Broadly speaking, a payment consists of three processes.
- The first process is the Agreement (A) in which buyer and seller agree on a transaction.
- The second process is the Payment (P), and
- The third process is the Delivery (D).
These three processes take place in a certain context that is referred to as the ‘transaction context’. The transaction context is ‘the total of situational circumstances in which each of the three processes take place’.
This model has proved its value for explaining the different choices people and businesses make when it comes to their preferred means of payment. Traditionally, payments were executed in one place, at one time. With the introduction of new channels, such as the Internet and mobile phones, the dynamics of the transactions have changed.
The three transaction processes (A, P and D) are now disconnected in place and time, resulting in a changing order of these processes. This leads to unbalanced risks for the buyers and sellers that are involved in the transaction process. As a result, multiple innovative payment methods and instruments were developed over time to mitigate these (perceived) risks.
Online payment methods
Online payment methods refer to the ways shoppers can pay for their purchases over the Internet. Online payment methods rely on one of the five core payment instruments used to ensure the money flows from buyer to seller.
The following five 'meta' payment instruments can be distinguished:
- card payments
- bank transfer payments
- direct debit payments
- cash payments
- wallet payments (e.g. paypal)
- crypto-currency payments
Despite the fact that this strict approach might be accurate, it does not give recognition to the market's perception of the term 'online payment methods'. Normally online payment methods refer to online payment method brands (MasterCard, Bitcoin, Boleto, Bancontact), online payment solution brands (e.g. Klarna, PayPal, MasterPass) and direct reference to one of the payment instruments (e.g. 'bank transfer').
Following the definition for online payments, 'online payment methods' could be seen as the ways shoppers can choose to pay for their online purchases and where the payment method itself is selected online. 'Online' refers only to the condition that the payment method selection is made online, at the merchant's online shop or within the merchant's app. It does not require that the actual transfer of funds is initiated online or happens online.
An online payment method is presented at the checkout or payment page of the online seller and should have a clear recognition by the buyer through means of a well-known logo (e.g. MasterCard or PayPal logo) or common all-purpose words like 'credit cards', 'bank transfer' or 'payment-on-delivery'.
Following from the above, the definition of an online payment method:
An online payment method is a payment instrument that generates a financial transaction between a buyer and a seller, whereby the selection of the payment instrument is made over the Internet in direct sequence with the purchase, and whereby the payment instrument is either represented by a payment brand, a solution brand or general payment term (e.g. cash-on-delivery).
Payment brand, solution brand and payment term
A payment brand refers to a consumer-facing brand that is directly linked to one of the five meta payment instruments, for example MasterCard (card payments), ELV (direct debit payments), WeChat Pay & Alipay (mobile payments) and Bitcoin (crypto-currency payments). When a shopper selects a payment brand, they instantly select one of the five payment instruments to complete the online purchase.
In contrary, payment solutions like Klarna and AfterPay – both pay-after-delivery payment solutions – create an additional layer whereby the shopper first selects the payment solution and then completes the payment through one of the available five payment instruments (e.g. card, bank transfer or direct debit payment).
Online Payment in China
China is leading the mobile payment industry with various innovation including the application of QR Code scanning, QR Code Extracting, NFC, soundwave, and some other technologies to facilitate both online and offline transaction. Major payment methods in China includes Alipay, WeChat Pay, Union Pay, which accounts to more than 95% of the total mobile payment market share. Consumers can bind their credit cards and debit cards to the payment methods, they can make deposit in the payment tools, and some even provide financial services to customers, for example, pay by credit, short-term loan, buying stocks, etc.