How can I pay? Let me count the ways

At TigerDirect Inc., a retailer of computers and consumer electronics, management’s goal is to offer as wide a selection of products as possible. But while expanding its product lines to build its reputation as a destination site for electronic products, it has extended its broad-brush strategy to include multiple online payment methods as well.

TigerDirect has learned, says Lonny Paul, director of e-commerce, that retail success depends on offering enough products so customers can choose what they want. “It’s the same way with payment methods,” he says. “We want to offer them all and let customers choose. We don’t want to restrict customers by what payment method they can use.”

Without offering that range of payment options, retailers may be forfeiting a large chunk of potential sales. “Credit cards are an 80% solution, which means there may be 20% or more of an opportunity that a retailer is not addressing without additional payment methods,” says Doug Schwegman, director of market intelligence for CyberSource. Corp., a provider of payment processing services.

TigerDirect, which sells computer equipment and accessories, digital cameras, televisions and other consumer electronic products and recently launched sections on office furniture, video games and digital video equipment, has moved further than most retailers into multiple payment methods, offering several alternatives to the general purpose credit cards, including e-checks, eBay Inc.’s PayPal third-party payment service, I4 Commerce Inc.’s Bill Me Later invoicing and bank wire transfers.

TigerDirect’s payment offerings represent a growing recognition by merchants that consumers desire options in how they pay—and that there’s money to be made and new customers to acquire by accommodating that desire. At Wal-Mart Stores Inc.’s WalMart.com, for example, offering multiple payment options—it accepts e-checks in addition to credit cards and gift cards—is another way to increase sales by extending Wal-Mart stores’ reputation for variety and customer service to online customers, says David Rolf, senior manager of finance operations. “Many customers pay with checks in our stores, so we’re extending what Wal-Mart stores offer to WalMart.com,” he says.

Offering multiple payment options also has its challenges, starting with deciding which methods are most in demand by a merchant’s customer base. In addition, multiple payments require network connections to the payment service vendor, they can bring new levels of risk for which a retailer may be unprepared, and they present the merchant with the challenge of administering multiple payment methods.

The benefits of offering multiple payment methods show in several ways, experts say. By including multiple payment options along with risk management, order automation and other processes, retailers surveyed by CyberSource realized an average 15% improvement in combined lower costs and increased revenues.

The survey also found that shopping cart abandonment rates decline along with increases in the number of offered payment methods. Shopping cart abandonment for survey respondents offering only one payment method was 40%, CyberSource says. The rate dropped to 34% for retailers offering two payment methods, 29% for those with three and 28% for those with four or more. “To get dramatic steps of improvement, retailers need to move to whole new payment categories beyond cards,” Schwegman says.

The CyberSource survey of 147 executives from retail companies with a combined $13 billion in 2003 online sales found e-checks to be the most popular form of payment other than general-purpose credit cards, followed by eBay’s PayPal and other non-card services such as I4 Commerce’s Bill Me Later invoicing service.

Significant part of sales

WalMart.com, using a web-based e-check application from Certegy Inc., says e-checks have quickly become a contributor to revenues. “E-checks are a significant part of our sales,” Rolf says. “Some e-check payments are incremental sales from customers who may not have or use credit cards.”

Although Wal-Mart won’t say how many online sales it processes with e-checks, customers use e-checks for purchasing all types of products throughout WalMart.com, Rolf says. He adds that the low cost of offering e-checks complements Wal-Mart’s corporate policy of keeping down operating costs while maintaining a high level of customer service.

“Merchants are looking at opportunities to cut down on payment transaction costs, and they get their biggest bang for the buck with e-checks,” says Larry DePalma, manager of the eCheckSelect suite of payment transaction services at Paymentech L.P., a provider of payment processing and related services.

Credit cards typically cost retailers about 2.5% of the value of the sale while e-checks can cost anywhere from a flat 20-25 cents per transaction if the merchant takes on all risk and performs other processing to about 2% of the value of the transaction if the merchant prefers to have the payment provider do all the work.

E-checks also offer a number of advantages as perceived by consumers, experts say. They cater to online consumers who either don’t have credit cards or have maxed out on their credit lines and they serve consumers who prefer to directly pay for expensive items without adding to their credit card debt. “It’s reasonable that consumers would use e-checks for high-ticket items,” Rolf says.

“E-checks are very hot,” says Paul of TigerDirect. Although TigerDirect doesn’t yet offer its customers the option of directly filling out an e-check form on TigerDirect.com, it lets customers call in their check information to a customer service rep, who enters the data into an online form for bank processing.

Phone comfort

Paul says TigerDirect decided to offer an e-check service from Certegy through its customer service call center partly because it was the best use of its resources and because some customers indicated they were more comfortable giving their account information to a person in a more familiar telephone communication than entering it into a web form. “Some people feel more secure on the phone,” he says.

