Online sales climbed 24% year over year, while Best Buy’s overall sales were flat.
New payment options and data security requirements are key issues facing e-retailers.
Online retailers already were moving to accept a broader variety of payment methods even before Google introduced its Google Checkout payments service last year. But the entry of the search engine giant has accelerated the trend, and prompted competitors to become more aggressive in pushing their alternate payment schemes.
And alternate payments are just one of the stories in online payments. Security remains a big issue, with online retailers facing increasingly tough data security requirements-and penalties for leaving consumer data unguarded. Plus, the question of applying sales tax to Internet purchases is not going away, adding another complexity to online payments.
The emergence of new ways to pay online beyond credit cards has already made payments more complex for online merchants. Online retailers on average accepted 3.5 payment methods last fall, up from 2.1 a year earlier, according to a survey of 351 U.S. online merchants by payments processor CyberSource Corp. And larger merchants, those with online sales of at least $25 million a year, offered customers 4.7 ways to pay on average, up from 2.6 in the 2005 survey.
Offering more ways to pay seems to boost sales, CyberSource found. The survey indicated that sales went up by an average of 14% when retailers offered three or more payment options.
Competition heats up
Acceptance of credit and debit cards actually slipped slightly in 2006, CyberSource found, from 97% of merchants in 2005 to 94% last year, but those familiar pieces of plastic remained by far the most common payment method offered. Next came PayPal at 34%, up from 23% the prior year, followed by gift cards and certificates at 26% and electronic checks or ACH payments directly from bank accounts at 24%.
Coming on strong was Bill Me Later, a service from I4 Commerce Inc., which allows retailers to offer instant credit to consumers. That method was accepted by 17% of retailers surveyed last fall, up from 9% a year earlier. Although Google Checkout had just been announced a few months earlier, it was already accepted by 6% of merchants as the holiday season was getting under way.
Google caught consumers’ attention last fall by offering coupons worth nearly $60 million for those who paid with Google Checkout. That helped boost Google Checkout’s share of purchases at participating merchants’ web sites to 19% in December, according to Matthew Pace, senior associate at Compete Inc., which monitors traffic to web sites. Among the online retailers accepting Google Checkout were Toys “R” Us, Sports Authority and Linens ‘n Things.
Google Checkout accounted for about 1 million purchases in December, fueled by those handy coupons, Pace says. But, with the coupon offer over, Google Checkout dropped to 250,000 transactions, or about 8% of purchases at those web sites in March, Pace says.
Still, the message had gotten through, not just to merchants and consumers, but also to Google’s rivals. After Google announced its coupon giveaway, PayPal responded by offering consumers up to $100 million if they pay with PayPal Express Checkout, which PayPal had introduced in 2005.
The Google and PayPal checkout services both allow consumers to register their payment card numbers and personal information, then pay by just entering a password at the sites of retailers that accept those payment services. With the PayPal service, consumers also have the option of registering their PayPal account information, debiting purchases directly from a bank account. Yahoo, Google’s chief rival, has developed increasingly close ties to PayPal and its corporate parent, eBay Inc., and promoted PayPal Express Checkout to merchants that use the Yahoo Stores e-commerce platform.
A growing number of larger online merchants are offering Google Checkout, according to a survey in June of the 200 largest Internet merchants by analyst Jim Friedland of investment firm Cowen and Company. He found 26 of those merchants were offering Google Checkout, up from 15 in January, just five months earlier. The similar PayPal Express Checkout was offered by 21 e-retailers in June, also up from 15 in January.
Google has continued to push Google Checkout to merchants, waiving processing fees entirely for this year and promising that in the future any transaction fees can be applied to the cost of buying advertising search terms through Google’s AdWords service.
Those cost savings are attractive, but the main reason larger merchants are adopting alternative payment methods is to attract new customers and higher-margin sales, says Allen Weinberg of the payments consulting firm Glenbrook Partners. “The cost factor is really secondary to the revenue lift factor,” Weinberg says.
Another form of credit
He says that also accounts for the attractiveness of the Bill Me Later service from I4 Commerce, which encourages consumers to make more expensive purchases when they know they can defer payment for a period of time without interest charges.
More than 500 online retailers now offer Bill Me Later, and 2.5 million consumers have chosen that payment option, says Vince Talbert, vice president of marketing at I4 Commerce. The company does not report the number of transactions, but Talbert says it has more than doubled each year for the past three years.
Talbert says the typical consumer who uses Bill Me Later is a woman between the ages of 30 and 50, who makes many of the purchasing decisions for her family. She may not have her purse handy when she wants to make a purchase, or may prefer not to use a credit card online. With Bill Me Later she does not have to divulge card information to the merchant. She enters the last four digits of her Social Security number and date of birth, and Bill Me Later responds with an approval decision within seconds, Talbert says.
Weinberg notes that payment services offered from well-known companies like Google and PayPal are especially helpful to smaller, niche merchants, as consumers may be reluctant to share card information with retailers they have never heard of. With both the Google and PayPal checkout services the merchant does not see the actual card number.