Trends & Tactics

Spot Credit And Mobile Fuel Online Sales

There’s been an awful lot of buzz about mobile payments the past few years, and now the payment method is starting to register. Indeed, 2012 marked the first time mobile-originated transactions accounted for a meaningful share of online purchase volume, says Beth Robertson, director of payments research at Pleasanton, Calif.-based Javelin Strategy & Research.

Overall, retail purchases online will reach $318 billion this year, up a healthy 13% from 2011, with mobile transactions accounting for more than 6% of that volume, according to a report released by Javelin last month. Overall, online transaction volume has nearly doubled just since 2006, when transactions totaled $163 billion.

The report forecasts that online transactions will cross the $400-billion level in 2015 and hit $458 billion in 2017, for a nearly 8% average annual growth rate.

But something else registered in the numbers, as well. Among payment methods, general-purpose credit cards are still leading the way, but transactional credit in the form of PayPal Inc.’s Bill Me Later is surging at a torrid pace. Some 21% of users of alternative-payment methods online now say they use Bill Me Later, compared to just 1% as recently as 2010.

Historically the most popular form of payment for online transactions, credit cards have lost the overwhelming dominance they once enjoyed but still command 42% of volume, a share Javelin expects to remain steady through 2017. No other single payment method comes close to that share. Often used for big-ticket buys, credit cards also account for the leading average order value, at $88.53, up more than $6 from last year.

The share loser will be debit cards, which will grow in usage but not fast enough to keep up with the growth of e-commerce. Debit’s share will shrink from 29% to 25%, Javelin predicts. Debit remains popular at the point of sale, but consumers have historically feared using it for online purchases, the report says. Debit has also been hobbled by the Durbin Amendment, which capped big issuers’ interchange income and led them to cut back on debit rewards programs and promotion.

Alternative-payment methods like PayPal and Amazon Payments will continue to gain share, growing from 16% to fully one-fifth of online volume five years from now. But in Bill Me Later, PayPal clearly has a secret weapon in its race with Amazon and other alternative-payment players.

PayPal parent eBay Inc. paid $945 million for Bill Me Later back in 2008, and now that investment is paying off in spades. At its 21% adoption rate, Bill Me Later easily exceeds Google Checkout (11%) and is catching up with Amazon Payments/Checkout by Amazon (26%). PayPal itself is far and away the kingpin among alternative players, claiming 84% of users.

“Once [Bill Me Later] was acquired by [eBay], it had access to a larger number of [PayPal] merchants,” Robertson says. “That helped make it more visible.” Making it, and PayPal, even more visible during the crucial holiday season, she adds, was a price-match promotion PayPal launched. The policy, which extended to both PayPal and Bill Me Later purchases, also threw in free return shipping if necessary.

Meanwhile, at $20.3 billion, mobile volume now represents a 6.4% slice of the total online market, marking mobile’s emergence into significance as a generator of online traffic.

Robertson says Javelin decided to start measuring mobile-originated online sales in 2012 after stores in 2011 began for the first time reporting measurable mobile activity after Thanksgiving. “The pick-up in [mobile] Black Friday sales in 2011 was enough to tell us we should start tracking it,” she notes. “The information was that people were using their mobile devices, which is why we did our forecasts in both the mobile and online environments.”

For all the online activity, whether from laptops or mobile devices, e-commerce sales still account for a relatively modest 7.4% of all retail sales, a share that will grow to 10% by 2017, Javelin says.

Will Consumers Accept a Low ATM Surcharge?

It’s a classic supply-demand question: What is a mutually acceptable ATM surcharge price point for consumers, who are conditioned to expect free use of any ATM, and retail ATM owners competing against big-bank ATM networks that customers can use for free, surcharge-free ATM networks, and stores that give cash back at no charge with purchases on PIN-debit cards?

With a new limited-surcharge program called Dollar$top, processor Fidelity National Information Services Inc.’s NYCE electronic funds transfer network is betting the demand and supply lines will intersect at $1, less than half the average surcharge on U.S. ATMs.

