April 30, 2003, 12:00 AM

The battle for credit card market share moves to the online arena

Card companies are taking the fight for transaction volume to the web by offering retailers incentives to promote certain cards online.

By Lauri Giesen

The Internet has become an important ring in which credit card companies are battling. With the current recession pulling down retail sales in the physical world while Internet sales continue to grow strongly, the web represents lucrative territory in the quest to gain card market share.

Credit cards are by far the most popular method of payment on the Internet-with more than 90% of online purchases placed on credit-so it only makes sense that the card associations and issuers want to grab as much share of that growing market as possible. “The Internet space is growing so rapidly and it is replacing many of the telephone and mail order sales. We need to make sure that we are there for our cardholders when they shop online,” says Elizabeth Ward, vice president of travel and entertainment industries for MasterCard International.

But MasterCard and its competitors want to do more than just serve their customers. Each wants to ensure that it is the card of choice when those customers reach the check-out section of an online retailer. To do that, MasterCard, Visa, American Express and Discover have all at some point partnered with retailers to offer discounts and give-aways to customers who make purchases on specific sites with their cards. Generally, they seek strong partners who already conduct a considerable sales volume online.

The obstacles

But each faces considerable obstacles to acquiring market share. For one thing, most online credit card transactions reflect the brick-and-mortar world. “Unless they see a tangible reason to do otherwise, most consumers will simply use the same card when making an online purchase that they would have used in the physical world,” says Robert Leathern, senior analyst with New York-based Jupiter Research Inc.

Numbers from such researchers as Cambridge, Mass.-based Celent Communications back up that assertion: Celent estimates online card brand market share reflects what is happening with all purchases on credit cards (see chart, p. 25). That dynamic could work, however, to further MasterCard’s online market share, some observers expect, as Citibank, the largest bank card issuer, converts its entire base to MasterCard.

Yet, many card companies believe that the Internet can present them with opportunities to increase market share. But for card companies to stand out on the Internet, they need the cooperation and assistance of online retailers who are willing to push one card brand a little more than the others. Sometimes that means featuring one card logo more prominently on a web site. Other times it means having one payment card be the “default” card-the one that automatically pops up when a customer goes to pay with a credit card. Finally, some retailers offer special deals when a customer uses a particular card.

And while it is not as blatantly promotional, a retailer’s decision to participate in certain online shopping security programs-such as Visa’s Verified by Visa or MasterCard’s SecureCard-helps prompt the use of those cards. That’s because some industry observers believe that new online shoppers are more likely to choose to use a card associated with one of these programs under the assumption that their purchase is more secure with that card.

All kinds of battles

To win over retailers, card companies have become innovative. “There are all kinds of battles going on by card companies to win favor with the retailers,” says Rene Pelegero, former head of global payments for Amazon.com Inc. and president of Seattle-based Retail Payment Global Consulting Group. “Issuers are trying just about every type of approach imaginable-from outright offers of cash to offers to promote the retailers’ products in their own ads to partnerships.”

But not all retailers are willing to sell their space to card companies. “Acquirers’ contracts prohibit certain types of promotions,” says Pelegero. When retailers sign up to accept credit cards, they sign contracts that require that they display payment options with “equal prominence.”

But there’s equal prominence and there’s equal prominence and some retailers have found ways to stay within the technical definition, while still promoting a partner’s brand. And some are willing to test the resolve of card companies to enforce equal prominence. “Sometimes a card issuer will come up with an offer that is rich enough to make a retailer willing to take the legal risk,” Pelegero says.

Often those “rich” offers are geared toward getting a particular brand to be the default card on a popular retailer’s site. Some card companies reportedly offered outright cash or the willingness to promote the retailers’ products to those who make that card association’s card the option that automatically pops up when a customer makes a purchase. While customers can simply click and move down a notch to another card if they desire, many believe that there are enough consumers who will automatically pay with the default card to justify the fight to become the preferred card.

Others, however, don’t think it is a big deal. “Consumers who are sophisticated enough to feel comfortable shopping online will be able to figure out how to change the default card,” says Jupiter’s Leathern.

Alphabetical order

Indeed, rather than select a favored card, most retailers prefer simple “fair” solutions. Most retailers automatically pop up the card that the customer last used-under the assumption that it is the one the customer will want to use again-for their regular customers. For first-time shoppers, the card options are either listed in alphabetical order or in the order of popularity as previously experienced by that retailer.

Amazon.com, for example, lists Visa as its top option for first-time customers, because that is the card brand that Amazon sees the most. “We tried to be fair and put them in alphabetical order,” says Pelegero. “But we got a lot of complaints. Because American Express came up first, a lot of customers weren’t watching what they were doing and they typed in their Visa numbers under the American Express name and then their orders got rejected. We switched to putting Visa first because that was what nearly 50% of our customers were using and then we put MasterCard second. We got fewer complaints that way.”

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