One of the challenges for German online retailers is offering their customers a wide range of payment options. Typically, the options range from traditional methods to advanced digital solutions. A classic payment method that is still used by many online stores is prepayment.

In this article, we explain prepayment, including how it works and what the legal regulations are for online retailers in Germany. We also explain the role prepayment plays in German ecommerce, how retailers can profit from this payment option, and its alternatives. Lastly, we clarify a few misconceptions about prepayment.

What’s in this article?

• What does prepayment mean?
  
• How does prepayment work?
  
• Prepayment in German ecommerce: Regulations and obligations for retailers
  
• Prepayment in German online retail
  
• Common misconceptions about prepayment
  

What does prepayment mean?

Prepayment involves the customer paying the purchase price in full before the seller delivers goods or services. This payment model is also sometimes referred to as “payment in advance” or “advance payment.”

Prepayment vs. other payment methods

The main difference between prepayment and other forms of payment is the timing of customer payments and when the retailer receives payment. With prepayment, retailers receive the full amount due prior to delivering goods or services.

Conversely, with payment on invoice, payment is made by a set date after receiving the goods. With direct debit, the customer gives the retailer a mandate to withdraw the amount due from the customer’s account on a defined due date.

With credit card payments, customers enter their card details during the order process. The payment provider verifies the card immediately and confirms that the amount can be charged. Consequently, the retailer receives an instant payment commitment and can usually continue processing the order. However, the payment provider generally pays out the actual funds to the retailer’s account with a slight delay—usually a few days.

By contrast, with prepayment, the customer makes an up-front payment. This difference is important for German ecommerce companies, especially when wording their terms and conditions and payment terms and designing checkout flows.

How does prepayment work?

The prepayment process in ecommerce occurs in these steps:

• Place order: A customer selects a product or service, completes the order process in the online store, and selects the prepayment option at checkout.
  
• Confirm order: Next, the customer receives a payment confirmation and invoice containing the retailer’s bank details.
  
• Make payment: The customer transfers the invoice total to the specified account.
  
• Receive payment: The retailer verifies that it has received the funds and matches this payment to the corresponding order.
  
• Approve order: Once the retailer confirms receipt of payment, it approves the order for further process.
  
• Deliver goods or render services: The retailer ships the goods or renders the agreed-upon service.
  
• Cancel order due to nonpayment: If the customer does not pay by the agreed-upon due date, the retailer can cancel the order or withdraw from the contract.
  

Prepayment in German ecommerce: Regulations and obligations for retailers

Prepayment is a widely used and generally permitted payment method in German online retail. At the same time, it is subject to clear legal regulations.

Statutory disclosure requirements in online retail

Online retailers must provide transparent information about the payment methods they accept and the conditions for each method before they conclude a sales contract. These disclosure requirements arise from legislation, such as Section 312j, Paragraph 1 of the German Civil Code (BGB). It states that “traders in electronic commerce are to indicate clearly and unequivocally at the latest at the beginning of the ordering process whether any delivery restrictions apply and which means of payment are accepted.”

The BGB also stipulates that customers must explicitly confirm that they are placing a paid order when shopping online (e.g., via a button labelled “Confirm and pay”). This helps to ensure that customers fully understand the financial implications of concluding a contract.

In addition, Article 246a, Section 1, Paragraph 1 of the Introductory Act to the Civil Code (EGBGB) and Section 312d of the BGB require online retailers to inform customers of the material conditions of a contract prior to its conclusion. This includes information on prices, payment terms, delivery and performance obligations, and the right of withdrawal. These regulations incorporate the EU Consumer Rights Directive (Directive 2011/83/EU) in German law.

Right of withdrawal and refunds on prepayment

In online retail, prepayment is subject to the same standard consumer rights as other payment methods. This includes the customer’s statutory right to withdraw from distance selling contracts.

If a customer cancels an online purchase within the statutory cooling-off period, the retailer must refund prior payments. This applies even if the purchase price was paid in advance via wire transfer.

According to the regulations, the retailer must refund the customer within 14 days of receiving the cancellation. Under certain circumstances, the retailer can withhold the refund until the goods have been returned.