While they’re giving up some market-rate surcharge revenues, ATMs in the Dollar$top program will generate $1.40 in interchange per withdrawal transaction versus NYCE’s normal rate of 50 cents. In contrast to purchase transactions, when they receive interchange, debit card issuers pay interchange to the ATM owner.

Payment Alliance International Inc., manager of the nation’s largest retail ATM network with some 60,000 machines, is NYCE’s first client. Louisville, Ky.-based PAI will offer the service to its more than 200 partner ATM independent sales organizations and retailer ATM owners. Individual owners make the decision about whether to participate. NYCE plans to approach more retail ATM owners.

NYCE developed the program in response to calls from its 3,000 financial-institution members, most of which have less than $10 billion in assets, to get more ATM firepower. NYCE also serves the 500-member Armed Forces Financial Network (AFFN).

“One of the things we would be regularly asked is, ‘What are you going to do for us about reach?’” says NYCE Payments Network president Neil Marcous. “‘We need more machines to be competitive, but these surcharges have gone through the roof.’”

In some surcharge-free transactions, a bank might reimburse an ATM owner $3.00 for a $2.50 surcharge on top of paying 50 cents in interchange. Small financial institutions “were absorbing fees, it was really cutting into their profitability,” Marcous says.

Thus was born the idea for Dollar$top, which presents both ATM owners and financial institutions with a balancing act. ATM owners need to decide whether taking only $1 in surcharge revenue but getting 90 cents more in interchange while possibly drawing more customers is worth the tradeoff of reduced upfront surcharge revenue.

Financial institutions need to decide whether paying higher interchange and persuading consumers to pay a flat $1 instead of searching out a surcharge-free ATM will be financially rewarding.

“It works out for the FI, the ATM owner, and the consumer,” Marcous says. “This will be satisfactory to a large group … it won’t satisfy everybody.”

Only retail (off-premise) machines are allowed. About 20,000 ATMs are enrolled in the early going, with more coming, according to Marcous, and he expects that about 1,000 of NYCE’s 3,500 eligible financial-institution members will participate as the program gets under way.

PAI executive vice president and chief operating officer Greg Sahrmann likewise says each ATM owner needs to look at its own financials before deciding whether to participate in Dollar$top, but PAI believes it will “draw traffic to their locations, not necessarily to all of them, but to a significant number.” About 30,000 of PAI’s ATMs have surcharges is the low $2 range, though some are higher, he adds.

ATM consultant Sam M. Ditzion, president and chief executive of Boston-based Tremont Capital Group Inc., says that if the program works as planned, it will attract new traffic to ATMs rather than cannibalizing existing transactions.

“It’s all kind of incremental gravy, if you will,” he says. “Driving incremental transactions is every ATM deployer’s goal.”

Prepaid Cards from the ATM Down the Street

The idea of dispensing prepaid cards through ATMs is gaining adherents, according to a technology company specializing in the niche.

Better ATM Services Inc. last month announced it would enable the sale of a Discover-branded gift card with nine national merchant sponsors that initially will be dispensed at an Arizona credit union’s ATMs. Up next for the Mesa, Ariz.-based firm are possible deals with financial institutions to sell Visa-branded prepaid cards through ATMs, according to chief executive Todd L. Nuttall.

Better ATM Services first appeared on the radar in 2007, but it has spent most of the time since then working with ATM manufacturers, plastic card providers, financial institutions, networks, and payment processors to enable ATMs to dispense modified prepaid cards through an ATM’s cash slot. The company provides hardware and software to make that possible, but the behind-the-scenes work is complex.

The process involves producing cards flexible enough to move past rollers and other components without jamming the ATM, but strong enough to be used at the point of sale.

