pandemic levels. However, cash will most likely continue to have its place in payments. 

Consumers aren’t entirely comfortable with getting rid of cash and want the flexibility of paying with cash as an option. Some economists suggest that an impending recession may drive a certain percentage of consumers back towards cash-based spending as they look to manage their budgets.

However, digital payments and digital payouts create efficiencies for consumers and businesses alike in a digital world that has transformed how to operate and deliver value to customers, amp up the user experience, and bolster global money movement across borders, according to Donaldson.

Today, payment channels tend to evolve based on consumer spending habits determined by the economic climate. Meeting customers’ ever-evolving needs and riding the next wave of growth for businesses requires a new approach, driven by consumer convenience. User expectations around digital payout features and integration indicate that providers who incorporate these features in their offerings will likely stick through the cycle.

“Despite traditional methods, consumers are increasingly acceptive to handle their money matters in new-fashioned ways to reach their financial goals. As adoption of digital wallets grows and consumers are offered newer and more flexible ways to save and spend – brands that will provide the customer control and choice regarding where payouts are received will be able to stand out in 2023,” added Donaldson.