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Alternative online-payment channels continue to spawn new players hoping to challenge the undisputed leader, eBay Inc.'s PayPal. But, analysts say, new online-payment brands could face a tough road ahead.
The alternative online-payments market consists of services that enable consumers to pay using a variety of vehicles, from credit and debit cards to automated clearinghouse funds transfers. New and existing players also have started testing mobile and text-based payment formats.
Among the other leading players in online payments are Bill Me Later Inc., Google Checkout and Amazon.com Inc.'s Amazon Flexible Payments Service
Although credit cards account for two-thirds of all Internet payments, some issuers worry that growing use of newer online-payment methods eventually may cut into their profits.
"Card issuers are not running scared, but they should watch online payments closely to stay on top of the game," says Bruce Cundiff, research director at Pleasanton, Calif.-based Javelin Strategy & Research. "Giants like PayPal and Google say they have no plans to enter the physical payments world, but it has to be on their road map somewhere. These are powerful brands that will continue to grow."
Cundiff predicts alternative payments will comprise 30% of U.S. online payments by 2012, when U.S. Internet commerce will reach $355 billion, up from 14% of $150 billion last year. By 2012, Cundiff says, credit cards' share of online payments may shrink to 44%, with consumers using debit cards to pay for more than one-fourth of online transactions. Debit cards last year were used to conduct 26% of online payments in the U.S. Analysts say U.S. Internet commerce accounts for less than 6% of total U.S. retail sales.
In terms of consumer usage, analysts say PayPal leads the pack among the four top alternative online-payment brands. PayPal accounts for 5% of all Internet transactions, and by 2012 it could have an 11% share if present trends continue, Cundiff says.
PayPal enables consumers to make online payments to anyone, including peers and merchants, via credit or debit cards, ACH funds transfers from demand deposit accounts, or funds stored in a personal PayPal account.
Bill Me Later, a privately held, Timonium, Md.-based company, offers a service that enables users to defer online payments. More than 700 Web sites support Bill Me Later, which entices consumers with interest-free financing for 90 days.
Amazon Flexible Payments Service, a division of Amazon.com, offers a suite of payment options closely paralleling PayPal's. Amazon devised its service primarily to support its core business as an Internet retailer.
Google Checkout, whose little blue shopping cart icon appears on thousands of items for sale on the Web and is spreading exponentially, enables consumers to pay using credit or debit card account information Google stores in its database.
"The goal of alternative online-payment providers is to become widely accepted payment-acceptance brands on Web sites alongside Visa, MasterCard, American Express and Discover," Cundiff says, noting that so far only PayPal has achieved widespread acceptance as a payment option, appearing on many top Internet sites and millions of smaller and microbusiness sites.
Growth Difficulties?
But analysts say new online-payment brands will face increasing difficulty gaining widespread acceptance as the online marketplace matures. Two recent contenders, Revolution Money, backed by Internet tycoon Steve Case, and Moneta Inc., affiliated with CheckFree, already appear to be fading from the field after unveiling bold plans for growth last year. Neither has achieved a significant following among consumers, and last month telephone calls and e-mails to Moneta's offices went unanswered.
Another contender making a bid this year to gain recognition on merchants' Web sites is NACHA, which manages the development, administration and governance of the ACH system. NACHA'S Secure Vault Payments option, which went live in May, enables consumers to pay bills and make Internet purchases online.
NACHA positions Secure Vault Payments to compete directly with PayPal and Google Checkout.
"Within 18 months we expect that Secure Vault Payments will have widespread adoption among major banks and most major e-commerce Web sites," an association spokesperson tells Cards&Payments.
One analyst says the Secure Vault Payments initiative faces an uphill battle gaining widespread acceptance on a majority of Web sites.
"This late in the game, banks would need to offer some kind of incentive and a lot of marketing to get consumers to switch to Secure Vault Payments from established brands like PayPal and Google Checkout," says Jennifer Roth, a senior analyst in global payments with Needham, Mass.-based TowerGroup, the research arm of MasterCard Worldwide.