Nonetheless, in following its strategy of not restricting customer access to alternate payment methods, TigerDirect is planning to offer an e-check service directly on its web site, Paul says.

When it does, it might want to take some cues from WalMart.com. “Wal-Mart does a good job of explaining how to use e-checks,” says Jan Whitfield, vice president of e-commerce for Certegy. “We recommend other retailers to display e-checks the way WalMart.com does.”

WalMart.com has designed pop-up messages that help train consumers how to use e-checks. It also presents a replica of the check online, and makes it easy to enter routing and account numbers, Whitfield says. Most other personal information about the customer is stored as part of the customer’s initial registration process, so a customer only needs to fill in bank routing and account numbers, driver’s license number and date of birth.

A Certegy e-check system can cost about $10,000 for complete system integration required by many larger retailers, though smaller ones may opt for a simpler browser-based plug-and-play application, Whitfield says. In addition, there are application set-up fees and a transaction discount rate similar to that charged by credit card companies. Overall costs can also depend on the amount of custom reporting a retailer wants to access to view transaction data.

The de facto standard

Similar advantages in serving customers are associated with PayPal and Bill Me Later, which provide merchants with immediate payments while offering consumers the option of paying the third-party service through checks, money orders or credit cards.

PayPal’s popularity has grown partly through its association with eBay.com, where it operates as a common payment vehicle for customers of thousands of sellers on eBay who don’t want to acquire merchant status from credit card companies. To make online purchases with a PayPal account, consumers first fund their account; then PayPal processes an immediate payment on their behalf, providing the merchant with an assurance of payment without the risk of fraud or bad credit. Merchants pay a percentage of the sale to PayPal.

The PayPal fees are worth the expense because the service has become increasingly popular with consumers, retailers say. “PayPal has become almost a de facto standard on the web for non-credit card payments,” Paul says. A main reason PayPal has emerged as a leading third-party player over other services is its ease of use, he adds. For example: To increase security, PayPal offers consumers the option of conducting payment transactions with a virtual account number for use in a single transaction. Although PayPal connects the one-time number behind the scenes to the customer’s actual account information, having only the one-time number showing in the transaction makes theft of the customer’s account information during the transaction virtually impossible, Paul says.

Another third-party service growing in popularity, I4 Commerce’s Bill Me Later, is earning strong marks from a range of merchants. Provide Commerce Inc., which operates Proflowers.com and other web sites offering perishable products, says Bill Me Later transactions are less costly to administer than other payment methods and make some customers feel more secure when buying online than when using credit cards. Hotels.com reports booking 10% higher average orders from customers using Bill Me Later, and jewelry retailer Ross-Simons reports increases in both average order size and number of new customers as a result of offering the invoicing payment option. For Ross-Simons, this has led to a double-digit increase in incremental says, says Cindy Marshall, vice president of marketing.

But Bill Me Later is as much a customer relationship tool as a tool for increasing sales, Provide Commerce says. “Through customer research, we have found that the primary reason customers use the Bill Me Later option is for security purposes,” a spokeswoman says. “So this is essentially a group that would rather not use a credit card for online payments.”

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No increased risk

Paul of TigerDirect adds that Bill Me Later is also growing in popularity among consumers because it can be an easier way to get credit. “Without having to go through a full credit card application, I4 Commerce offers a quick and easy application,” he says. “But we haven’t seen riskier consumers coming through Bill Me Later.”

Bill Me Later is currently offered by 24 merchants, with 16 more expected to sign up by the end of this year, says Mike Lavelle, vice president of business development for I4 Commerce. Bill Me Later accounts for 3-7% of its client retailers’ overall payments, Lavelle estimates. While merchants offering Bill Me Later today tend to be larger retailers, I4 Commerce expects to begin building its base among small merchants as well, he says.

In addition to the benefits some retailers report in higher sales and average order size, Bill Me Later also offers merchants some of the financing flexibility more commonly associated with in-house financing or private label credit card programs. For example, merchants have the option of offering consumers free credit for 90 days, instead of the usual deal of letting customers pay after the first month.

When an online retail customer clicks on the Bill Me Later icon to make a payment, she enters the last four digits of her social security number and her date of birth, clicks a button to accept Bill Me Later’s terms and conditions, then waits about three seconds or less to get an authorization, Lavelle says. She receives a bill from Bill Me Later within 7 to 15 days, then has a 25-day grace period before Bill Me Later incurs interest charges of 17.99%.

Merchants pay I4 Commerce transaction fees that run 30-40% less than similar fees charged by credit card companies, Lavelle says.

