Alternative Payments Are Gaining Online, But Not All Retailers Are Sold

The share of e-commerce dollars coming from so-called alternative payment methods will grow from 12% in 2005 to 26% in 2009, an electronic-payments expert says. And two such alternatives emerging only now will gain momentum over the coming three years, with PIN debit accounting for about 3% and NACHA's new online-payment application grabbing around 2% of Internet sales by 2009, according to projections made by Dan Schatt, senior analyst at Boston-based researcher Celent LLC. Still, online merchants seeking to break the hammerlock of credit cards may want to think hard about which alternative payment methods they adopt, and how much they are prepared to invest. “Implementing an alternative payment method isn't an easy process,” cautions Alicia Berry, director of operations at DVD Empire, a Warrendale, Pa.-based e-commerce merchant. Schatt and Berry, who spoke this week at a Chicago trade show for Web merchants sponsored by Internet Retailer magazine, represent two sometimes conflicting currents of thought coursing through the electronic-transactions industry. On the one hand, credit cards' ever-mounting acceptance costs, coupled with the need to pour more and more resources into back-office operations to review card-based orders for fraud, are pushing online retailers to seek more efficient payment types. Indeed, according to Schatt, Web merchants' success in getting online fraud down to 1.6% of sales from around 3% four years ago has come with an eye-popping price tag: some $1.12 billion invested last year alone in back-office staff and fraud-detection technology. At the same time, merchants are more and more concerned about customers' rising worries over card security online. “A fair number of people are not making transactions online because they think their credit card data are going to be mis-used or intercepted,” Schatt told his audience of e-merchants. That has led to a “pent-up” demand for alternative payment methods among both consumers and merchants, he added. It has also put a crimp in e-commerce growth. While the proportion of Web-site visitors who bought something online jumped from 48% to 61% between 2000 and 2002, that percentage has increased to just 67% in the years since, Schatt said. As a result, credit cards are losing e-commerce market share perhaps more rapidly than many observers may have thought: they now account for 58.3% of online sales, down from a dominant 96% share in 1999, according to Schatt. By 2009, he forecasts, that share will have dwindled to just 48.4%. This decline comes as credit cards continue to make gains in the U.S. economy as a whole. They account for 26.1% of all transactions, up from 22.1% six years ago, and will reach a 29.3% share by 2009. By contrast, new electronic payment systems, such as real-time debit and third-party credit, are likely to grow fast. Bill Me Later, a service from Timonium, Md.-based I4 Commerce Inc., represents a trend in third-party credit, or so-called invoicing, that will grab just over 2% of all online dollars by 2009, up from 0.3% now, Schatt says. Use of the automated clearing house will grow as NACHA, the Herndon, Va.-based rules-setting body for the ACH, continues to develop its new online-payment system, for which it will launch a pilot early next year (Digital Transactions News, May 11). And technology companies like ATM Direct, which announced its first merchant this week, will help drive up PIN debit usage online (Digital Transactions News, June 5 and June 7). On the other hand, DVD Empire's Berry sounded a note of caution. “Of all the payment methods I had grandiose plans of implementing six months ago when Internet Retailer asked me to speak, I've implemented none,” she told the audience. Often, she said, new payment methods demand costly and thorough-going changes to existing operations, making it hard to cost-justify them when looking at their transaction potential. Even new technology from an established payment network–Visa USA's Verified by Visa user-authentication system–has proven nearly unworkable. Two years after embarking on the project, Berry said, DVEmpire still hasn't been able to bring the system live. “It took us 14 months just to get this online for one day,” she said, and this with the efforts of six programmers. Visa's server farms “go down frequently,” she said, while even things like users' pop-up blockers and non-Internet Explorer browsers can frustrate the system. Still, even Berry hasn't given up entirely on alternative payments. Her site will be accepting PayPal next week, she said, while Bill Me Later could be an option later on.