Web Portals Expand Their Payment Options

  If the Web is so huge, why can't America Online make a buck? And why are competitors snapping at the heels of Yahoo! Inc., which has emerged as a dominant Web portal?
  The questions aren't entirely fair-AOL does make a pretty good living-though the Dulles, Va.-based Internet service provider has had more than its share of troubles. And Yahoo remains a prominent Web presence.
  Still, AOL of late has been like the failed son of the richest man in town. A few short years ago it claimed about 30 million subscribers and access to such treasure troves as the music, movies and publishing libraries of its parent, Time Warner Inc. And one-time golden boy Yahoo has spent a few years in neutral, unsure which of its many options to emphasize as a revenue source.
  Now, both firms are looking to advertising as central to their bottom line. And both also are looking to Web merchants and payments as a way to bolster revenues-and that means more volume and revenues for the card industry.
  Yahoo is sticking to its tried-and-true talents as a host to small and mid-size merchants, charging fees for core services. AOL has decided to be a mall of sorts, offering comparison-shopping for brands big and small, and introducing new lines of bundled goods. Additionally, AOL is attempting to become a center of bill payment for its subscribers.
  Both can be grateful that consumers have embraced the Web as a major shopping destination. That means merchants continue to beef up their efforts in the area, buying ads, improving sites, and investing in fraud prevention.
  These moves come as Internet sales continue their strong growth. Once the final counting is done, Cambridge, Mass.-based Forrester Research expects 2004's online sales to reach $144 billion, a 26% rise from $114 billion in 2003. Online sales last year represented 6.6% of retail sales, up from 5.4% in 2003, according to Forrester projections. The relatively cheaper cost of doing business over the Web meant that 79% of online retailers were profitable in 2003, up from 70% in 2002, according to Forrester.
  The benefit to the card industry is one of those well known but unscientific facts, with experts estimating that over 90% of online payments are made with a credit card. An executive with transaction gateway and online fraud fighter CyberSource Corp. estimates that more than 95% of the orders it touches at its 5,000 online merchant clients are conducted via credit card.
  Against this background of e-commerce growth and continual changes in the way businesses and consumers use the Internet, AOL-whose dial-up service provided millions of consumers with their first Web experiences in the 1990s-is remaking itself in an attempt to ease the loss of millions of subscribers looking for faster broadband-cable or DSL-Internet connections that it doesn't provide. The company remains huge with about 22.7 million U.S. subscribers at the end of September, but that's down from 24.7 million at the same time in 2003, according to filings with the Securities and Exchange Commission. (AOL counts about 7 million subscribers to AOL Europe.) AOL's influence is less than it used to be, but its still-considerable size means any business-model change it institutes can affect the Web-based retailing.
  Time Warner reported revenues of $30.9 billion and operating income of $4.6 billion through 2004's first three quarters. During that time, AOL provided $6.5 billion in revenues, or 21% of Time Warner's revenues. But its $814 million in operating income generated only 18% of total company income.
  AOL was slow to adjust to the rise of broadband, and its monthly subscription fee near $24 was double that of many competitors. To lessen the revenue impact from the loss of dial-up subscribers, AOL spent much of last year shifting to a paid-search and traditional advertising approach. Consumers and shareholders will have to decide if its changes are simply a Botox injection or a complete Hollywood makeover.
  AOL restructured itself in late 2004 with four divisions: Access, Audience, Digital Services, and AOL Europe. The Audience division is responsible for advertising, search, pay-for-performance, and commerce. These areas of the company are growing at a 35% annual rate, according to a November letter to AOL staff from Chief Executive Jon Miller.
  The Digital Services division will handle premium services such as product bundling. AOL has allied with Valista Ltd. to manage and run the product offerings while AOL lends its name and members. Valista provides its OffersPlus technology for payments and product catalogues, while managing payments to vendors.
  The first offering is an online security software package that includes antivirus capabilities, spyware, site authentication, and a firewall for the consumer's computer. Dublin, Ireland-based Valista accepts eBay Inc.'s PayPal online payment service, along with credit, prepaid and signature debit cards. Valista and AOL plan to use their databases to best target products to the right consumer.
  The bundling is designed to be cheaper and easier for many consumers, says John Hurley, Valista's vice president of marketing.
  "We will offer themed bundles," says Hurley. "The first is security. The next may be entertainment with an MP3 (music player), subscription to a music service and a compact disc for one price." Many consumers don't want to go surfing all over the Web to compare prices, he notes.