Better ATM Services’ technology uses cards slightly narrower than a conventional credit or debit card, one-third the thickness (10 mils, or 10 one-thousandths of an inch versus 30 mils for regular cards), and made of a different plastic. The cards, often attached to a set of instructions and a coupon, typically take one or two trays in the ATM, leaving the majority of trays for cash.

Nuttall says retrofitting an ATM for the system typically costs a few hundred dollars to $1,000. On the software side, the company gets a fee depending on the level of service provided.

Apart from the physical modifications, dispensing prepaid cards through ATMs involves getting approvals from the card networks and processors, which can be a long and arduous task, working with service providers, and persuading financial institutions and retailers that selling prepaid cards at their ATMs is a good idea.

“We’re kind of the group in the middle that gets everyone to dance together,” says Nuttall, adding that the world now has 2 million ATMs, including about 400,000 in the U.S. “All of these new ATMs are looking for new revenue streams, and prepaid card [providers] are looking for more distribution.”

What Better ATM Services calls the world’s first ATM-dispensed “multibrand” prepaid card is one of the early fruits of a half-decade of work. The card, called the myGift card, is issued by MetaBank and is a hybrid with characteristics of the prepaid card industry’s two main divisions: open-loop and closed-loop cards. It has the Discover logo, which would seemingly make it open-loop, but it’s good only at its nine sponsoring merchants, making it a semi closed-loop card.

The sponsor merchants are Macy’s, Cabela’s, Express, Lowe’s, Flemings Prime Steakhouse, Roy’s Hawaiian Fusion Cuisine, Carrabba’s Italian Grill, Bonefish Grill, and Outback Steakhouse. The card is the handiwork of prepaid card services provider InteliSpend Prepaid Solutions LLC, which works with merchants on cards for specific markets and needs.

The test sites for the Discover myGift card will be ATMs at 11 locations of Banner Federal Credit Union, a credit union for employees of the Banner Health System, a big health-care provider in Arizona, and some smaller medical firms. Fifty cents will be donated to Banner’s foundation for every prepaid card sold through March.

Meanwhile, Nuttall says his company has received approval from Visa Inc. for expansion of Visa-branded prepaid card sales from ATMs following tests at three Arizona credit unions. That could open up a big new market.

“We’re in discussion with numerous FIs” as well as non-bank ATM owners, he says.

Square Draws a Circle Around Digital Gift Cards

Square Inc.’s announcement last month that it is making digital gift cards available for its base of mostly small merchants heralded the San Francisco startup’s entry into what is turning into hot market.

With the move, Square is now competing with traditional acquirers on yet another front. In recent months, Square revamped its merchant pricing and agreed to process transactions for coffee emporium Starbucks Corp. Now it will go up against merchant acquirers that have been selling gift card programs to merchants for years.

Its new program will allow consumers to send a digital card to anyone via e-mail. Recipients can store the electronic card in the Square Wallet app or, for those with Apple Inc.’s latest operating system, in Apple’s Passbook wallet owing to an integration announced at the same time.

Users can redeem the card via barcode scanning directly from their phones or by printing out the code and taking it to the store. Also, Square Wallet, which opens a tab as users walk in the store, allows cardholders to redeem the card by giving their name.

Square did not respond to inquiries from Digital Transactions, but, assuming Square’s pricing for other transactions applies, gift card sales will cost merchants 2.75%. Under a new pricing policy Square announced in August, merchants can process up to $250,000 per year for a flat fee of $275 per month.

For consumers, digital gift cards are quick and convenient, and offer the chance to postpone, for example, Christmas gift giving until virtually the last minute. For merchants, they represent a far less expensive alternative to plastic cards. But market size is another matter.

While growing, the segment was expected to account for just $330 million in loads in November and December, about 0.8% of the overall closed-loop gift card market over those two months, according to Mercator Advisory Group, Maynard, Mass. “The short version is, they’re not super-exciting in terms of volume,” says Mercator analyst Ben Jackson.

