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More changes are coming in online payment processing
Most online shoppers still pay with credit cards, but payment alternatives are slowly gaining traction, with more on the way. And just as consumers have more choices about how they pay, online retailers will have another payment-processing option as a big processor plans to split into two.
That company is Chase Paymentech Solutions LLC, which claims to process two out of three e-commerce purchases made by U.S. consumers. The company is a 12-year-old joint venture now owned by First Data Corp., the biggest U.S. payment card processor, and J.P. Morgan Chase & Co., one of the country’s biggest banks and card issuers. After a private equity firm bought First Data, Chase had the option of busting up the joint venture, and announced in May it would do just that.
What it means for the many online retailers that use Chase Paymentech as a processor-including Walmart.com, Zappos.com, Overstock.com and Buy.com-is that the company will split nearly in two, with Chase taking the Chase Paymentech name, 51% of the assets, the Dallas headquarters and most of the employees. Importantly for e-retailers, Chase will retain the Salem, N.H., processing facility that specializes in handling online and catalog transactions.
However, First Data will get a copy of the Salem technology and is expected to launch its own e-commerce processing operation. Once First Data gets that operation up to speed, expect increased competition for the processing business of online retailers, says payments consultant Steve Mott of BetterBuyDesign.
“Many of them will have multi-year contracts, so there will not be a mass exodus right away,” Mott says. “But in time there should be a very vigorous competition for these customers.”
More of the details of the division of contracts and assets will be forthcoming over the next few months, says Mia Shernoff, executive vice president of marketing at Chase Paymentech. “Our priority is to ensure no merchant, online or retail, has any disruption of service,” Shernoff says. Ultimately, she says, retailers will benefit, “because merchants will get two companies very focused on investing in the business in their own way.”
A First Data e-commerce processor would join an already crowded field in which prices keep going down, especially for larger online retailers. The competition among large processors has driven processing costs for big e-retailers down to under a penny per transaction, says Allen Weinberg of the Glenbrook Partners payments consulting firm.
Plenty of alternatives
Meanwhile, consumers have several ways to pay other than the familiar pieces of plastic carrying the brands of Visa, MasterCard, American Express and Discover. Adoption of alternative payments is growing gradually and analysts expect it will pick up-especially if more merchants offer and promote these alternative payment types.
To be sure, plastic is still king when it comes to paying online. A survey by research and consulting firm JupiterResearch LLC found 81% of online shoppers paid with credit cards during the 2007 holiday season, up slightly from 80% the year before.
Debit card use dropped from 42% in 2006 to 35% last year. But Jupiter analyst Edward Kountz says that could be a one-time discrepancy as other data suggests debit use is growing online and off.
More reflective of a long-term trend, he believes, is the drop in online payments with retailer-issued credit cards, to 9% in 2007 from 13% the previous year. Kountz says that reflects overall modest use of such store cards and the proliferation of other online payment options.
Those alternatives to plastic showed little growth in Jupiter’s 2007 holiday survey. PayPal, the most popular alternative payment method online, stayed steady at 25%, Bill Me Later use dropped to 4% from 6% and Google Checkout increased from 2% to 3%.
More retailers are planning to add alternative payments. PayPal was an investment priority of 53% of retailers surveyed last fall and deferred billing options like Bill Me Later of 38%, according to Forrester Research and e-retailer trade group Shop.org. First Annapolis Consulting says a survey last December of retailers with annual online volume of $5 million to $10 million shows 41% accept some kind of alternative payment, including 34% that take PayPal and 20% Google Checkout.
Of the consumers who pay with something other than a credit or debit card, 37% cited security and 25% convenience as a primary reason to use an alternative payment system. The perception of security comes from the customer not having to enter a payment card number on the merchant’s site as it is stored by the alternative payment provider. The convenience comes from being able to pay with just a user name and password, as opposed to entering card data.
Many consumers continue to shy away from buying online because they fear their personal or payment card information will fall into the wrong hands. In a survey late last year, 75% of respondents agreed that they did not like giving out their credit card number or personal information online, including 36% who strongly agreed with that statement, according to the Pew Internet & American Life Project.
Seeking to allay those fears, more than 4,000 online businesses have deployed Extended Validation SSL certificates from VeriSign Inc. that provide visual cues of a web site’s legitimacy. At such sites, visitors using high-security browsers such as Internet Explorer 7 or Mozilla’s Firefox 3 see an address bar that turns green, a lock icon next to the address and a new field to the right of the address bar displaying the site owner’s name.
Among online retailers using the Extended Validation SSL certificates are Buy.com, Overstock.com and Blue Nile. “In today’s world, where every day seems to present a new threat or vulnerability, our ability to communicate immediately to guests that they have reached a genuine Buy.com checkout or account page is an important step in providing them with the best possible shopping experience,” says Jeff Wisot, vice president of marketing at Buy.com.
At Overstock.com, shoppers using browsers that interface with the VeriSign Extended Validation SSL certificates abandon their shopping carts 8.6% less often than others, the e-retailer says. “We’re ecstatic with the ease of implementation and the subsequent decrease in shopping cart abandonment,” says Geoff Atkinson, marketing chief of staff.