January 31, 2006, 12:00 AM


New options are changing how consumers pay for online purchases

­­­When online retailing began, retailers widely assumed that they had one payment choice: credit cards. And that was how it was for several years. Then, just as the Internet revolutionized retailing, it began revolutionizing payments. Today, online retailers have a choice of payment options and the choices will probably just keep growing.

“More and more retailers are adding payment methods to their web sites because retailers are seeing that they can reach a wider base of potential customers by offering a bigger mix of payment methods,” says Stephanie Tilenius, vice president of merchant services, PayPal Inc., which started as a payment method for eBay auctions and has grown into a mainstream online payment option. “We’ve seen this trend in the past year with businesses of all sizes-from the small mom-and-pop shops to the largest retailers on the web.”

Changing dynamics

The explosion of payment options has changed the dynamics of web retailing. “This is the most dynamic and interesting time in the payments industry in 30 years, since the shift from cash and checks to credit cards,” says Gary Marino, CEO of I4 Commerce Inc., developer of the Bill Me Later payment option. “With all the innovations in payments, the balance of power is shifting.”

Marino should know-not only is he helping shift that balance by developing and heavily promoting an alternative to credit cards, but he also had a long career in the credit card business before joining the venture capital-backed I4 Commerce in 2001.

When I4 Commerce launched in September 2000, the market was ripe for an alternative, Marino says, primarily because retailers were looking for a better deal. “We changed the economic equation in pricing for web merchants and call centers by offering pricing that was 40% lower than Visa and MasterCard pricing,” Marino says. “Our price is very, very attractive.”

In addition, Marino argues, retailers know very little about their customers who use credit cards. By offering what amounts to house credit, the retailer has the opportunity to learn more about its customers. “We’re much better users of information than the credit card companies,” Marino says, “because we work with the merchant to understand the customer better.”

Bill Me Later is a credit option that customers can choose as they are checking out. Applicants fill out a simple form and get approval within seconds. Bill Me Later has signed up 1.2 million consumers and transaction volume grew 400% last year over the year before, Marino says. I4 Commerce boasts a stellar roster of merchant customers, including Walmart.com, Newegg.com, Overstock.com, TowerRecords.com, as well as America West and Continental Airlines on the travel side.

Low fraud rate

One reason that I4 Commerce is able to charge lower rates to merchants is its lower fraud rate, Marino says. Marino says his background with credit card companies-he was chief credit officer at Citibank for its North American, European and South American card operations and chief marketing officer and chief credit officer at First USA-gives him insight into managing risk through better use of information technology. Fraud control applies to both sides of the equation, he says, with the upfront credit decisions reducing the risk on the merchant side. “We’ve experienced very little fraud,” he says.

Even though virtually all creditworthy consumers have multiple credit cards, Bill Me Later has tapped into demand for yet another credit product. And, in spite of some earlier belief that the product would appeal to consumers who didn’t have credit cards, the reality has been just the reverse, Marino says. “90% of our customers are very high-demographic, three-car, multiple-residence consumers,” Marino says. “We tell prospects that if they want to know why our average ticket is 300% higher, all they have to do is look at our customers. They’re huge, huge spenders.”

In addition, Bill Me Later customers have shown a propensity to shop at online stores that accept Bill Me Later and that has made the product attractive to retailers, Marino says. “It’s true of almost every merchant we do business with,” Marino says. “Customers come back within 90 days and they shop 20% to 50% more frequently.”

Many high-end consumers are attracted to Bill Me Later because they fear compromising their high credit limits on card accounts, he says. “If I have a $100,000 credit line on a Visa, I don’t feel comfortable giving that number to someone on the phone that I’ve never met,” he says. Consumers transfer funds into a PayPal account from a credit card or checking account, then use the PayPal account to pay for their purchases.

That concern for security is true across the market, payments processors say. “We’ve seen some key trends regarding consumer behavior and payments,” Tilenius says. “One is that consumers are increasingly more concerned about protecting their identities online. PayPal recently conducted a survey of online buyers, and 65% of respondents said their number one concern when shopping online is identity theft. So consumers are really looking to e-commerce providers to ensure that their personal and financial information is safe. And that’s one reason we’ve found that consumers like using PayPal. Since we don’t share buyers’ financial information with sellers, privacy is built into our system.”

Multiple benefits

Retailers’ experience with alternative payments has shown that there are multiple benefits to accepting non-credit card products for payment. PayPal cites evidence that accepting an alternative form of payment attracts new shoppers. “We recently saw this with one of our own merchants, TigerDirect,” Tilenius says. “TigerDirect is a multi-million-dollar reseller of computer equipment. They had been accepting credit card payments online for years. After they added PayPal to their site, they found that 87% of their PayPal transactions were completely new customers.”

In fact, Tilenius cites a recent CyberSource study that shows the importance of alternatives. “CyberSource’s study last year found that merchants can convert as many as 20% more customers just by adding more payment types for shoppers to choose from,” she says. “When it comes right down to it, it’s all about letting your customers buy your goods in the way they feel the most comfortable.”

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