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Payment options evolve as electronic commerce grows
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Since the early days of online retailing, retailers and their payments providers have searched for a payment instrument that meets the complex demands of electronic commerce. The mainstays of brick-and-mortar retailers-cash and checks-were inefficient and outmoded in an industry where transactions could be processed in a matter of seconds. And while credit cards are more suited to Internet shopping, they also are more costly than in the brick-and-mortar world.But, while credit cards still make up the vast bulk of online payments, the billions of dollars to be gleaned from e-commerce have led to the emergence of new types of payment providers, such as person-to-person payment and electronic check services. Meanwhile, traditional payment providers, such as money-transfer services, continue to evolve, adapting their products to meet the needs of the Internet.For some e-commerce-spawned payment products, change is a constant. PayPal, the person-to-person payment system developed for use by buyers and sellers on online auction giant eBay, continues to expand its utility. Founded in 1998, PayPal was acquired by eBay in 2002.PayPal enables any individual with an e-mail address to send and receive payments online. Beyond the basicsOver the years, PayPal has moved beyond its eBay base, recruiting online retailers with no ties to the auction site. It’s most recent product, PayPal Pro, opens PayPal acceptance to a new segment of merchants-those with annual sales of between $250,000 and $5 million. Previously, its merchant base consisted mainly of small proprietorships with annual sales volume of between $500 and $250,000. “With our new product, we’re taking the same value we’ve historically provided and extending it to a new, larger class of merchant,” says Stephanie Tilenius, vice president and general manager of merchant services.A major feature of PayPal Pro is that it allows merchants to accept credit cards in addition to PayPal. Wells Fargo Bank is PayPal’s card processor. Previously, PayPal merchants could accept credit cards only indirectly via customers using cards to fund their PayPal accounts. There is no charge for buyers to use PayPal.PayPal Pro differs from the traditional PayPal product in that the buyer will be able to checkout on the merchant’s site rather than being transferred to the merchant’s page on the PayPal site to complete the transaction, Tilenius says.“The goal is that as a merchant, you can provide two different experiences-you can provide a traditional credit card checkout where we’re in the background and then you can provide the PayPal Express Checkout,” she says. “You get the benefits of a (bank card) merchant account plus all of the benefits of the PayPal network.”PayPal is stiff competition for credit card issuers, Tilenius says, adding that it ranks third, behind Visa and MasterCard, as an online payment mark. As of the first quarter of 2005, PayPal had more than 72 million accounts, and was adding about 5 million per quarter, she says. And it was available in 45 countries and six currencies. “It’s really like an online wallet, where you can use any form of payment, whether it be MasterCard, Visa, American Express, Discover, or your bank account,” she says.All-in-one packageIt takes merchants about an hour to set up a PayPal account. There is no set-up fee, but PayPal merchants pay a per transaction fee for processing. Merchants enrolled in PayPal Pro also pay a $20 monthly fee.PayPal offers some of the same benefits as credit cards, including buyer protection of up to $1,000 on eBay, that make it attractive to consumers, Tilenius says. In addition, it calms buyers’ fears that their confidential card data will end up in the hands of a thief because the merchant never sees that information, which is stored at the PayPal site. Those protections give customers an incentive to buy from merchants accepting PayPal, she says. PayPal offers another major benefit to online retailers-an increase in sales of between 5% and 15% for small merchants and between 1% and 5% for larger merchants, she says. Over a two-week period, about $1 billion is processed through the PayPal system, she adds. What’s more, PayPal gives e-merchants a gateway, an acquirer and a processor all in one package, Tilenius says. “You don’t have to have separate relationships,” she says. “We’re a one-stop solution.”The non-check checkAnother payment product developed specifically for online use also is being tweaked to provide more functionality. CheckFree Corp., which started as an electronic billing and payment service, recently moved into the mainstream online retail space. More than 400 billers use CheckFree.“We have an effort underway to call on retailers to accept CheckFree as a payment method on their sites,” says Mike Ressel, vice president and general manager of CheckFree Retail and Auction Payments.CheckFree is hoping to persuade the millions of consumers enrolled in its bill payment service to use CheckFree when shopping online. “Our retail payment service is basically an extension of the value proposition to the consumer,” he says. “Once they’ve signed up for electronic billing and payment, it’s extremely easy for them to visit a retailer’s site and authorize payment using their CheckFree credentials.”CheckFree already has what Ressel describes as a “very small presence” on eBay. “We really don’t put a lot of focus or energy on it but we are out there,” he says. “If there’s a small mom-and-pop retailer who lists on eBay and wants to list CheckFree as a form of payment, we do support that. It’s the same network of consumers.”CheckFree also can offer the equivalent of a person-to-person payment service. Individuals signed up as sellers on eBay can go to a seller enrollment site to register to receive CheckFree payments, Ressel saysIn addition to eBay, CheckFree has signed 34 other online retail sites-PalTalk.com, a provider of messaging and chat rooms; TigerDirect, an electronics retailer; and the 32 sites operated by e-commerce provider FanBuzz, a division of ShopNBC. FanBuzz provides e-commerce services for licensed sporting goods marketers, including the National Hockey League and the Boston Celtics.As with most other payment providers, the fees CheckFree charges merchants depend on the volume of transactions processed. But he says the off-the-shelf list price is 1.5% plus 30 cents per transaction. “Most retailers that we negotiate with get pricing that’s at a discount to that rate,” he says. Good ole cashBut online retailers are not limited to payment products designed specifically for the Internet. They also can turn to traditional providers, such as money-transfer services, which are adapting their systems to cater to e-merchants. Western Union, for example, has 46,000 brick-and-mortar payment centers where consumers can make a payment to an online retailer, says Skylar Webster, product manager. “We notify the online retailer in real time that the person has made a payment and they can ship out the order,” she says.Western Union also can process electronic payments, including automated clearinghouse, debit and credit card transactions, for online retailers. “We really have the entire suite of payment services that we can offer to an online retailer,” Webster says.There’s no doubt that payment products for e-commerce will continue to evolve as online retailing grows and becomes more complex. Whether they succeed will depend largely on whether they can give retailers what they desire most-low cost, efficient and secure payment instruments that will build trust with consumers.