SAN FRANCISCO — Despite their preferences, until recently consumers had few options other than credit cards for online payments, industry observers say, but dozens of companies are offering or developing alternatives that are starting to eat into cards' share of online transactions.
Credit cards will be used for 60% of online transactions this year, but by 2012 that figure will drop to just 44%, according to a report Javelin Strategy and Research released Tuesday. The percentage for debit cards will remain 26%, the report said.
Though the increasing use of the Internet for purchases will raise the number of online card transactions, the use of alternative payments systems is expected to grow much faster, Javelin said.
"Alternative payments — anything that isn't credit or debit card — are going to represent 30% of online transactions by 2012," said Bruce Cundiff, the Javelin research analyst who wrote the report. He presented his findings at a forum here hosted by Chase Paymentech Solutions LLC, an acquirer joint venture of First Data Corp. and JPMorgan Chase & Co.
Sucharita Mulpuru, a senior analyst at Forrester Research Inc., said during a presentation that shoppers have been looking for alternatives to cards. "Left to their own druthers, consumers would prefer other ways to pay."
According to Ms. Mulpuru, 28% of consumers who use the Internet have never made a purchase online, in large part because they are reluctant to use their cards there. Security is "the No. 1 reason that shopping holdouts are shopping holdouts."
The fact that consumers use cards for only 28% of purchases offline, demonstrates a preference for multiple options, she said.
Rajiv Dutta, the president of PayPal Inc. of San Jose, said that consumers want convenience and security online, and that many companies, including his, now offer alternatives to cards.
"There are at least, as we speak — and there are probably more — 50 alternative payment companies in existence," he said. "Almost all of them have come into existence in the last three to five years."
Ms. Mulpuru said that some payment methods, including PayPal's, Bill Me Later Inc.'s alternative credit service, and Google Inc.'s Checkout, are being adopted online faster by consumers than by merchants.
"All of these tools have much higher awareness than the percent of retailers that adopted them," she said. "Despite the fact that most retailers don't even have these tools, consumers are using them."
Some of these methods have appealed to different demographic groups. For example, Bill Me Later, which enables people to make purchases online, then sends them a bill afterwards, has attracted people at the high and low ends of the income range among Internet users, Mr. Cundiff said.
Vince Talbert, the vice president of marketing for Bill Me Later, said that even though its service offers credit, it was not designed to appeal just to people who need credit for online purchases. "Our goal was to bring the big offline spender online," and the Timonium, Md., company has found that in many cases people use its service to get comfortable with the idea of shopping online.
People can pay their Bill Me Later invoices with a check or electronically, he said. "Seventy-five percent of our customers go online and pay, which is ironic" and suggests that there is an "on the fence" group that wants to shop online but needs a system they can learn to trust.
Tyler Hoffman, the senior director of merchant services at PayPal, said that every user of its service has a credit card, but only half of its transactions are funded by a credit card. Two-thirds of the others are funded by automated clearing house transfers, and the rest are paid from a balance in a PayPal account.
Customers who maintain a balance in their accounts are among PayPal's best spenders, he said. "PayPal shoppers are online shoppers on steroids."
When customers use their balance, "that money feels very much to them like spent money," Mr. Hoffman said. "In fact, it feels like 'funny money' to a lot of them."
Benjamin Ling, the product manager and director for Google's Checkout, said his company wants to make it easier for shoppers to use cards online, because any friction in that process can affect Google's own revenue by lowering sales at the companies that advertise with the search engine company.
Since Google makes money from paid ads, it wanted to streamline the payment process that takes place after those ads are clicked by users, Mr. Ling said. "What's in Google's interest is to make searchers search more often."
Checkout was developed to "eliminate as much friction as possible," he said. "We don't think of Google Checkout as a stand-alone business."
Because Google is "not focused on is building alternative payments product," it has not let customers fund purchases with anything other than credit and debit cards, Mr. Ling said.
Mr. Cundiff said that Checkout is more comparable to a shopping environment than a payment mechanism. A lot of Google's merchants consider Checkout part of their total Google relationship.
Javelin's study predicted that online accounts, such as those offered by PayPal, would be used for 11% of online transactions in 2012, versus 5% this year. The use of online credit services, such as Bill Me Later, are expected to grow from 2% to 3% of transactions.
Mr. Cundiff made no projection for Checkout. That service "doesn't fit into the alternative payment survey, because right now they're not really an alternative method of payment," he said. "Google says they're really focused on the checkout process itself. … They are not considering themselves to be in the payments business."
He also predicted that the use of private-label cards would grow to 7% of online transactions, versus 4% this year. Many large retailers promote these cards heavily in their stores but do little to promote them online, through in the next five years, Mr. Cundiff expects retailers to push their customers to use the cards online.
Still, "that example is only going to reach certain customers," so there will still be room for more alternatives, he said.
