Trends & Tactics

Online Alternatives Go Mainstream

With millions of people now using PayPal, Amazon Payments, Google Wallet, and other so-called online alternative payments, observers are starting to say that the term is rapidly becoming outmoded.

In a February report, Javelin Strategy & Research says eight in 10 online shoppers used an online alternative-payment service in the past year, and 39% used one in the past 30 days.

“They have reached mainstream, particularly PayPal,” says report author Nick Holland, senior analyst for payments at Pleasanton, Calif.-based Javelin, a unit of Greenwich Associates LLC. “Amazon is poised to be incredibly powerful.”

The report, “Online Retail Payments Forecast 2013-2018: Alternative Payments Go Mainstream,” tracks the growth of e-commerce since 2000, when its $28 billion in volume accounted for just 1.1% of U.S. retail sales. Javelin predicts online sales will hit $486 billion in 2018, for a five-year compounded annual growth rate of 6.7%, and account for 10.3% of retail volume.

While PayPal, Amazon Payments and other newer services have always been called alternatives, under the hood, many route their transactions over the major credit card networks.

“It might be different on the front end, but back end is business as usual,” says Holland. “But there is some innovation out there.”

A number of alternatives, from PayPal down to Dwolla and others, are trying to develop lower-cost models, but Holland says success in this endeavor might be most easily achieved by players with the most scale—PayPal, with more than 100 million account holders; Apple Inc. with its 500 million-plus iTunes customers; or social network Facebook Inc., with more than 1 billion members worldwide.

Javelin estimates that in 2012 major-brand credit cards held 41% of the online purchase market versus 32% for debit cards, 5% for private-label credit, 6% for prepaid cards, and 15% for the alternatives. By 2018, Javelin predicts major credit and debit cards’ respective shares will slip a bit to 39% and 29% while store-branded credit and prepaid cards’ share will grow slightly to a respective 6% and 7%. The big gainer will be the alternatives, with a 20% share.

As it has for years, PayPal remains the No. 1 payment alternative, used by 87% of respondents. That’s up from 84% in 2012 but down from 91% in 2010 and 2011.

Amazon.com Inc.’s services, Amazon Payments and Checkout by Amazon, are on a roll, used by 33% of respondents last year, up from 26% in 2012 and 2011 and 24% in 2010. Holland attributes much of the growth to the online bazaar’s emphasis on fast shipping of goods.

“Clearly Amazon is really pushing hard on speeding up the delivery process,” he says.

In third and fourth place, respectively, are PayPal’s credit affiliate, Bill Me Later, and Google Inc.’s Google Wallet. Some 15% of online purchasers in 2013 used Bill Me Later, down from 21% in 2012, when the so-called transactional credit service boomed from 14% usage in 2011 and just 1% in 2010.

The recovery of general-purpose credit cards may have eaten into Bill Me Later’s share last year, according to Holland. “[Bill Me Later’s] desire to be as ubiquitous as PayPal hasn’t really panned out,” he says. “There’s a diminished need with the greater availability of standard credit.”

Google Wallet also lost share last year, being used by 8% of online shoppers versus 11% in 2012 and 9% in the two preceding years. Google Wallet, which started out using a pure near-field communication (NFC) technology model, has struggled to find its footing and has experienced various platform and executive changes.

“They’ve been slightly incoherent,” says Holland.

The alternative leaders and many others are putting lots of resources into developing mobile services. Javelin estimates retail purchases on smart phones and tablet computers totaled $56.6 billion in 2013, or 16% of the $351.9 billion in retail online purchases.

As other researchers have noted, Javelin says consumers especially like shopping with tablets, which have bigger screens than phones, and they often use them with or instead of the home PC for online purchases.

“There’s a bit of the graying in terms of the line between mobile and in-home devices,” Holland says. “There’s a lot going on with tablets. People are doing their transactions in multiple locations.”

The rise of mobile devices goes hand in hand with more shopping on social networks. Some 41% of mobile-phone users and 57% of tablet owners use their devices to access social networks such as Facebook and Twitter, according to Javelin. Thirty percent of all social-network users, and higher percentages of younger adults, have bought something on a social network.

