July 31, 2011, 12:00 PM

A Big Win

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Once e-retailers lock in the lower debit interchange rates, they can turn their attention to another question: Is it worth trying to get more customers to pay with debit rather than credit cards?

Kirshner has no plans to promote debit card use on his e-commerce site, such as offering a discount for using a debit card. Consumers will use the cards they want to, he says.

Others point out that it would be hard to offer a meaningful discount when a merchant is only saving about $1 in processing fees on a debit versus credit transaction.

"It is virtually impossible for us to encourage debit use online," says Jon Kuhlmann, owner of Grapevinehill.com, a shoe e-retailer. "Even though the numbers are meaningful from a profitability standpoint, it is really not a needle mover that warrants any investment to maximize the benefit."

From the point of view of the customer, he says, "They are making the decision based on personal finances and where they want the funds to be drawn from."

Web-only retailer Overstock.com Inc. intends to monitor how consumers react before deciding whether to promote debit cards as a payment method, though the company has not thought of how it would promote it, says president Jonathan Johnson.

About half of the purchases made on Overstock.com are made with a credit card, 25% with a debit card and the remaining 25% with such online alternatives as PayPal and Bill Me Later, Johnson says. "We're going to watch to see if our percentages change," he says. "I would hope so."

Risks and rewards

Web retailers might be best off leaving it to customers to decide how to pay, says Litle's Pouliot. For many consumers, he says, payment choice is a habit, he says. "Most merchants will want them to complete the sale," he adds.

Even without taking action, online retailers are seeing more consumers pay with debit cards, particularly since the recession hit three years ago, prompting many consumers to use their credit cards less. As of the first quarter of this year consumer revolving credit, mostly credit cards, stood at $790.6 billion, a 5.9% decrease from $840.1 billion in outstanding revolving credit in the first quarter of 2010.

"Overall, the recession has played into increasing use of debit cards in general, including online," says Beth Robertson, Javelin director of payment research. "Consumers started to use credit cards a lot less." According to an annual Javelin survey, 29% of online purchases were made with debit cards in 2010, up from 28% a year earlier, while credit cards' share of web transactions fell from 44% in 2009 to 40% in 2010.

And at least one recent poll suggests consumers may be inclined to use debit cards more: In an online survey this year of 1,000 consumers, 46% said they prefer to use a debit card for online shopping compared with 40% who prefer a credit card, says Total System Services Inc., a payment processor that conducted the survey with consulting firm Mercator Advisory Group Inc.

But there could be drawbacks for e-retailers if consumers pay more often with debit cards, because shoppers are more likely to be frugal when the money is coming directly out of their bank accounts, says Patricia Hewitt, director of the debit advisory service at Mercator. They are also more concerned about the security of their bank accounts, she says.

"Consumers understand their debit card is accessing their spendable cash," Hewitt says. "Consumers are very concerned about controlled access to that and controlling those accounts. That's what keeps a lot of consumers from transacting online."

Consumers clearly spend more online with credit cards than with debit cards: a Javelin survey in September 2010 of 4,998 consumers found the average online credit card purchase was $96.80, 23% higher than the $78.70 average online transaction with a debit card.

Online retailers could see other changes ahead as a result of the new debit card fees. Banks, which some analysts say will lose $10 billion or more annually in fee income as a result of the lower debit fees, may well add fees to the checking accounts that are tied to debit cards, or restrict how much consumers can spend with debit cards. Such changes could impact consumers' views of their debit cards. When 1,000 online consumers were asked recently how they would react to a hypothetical $50 limit per debit card transaction, 34% said they would stop using the cards and 27% said they would use their debit card less.

Such changes remain hypothetical, as banks are still pondering their response to the dramatic reduction in debit interchange. For online retailers, the pressing task is to make sure they get the full benefit of the lower debit card fees. Then they can contemplate whether it's worth trying to get consumers to use their debit cards more often.


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