For the past few decades, checks, ACH, credit cards and debit cards have been the primary means of payments for consumers.
These payment methods have been successful because consumers can pay for their purchases without carrying cash, merchants can increase sales by reaching a wider consumer base, and banks are able to establish themselves as trusted financial providers to both merchants and consumers. However, changing market trends are creating opportunities for alternative payment methods and practices.
The Driving Forces Behind Payments Innovation
Communications technologies, mainly the Internet and mobile phones, have dramatically altered the ways in which individuals interact with each other and, in turn, consumers are shifting more of their purchases from the physical world to the virtual. Merchants have adapted by becoming multichannel marketers and banks are following suit by providing new means for consumers to interact with their finances through popular tools such as online bill pay and mobile banking.
Second, the rise of online purchases has brought with it concerns of security. While most banks fully protect consumers against fraudulent transactions, consumers don’t want to go through the hassle of identifying and fixing fraud. And merchants are even more concerned especially since they end up digesting most of the liability in the event of a security breach.
Merchants are also concerned about managing the rising costs of payment acceptance. Over the last 20 years, credit card interchange fees have gone up 25 percent to 90 percent, depending on the card type and the nature of the merchant business.
Finally, there are specific consumer niches that are not served or underserved by the existing payment systems. This includes the unbanked and the credit-wary consumers that are looking for alternatives outside the traditional payment methods.
A Range of Alternatives
Capitalizing on the trends above, there are a wide range of payment alternatives available to consumers, merchants and banks. A partial list includes the following:
- Bill Me Later
- Google Checkout
- Pinless Debit
- Secure Vault Payments
- Amazon Payments
- Revolution Card
Most of these alternatives are optimized for online commerce in order to secure consumer’s financial information and reduce the chance of fraud. Popular online payment methods are PayPal, Bill Me Later, Google Checkout and eBillMe. Revolution Card and GreenDot are examples of payment methods that work in both the physical and online world. Several of these also offer merchants lower interchange fees compared to credit cards.
Payments Issues That an E-Commerce Merchant Should Consider
While various alternative payment methods are available for merchants, it is important they understand the relevance of each method to their business. Each merchant should ask their acquirer or payment processor for assistance in evaluating the alternatives — some questions to ask include:
- How many consumers and merchants use the method of payment?
- What is the typical revenue increase in my market segment?
- Can the method of payment be used across all my sales channels?
- Is there support for one time payments and recurring payments?
- How many days does it take for me to be funded for the transactions?
- Can I delay capture until I fulfill the product or service?
- Is payment guaranteed for properly authorized transactions?
- What is the typical percentage of fraudulent transactions? Who bears the financial responsibility for fraud loss?
- How are disputes and charge-backs handled?
- Can I finance my customer’s purchase?
- What are the typical interchange fees?
- How long does it take to integrate the payment method? Can I go direct to the provider or do I have to integrate through a processor?
Most of the innovation in the alternative payments space has been outside the banking world. However, there are indications this may change. Celent estimates that by 2012, banks will collectively see a decline of $1.2 billion in interchange revenue due to increasing acceptance of online alternative payments. Knowing this, it is likely that banks will create innovative new payment methods that address changing consumer and merchant needs.
One alternative to watch is the Secure Vault Payments (SVP) from NACHA. With SVP, consumers authenticate themselves through their online banking portal and authorize the purchase transaction.
Since the bank authenticated the consumer, online fraud liability shifts from the merchant to the bank. This enables millions of checking account holders to safely make online transactions and provides merchants with lower interchange fees and lower fraud losses.
By 2012, it is estimated that online payments will gross US$355 billion in value with alternative payments holding a 30 percent market share. By targeting unmet merchant and consumer needs, alternative payments are seeing a growing market acceptance. With increased market acceptance, alternative payments would no longer be ‘alternative’ but could become mainstream consumer payment methods in the future.
Bala Janakiraman is principal product manager with payment management firm Litle & Co.