A Forrester Research report analyzes the early successes and failures of Apple’s mobile payments system.
Debit rates have not fallen much since the Fed ordered a reduction, but this could be an issue as e-retailers renegotiate processing deals.
E-retailers had reason to hope their fees for accepting debit cards would fall after the Federal Reserve Board last fall ordered a reduction in debit card interchange, a significant component in the discount rate that retailers pay when accepting credit and debit cards. But most e-retailers are still waiting to see any benefit from the interchange reduction, according to a new survey by Internet Retailer.
Only 14.6% of online retailers that responded to the survey say they're paying lower fees on debit card transactions, while 17.7% say they're paying more and 67.7% say their debit processing fees have not changed in the past year.
The Fed's order took effect Oct. 1, and it may be too soon for web retailers to see the impact in their processing bills, says Denée Carrington, a senior analyst at Forrester Research Inc. Many processing contracts may not have come up for renewal, for example. "I would have expected Internet retailers to have appreciated a benefit from the rate reduction," Carrington says.
The survey shows most e-retailers are still waiting for that benefit. 73.9% say they receive no special rates for debit transactions, although 26.1% say they do. If the lower rate is eventually passed on to web retailers, it could significantly reduce the fees for accepting debit cards. On a typical web transaction of nearly $80, the interchange fee for accepting a Visa or MasterCard debit card online had been around $1.60; under the new Fed policy, that would be about 25 cents. But payment processors do not automatically pass along lower interchange to web merchants, and it may be that most e-retailers still have to negotiate lower debit fees as their contracts come up for renewal.
Still, e-retailers' debit rates rose less than credit card fees, the survey shows. 23.5% say their credit card processing rates increased in the past year, 12.5% saw a decrease and rates stayed the same for 64.0%. Internet Retailer received 254 responses to the survey from readers of its IRNewsLink newsletter. The survey was conducted in February in conjunction with marketing and survey technology provider Vovici Corp.
It remains slightly less expensive for an e-retailer to accept a debit card than a credit card, the survey shows. Overall, 34.6% of e-retailers pay less than 2.0% to accept debit transactions, and another 42.9% pay between 2.0% and 3.0%, the survey finds. Smaller percentages of e-retailers pay more, with 14.3% paying between 3.0% and 4.0%; 3.0% paying 4.0% to 5%; and 5.3% paying more than 5.0%.
On the credit side, 20.6% of respondents say they pay less than 2.0% in credit card processing rates. 50.7% pay between 2.0% and 3.0%; 19.9% pay between 3.0% and 4.0%; 3.7% pay between 4.0% and 5.0%; 2.2% pay between 5.0% and 7.0%; 1.5% pay between 7.0% and 10.0%; and 1.5% pay more than 10.0%.
Online shoppers, however, pay with credit cards much more often than debit cards, according to the e-retailers surveyed. Only 3.8% of the e-retailers responding to the survey say 50.0% or more of their transactions are made with debit cards. 5.3% say between 41.0% and 50.0% of their customers used debit cards; 3.0% between 31.0% and 40.0%; 15.0% between 21.0% and 30.0%; 20.3% between 11.0% and 20.0%; 15.0% between 6.0% and 10.0%, and 37.6% between 1.0% and 5.0%.
In comparison, credit card sales continue to be the favored payment choice at e-retailers. 49.4% say 91.0% to 100.0% of their sales came from credit cards; 20.5% say 76.0% to 90.0%; 14.1% between 51.0% and 75.0%; and 16.1% say 50.0% or less.
Many e-retailers—31.6%—also say the percentage of their sales from credit cards increased over the past year. 50.2% say the percentage stayed the same and 18.2% say it decreased.
PayPal, an online payment service owned by eBay Inc., gained popularity with consumers shopping on e-commerce sites. Of the e-retailers responding to the survey, 43.2% report their PayPal sales increased in the past year, compared with 50.2% who say they stayed the same and 6.6% who say they decreased.
PayPal's popularity is no surprise to David Montague, president of The Fraud Practice LLC, a consulting firm specializing in online fraud. "It's become more of a standard form of payment," Montague says. "That's consistent directionally with what we've seen overall for online purchases," Forrester's Carrington adds.
In fact, though credit is the most favored online payment choice, PayPal surpasses debit for second place. In the survey, 20.6% of respondents say PayPal made up more than 50.0% of their total sales, compared with 3.8% who say the same for debit cards. 6.6% report 26.0% to 50.0% of their sales came from PayPal accountholders; 4.4% between 21.0% and 25.0%; 7.4% between 16.0% and 20.0%; 11.0% between 11.0% and 15.0%; 15.4% between 6.0% and 10.0%; and 34.6% between 1.0% and 5.0%.
Among the e-retailers that offer PayPal, 44.4% say they offer that payment option because customers want it. The next most popular reason, cited by 25.3% of respondents, is that it eliminates the need to store payment card data, followed by lower costs—16.7%—and a simple sign-on for mobile commerce sites, 13.8%.
No other alternative payment system is offered by even one in 10 of the retailers surveyed. 9.2% offer Google Wallet, formerly known as Google Checkout, 8.4% electronic check acceptances, 5.6% Amazon Checkout and 4.4% Bill Me Later.
Such alternative payment systems represent a significant percentage of sales for some e-retailers, with 37.5% of those accepting them saying those methods account for more than 10% of receipts. E-retailers are split on whether alternative payments will grow in popularity in the coming year. 42.2% say they expect the volume of alternative payments to increase, 7.5% to decrease and 50.3% expect it to be unchanged.
New fraud risks
E-retailers that accept alternative payment systems should be aware that criminals are increasingly stealing more detailed personal information about consumers, such as their bank account numbers, which can be used to steal money from a payment system tied to a bank account, Montague says. "While the merchant community is getting better at verifying and doing checks, the fraud community is getting better at getting cleaner data," he says.