That could change soon. Companies that specialize in digital cards say they are about to tap a gold mine. “We’ve found that no one’s waiting any more, everyone’s trying to figure out how to get into this space,” says Tom Niedbalski, senior vice president of business development at Transaction Wireless, a San Diego company that provides digital gift cards for chains including Buffalo Wild Wings, Finish Line, and Land’s End.

The company added 100 retail brands over the past year and now processes for 150, Niedbalski says. Since Transaction Wireless also sells plastic gift cards, it has tracked consumer preference. “We’re seeing at least 60% gravitating to digital cards,” says Niedbalski.

The biggest test of this preference may come in Target Corp. stores. The retailing giant has started offering digital Target gift cards at the same displays where it sells the plastic versions. To send a digital card, consumers use their smart phone to scan a barcode at the display.

Mercator’s Jackson says this is the first time he has seen side-by-side, in-store marketing of the two types of card. The test will be whether virtual cards will “have an edge for somebody who’s shopping for plastic where that plastic is instantly grabbable,” he notes.

Still, while the market may be on the verge of a boom, it could hold disadvantages for Square. While digital cards may save money for small businesses looking to squeeze expenses, many of these merchants may still prefer physical plastic, Jackson says.

And the volume potential from more than 200,000 Square businesses may not in the end total to an impressive number. “It’s cool to those of us in the payments business, but I’m not sure anybody’s going to get all that excited about it,” says Jackson.

Rick Oglesby, a senior analyst at Boston-based Aite Group who follows mobile payments, agrees, but adds there could be a larger significance to Square’s move into the market. “It won’t show up as a huge number, but it’s a good demonstration of what cloud-based services can do,” he says. “There’s 200,000 merchants out there that don’t have to do anything [to participate].”

New Data Point to Checks’ Electronic Future

The latest data about automated clearing house transaction activity show a nearly inverse relationship between online bill payments, which grew by 9% in 2012’s third quarter, and paper checks mailed to lockboxes, which decreased by 8%.

The story behind the numbers boils down to the well-documented switch by consumers to electronic forms of paying with their checking accounts, according to Mike Herd, managing director of ACH Network Rules at NACHA, the ACH’s Herndon, Va.-based governing body.

WEB is the ACH code for online consumer debits, typically from bill-payment sites. Third-quarter volume hit 732.5 million transactions versus 672.2 million a year earlier.

In contrast, ARC (accounts-receivable conversion), the code for paper checks converted into ACH transactions after being mailed to a lockbox, saw its volume slip to 455.3 million transactions from 495.2 million in 2011’s third quarter.

CIE (customer-initiated entry), another code for bill-payment transactions but which generates an ACH credit, saw its volume increase 5% to 41.4 million transactions.

“The ongoing story continues to be consumers are writing fewer checks and are making more transactions online,” says Herd. “We think a good amount of the WEB volume has displaced ARC volumes and a good amount of checks for bill payments that weren’t converted [to ACH transactions].”

In addition to bill payments, consumers continued to write fewer checks at the point of sale, according to data for two codes for converting paper checks written by customers in stores. The point-of-purchase (POP) code’s volume slipped 8% to 111 million transactions. Volume under the BOC (back-office conversion) code fell 9% to 46.5 million.

TEL, the code for telephone-based ACH payments, declined 6% to 86.3 million transactions, but Herd says it’s too soon to say if TEL has entered a long-term decline. TEL’s volume for all of 2011 increased nearly 4%.

One of the biggest third-quarter gainers among the ACH codes was IAT (international ACH transaction), whose volume jumped 13% to 10.8 million transactions. NACHA created the code in September 2009 to facilitate smoother cross-border ACH transactions. IAT can be used for remittances, pension payments to American retirees who’ve moved abroad, salary payments to foreign-based workers, and other transactions, and both consumers and businesses can initiate them.

Herd says many banks and other companies are still working on integrating IAT payments into their businesses, so he expects growth to continue. “There are lots of different use cases,” he says.