Cost & security

There are few things more important and more vexing to online retailers than deciding which payment options to accept. The major brand credit cards—American Express, MasterCard and Visa—have been the online payment methods of choice since Internet retailing was born.

However, some e-retailers—particularly small start-ups—can’t afford the high cost of credit card acceptance, and, in many cases, can’t even get a merchant account. And all e-retailers know that credit and debit cards come with a built-in problem: Many consumers still will not use their cards online because of fear over releasing financial and personal information into cyberspace.

“There’s still a huge population out there who won’t buy online or will only buy very little online because of security concerns,” says Vince Talbert, vice president of marketing at I4 Commerce, developer of the Bill Me Later payment option. “They want to buy online because they see how easy it is but they’re afraid to use their credit card.”

On the cost side, alternative payment options often come in the form of hybrids that can help retailers cut expenditures or boost revenue. What’s more, these alternatives can bring in shoppers who don’t qualify for credit cards or have bank accounts. As for security, many of the options eliminate the need for consumers to submit confidential information such as credit card and bank account numbers to merchants, helping alleviate fears of identity theft.

“The more options you have, the more you can expand,” says Troy Lawson, chief technology officer at BestKiteBoarding.com, a retailer of kite-boarding equipment and apparel. BestKiteBoarding began accepting PayPal three years ago in response to consumer demand. “PayPal was becoming more and more popular. Some people simply felt safer with the type of security it offers.”

The enticement of lower costs and shoppers’ concerns about security are powering alternative online payment options. Typically they are easier and less costly to implement than cards. For example, Google Checkout, launched this year, offers lower card processing costs to merchants using Google’s AdWords search engine marketing program.

“Merchants are starting to look at payment vendors and ask, ‘What more can you do for us besides just offer payment?’” says Dan Schatt, senior analyst at Celent LLC, a payments research firm.

Whether it’s driven by the fear factor or the desire for related ­services or lower costs, retailers increasingly are adopting alternative payment methods. Online ­merchants on average offer ­customers 3.5 payment methods, up from 2.1 in 2005, according to a new survey by CyberSource Corp., an e-commerce payments processor and fraud-prevention services provider. Larger merchants—those with more than $25 million in annual online sales—offer 4.7 payment methods, up from 2.6 a year ago.

Essentially every online retailer has to support plastic, says Doug Schwegman, director of customer and marketing intelligence at CyberSource. “Most merchants are doing that plus one other payment type,” he says, “whether it’s electronic checks, gift cards, PayPal or Bill Me Later.”

Converts
The impetus behind online retailers’ adoption of alternatives to credit and debit cards is higher conversion rates, Schwegman contends. Retailers offering three or more payment types experience on average a 14% lift in conversions, according to CyberSource research.

In addition to increased conversions, ticket sizes often grow when a retailer offers alternatives to cards. At DiscoveryStore.com, for ­example, there was a “significant increase in average dollars per transaction” from customers using Bill Me Later, says Kelly Day, senior vice president at Discovery Interactive. “That really has exceeded our expectations,” she says.

One of the first and most widely accepted alternative payments is PayPal, online auction giant eBay Inc.’s payment service. Launched in 1998 as a payment option for buyers and sellers on eBay, its use among online retailers gradually is ­growing. PayPal today has 123 million accounts, according to eBay figures.

During the third quarter of 2006, PayPal posted total payment ­volume of $9.1 billion, a 37% increase from $6.7 billion during the same period last year. Merchant services accounted for $3.3 billion of that amount, up 59% from $2.1 billion in the third quarter of 2005.

“We spent the first few years addressing merchants that were most able to take advantage of the PayPal product or that were more forward thinking than other merchants,” says Tyler Hoffman, senior director of PayPal’s merchant services business. “Over time, we’ve found it’s become sort of mainstream. Everybody’s ­looking for alternative payments now.”

Among major online ­retailers accepting PayPal are Dell Inc., Hewlett-Packard Co., Barnes&Noble.com Inc. and 1-800-Flowers.

Gateway to money
PayPal took a giant step toward expanding beyond its eBay base in November 2005 when it acquired VeriSign Inc.’s online payment gateway business. Now PayPal Pro enables merchants to accept credit cards in addition to PayPal.

Previously, PayPal merchants could accept credit cards only indirectly via customers using cards to fund their PayPal accounts. Now PayPal Pro enables buyers to check out on merchants’ sites rather than being transferred to merchants’ pages on the PayPal site to complete the transaction. PayPal charges between 1.9% plus 30 cents and 2.9% plus 30 cents per transaction for processing.