  Mobile Commerce
  Valista has been active internationally with a focus on mobile commerce. Japanese telecommunications provider NTT DoCoMo uses Valista's PaymentsPlus to offer mobile banking, shopping and entertainment. Subscribers can pay with credit cards, cash or prepaid vouchers or choose to be billed after the sale.
  Valista also is active with France's Orange mobile service, processing about 300,000 small purchases a day of digital goods over Web, says Hurley.
  "These are micropayments under $1," he says. "They are added up, batched and cleared through the consumer's credit card or debit card."
  Valista sells its service to AOL under a license, and earns revenue depending on the number of transactions conducted worldwide through OffersPlus on AOL. Hurley and an AOL spokesperson declined to give details of the multi-year contract or name the processor of card payments.
  AOL also is expanding its retail offerings. In September, it opened inStore, a self-branded, comparison-shopping site. The recent holiday season saw major brands Burberry, Dell Computers and Macy's participating along with ads for the Discover card. AOL members can assign purchases from those retailers to the credit card they use to make their recurring monthly subscription payment.
  In addition, AOL hopes to grow in travel, a business transformed by the Web. Nearly 30 million U.S. households spent $53 billion in online travel in 2004, according to Forrester Research. AOL already has an on-site exclusivity deal with Travelocity, an online travel agent where consumers buy travel packages. Last year, AOL bought a minority stake in Kayak Software, a provider serving budget travelers who prefer to build their own package.
  AOL plans to launch the Kayak service this quarter, probably with a different name, and a brand identity separate from its parent, according to the spokesperson. AOL also has its eye on the auto and real-estate markets though nothing concrete has been announced.
  Along with selling products, AOL is seeking to interact with consumers as they pay for products. It teamed with Yodlee Inc. last March to offer AOL Bill Pay, an online bill-payment service. The spokesperson declines to share consumer response to the service, claiming numbers will be released on its one-year anniversary.
  Redwood City, Calif.-based Yodlee is considered a bill aggregator as it signs on billers nationwide, and makes available their bills for participating consumers. Over 2,800 billers, including card issuers, utilities, lenders and others are registered for the service Yodlee markets as BillDirect.
  Consumers haven't fully embraced the aggregation model for electronic bill presentment and payment. In 2003, 14.4 million households paid a bill at their biller's Web site, compared to 9 million that paid at their bank's site, according to Forrester. It may be easier to go to one site to pay your bills, but consumers can receive same-day credit when paying at a biller's site.
  An enrolled AOL member visits her Bill Pay account through AOL, and selects the bill she wishes to pay. A window then "opens" on the biller's site where the Bill Pay member can input the amount of payment. The consumer opts to pay using her direct-deposit account, or, if the biller allows, the card account she uses to pay her monthly AOL subscription. Virtually all major card issuers and cell-phone companies accept payments through Bill Pay, according to the spokesperson.
  E-Mail Alerts
  AOL has instituted a service it has branded as Chrome to identify e-mail alerts from Bill Pay. Chrome messages, which are encrypted e-mails that ensure security, join the growing list of "heads-up" alerts from online financial-services firms, notifying consumers when, for example, a credit card account has hit the credit limit or a bill is due.
  "The member manages Chrome, sets the figures that monitors spending on their card and the cell-phone minutes," the spokesperson says.
  Yodlee has more up its sleeve. It announced in November at the Bank Administration Institute's Retail Delivery Conference & Expo in Las Vegas that it had teamed with an unnamed top-five card issuer to offer cardholders reward points for recurring payments. A bank subscribing to Yodlee's Bill Direct for Card Issuers would earn interchange for payments charged to one of its cards while the cardholder earns points for paying their electric bill.
  Sunnyvale, Calif.-based Yahoo, meanwhile, takes a different approach from AOL in its retail offerings, attracting small and medium-sized businesses that rent online space to market to the 263 million consumers worldwide who use the Yahoo site.
  The Yahoo! Merchant Solutions unit offers domain names, e-mail, Web hosting, card processing, site design, management, statistical analysis, and marketing services. Yahoo declines to share specifics on sales for Merchant Solutions and didn't make an executive available to comment for this story, but it brags on its Web site that more than 30,000 merchants offer their wares through the service, representing one out of every eight online stores. The shops generate billions in sales, Yahoo says.
  The unit represents only a small part of Yahoo. The company posted 2003 revenues of $1.6 billion, up 71% from 2002, and net income of $238 million.
  Partnerships
  Yahoo has re-emphasized advertising as its bread and butter. It was smart to get on the broadband train early, partnering with SBC Communications Inc. and British Telecommunications plc, and claimed 5 million paid broadband users at year-end 2003.
