Ways to pay

It’s a strategy as old as retailing itself: The more products, services and purchasing methods retailers make available to customers, the more opportunities to generate sales and fatter profit margins.

For many retailers, one of the more attractive and potentially profitable services has been some form of proprietary or alternate financing. That was true in the early 20th Century as retailers’ house credit evolved into house credit cards. And it’s equally true in the early 21st Century as online retailers seek payment options beyond multi-purpose credit cards. “We want to offer customers as many ways to purchase as possible,” says Diane Irvine, chief financial officer of BlueNile.com Inc., e-retailer of jewelry and gifts.

BlueNile is one of a number of online retailers who have found ways of accepting payment beyond general-purpose credit cards. Their goal is to serve the 25% of consumers without general-purpose cards such as Visa, MasterCard, American Express and Discover, and to attract shoppers who would rather make a purchase—particularly of high-ticket items—on an account other than a credit card that may already have a high balance and a lofty financing rate. “Alternative forms of payment can reach new customers and help some of them over a price barrier,” says Duif Calvin, a retail analyst based in San Francisco.

The Sears lesson

But while it often sounds great and looks good on paper, a move beyond a retailer’s fundamental operations—such as offering credit—can lead to unexpected problems and put a critical merchandising strategy out of focus. Retailers need look no further than the July sale of Sears, Roebuck and Co.’s long profitable though troubled credit card program to Citigroup Inc. Sears had engaged in an aggressive attempt to sign up more cardholders, but the growth resulted in an overextended program marked by a large number of delinquent accounts. Now, Sears does not even own its proprietary card program; it, along with Sears’ MasterCard portfolio, are in Citigroup’s hands.

Analysts say there’s a lesson there for all retailers. “You have to be highly skilled and possess the appropriate technology and infrastructure to offer your own credit ,” says Kent Anderson, president of Macys.com, whose private label Macy’s card is issued through Federated Accounting and Services Group, an arm of Macy’s parent Federated Department Stores Inc. “It can be exceptionally painful if you don’t.”

The advantages of offering credit directly to consumers has long enticed retailers for reasons that extend beyond increasing sales by putting more purchasing power at customers’ disposal. In-house credit programs could provide a wealth of customer data as well as revenue and profits gained through financing. Whenever a store customer pays with a proprietary credit card or other house financing, the merchant can learn, record and later leverage information on the customer’s shopping behavior, data not available if a customer pays by cash or general-purpose credit card.

Yet, as Sears showed, proprietary credit programs are rife with hazards and can meet with spectacular failure. As a result, fewer retailers today are turning to proprietary programs as part of a revenue-boosting strategy. “In 2001, a lot of retailers were looking at house credit,” Calvin says. “But after they saw Sears having a problem, many said ‘We’re not sure we’re capable of doing this.’”

Moreover, many retailers have long avoided offering any form of house credit because they prefer to interact with their customers only as merchandisers, not financiers, she adds. “Retailers are concerned about their long-term retail relationships with customers to get them used to shopping with them,” Calvin says. “So they have tried to avoid having the reputation of financial services companies that mine their purchasing data and sell it to other companies.”

Keeping the relationship pure

The online world, meanwhile, puts alternate financing programs in a new light for retailers. Unlike in brick-and-mortar retail, where proprietary credit programs open the door for merchants to connect a customer’s name to shopping behavior, the online world doesn’t need such help. Because web merchants must gather a customer’s personal billing and shipping information to complete a sale, they don’t stand to gain much in the way of customer data through the use of house credit. “The online channel is the least in need of additional information from customers to establish long-term relationships,” Calvin says. “So online merchants don’t need to push house credit online.”

Still, online merchants have discovered benefits in proprietary credit, such as customer loyalty and higher average orders, and so some are building alternate credit programs as part of a customer service strategy. Furthermore, retailers who are trying out new payment systems are finding they also bring in new customers.

Irvine says BlueNile’s programs that offer customers special terms not available to customers paying with general-purpose credit cards have helped drive sharp increases in BlueNile sales in recent years. While the online jewelry industry’s overall sales in 2002 climbed 20% over 2001, BlueNile’s sales over the same period surged 48%, Irvine says. She adds that they’re on pace this year to top 2002’s sales by more than 80%.

BlueNile has made financing a key part of its overall customer relationship and selling strategy. For instance, BlueNile provides special payment terms on purchases of $750 or more. It figures that that minimum will serve to assist most customers making a special purchase they might not want to add to one of their existing general-purpose revolving-credit cards.

Through financing backed by MBNA America Bank N.A., a major consumer lender and a leading credit card issuer, BlueNile offers a line of credit under which customers can take up to 60 months to pay off a credit balance at a rate as low as 9.99%, or take up to 90 days to pay off a balance with no interest.

Money by wire

In addition, BlueNile accepts bank wire transfers of money from a customer’s checking account directly to BlueNile’s account. “Bank wires work great,” Irvine says. Not only does BlueNile get its cash immediately, but wire transfers tend to support larger-than-usual purchases by consumers who don’t want to incur finance charges on, say, a $10,000 diamond ring. As an incentive to get customers to use bank wire transfers, BlueNile offers a 1.5% discount above and beyond other special promotions.

BlueNile is a privately held company and doesn’t break out specific financial numbers. But Irvine notes that the bank wire transfers and the MBNA financing each accounts for about an equal amount of consumer purchases, and that both are growing at the same pace as the retailer’s overall 80% growth this year.

She adds that the financing options help to make BlueNile’s products-—the average purchase price is $1,000, though diamond rings can run $40,000 or more—accessible to a larger number of consumers. “The offers certainly widen our target audience,” Irvine says.

