Alternative payment methods gain acceptance

To get a bigger piece of the e-commerce pie, more merchants are offering alternative payment methods.

According to the 2009 fourth-quarter mystery shopping survey from e-commerce consultancy E-tailing Group, 47 of the top-100 online merchants offer deferred payment plans or Bill Me Later, up from 40 in 2008. A credit card alternative, Bill Me Later offers consumers same-as-cash payment options if a bill is paid off in 30, 60 or 90 days.

PayPal, the service that allows merchants to accept credit card or cash payments from consumers online, is being used by 34% of the top-100 merchants, up from 23% the year before.

(Bill Me Later was bought by eBay in 2008 and is a part of eBay’s PayPal unit. Bill Me Later is also now a payment option for consumers who use PayPal.)

“Merchants are reaching out to different customer segments that may not have credit cards, or who have their credit cards maxed out,” says Lauren Freedman, president of E-tailing Group.

It’s the nature of the economy, she says: “People may want to defer payments for something they want to have so that they can buy the things they need.”

According to a study released in February by Javelin Strategy & Research, prepaid cards, gift cards and alternative payments are projected to have the highest rates of compound annual growth for e-commerce purchases through 2014.

The growth is not just about wanting to keep their credit card balances down or defer payments. Javelin’s study says security is the main driver for consumers using alternative payment methods.


Education may be key to merchants getting over the myths and misconceptions of alternative payments, says Bill Zielke, vice president, product marketing for Bill Me Later.

For example, Zielke says one of the hurdles Bill Me Later has had to get over is convincing merchants that the service is not a downscale offering. The service’s average customer is a woman with children and an annual household income of more than $70,000, he says.

Merchants are starting to get that message. This past holiday season, food and gifts merchant Harry and David featured a Bill Me Later logo as a dot-whack on the front cover of its holiday catalog, right next to a shot of one of its trademark succulent pears.

Men’s apparel cataloger/retailer Jos. A. Bank Clothiers unveiled a redesigned Website this past November that now includes Bill Me Later and PayPal.

Apparel merchant The Orvis Co. said at the eTail show last August that while its average order size was $150, customers using Bill Me Later spent on average $175 per order.

And jewelry seller revealed at eTail that 15% to 30% of its customers use alternative payments. That includes PayPal, Bill Me Later and a private-label credit card that set up through Bill Me Later called JTV Preferred Account.

How are alternative payment providers getting retailers to see the value of their services? Zielke says his marketing team works with merchants to educate them on the incremental sales lift alternative payments such as Bill Me Later can bring. “We’ve come up with studies to help merchants understand that consumers are using alternative payment options, and that it can help them with their return on investment,” Zielke says. There are other benefits.

For instance, Bill Me Later will showcase merchants on its home page, Zielke says. This has helped many acquire customers and grow incremental sales, he notes.

How much does Bill Me Later charge merchants? There is a transaction fee, which Zielke did not disclose, plus up to 2% of the purchase price. But that can amount to 40% less than what the credit card transaction customers charge merchants, Zielke says.

And Bill Me Later’s integration is not an overnight process. Zielke says the service uses the same authorization and approval protocol as credit cards, but it’s a six- to eight-week process to get it up and running.

What’s more, Bill Me Later is not an option for small merchants: Zielke says the service’s threshold is retailers who do annual sales of at least $25 million.

And some marketers have had mixed results with it. Pet supplies merchant Doctors Foster and Smith has found that about 10% of its customers use PayPal. But Gordon Magee, the company’s Internet marketing and media manager, estimates that only about 5% of its customers use Bill Me Later.

Doctors Foster and Smith offered Bill Me Later’s 90-days-same-as-cash offer throughout 2009 on its subsite, which sells aquarium products and water life. And Magee feels the promotion worked effectively with that brand.

“Part of it was that the average order size is larger there, because of the price to ship live fish or the associated hard goods,” Magee says. “We ran it for a full year and it worked quite well; it was worth our time to do it.”


But for many marketers, conventional credit remains key. At electronics merchant Crutchfield, more than 80% of customers are using credit cards to make a purchase, says Deborah S. McPhillips, director of financial and operational analysis.

“Alternative payment methods are nice to have, but they are not driving a lot of business,” says McPhillips, adding that Crutchfield also offers the cash alternative eBillme. “They were both off a little from 2008, but the average order value of people paying with eBillme went up quite significantly.”

So how does eBillme differ from Bill Me Later? For the consumer, Bill Me Later is, technically, a form of credit, even though an account number is not entered at the point of purchase.

For the merchant, eBillme does not need to be integrated into its e-commerce platform. A customer just selects eBillme as its payment option, and receives instructions on-screen and via e-mail on how to pay that bill via online banking or at virtually any bank.

EBillme also allows customers without bank accounts the option of paying their eBillme bill at walk-in locations, including convenience stores and cell phone retailers. The company recently added Walmart as a payment location. EBillme works on the platform of secure transaction provider Cardinal Commerce, and charges merchants a flat fee of 1% per sale.

The five-year-old company also has had to escape a low-brow image, says Samir Frozley, vice president-marketing for eBillme. But merchants have been increasingly receptive to using it as a payment method, with about 800 retailers on board as partners.

“They are much more receptive because they know customers have changed their spending habits,” Frozley says. “The past two years, consumers have been more willing to pay cash than use credit cards, and that pattern began before the credit crunch hit.”

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