What’s more, the mix of goods purchased is moving from digital items to physical goods. Twelve percent of social networkers have bought clothing, electronics, or other hard goods while 9% of users have bought access to virtual games and 9% have purchased music downloads.

“There is certainly an increase in consumers willing to purchase on a social network,” says Holland. “It’s really fusing the online and offline space.”

One more interesting factoid from Javelin: only 3% of consumers have never shopped online, down from 9% in 2012.

—Jim Daly

Electronic Payment Orders—Not Quite Yet

Remember electronic payment orders? The concept burst on the scene about four years ago when a white paper from the Federal Reserve proposed technology that would let smart-phone users send each other checks that could be created on the device as an image. In other words, the EPO would never exist as paper in the first place.

The idea seemed appealing—what’s not to like about getting rid of paper entirely while retaining the advantages of checks?—but nothing really came of it. Until now. Sort of.

Last month there emerged on Apple Inc.’s App Store a product called Mobile Checkbook, which lets users create and send check images. It works with Apple iOS devices and comes from VerifyValid LLC, a 4-year-old company based in Grand Rapids, Mich.

The app makes it easier for consumers to access an existing service currently used mostly by businesses. After downloading it, a user can create a check image and email a link to it to the payee, who can retrieve it and print it out.

Recipients can deposit the printout or turn it back into an image using their bank’s remote-capture app. They can also leave the image as is and request that VerifyValid deposit the item for them.

“We give our customers essentially the ability to send checks over the Internet,” says Paul Doyle, founder and chief executive of VerifyValid. That appeals to businesses because it transfers the costs of printing checks to the recipient while eliminating postage. Clients save about $1 per check as a result, even after paying VerifyValid’s fee, Doyle says.

At the same time, the system retains one of the greatest advantages of checks—ubiquity. “I can make a payment to pretty much anyone,” Doyle says.

VerifyValid manages fraud by reducing the potential for counterfeit and duplicate items, Doyle says. That should appeal to a payments industry dealing with a steady migration of remote-capture fraud to consumer channels.

This service relies on a form of what Doyle calls “integrated positive pay,” in which banks of first deposit can check incoming deposits against checks created.

“For a given routing and transit number, account number, and check number, there should be one and only one item,” he notes, adding that catching frauds at the bank of first deposit allows banks to stop them before fraudsters walk away with funds.

Traditional positive pay, in which paying banks compare incoming checks to lists of checks written by commercial customers, “is used by 80% of commercial businesses, so why does check fraud persist? The answer is, it’s too late, it’s performed at the paying bank and the fraudster is gone with the money,” Doyle says.

Indeed, he notes, VerifyValid got into check technology in the first place via work it was doing on fraud prevention.

Clients pay 50 cents per check, a price deliberately set to roughly equal the cost of a first-class stamp, Doyle says. Businesses that use the company to make deposits via remote capture pay fees on a sliding volume scale that starts at $10 for 25 deposits.

Now, with the new app in the market, the company hopes to expand its business with consumers, which currently accounts for 10% of its revenue. For consumers, the app could answer a growing demand for faster payments combined with the ability to pay anyone.

That’s because, with image exchange now commonplace among banks, settlement can occur the same day as the deposit. “We’re in a fascinating and exciting time of change,” says Doyle.

But, though it’s close, what VerifyValid is doing isn’t technically an EPO. True, people use iPhones to create the items and send them one another or to businesses (or more properly, to send links). But an EPO, remember, is a check that never exists on paper, but rather is created, deposited, and processed only as an image.

VerifyValid itself says its service doesn’t create true EPOs, since checks are either converted into paper for deposit or handled through remote capture.

But the company may be very nearly unique in approaching the EPO idea. “VerifyValid appears to occupy a lonely spot,” says Bob Meara, a senior analyst at researcher Celent, via email. Meara follows remote capture and the automated clearing house.

Still, there could be roadblocks along the way, Meara warns.

“VerifyValid appears to have solved for the fraud/duplicate presentment problem. I wonder if they have solved for the demand problem?” he asks. “Will consumers adopt a standalone app to create a payment mechanism like this? Not without some serious (and expensive) buzz. I like it, but think it will see adoption in [business-to-business] applications, with or without the app.”