And when it comes to really alternative, PayPal earlier this year launched PayPal Mobile, a text-­message-based service enabling consumers in the U.S. and Canada to make purchases via mobile phones using their PayPal accounts. The Text-to-Buy feature of the service enables consumers to buy items featured in advertisements by sending a product code from the ad to PayPal via text messaging. Merchants running campaigns using PayPal Mobile include Sony BMG, L’Oreal, drugstore.com and Lucky Magazine, which includes Estee Lauder, Target and Avon.

Schatt says he expects PayPal will retain a dominant share of the alternative e-commerce payments market because it offers services beyond a simple payment function. “They’re doing a very good job of branching out up the supply chain to provide additional merchant services capabilities that can be very valuable for small and large merchants alike,” Schatt says.

Another payment option that brings additional services to merchants is Google Inc.’s Google Checkout, which enables shoppers to purchase from participating stores with a single Google log-in. To use Google Checkout, consumers create an account at Google.com or a participating retailer. Shoppers can locate retailers accepting Checkout by looking for the service’s icon on Google AdWords advertisements or at an e-retailer’s site. Retailers using Checkout also are listed on the Google site.

Even though many analysts view Google Checkout as a payment alternative to PayPal, Google insists it’s not a form of payment. Instead it uses consumers’ existing cards and streamlines the payment process. Either way, it definitely is a competitor in the payment arena because of its potential to eat away at PayPal and other players.

Free transactions
For example, the standard rate for using Google Checkout is 2% of a sale plus 20 cents per transaction. Merchants who accept Checkout and also use the company’s AdWords program can process $10 in sales at no charge for every $1 they spend on AdWords. This makes use of Checkout considerably less expensive—potentially even free—than what merchants must pay for card and PayPal transactions.

“With Checkout we’re focused on the entire search-find-buy cycle of e-commerce—driving leads via the Checkout badge that appears in AdWords ads, increasing conversions by allowing buyers to make their purchase with just a few clicks, and reducing costs through the AdWords pricing incentive,” a company spokesman says.

Although Google won’t release detailed numbers, the spokesman says it added thousands of merchants to Checkout during the third quarter. Participating merchants include BlueFly.com, Buy.com, RitzCamera.com and Sierra Trading Post. Google also declines to give sales volume.

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“Google Checkout is kind of a different flavor because on the one hand it’s more of a payment ­facilitator with the end goal of trying to boost ad spending,” Schatt says. “Its core business is not payments, but a lot of what it does is manage payments because so many people are basically paying for AdWords and they’ve got to have a robust payment infrastructure for that.”

What appeals to many merchants about Google Checkout is the ability to bundle AdWords costs in with potentially lower payment processing costs, Schatt says. “They’re two of the largest line items that any merchant has.”

Shopping.com, eBay’s comparison shopping engine, expects to test similar cart-related payment functionality by year’s end. The integrated shopping cart, with attached wallet functionality, will enable shoppers to purchase items from multiple merchants across Shopping.com directly from Shopping.com using one cart. The shopper won’t have to visit merchants’ sites to complete the purchase.

Because of Shopping.com’s ties to eBay, the 90-million plus registered eBay users don’t have to enter their information again, if they sign in under an eBay account. The sign-on places them right in the shopping cart and at checkout they only need to provide payment and shipping information. Shoppers can use any payment method.

Even more nuance
Adding yet another nuance to the alternative payment scene is the fast-growing Bill Me Later. It’s a form of e-invoicing, in which a customer is granted an instant credit line to make a purchase and then is sent a bill. When a shopper clicks the Bill Me Later box at checkout, he is asked to provide two basic pieces of information, such as date of birth.

Bill Me Later processes that information through a proprietary gateway comprised of multiple sources of customer ­information—including credit bureau and proprietary databases—to assess the shopper’s creditworthiness. The transaction is approved or denied within three seconds. Bill Me Later handles all billing and collections and assumes all fraud and credit risk.

“It’s really a convenient option for the merchant to adopt since it acts just like a credit card on the backend, but from a consumer appeal perspective it’s simply checking a box on the payment page saying ‘Bill Me Later,’” says Talbert of I4 Commerce.

I4 Commerce has developed a turnkey process that leverages the retailers’ existing payment ­processors. Retailers pay between 1.5% and 1.85% of the sale plus 15 cents per transaction, depending on the size of the merchant. “That is typically 30% to 40% lower than what they would be paying with Visa or MasterCard,” Talbert contends.