BlueNile’s financing options play a key role in building a stellar customer service experience, she adds. “From the time customers first come to our web site, we want them to feel like it’s a good experience,” Irvine says. “If we can continue that great customer experience, people will continue telling their friends about us. We want people talking about us in a positive way.”

Many BlueNile customers are men who don’t often buy jewelry, but want help in picking out a high-priced item like a diamond engagement ring. The financing options serve as an extension of that personalized customer service, Irvine says. “By offering several payment methods, we let them choose the method that’s right for them,” she adds.

She figures that, when a first-time customer purchases a low-end product, he’ll notice and remember the special financing terms for later, larger purchases. In other cases, first-time customers are lured by the financing to purchase a high-ticket item. “We want customers to have a number of choices in how to pay, so they’ll consider more products,” Irvine says.

Special credit in moderation

Special financing follows another approach at QVC.com, the online version of QVC Inc.’s televised QVC shopping service. QVC.com’s special financing offers are used occasionally to boost sales of a particular product or category. “We use it infrequently, because we don’t want people to get accustomed to it,” says Dave Balliet, vice president of inventory planning and merchandise operations. For instance, QVC will also occasionally offer to defer all payment on a promoted product until a pre-set date, though this option is only available to holders of QVC’s private label Q Card credit card. “It’s a successful strategy when used in moderation,” Balliet says. “It allows people to bring into their homes products that they might otherwise not.”

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Getting the full view

Prompting sales may be the primary use of a proprietary card, but in today’s multi-channel environment, retailers can’t overlook the 360-degree view of a customer’s behavior that a proprietary financing vehicle can provide, says Anderson of Macys.com. “We can store both their online and offline transactions to see their cross-channel behavior, which supports the fact that customers that shop in multiple channels spend more overall,” he says. He adds it would be possible but more difficult for Macy’s to store and analyze shopping transactions made with general purpose cards, since Macy’s doesn’t control the card transaction data.

Anderson says Macys.com has no plans to extend credit beyond credit cards, such as through installment loans or electronic checks—an approach that can widen a customer base beyond holders of credit cards. “My strategy is to pursue customers by income type and demographic that would typically carry credit cards,” he says.

Retailers who want to offer alternative forms of credit needn’t take on the financing and management burden themselves, however. Another payment option is Bill Me Later, a cardless payment system that lets consumers pay under an installment plan. Figuring there are still many consumers who prefer not to use credit cards for online purchases, Buy.com Inc. began offering the Bill Me Later service last fall.

While Buy expected customers to appreciate the alternate means of financing a purchase, it was surprised when the service became an effective tool for acquiring customers and driving up the value of purchases, COO Brent Rusick says. “The vast majority, or over 70%, of customers who buy using Bill Me Later are new customers,” Rusick says. “We’ve found it to be a great customer acquisition tool.”

In addition to serving as a customer acquisition tool, Bill Me Later also provides Buy.com with a more flexible means of offering special financing promotions, such as offering TVs or computers with no payments or interest for six months, Rusick says.

Rusick adds that customers who purchase with the Bill Me Later feature, which is offered through CIT Bank and managed by I4 Commerce Inc., make larger than average purchases. Rusick says he figures that’s because some customers who want to purchase products, such as big-screen TVs for $1,000 or more, often don’t want to risk using their credit cards online or pay credit card interest.

Other alternates

To use Bill Me Later, shoppers click on the Bill Me Later option at checkout, input their personal data and billing information, then wait for an authorization that takes about the same time as a credit card authorization, Rusick says. Shoppers pay for products through monthly installment payments on a line of credit approved by I4 Commerce.

Jeff Foster, executive vice president of London-based Retail Decisions plc, a data processing and consulting firm that helps retailers get connected with Bill Me Later, says that most consumers who use Bill Me Later have credit cards but prefer not to use them for online purchases.

Alternative credit is not the only form of alternative payment, however.

E-retailers, including Wal-Mart Stores Inc.’s WalMart.com, have begun accepting other means of payments such as electronic checks, which proponents say can serve the 40% of consumers who either have no credit cards or are maxed out on them. Certegy Inc.’s Certegy Check Services division is providing the e-check processing system for WalMart.com

In addition, AmeriNet Inc., a provider of e-check services, has introduced a new cash payment service for online purchases. When a customer wants to pay by cash at a participating online merchant, AmeriNet produces a record locator number that the shopper takes to a Western Union office. Once the shopper makes a payment to Western Union, the money transfer company alerts AmeriNet, which sends the order to the merchant’s fulfillment center. The cost, about $4 for low-value transactions and up to $20 for transactions valued at about $1,000, can either be paid by the merchant or passed onto the consumer, AmeriNet president David Kerlin says.

But even in a time when e-retailers are looking to offer as many financing options and related incentives as possible, credit cards will continue to play a strong role in serving customers and driving traffic to retail web sites, says Macys.com’s Anderson. Among the strategies the Macy’s web site will launch in the near future, he says, are personalization and loyalty programs based on activity on the Macy’s private label card. “The proprietary card customer, whom we know better than other customers, will get offers others don’t, such as rebates based on minimum purchase requirements,” he says. “Our primary focus will be on rewards, giving customers certificates to allow them to defer the cost of their next purchase on Macys.com.”

paul@verticalwebmedia.com

Why some consumers won’t use credit cards online

Concerned about security 70%

Don’t like having to enter information 9%

Don’t have a credit card 7%

Don’t like interest charges 6%

Purchase value too small†to place on card 4%

Exceeded personal credit limit 4%

Source: PaymentOne, April 2003