August 31, 2011, 3:27 PM

Survey: Online Payments

With debit card fees about to drop, some e-retailers adjust their payment strategies.

The ink is barely dry on the Federal Reserve Board's June 29 ruling ordering a cut in debit fees, but already about one in six retailers are planning to steer online shoppers to use debit cards, according to the newest Internet Retailer survey. 17% of the 112 respondents to the survey on payment strategy said they planned to take such steps as offering discounts and more prominently displaying debit card options on e-commerce sites.

The Internet Retailer survey generated 112 responses, 68.8% of them from web-only merchants, with the rest from chain retailers, catalogers and consumer brand manufacturers. 50% of respondents have annual web sales of less than $1 million, with 22.3% taking in between $1 million and $5 million per year; nearly 10% of respondents said their annual web sales exceed $50 million.

Among the biggest payment questions online retailers will face in the coming months is the impact of the new debit card fees, and some respondents are plotting ways to move consumers away from using credit cards, which will now cost e-retailers more than accepting debit.

Starting Oct. 1, the Fed will cap debit interchange at 21 cents per transaction plus 0.05% of the transaction amount; with online debit purchases averaging $78.70, according to Javelin Strategy & Research, that would make the debit interchange fee 25 cents on an average web purchase. Today, online retailers typically pay Visa and MasterCard debit interchange of 1.60% plus 15 cents a transaction, or $1.40 on a $78.70 purchase. The Fed made no distinction between online and face-to-face transactions in setting its debit card fees.

There's much uncertainty about how this fee change will play out, and merchants should discuss with their payment processors how the decision might affect their businesses, advises Tom Pouliot, payments evangelist at Litle & Co., which specializes in handling payments for online and other retailers that don't sell through physical stores. "Clearly there will be an impact on merchants," he says, "but to know how much will be determined by their own transaction specifics, such as the percentage of debit cards versus credit cards used and the average ticket."

The survey results suggest that many online retailers are still unaware of the debit card changes, and others are reluctant to influence how consumers pay. 39.6% of respondents said they didn't know debit card fees were going down; a further 43.2% said they have no plans to encourage more debit card spending on their retail sites, while 17.1% will take steps to lower their costs by encouraging debit card payments.

Only two respondents to the survey, or 1.8% of the sample, plan to offer consumers discounts for using debit; the same number say they will let consumers know that every debit card transaction will result in a donation to charity. 8.0% will tell shoppers that using debit cards instead of credit cards can keep prices low overall, while 3.6% will highlight security policies to increase confidence in paying by debit. The largest group among those planning to push debit, 10.7%, simply plan to display the debit card option more prominently.

E-retailers also should be aware that banks, unhappy with the drastically lower debit fees they'll be getting, may try to steer consumers away from paying with their debit cards. Wells Fargo, for example, last month announced plans to test charging consumers this fall when they use a debit card to pay.

Debit card use has been increasing somewhat more quickly than use of credit cards, likely a result of consumers trying to avoid running up credit card charges in a shaky economy. Among survey respondents 40.2% report an increase in debit card use over the past year; 3.7% report a decrease, and 56.1% say it has remained the same. For credit cards, 35.1% of respondents report increased use over the past year, 16.2% a decrease and 48.6% no change.

But consumers still pay online more often with credit than debit cards. 61.6% of retailers said between 76% and 100% of their online sales come from credit cards. Only 7.5% said more than 41% of sales come from debit cards.

"Credit card use in online retail purchases continues to have the largest volume," says Souheil Badran, senior vice president and general manager at Digital River World Payments, the payment services arm of e-commerce services provider Digital River Inc. "But we have seen a big surge over the last few years in the use of debit cards and alternative payments such as direct debit, gift cards and prepaid cards."

Alternative payments

When it comes to other payment methods, PayPal accounts for at least a fifth of online sales for 30.3% of survey respondents; 38.3% say the percentage of sales via PayPal has increased over the past year, with only 5.6% reporting a decrease, and 56.1% no change.

Moreover, 56.8% of respondents say they accept forms of payment other than PayPal, credit cards and debit cards, with Google Checkout, at 23.2%, being the most popular of these payment alternatives. Such payment methods, which also include Amazon Checkout (8.9%), private-label credit cards (2.7%) and Bill Me Later (8.9%), account for between 1% and 5% of web sales for 50.8% of respondents, and between 6% and 10% of web sales for 23.0% of respondents.

In all, 42.6% of respondents expect the percentage of web sales via payment methods other than credit cards, debit cards and PayPal, to increase, with only 3.3% expecting a decrease and 54.1% anticipating no change. Retailers will continue to test the payment methods best suited to specific customers and product offers, experts say. "As the number of alternative payment providers continues to grow," Badran says, "they must be able to offer stronger value propositions that can satisfy the consumer, retailer and issuers."


To view the Internet Retailer Guide to Payements Products & Services click here.

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