When most online shoppers get to the payment page of an e-commerce site they type in a credit or debit card number. While alternatives to cards have been around for more than a decade, only PayPal, with its 81 million global users, has made a dent.
That could change. The recession has led some consumers to turn away from credit cards and prompted Congress to pass a law making it harder for banks to promote credit cards to younger consumers.
And some very big companies are showing greater interest in online payments. That includes credit card companies Visa Inc. and American Express Corp., online retailing giant Amazon.com Inc., and search engine colossus Google Inc.
Many online retailers are open to alternatives, hoping to reduce card processing fees and potentially gain new customers who are loyal to other ways to pay. E-retailer GiftTree.com, for instance, has added two payment methods in the past two years, PayPal and Moneta, a newer service that lets consumers pay for online purchases from their bank accounts. “We’re always looking for alternative payment methods,” says Craig Bowen, president of the e-retailer.
But GiftTree’s experience shows that it takes more than an icon on a checkout page to shift payment behavior. Bowen says PayPal accounts for only about 5% of purchases on his site, and Moneta less.
Bowen is considering a marketing campaign with Moneta to promote its use. While PayPal’s rates-1.8% to 3.0% of the transaction amount plus 30 cents-are not much of a savings on credit card rates, Moneta generally charges no more than 1.5% of the purchase price.
Online retailers have found it is possible to induce consumers to try new ways to pay with incentives. But, apart from PayPal, few of the alternative payment methods have generated a large following. The recent moves by such major players as Visa, American Express, Amazon and Google will be worth watching-because they can reach millions of consumers and have the deep pockets to offer attractive incentives.
Change on the horizon?
A few alternative payment systems have gained some traction among the larger and midsized online retailers represented in the Internet Retailer Top 500, which ranks e-retailers in North America by online revenue. In last year’s listing, 205 of the Top 500 accepted PayPal, 124 Bill Me Later and 110 Google Checkout. Consumers who use PayPal pay with funds stored in an account or through payment cards registered with PayPal; Bill Me Later typically offers consumers 90 days or so before they have to pay; Google Checkout is an electronic wallet for storing credit and debit card numbers.
Other alternative payment methods have had less success. For instance, eBillme, which went live in 2005, was accepted by only 23 of the Top 500 merchants last year. (The company says 820 e-retailers in all accept the payment method, which enables payments through a consumer’s online bill-payment system.) RevolutionCard, a new card brand that American Express acquired last year, was accepted at only four Top 500 sites.
But just because a site accepts a payment method doesn’t mean consumers will use it. For most consumers, the familiar brands like Visa and MasterCard are still the way to pay online, according to a February report from research and consulting firm Javelin Strategy & Research.
Credit cards captured 43.5% of online total payment volume in 2009, Javelin says. The share of credit card payments, however, will decline to 39.4% in 2014, Javelin predicts, as consumers try to reduce their debt. Also, the Credit Card Accountability Responsibility and Disclosure Act Congress passed last year prohibits the issuance of credit cards to consumers under the age of 21 unless they have an income or parents who will co-sign.
Debit cards also will represent a smaller share of online payments, declining to 25.6% in 2014 from 28% in 2009. Prepaid and gift cards will account for 10.7% of online payments by 2014, up from 6.6% in 2009. Prepaid card use will grow because consumers without bank accounts will use reloadable prepaid cards more often, and federal rules scheduled to take effect in August will limit prepaid fees, Javelin says. At Buy.com, customers are using prepaid cards more often, but the increase has been slight, not substantial, says Jeff Wisot, vice president of marketing.
As for alternative payment methods, Javelin forecasts they will capture 19.2% of online purchases in 2014, up from 15.9% in 2009. “People are experimenting with alternatives,” says Javelin analyst Elizabeth Robertson.
Sweeten the offer
If consumers are experimenting, so are merchants. Shoebuy.com, for instance, offers at least a dozen payment options, including eBillMe, Moneta and PayPal. “We think credit cards will continue to be dominant,” says James Keller, the e-retailer’s senior vice president of marketing and business, “but each alternative payment method has its own customers, and bundled together, that becomes significant.” He declined to say how much consumers use the alternatives.
Retailers should not be overly optimistic about consumers’ interest in new ways to pay, says Nick Malone, chief financial officer for CSN Stores LLC, which sells furniture and housewares and offers such payment options as PayPal, eBillme and Bill Me Later. “When you first offer an alternative, it’s like turning the tap on. There’s a huge jump in use and then it kind of flattens out,” he says. Malone says alternative payments account for less than 10% of the transactions at CSN’s more than 200 e-commerce sites.
Incentives help drive consumer use. For instance, the deferred payment option of Bill Me Later leads shoppers to spend more on average at CSN sites. “The average order value for a Bill Me Later transaction is going to be higher,” Malone says, “because someone is more likely to finance or defer payments for 90 days.”
JTV.com’s experience with private-label cards also shows how incentives and promotions can drive payments. The retail arm of Jewelry Television has heavily promoted use of its private-label cards, offering discounts and 90 days same as cash for purchases of at least $199. The card charges a relatively high annual interest rate of 23.99%, making it profitable for the retailer, even with the incentives.