—John Stewart

You’ll Hear, ‘Cash, Card, or Bitcoin?’ a Bit More Now

Despite Bitcoin’s recent travails, the fledgling digital currency has begun to win support—some of it effusive— from some of the nation’s best-known merchants.

Last month came news that New York City-based department-store chain Lord & Taylor will start accepting Bitcoin through a mobile app called Pounce. The news followed upbeat Bitcoin results released by online retailing giant Overstock.com, which started accepting the currency Jan. 9.

Salt Lake City-based Overstock may be the country’s biggest Bitcoin enthusiast right now. It announced it sold more than $1 million worth of goods to Bitcoin users, or more than $18,000 a day, in the first two months of acceptance. Average order size for Bitcoin users was higher by more than a third compared to dollar users, $226 vs. $168. And some 58% of the Bitcoin customers were new to the merchant.

Transaction cost for Bitcoin is averaging less than 1%, Overstock said, compared to 2.2% plus 20 cents for sales on credit cards, the most common method of payment for e-commerce sellers. Overstock uses San Francisco-based processor Coinbase Inc., which offers a Bitcoin wallet for consumers and handles transactions on the currency for 26,000 merchants overall.

Bitcoin’s performance on all measures “has been better than we expected,” says Jonathan Johnson, executive vice chairman at Overstock. “We’ve been really pleased with the uptake [of Bitcoin].”

So much so, in fact, that the merchant now projects the currency will account for somewhere between $10 million and $15 million in sales this year, compared to an initial estimate of $3 million to $5 million.

As a fraction of total sales, Bitcoin usage accounts for about 0.5%, a number that hadn’t budged in the weeks leading up to the announcement of the results. But Johnson says he expects that fraction to begin rising again soon.

“We’re on the front end of a curve that’s going to hit a tipping point,” he says. “I liken this [Bitcoin trend] to the early ‘90s and the Internet or the early ‘80s and the PC. That’s where Bitcoin is going to go.”

Right now, where it’s going to go could be anyone’s guess. Tokyo-based Mt. Gox, one of the largest Bitcoin exchanges in the world, collapsed in February and filed for bankruptcy.

Meanwhile, the currency, under attack by regulators around the globe, has seen wild price swings in recent weeks. It was trading at $646 at one point in mid-March, representing something of a recovery from the year’s low so far of $545 but still well below the all-time high of $1,151 reached in December.

Overstock tempers its currency risk by having Coinbase convert its Bitcoins instantly into dollars, though Johnson says the merchant will soon start leaving 10% of its Bitcoin haul uncoverted. This, he says, is not meant to be an investment in the digital currency, but rather the beginning of a new cash account.

“We have employees who have expressed an interest in being paid in Bitcoin,” Johnson says. “And we have vendors who are interested in being paid in Bitcoin.”

Unlike Overstock, Lord & Taylor will not accept Bitcoin directly from customers. Instead, customers will use the Pounce app, from Israeli technology company BuyCode Inc. BuyCode has also signed up Best Buy, Toys R Us, and other merchants for Pounce, though so far only Lord & Taylor has agreed to accept Bitcoin, according to a spokesperson for Coinbase, which is enabling the Pounce transactions at Lord & Taylor.

With Pounce, a consumer can scan a product featured in a retailer’s print ad and have the same product appear on her mobile screen. The screen features a “buy now” button that lets the consumer purchase the product immediately using payment credentials stored in a digital wallet on the phone. Once she taps this button, Pounce places the order through the merchant’s e-commerce system.

Overstock’s Johnson predicts more major merchants will follow Lord & Taylor and his own company in accepting Bitcoin. Indeed, he predicts the currency, for all its recent troubles, will enter the mainstream of payments sooner than most expect.

One factor that will motivate merchants to take Bitcoin, he says, is that they will fear losing sales if they don’t. “No retailer wants to give up market share,” he says. “Candidly, I’m surprised Amazon hasn’t started accepting Bitcoin.”

—John Stewart