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New direct-debit payment systems bloom as more consumers develop an allergy to credit.
The sour economy has soured consumers on credit cards-43% say they are determined not to run up big credit card bills, according to a recent BIGresearch survey. One sign online shoppers are sticking to that pledge: payment processor Litle & Co. reports 12% more use this year of debit cards versus credit cards for Internet purchases.
Seeking to take advantage of this pay-as-you-go mood, several new payment systems have emerged that enable consumers to pay for online purchases directly from their bank accounts. And they offer an appealing lure for e-retailers in the form of lower fees than merchants pay on credit cards or Visa- and MasterCard-branded debit cards.
But will they catch on sufficiently to justify the work required for a retailer to implement and manage another payment method? With one exception, these systems are too new to have much of a track record. But analysts are paying attention because these alternatives are in sync with the times.
“We’re definitely seeing consumers switching from credit to debit,” says Bruce Cundiff, a payments specialist at research and consulting firm Javelin Strategy & Research. “But the hurdle for these systems is that consumers already have a debit card in their wallet. So a behavior change must take place for consumers to use these solutions.”
Consumers usually need an incentive to change their behavior, and whether these direct debit payments systems can offer sufficient incentives will depend on whether merchants and banks get behind these payment alternatives.
Merchants could benefit from lower fees and might be able to appeal to consumers leery of giving a card number-debit or credit-to an online retailer. But what’s in it for the banks?
“We give them a cut of the revenue,” says Guido Sacchi, CEO of Moneta, one of the companies pushing a new direct-debit payment system. While the cut Moneta gives the banks is not as big as the interchange fees they get today from credit or debit card purchases, it’s better than systems like PayPal and Bill Me Later that may provide the bank with no revenue. “It’s a defensive strategy against alternative payment transactions that now don’t generate value for the banks,” Sacchi says.
Cundiff says banks may be leery of payment methods that pay them less than they now get from credit and debit cards. But Javelin predicts greater use of alternative payment methods, with those systems accounting for 31% of online purchases by 2013 versus 18% last year. Javelin predicts the biggest component of those alternative payments will be prepaid and gift cards, followed by PayPal and other e-mail-based systems, and store-branded cards.
The big advantage the new debit systems have is low cost, which comes from using existing bank networks or online bill payment systems. That allows them to pass savings on to merchants, and potentially to compensate banks for pushing their systems.
While all tout low merchants fees, they otherwise differ in several ways, including how many consumers can use them and how consumers pay with these systems. Here’s a capsule look at four newcomers and one system that’s been in the market, with a description of how they operate and the pros and cons of each.
The only direct-debit offering with a real track record is eBillme, which was launched in late 2005 and enables consumers to pay through their online bill payment systems. When an online shopper chooses eBillme, eBillme e-mails an invoice, the consumer sets up eBillme as a payee in his bill-pay system and pays the bill. The consumer only has to add eBillme once; after that, he selects eBillme and pays the bill.
EBillme does not report transaction volume or how many consumers use the system. In a Javelin survey last year, 3% of online shoppers said they had used eBillme, compared with 64% who used PayPal and 17% Bill Me Later.
EBillme is in discussions with banks about sharing merchant transaction fees, says Marwan Forzley, president and CEO of ModaSolutions, the parent company of eBillme. That could lead to banks promoting the service to their customers.
EBillme runs periodic promotions, typically sharing the cost with merchants. When online retailer ShoeBuy.com introduced eBillme last November, a $10 off promotion helped drive consumers to the site, and 42% of the shoppers who checked out with eBillme were new customers for ShoeBuy.com.
Over 200 online retailers accept eBillme and for those that do it accounts for between 1% and 10% of transactions, Forzley says.
Pros: All 110 million U.S. consumers who bank online can use the system; no bank setup is required. No chargebacks.
Cons: Consumers have to go through additional steps, setting up eBillme as a payee in their bill-pay system, then paying the bill. Payment typically takes one to three days. Until then, the retailer either takes the risk of shipping without being paid, or holds the inventory awaiting notification. Forzley says that’s no different than what retailers do while waiting for a check or money order to clear.
‘Just like cash’
Mazooma, launched in February after testing with a handful of merchants, also is aimed at consumers who bank via the web. Its slogan is: “Just like paying with cash. Online.”
The first time a consumer pays with Mazooma, she registers with five pieces of personal information. With subsequent purchases, she enters a Mazooma user name and password. Once signed in, she selects her bank from a drop-down menu, is prompted to enter her online banking user name and password, and is presented with the amount of the transaction. If she approves, and has sufficient funds in her account, the bank is directed to pay the merchant.
Mazooma creates the step-by-step prompts that lead the customer through signing in with her bank and authorizing payment, and no agreement from the bank is required. At the time it launched, Mazooma could be used by customers of 14 banks that represented 70% of online banking consumers, Mazooma says.
Among the merchants that tested Mazooma was BowlingBall.com. John Congdon, chief information officer, says the system worked, but few consumers used it. Incentives will be required for Mazooma to catch on, Congdon says.