September 28, 2007, 12:00 AM

Paying Without Plastic

When weighing alternative online payment options, costs may be trickier to estimate than benefits.

When Robert Steiner of Market Warehouse Inc. added PayPal to his redesigned web site in July international orders shot up from 4% of his business to 12%.

Steiner, whose site sells computer software, consumer electronics and housewares, suspects many online shoppers from other countries use PayPal because they encounter difficulties paying with a credit card on U.S. sites. Whatever, the reason, he says, “Once our new site had PayPal, international users flocked to it.”

That’s a good example of how an added payment option can bring an online retailer new customers. PayPal has a strong base of international users-of 153 million accountholders more than 35 million live in Europe and 8.4 million in the Asia-Pacific region. For them, buying Steiner’s products got easier when he added PayPal.

Calculating ROI

When a retailer can add a slew of customers it becomes easy to justify the expense of adding a payment option beyond credit and debit cards. Higher tickets and lower processing fees, fraud costs and shopping cart abandonment also can contribute to the business case.

The cost side of the return-on-investment calculation is often trickier. Integration time can vary widely from one site to another and business processes may have to change in unanticipated ways. Plus, a new payment option can require sign-off from many departments within a retail organization.

“It touches every piece of the business, including legal, technical and marketing,” says Alan Johnson, director of payments at online retailer Overstock.com. “And it touches customer service, because they need to understand the different payment options when customers call.”

The work required may account for why smaller online retailers are slower to adopt alternative payment methods, says Doug Schwegman, direct of market and customer intelligence at CyberSource Corp., a payments processor and fraud-prevention company. A CyberSource survey last year found that the average web merchant with annual sales below $500,000 offered 2.2 payment methods, increasing to 2.5 for those with sales of $5 million to $25 million and 3.4 for retailers above $100 million in revenue.

CyberSource’s annual survey has reported an increase in adoption of alternative payments for three years running. And the survey suggests the new ways to pay are paying off for merchants. Retailers offering three or more payment choices reported a 72% completion rate on purchases, compared with 63% for those offering one or two payment options.

For Overstock.com, higher average order value and lower fraud-related costs have contributed to a positive ROI from adding Bill Me Later, which offers deferred payment to qualified consumers. Bill Me Later transactions have ranged between 5% and 10% of Overstock transactions, depending on how heavily the option is promoted, Johnson says. He says the Bill Me Later purchases average four times more than the average for the site-but that is due in part to promotional financing offers that until recently required a minimum purchase of $250.

Guaranteed payment

To use Bill Me Later, a customer supplies the last four digits of a Social Security number and a birth date; Bill Me Later runs a credit check and approves or rejects the customer for credit.

Johnson says more customers seem to be declined when the purchase amount reaches $1,500 or more. Bill Me Later says more high-value transactions are declined because the fraud risk is higher and the consumer is more likely to lack the required credit.

Once Bill Me Later approves a purchase Overstock is guaranteed payment, which means Johnson need not assign risk-management personnel to review those orders. He figures that saves him 20 to 50 basis points per order.

That helps offset the cost of a Bill Me Later transaction: a 90-days-same-as-cash offer costs the merchant 3% of the transaction amount plus 15 cents, about a percentage point more than on a typical credit card transaction, Johnson says. The core Bill Me Later product that requires the consumer to pay in a few weeks costs the merchant 1.5% plus 15 cents.

Rapid payback

Overall, Overstock calculated that Bill Me Later paid for itself in a day and a half, with the extra business it brought covering the week it took a few developers to implement. Johnson notes, however, that the site is more complex today and implementing any new payment method would take longer. “The payback would be there, just not as quick,” he says.

Many alternative payment systems, especially those that move funds through the interbank automated clearing house system, cost retailers less than accepting credit cards. For instance, eBillMe, in which a consumer pays for an online purchase through an online bill payment system, charges 1% for large retailers and up to 2% for smaller ones. Credit card fees typically range from 2% for big online merchants to 4% for smaller e-retailers, says Steve Mott of payments consultants BetterBuyDesign. PayPal fees are also typically less expensive than plastic, for instance, averaging 30 basis points less than credit card fees for retailer Grapevinehill.com.

Another new alternative from MyECheck Inc. offers processing fees roughly half those of credit cards, says Ed Starrs, CEO. And, he says, it offers important advantages over the ACH, in particular less recourse for the consumer to reverse the payment. The consumer pays on a web site by providing personal and bank account information, and MyECheck creates an electronic version of a check that is routed through the Federal Reserve System, whose rules are less consumer-oriented than those governing the ACH, Starrs say.

While alternative payments can increase sales and cut costs, there are costs associated with additional payment options. An important one is staff time required to do the integration work, and that can vary by site and payment option.

Complexity = time

For instance, CompSource Inc., online retailer of computers and consumer electronics, integrated eBillMe in a couple of days, but Google Checkout took two and a half weeks. The difference stems from the amount of information exchanged, says Dean Bellone, founder of CompSource. EBillMe requires only the customer’s name, address and the purchase amount. Google requires detail on every item, the shipping cost and any discount coupons applied, among other data.

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