Report Documents the March of Online Alternatives to the Payments Mainstream

Alternative payments? So many people are now using services such as PayPal, Amazon Payments, Google Wallet and others that the term is becoming outmoded. In a new report, Javelin Strategy & Research says eight in 10 online shoppers have used an online alternative payment service in the past year, and 39% have used such an option in the past 30 days. Only 3% of consumers have never shopped online, down from 9% in 2012.

“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. Last year, e-commerce totaled $352 billion and captured 8% of 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 they often 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, the 500 million-plus iTunes customers of Apple Inc., or social network Facebook Inc., with more than 1 billion 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-brand credit and prepaid cards’ share will grow slightly to a respective 6% and 7%. The biggest gainer will be the alternatives, with 20% share.

As it has for years, PayPal remains the No. 1 alternative payment system, 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 Amazon’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 of 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 four 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 much 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 versus 9% of users buying access to virtual games and 9% buying 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.”

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