A new forecast from Forrester Research credits greater online spending by Canadians, lower shipping costs and more selection for the spending increase.
Low-cost alternative payment methods that tout greater security are challenging credit cards’ hold on e-retailing.
There are few things more important and more vexing to online retailers than deciding which payment options to accept. The major brand credit cards-American Express, MasterCard and Visa-have been the online payment methods of choice since Internet retailing was born.
However, some e-retailers-particularly small start-ups-can’t afford the high cost of credit card acceptance, and, in many cases, can’t even get a merchant account. And all e-retailers know that credit and debit cards come with a built-in problem: Many consumers still will not use their cards online because of fear over releasing financial and personal information into cyberspace.
“There’s still a huge population out there who won’t buy online or will only buy very little online because of security concerns,” says Vince Talbert, vice president of marketing at I4 Commerce, developer of the Bill Me Later payment option. “They want to buy online because they see how easy it is but they’re afraid to use their credit card.”
On the cost side, alternative payment options often come in the form of hybrids that can help retailers cut expenditures or boost revenue. What’s more, these alternatives can bring in shoppers who don’t qualify for credit cards or have bank accounts. As for security, many of the options eliminate the need for consumers to submit confidential information such as credit card and bank account numbers to merchants, helping alleviate fears of identity theft.
“The more options you have, the more you can expand,” says Troy Lawson, chief technology officer at BestKiteBoarding.com, a retailer of kite-boarding equipment and apparel. BestKiteBoarding began accepting PayPal three years ago in response to consumer demand. “PayPal was becoming more and more popular. Some people simply felt safer with the type of security it offers.”
The enticement of lower costs and shoppers’ concerns about security are powering alternative online payment options. Typically they are easier and less costly to implement than cards. For example, Google Checkout, launched this year, offers lower card processing costs to merchants using Google’s AdWords search engine marketing program.
“Merchants are starting to look at payment vendors and ask, ‘What more can you do for us besides just offer payment?’” says Dan Schatt, senior analyst at Celent LLC, a payments research firm.
Whether it’s driven by the fear factor or the desire for related services or lower costs, retailers increasingly are adopting alternative payment methods. Online merchants on average offer customers 3.5 payment methods, up from 2.1 in 2005, according to a new survey by CyberSource Corp., an e-commerce payments processor and fraud-prevention services provider. Larger merchants-those with more than $25 million in annual online sales-offer 4.7 payment methods, up from 2.6 a year ago.
Essentially every online retailer has to support plastic, says Doug Schwegman, director of customer and marketing intelligence at CyberSource. “Most merchants are doing that plus one other payment type,” he says, “whether it’s electronic checks, gift cards, PayPal or Bill Me Later.”
The impetus behind online retailers’ adoption of alternatives to credit and debit cards is higher conversion rates, Schwegman contends. Retailers offering three or more payment types experience on average a 14% lift in conversions, according to CyberSource research.
In addition to increased conversions, ticket sizes often grow when a retailer offers alternatives to cards. At DiscoveryStore.com, for example, there was a “significant increase in average dollars per transaction” from customers using Bill Me Later, says Kelly Day, senior vice president at Discovery Interactive. “That really has exceeded our expectations,” she says.
One of the first and most widely accepted alternative payments is PayPal, online auction giant eBay Inc.’s payment service. Launched in 1998 as a payment option for buyers and sellers on eBay, its use among online retailers gradually is growing. PayPal today has 123 million accounts, according to eBay figures.
During the third quarter of 2006, PayPal posted total payment volume of $9.1 billion, a 37% increase from $6.7 billion during the same period last year. Merchant services accounted for $3.3 billion of that amount, up 59% from $2.1 billion in the third quarter of 2005.
“We spent the first few years addressing merchants that were most able to take advantage of the PayPal product or that were more forward thinking than other merchants,” says Tyler Hoffman, senior director of PayPal’s merchant services business. “Over time, we’ve found it’s become sort of mainstream. Everybody’s looking for alternative payments now.”
Among major online retailers accepting PayPal are Dell Inc., Hewlett-Packard Co., Barnes&Noble.com; Inc. and 1-800-Flowers.
Gateway to money
PayPal took a giant step toward expanding beyond its eBay base in November 2005 when it acquired VeriSign Inc.’s online payment gateway business. Now PayPal Pro enables merchants to accept credit cards in addition to PayPal.
Previously, PayPal merchants could accept credit cards only indirectly via customers using cards to fund their PayPal accounts. Now PayPal Pro enables buyers to check out on merchants’ sites rather than being transferred to merchants’ pages on the PayPal site to complete the transaction. PayPal charges between 1.9% plus 30 cents and 2.9% plus 30 cents per transaction for processing.
And when it comes to really alternative, PayPal earlier this year launched PayPal Mobile, a text-message-based service enabling consumers in the U.S. and Canada to make purchases via mobile phones using their PayPal accounts. The Text-to-Buy feature of the service enables consumers to buy items featured in advertisements by sending a product code from the ad to PayPal via text messaging. Merchants running campaigns using PayPal Mobile include Sony BMG, L’Oreal, drugstore.com and Lucky Magazine, which includes Estee Lauder, Target and Avon.
Schatt says he expects PayPal will retain a dominant share of the alternative e-commerce payments market because it offers services beyond a simple payment function. “They’re doing a very good job of branching out up the supply chain to provide additional merchant services capabilities that can be very valuable for small and large merchants alike,” Schatt says.
Another payment option that brings additional services to merchants is Google Inc.’s Google Checkout, which enables shoppers to purchase from participating stores with a single Google log-in. To use Google Checkout, consumers create an account at Google.com or a participating retailer. Shoppers can locate retailers accepting Checkout by looking for the service’s icon on Google AdWords advertisements or at an e-retailer’s site. Retailers using Checkout also are listed on the Google site.