But for all the advantages of offering multiple payment options, retailers can’t escape its challenges. For many retailers, the challenges appear to be more than they want to take on: less than half—47% of merchants surveyed by CyberSource—offer more than two payment methods for online purchases.

The first step toward offering multiple payment methods is deciding which to offer, though merchants who have taken the multi-payment approach say that can be easy if a retailer is willing to listen to customers. “The main thing for us was that this was customer-driven,” says Rolf of WalMart.com, which began accepting e-checks last summer. “We got calls into our customer service center from customers who said they wanted to pay by check, but dealing with paper checks for online orders is not a good way to go.”

By contrast, TigerDirect has taken a more aggressive approach. It added PayPal after getting many requests for it from customers, but it has added other payment methods as part of its policy of offering customers as many choices as possible.

Once the decision for multiple payments is a go, the next chore is figuring out how to get connected with more payment services. The web, however, is making this an easier task than in the past, experts say. “You no longer need a dedicated line to Visa and every other payment service,” says Paul. “It’s all pretty standard on the Internet these days, using a virtual private network on the web.” He notes that TigerDirect’s in-house IT staff took less than a month to set up connections for each payment method. “It’s really not a problem,” he says.

Once the merchant has made the decision to offer multiple payment methods, there are additional administrative chores, including fraud management and monitoring conversion rates and average order sizes for the different methods.

TigerDirect built network connections for each of its payment methods, Paul says, but retailers also can use an outside service provider, such as CyberSource or Paymentech, to provide the multiple connections and consolidate transaction data for a single administrative view.

$10 billion more

Paymentech’s new eCheckSelect suite of payment services, for instance, can handle multiple payment options, including e-checks, automated clearinghouse transactions, consumer identity authentication and data validation. It also integrates with eFunds Corp.’s Shared Check Authorization Network, or SCAN, to check records of bounced checks, and it uses eFunds’ ID Verification service to match checking account numbers with consumer databases of names and addresses. Paymentech also processes Bill Me Later transactions.

Paymentech also offers custom reporting to let merchants see how many transactions it conducts daily through all of its payment methods. “The merchant gets online reports broken down by method of payment, so they know what they did in MasterCard, Visa, Bill Me Later and e-checks,” DePalma says.

Getting a good look at how a merchant is spreading out payment options for its customers can help put it on a track toward higher returns, experts say.

CyberSource, by applying its survey findings to the entire business-to-consumer sales channel, figures online retailers offering only one or two payment methods may have lost in aggregate $8-$10 billion last year due to higher shopping cart abandonment rates.

paul@verticalwebmedia.com

They may be small, but micropayments arecommanding more attention

For years, micropayments have held out the promise of letting Internet merchants cash in on sales of low-priced items to large numbers of consumers. But it has taken the onset of online music, games and other digital content—and now, with a boost from cell phones—to create an actual though still limited market large enough to attract attention of both merchants and buyers as well as a growing number of micropayment processors.

The value proposition of micropayments is to make it worthwhile for retailers to sell digital content and other products for $1 or less. And with more consumers buying digital music online at a common rate of 99 cents per song, a new range of micropayment services is becoming available. Paymentech L.P., for example, established last fall an alliance with micropayments processor Yaga Inc. to offer micropayments as an option to web merchants. Paymentech says it processes more than half of North American Internet payment transactions.

Peppercoin Inc., a new micropayments company, released a survey last fall that found that 4 million U.S. consumers had purchased digital content at less than $2 per purchase in the prior 12 months. It also projected that 30 million consumers were likely to purchase digital content this year. Jupiter Research projects that micropayments will reach $677 million by 2008, driven mostly by digital music purchases.

Paystone Technologies Corp. is offering a hosted, web-based micropayments application that charges no set-up or monthly fees. It charges transaction fees of 5% plus 10 cents for transactions valued from 25 cents to $5, and 3% plus 30 cents for transactions valued $5.01 to $500. For a 25-cent transaction, the fee would amount to 11.25 cents. Other micropaymet services include PayPal and Bitpass.

Not everyone is sold on the business case for micropayments, however. Lonny Paul, director of e-commerce for TigerDirect.com, says he doesn’t see a long-term market for them. Paul will take a pass on micropayment services even though he’s planning to launch a co-branded site with Zingy Inc., a major provider of digital content for cell phones. The new site, which will operate within TigerDirect.com, will let consumers download to their phones digital songs, games, ringtones and other content at prices of $2 or less. Figuring he’ll pay about 6 cents in credit card fees for a $2 charge, Paul says he sees no advantage in supporting micropayments.

A better option for supporting digital content purchases, he says, is the sale of stored-value cards that teenagers can buy in stores or online in lieu of using credit cards. “Zingy has been one of the leaders in offering those cards,” he says.

Click here for the Internet Retailer Guide to Payments Processing Solutions