Prepayment in German online retail

Prepayment remains a well-established payment option in the German ecommerce sector but plays a significantly smaller role compared to other payment methods. Payment on invoice, direct debit, and card payments account for significantly higher shares of sales, while prepayment is primarily used in specific scenarios.

German retailers frequently offer this method as an alternative payment method, especially for specialized products and personalized goods or in the B2B sector.

Advantages of prepayment for retailers

For retailers, prepayment offers a number of practical advantages for day-to-day operations. The most significant is that payment is guaranteed before delivery. Since retailers receive payment before they provide the good or service, there is no risk of a customer defaulting or invoices going unpaid.

Another plus is that prepayment excludes the possibility of chargebacks. With many other payment methods—such as direct debits or credit cards—customers can reverse a debit, under certain conditions. With a prepayment made via traditional wire transfer, this is virtually impossible once the transaction is completed.

It is also a comparatively cost-effective payment method from the retailer’s perspective. Since there is no need to involve payment providers—including their complex risk assessments or buyer protection systems—the transaction costs tend to be lower compared to many other digital payment methods.

Disadvantages of prepayment for customers

From the customer’s perspective, prepayment can potentially come with a few downsides. Since customers pay before goods are dispatched, customers bear the risks of late deliveries or undelivered orders. Therefore, prepayment requires customers to trust in the reliability of the retailer.

Customers might also be discouraged by the additional waiting time involved in prepaying for an order. While lots of digital payment methods allow for instant payment confirmation, a wire transfer can take 1–2 working days, depending on the bank and when the transfer is made. Usually, retailers don’t start processing and shipping an order until they have confirmation that payment has been received.

Combining prepayment with other payment methods at checkout

Prepayment is a low-risk option from the retailer’s perspective, but it can create uncertainty and additional waiting time on the customer side. For that reason, retailers do not typically offer it as the sole payment option.

Instead, many retailers offer prepayment in addition to other payment methods at checkout. This allows retailers to provide a payment option that is comparatively secure, while accommodating the differing expectations and security needs of their customers.

Modern payment solutions—such as Stripe Payments—help retailers offer multiple payment methods for the smoothest possible checkout flow. Payments gives retailers access to more than 125 payment methods, allowing them to customize their payment options to suit different markets and customer expectations. Cross-border payment options allow them to accept payments from up to 195 countries and in more than 135 currencies. The wide range of alternatives to prepayment allows online stores to offer flexible payment options and reduces the risk of abandoned carts.

Common misconceptions about prepayment

Prepayment in ecommerce can be misunderstood, which can lead to false expectations and uncertainty during the order process. Below, we clear up some common misconceptions.

Same as SEPA Direct Debit

Prepayment is frequently confused with other bank-based payment methods, especially Single Euro Payments Area (SEPA) Direct Debit. However, there are actually fundamental differences between the two processes.

With prepayment, the customer receives a prepayment invoice and then wires the invoice total to the retailer’s account before the retailer ships the goods. With direct debit, the customer gives the retailer a mandate so the retailer can withdraw this amount from the customer’s account. In this case, the retailer triggers the payment, rather than the customer actively making the payment.

Lacking integrated buyer protection

Unlike some modern online payment methods, traditional prepayment does not offer automatic buyer protection. While payment services or credit card providers do offer some chargeback or dispute resolution mechanisms, prepayment wire transfers are generally made directly from the customer’s account to the retailer’s account. This means it is typically difficult to reverse the payment once the transaction is completed.

Therefore, customers should look for trustworthy providers and transparent business information, especially when shopping at unfamiliar online stores.

Subject to bank processing delays

When the shipping of a prepaid order is delayed, this is often due to the bank’s processing times, rather than the retailer. Depending on the bank and when the wire transfer is made, it can take several working days for the funds to be credited to the retailer’s account.

Many retailers do not continue processing an order until they receive confirmation that payment has been received. This can give customers the impression that their shipment is delayed. However, the retailer is actually delaying shipping due to an outstanding payment.