PayPal's Advantage
PayPal's big advantage is its 149 million registered users, a base that evolved primarily from consumers making small-ticket purchases on eBay auctions. More than 50% of eBay payments were conducted through PayPal before eBay acquired it in 2002. PayPal's growth rate now surpasses eBay's, as its participants use their PayPal accounts for purchases at a wide variety of non-eBay merchants.
"Customers tell us they want PayPal to be everywhere they are on the Web, so we are expanding our presence everywhere online," says Tyler Hoffman, PayPal senior director of merchant services.
Analysts say consumers conduct about 50% of PayPal transactions with credit cards. PayPal users conduct the rest using the ACH system or with funds from their PayPal accounts.
Merchants recently began to include PayPal as a payment option for such larger transactions as airline tickets, office equipment and computers. Southwest Airlines and Northwest Airlines were the first airlines to begin accepting PayPal last year, and US Airways, Midwest Air and the United Kingdom's Monarch Air soon followed. JetBlue Airlines, CompUSA and Office Depot announced their acceptance of PayPal this year.
Hoffman says PayPal's lure for airlines is greater convenience. Cundiff says airlines get a slight break on transaction fees through PayPal because its blended rate is lower than some of the highest rates on credit cards affluent travelers use. Those rates frequently exceed 2% of the sale.
Hoffman says about 9 million new PayPal customers sign up each quarter. At the end of March, PayPal reported that 60.2 million consumers used PayPal within the previous 12 months, up 17.3% from 51.3 million users during the previous year.
PayPal says it is available to users in 190 markets globally and supports payments in 17 different currencies. PayPal offers localized versions in 14 markets outside the U.S., primarily to handle different countries' unique banking systems, Hoffman says.
One analyst says PayPal's future growth will be based primarily on international markets. At the end of March, international activity represented 43% of PayPal's overall payment revenue, up from 41% a year earlier.
"PayPal will surge in growth over the next several years in emerging markets where e-commerce is growing and the established base of credit cards is low," says Ali Raza, executive vice president of Speer & Associates, an Atlanta-based consultancy. India, China, Mexico and Brazil are the hottest potential markets for PayPal.
Mobile payments powered by PayPal likely will be the company's next frontier, Raza says. PayPal introduced text-based payments for mobile-phone users in 2006, and the company is experimenting this year with mobile-payment trials with some telecommunications companies, including Sprint Nextel Corp.
But the company's mobile offerings are nascent. "It's early days for PayPal in the mobile arena," Hoffman says.
Amazon's service enables users to send payments by e-mail from bank accounts or credit card accounts. It also enables peer-to-peer payments through Amazon TextPayMe and Amazon TextBuyIt, which the company introduced in April, accommodating instant purchases from Web merchants via cell phones.
"Amazon is PayPal's closest competitor in terms of technology, but its primary mission is to sell merchandise through Amazon.com and to hook up e-commerce sites to its technology," TowerGroup's Roth says.
Google Checkout, which operates like a gateway for credit and debit card payments, also is spreading rapidly on the Internet. Its merchants typically receive discounts on merchant-processing fees by purchasing Google's online advertising media. Although Google Checkout primarily serves as a promotional channel, the brand is becoming synonymous with online payments, analysts say.
Bill Me Later, whose online awareness and usage surged last year, is poised to double its growth over the next 12 months, analysts say. Chris Williams, Bill Me Later vice president of consumer marketing, says its market research shows it has a large following among affluent women between the ages of 35 and 55 who prefer the security and simplicity of its payment process: consumers instantly qualify for Bill Me Later credit by providing their birth dates and the last four digits of their Social Security numbers.
"It's amazing how many people are leery about using their credit cards on the Web," Williams says, noting that customers often mention the possibility of credit card fraud as one of the reasons they prefer Bill Me Later's instant credit-decisioning feature.
While banks and credit card issuers sometimes seem threatened by the growth of alternative online-payment channels, financial institutions and card issuers actually benefit from their growth, Roth says. "Behind nearly every type of alternative online-payment transaction, there is a bank or credit card transaction," she notes.
Alternative online-payment channels represent a fraction of all payments, but their share of payments is growing. Instead of fearing their rise, banks and card issuers have much to gain by watching mistakes and innovations in these new payment channels. CP
