One of the issues that companies trying to promote payment alternatives to credit and debit cards have had to consider is whether to compete using rewards programs.
Several have found that rewards programs matter little to online shoppers but can make a big difference to in-store shoppers, and this dichotomy has played an important role in how these companies go after customers.
Rene Pelegero, the senior director of industry relations and strategy for PayPal Inc., said the online payment provider has explored the idea of offering rewards programs, but "consumers said, What you're doing is fine."
Though the eBay Inc. unit has a rewards program for its affinity credit card, it has determined that for its flagship service, "there is little need to provide incentives to increase usage."
Mr. Pelegero said online shoppers will seek out an alternative that may offer better security than cards, and he said many people think PayPal is safer to use than cards because they can initiate a PayPal transaction using only an e-mail address and password — there is no need for people to share their account number with merchants.
Mark Lavelle, a co-founder and executive vice president of Bill Me Later Inc., said that his company's service is easier to use online than credit cards, and that this convenience is appealing to time-pressed shoppers.
Bill Me Later offers credit for online purchases and later sends people a bill by e-mail or traditional mail that they can pay with a card or check. Most of the information the company needs to authorize a transaction can be gleaned from the personal data customers provide to merchants when placing an order; Bill Me Later only asks for their birth dates and the last four digits of the Social Security numbers.
In contrast, card users must enter a 16-digit account number, an expiration date, and often a verification code to shop online, Mr. Lavelle said.
"The very loyalty that Bill Me Later engenders comes from the experience," he said. "We have not added the traditional loyalty and rewards."
Mr. Lavelle and Mr. Pelegero discussed their strategies Monday during a conference on alternate payments hosted by SourceMedia Inc. (SourceMedia also publishes American Banker.)
Bruce Cundiff, an analyst for Javelin Strategy and Research of Pleasanton, Calif., said online shoppers have not taken to rewards programs. The perception of heightened security and an easier checkout process are much stronger selling points, he said.
Rewards are "not necessarily a factor or it's not necessary," he said, "and certainly rewards are expensive, so if you can get away with not having to pay for a rewards program, then by all means."
However, companies pushing payment alternatives at the point of sale, where swiping a card is one of the easiest options available and security is much less of a concern, have found that rewards programs are one of the only ways to attract users.
"If you've got credit card as an option, and you've got consumers coming in that are carrying credit cards, then" merchants and payment providers may need to offer "loyalty rewards that are potentially more compelling than the ones they are using," Mr. Cundiff said.
Tempo Payments Inc. of San Mateo, Calif., offers a decoupled debit card, which uses the automated clearing house network to route payments to users' bank accounts. Unlike standard debit cards, decoupled cards are provided by issuers to consumers, who can connect them to accounts at any bank.
Tempo says that using the low-cost ACH system makes the cards attractive to merchants, but this has no appeal to consumers. Instead, it is offering rewards to get people to use the card instead of other credit or debit cards, which usually have their own rewards programs.
"A key part of the program is that the consumer value proposition has to be compelling enough through rewards," said Anthony Ruebner, Tempo's vice president of business development.
HSBC Finance Corp. is testing a cobranded Tempo card with the drugstore chain CVS Caremark Corp. of Woonsocket, R.I., and Pathmark Stores Inc. of Carteret, N.J. Mr. Ruebner said that Tempo's clients are either pairing the decoupled debit card with an existing loyalty program or, in the case of a large big-box retailer that he would not name, are building a loyalty program around the cards' stored-value feature.
Another example is Solidus Networks Inc.'s Pay By Touch biometric payment system. Solidus launched the payment system, which allows consumers to use a fingerprint scanner to authorize payments from a debit or credit card, in 2002. In 2006 it introduced a loyalty program called SmartShop that it began to sell as a key feature of the payment system.
Observers have said the loyalty program is essential for Solidus, since without it, consumers have little incentive to switch from their cards.
(Solidus was recently brought to bankruptcy court by some of its employees who had not been paid for several weeks; court filings revealed that it was also behind on several of its bills. Though the court approved emergency funding, the company said in a letter to its employees that it would not be enough to pay everyone fully. Solidus did not return a phone call requesting comment for this story.)
A potential exception to the need for rewards programs is for payment systems that are aimed at the underbanked, who may not have credit cards or who may want to avoid using them.
Mr. Ruebner said the only Tempo retailer not using rewards is a large mass merchandiser aiming the card at the underbanked; he would not name the company.
Chris Britt, the chief product officer of the prepaid card company Green Dot Corp., said many of his customers are considered underbanked. Most of them, he said, "are just happy to have the opportunity to have access to things like a MasterCard," or to have "the convenience of being able to make their payments and convert their cash to an electronic form."
