Tighter economic times are here, and retailers are looking to pinch pennies. One emerging solution is alternative payments such as PayPal, Google Checkout and Bill Me Later, which can help merchants slash their credit and debit card processing fees. However, this tactic could prove detrimental to those whose livelihoods rely on revenue from card processing fees.
PayPal acts like a middle man during transactions. Payments are withdrawn from the user's PayPal-linked credit card or bank account.
Google Checkout expedites checkout and payment by allowing consumers to store account details for their credit and signature-debit cards in an electronic wallet. Bill Me Later is an instant card service and attracts customers by acting as an open-ended credit card in online transactions.
These three have paved the way for companies such as TrialPay Inc. and Webloyalty.com Inc.
TrialPay is a conversion tool that allows customers to pay for one item by purchasing something else, in turn, giving them a discounted or free item. Webloyalty provides customers benefit packages, which then boost sales for e-commerce merchants.
Are credit cards losing ground to alternative payment services? According to Javelin Strategy & Research, this could be true: Alternative payment is not a niche trend; it is slowing credit card growth and contributing to the decline of cash and checks. Javelin's projected numbers also show a shift in consumer preference from traditional cards to alternative payment methods.
Much of this switch has been driven by e-commerce. Javelin predicts online transactions will reach $355.2 billion over the next five years. By 2012, 30% of Americans will turn to alternative payments - stored-value, e-mail payments and instant credit - when purchasing online, up from 14% in 2007.
"Although it took nearly a decade for alternative payment methods to secure their position in the online world, it's apparent that everyday consumers are ready to view them as a trusted and viable way to buy online," said Bruce Cundiff, Senior Analyst with Javelin.
Some experts believe credit and debit cards paved the way for alternative payments. A Celent LLC study shows PayPal was still highly dependent on credit cards for account funding in 1999, with a 96% dollar volume for all consumer e-commerce purchases.
But fees exceeding 3% for card-not-present transactions sparked merchants to provide new value propositions. Celent's study shows just 12% of 2005 online payment volume was attributable to alternative payment options. However, it projects the total will more than double by 2009 to 26%, dropping online card volume to 50%.
According to Cundiff, PayPal is the main reason credit and debit card alternatives have gained a roughly 14% market share. PayPal said it has more than 153 million accounts worldwide and is available in 190 world markets in 17 different currencies.
And the expected growth in alternative payments may not be limited to e-commerce. "Given the recent online surge, we expect to see some of these trends transfer to offline buying over time," Cundiff said. "For example, more consumers may prefer to use alternative payment methods instead of credit cards, online and in person. But overall, we see continuing growth of online transaction and a decline of paper payment methods."
But not everything is rosy in the alternative payments market. Challenging the PayPals of the world is the surge of e-commerce fraud. A CyberSource Corp. survey estimates online fraud losses will grow to $3.6 billion in 2007, up from $3.1 billion in 2006.
"Merchants did see their online sales grow approximately 20%, but the costs of managing fraud grew a nearly identical amount," said Doug Schwegman, Director of Customer and Market Intelligence for CyberSource. "The picture is one of merchants swimming harder against an accelerating current."
In response, merchants are adding more antifraud tools, such as velocity monitoring, to their e-commerce systems. In 2007, 53% of merchants used five or more fraud detection tools. The largest merchants used an average of eight.
One outcome of adding fraud detection tools is that more orders may be diverted for manual review. CyberSource estimates that approximately 38% more orders were reviewed in 2007 than in 2006, and that extra diligence may have cost merchants an additional $100 million.
As the appeal for alternative payments continues to climb, merchants will find ways to combat fraud and offer as many payment options to consumers as possible. For now the alternative payments sphere is playing catch-up to credit and debit cards, but will it become the front-runner in time?
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