  The primary processor for Yahoo's merchants is Paymentech L.P., the Dallas-based acquirer co-owned by J.P. Morgan Chase & Co. and First Data Corp. In 2003, Paymentech processed 7 billion transactions worth $162 billion.
  Merchants can apply online through Yahoo for a Paymentech merchant account. Merchants that want to list on Yahoo don't have to use Paymentech, but they must have a merchant account compatible with First Data Merchant Service's so-called Nashville platform.
  Yahoo offers three e-commerce hosting packages, depending on the size and sophistication of the merchant. Higher-volume merchants pay Yahoo a higher monthly fee but less per transaction.
  The Starter package goes for $39.95 per month and a 1.5% per transaction fee, followed by the Standard package with a $99.95 per month charge and 1.0% transaction fee. The Professional costs $299.95 per month and includes a 0.75% per transaction charge. Yahoo was waiving $50 set-up fees for the packages in December.
  According to Yahoo's Web site, all three packages offer much the same services, including disk space, design assistance, inventory management, security and order processing. However, Standard and Professional merchants receive greater statistical analysis and merchandising capabilities.
  In addition to Yahoo's costs, a Web merchant must pay Paymentech several fees for its processing services. Paymentech charges $22.95 a month but set-up fees are waived for Yahoo merchants. Processing fees include 2.69% of the transaction plus 20 cents for MasterCard and Visa credit cards, and 2.58% of the sale plus 20 cents for MasterCard and Visa debit cards. Paymentech adds 15 cents per transaction to the discount fees that Discover and American Express charge for processing their cards. There is also a $15 fee per chargeback.
  Yahoo also promotes two other processors on its site: Cardservice International, a First Data subsidiary catering to smaller merchants, and privately held 1st American Card Service of Beverly Hills, Calif.
  'Road Kill'
  Brian Roemmele, 1st American president, says his company has been a processor of online payments since 1995, and was a Yahoo charter advertiser in 1997. His firm is an intriguing example of the opportunities offered by the Web. 1st American currently owns or has affiliations with 150 sales offices nationwide, processing for 150,00 brick-and-mortar merchants and 100,000 Web merchants, according to Roemmele, who declines to share revenue statistics.
  1st American offers economies of scale to independent sales organizations, providing processing of cards and checks along with such services as online fraud-fighting packages.
  Generally, 1st American's clients are going to be a little smaller and newer than merchants processed by a giant like Paymentech, acknowledges Roemmele.
  "We pick up the road kill along the information superhighway," he jokes.
  For merchant customers selling over $1,000 a month online, 1st American charges 1.99% to 2.05% of the sale plus 20 cents to 30 cents for MasterCard and Visa credit cards, depending on volume and product type, Roemmele says. The company also offers new online merchants such services as Web-site design, hosting, and management through its subsidiary Creditcardcommerce.com.
  "When we started, banks feared non face-to-face transactions. Today the entry-level merchant is not as risky," says Roemmele, noting that oversight by the Federal Trade Commission and the evolution of MasterCard and Visa policies regarding online merchants have gone far to "tame the Wild West."
  Despite the Web's newfound maturity, each day can offer a learning experience. Many online merchants began by selling their products in an auction setting on eBay and accepted payments through PayPal. The move to a stand-alone, card-accepting business with a site on Yahoo can be difficult for some merchants, according to Roemmele.
  Misperceptions
  "There's a false perception that someone doing auctions can easily step up to a Yahoo address," he says. "That's similar to thinking a 12-year-old familiar with a bike can just start driving a car."
  PayPal, however, is a formidable competitor. It reported in the third quarter 56.7 million accounts and total payment volume of $4.6 billion, a rise of 52% from the same period in 2003. PayPal claims that one in three online shoppers has a PayPal account.
  Yahoo's own auction payment service, PayDirect, failed to make any headway against PayPal. Yahoo declined to share usage statistics for PayDirect but announced last November it would phase it out, with plans to completely shut the doors this May. PayDirect charged 2.4% of the transaction amount plus 30 cents for each transaction. HSBC Bank USA administered the service.
  For its part, AOL offered Citigroup Inc.'s c2it person-to-person payment service, but Citi officially closed c2it in February 2004. Perhaps bowing to the inevitable, Paymentech in December reported it would begin offering PayPal to its merchant clients early this year.
  What, if any, of AOL's offerings will pay off? Worst case, this might be little more than the cook throwing spaghetti against the wall to see what sticks. Still, chef AOL boils a giant pot of pasta, so any success would affect the market. Meanwhile, Yahoo appears to be back on track after a brief pit stop. Together, the two offer merchants and consumers a blend of felicitous Web services.