2 x 7
Consumers who sign up for the Bill Me Later option typically spend 28% to 46% more in the first 90 days than customers using credit cards, according to I4 studies. In addition, the average Bill Me Later customer visits the Bill Me Later web site twice a month and ­connects from there to seven different ­merchants during those visits, Talbert says.

The Bill Me Later option also is designed to integrate with ­retailers’ merchandising promotions. For example, an electronics retailer could offer a customer no payments for 12 months if they buy a plasma screen TV.

“The blending of merchandising capabilities with payment capabilities—being able to dynamically bundle products that can be paid for in a promotion—is very appealing and has led to more impulse buys because the credit experience is so straightforward and user friendly and the consumer can delay payment as an alternative to the credit card,” Schatt says.

Another alternative online payment method that holds potential is an initiative being developed by NACHA—The Electronic Payments Association. NACHA will begin testing an Internet payment option—generically known as a credit push—tied to a shopper’s bank account early next year. With the NACHA payment option, consumers will be able make online purchases by accessing their bank accounts online, says Samantha Carrier, senior director of special projects. The ACH model leverages a consumer’s online bank account and the bank’s online platform for authentication.

A shopper initiates a credit push transaction by selecting the NACHA option at checkout. If the shopper’s financial institution is participating in the program, she will be presented with a log-in screen for her online banking program. After the consumer is logged into the site she sees details of the transaction, including the retailer’s name, shopping cart items and price. Once she authorizes the sale, the consumer is redirected back to the retailer’s site. The bank authenticates the transaction and sends the seller real-time authorization of a guaranteed payment.

The benefit for shoppers: “As the consumer, I’m never sharing my ­private financial data with the seller,” Carrier says. And retailers benefit from the credit push payments, too. “You’re looking at the potential to draw in folks who have been ­hesitant—or flat out unwilling—to shop online because they don’t want to share that private financial data with anybody other than their financial institution,” Carrier says.

Meeee-OW
But don’t expect to see widespread acceptance of the ACH payment option in the near future, Schatt says. “ACH is going to take a long time because it’s like herding cats,” he says. “You’ve got so many different constituencies.”

Just how much NACHA decides to charge merchants for using the ACH payment also will play a decisive role in whether it gains widespread acceptance, Schatt says. For the pilot, NACHA plans to set up an interchange fee structure similar to the card industry’s. “The devil really is going to be in the details of how they price this model, but it represents a secure, efficient way to pay for things on the Internet,” he adds.

MODASolutions’ SECURE-eBill is another payment method that uses a consumer’s online bank account. When ­consumers select the SECURE-eBill payment option at checkout, they are sent an e-mail invoice confirming the purchase. The consumer then pays the invoice from their online bank account, just as they would pay any other bill online.

“The consumer is not giving any personal, financial or sensitive information to the merchant,” says Marway Forzley, president and CEO of MODASolutions. “All you give is your e-mail address.”

SECURE-eBill handles the transaction processing and posts the records to the merchant. Merchants pay a transaction fee from 1% to 5% of a sale for the service. Merchants connect to SECURE-eBill’s system using an application program interface.

“Once they decide to deploy SECURE-eBill, we set them up on the biller network so their payee information is available to the banks; so any consumer who does online banking is able to use eBill to pay the merchant,” Forzley says.

I’ve got to be me
To add yet another layer of security, some online payment options use biometrics technology. That’s the case with Pay By Touch Inc., which last month released TrueMe, an Internet version of its biometric authentication service that uses a customer’s fingerprint to verify identity. By sliding a finger on a TrueMe-certified finger sensor, a user can securely access his web-based accounts with no need for IDs, passwords or account numbers.

Consumers can sign up for TrueMe at participating merchant or financial institution sites. “They do this once and any site that’s enabled for TrueMe would be able to activate the user,” says Jon Siegal, executive vice president at Pay By Touch. During checkout, TrueMe provides the merchant any information needed to complete the transaction, including billing, shipping and payment information. “We’re securely storing all that information on behalf of the user and the fingerprint makes it available to the merchant site,” he says.

Whether as high-tech as biometrics or as simple as bundling information together to be securely accessed by name and password, alternative payments are expected to account for an increasingly larger volume of online transactions. Schatt estimates that less than 50% of e-commerce volume will come from credit cards by 2009.

linda@verticalwebmedia.com