RESOURCE GUIDE: Alternate Payment Systems

Merchants operating businesses through the mid-1960s were in the habit of receiving two types of payments from customers: cash and checks. From the mid-1960s through the mid-1990s, more and more customers began replacing cash and checks with credit-card payments. Now, in the 2000s, merchants and customers have a plethora of payment options, conveniently termed alternative payment systems (APSs).

According to research conducted by Celent Communications, a financial services IT consulting firm in San Mateo, CA, credit- and debit-card payments, which accounted for 90% of online payments in 2000, will account for fewer than 50% by 2009. The reason: the increase in APSs.

While brick-and-mortar retailers are becoming involved with APSs to some degree, it is really direct marketers that are leading the charge — or rather, the move away from the charge. Partly it's to win over consumers who remain concerned about online security and thus are reluctant to pay for Web purchases via credit card. But there's also the fact that most APS transactions are less expensive for the merchant than credit-card transactions.

“There is quite a bit of allure for merchants and customers, and I don't see this trend tapering off,” observes Jeffrey Burke, senior product manager for CyberSource Corp., a Mountain View, CA-based provider of electronic-payment and risk-management services. “In fact, I see the market bringing on more and more types of alternative payments as time goes on.”

Marwan Forzley, president/CEO of Wayne, PA-based MODASolutions, which provides an APS called Secure-eBill, agrees. “If you go into a retail store, you can pay by cash, check, credit card, or debit card. However, if you go on that same retailer's Website, you can probably pay only by credit card.” For direct marketers to set themselves apart from the online competition and to compete with offline merchants, they need to offer more payment options.

CATEGORIES OF APSs

Some examples of types of APSs are electronic check processing, debit cards, third-party deferred billing options (such as Bill Me Later), wire services (such as Western Union's Speedpay), installment plans, and stored-payment options (such as PayPal and the relatively new Google Checkout). But categorizing the various options can be incredibly difficult. For one thing, numerous providers offer multiple services in a number of categories. For another, many providers offer services that seem to straddle two or more categories.

Pascal Burg, a director with Atlanta-based financial services consultancy Edgar, Dunn & Co., offered three categories of APSs:

• Pull payments

  An example is an automatic clearinghouse (ACH) electronic funds transfer that is initiated by the merchant, enabling the merchant to pull funds from the customer's account via an electronic check. Banks, the traditional providers of credit and debit cards, are working hard to stay abreast of options in this category.

  For example, U.S. banks are working on the NACHA Online Payments Pilot, where buyers would be able to send payments to retailers from their Internet banking facility, Burg says. NACHA is a nonprofit organization representing financial institutions and others involved in electronic payment processing.

  Joel Van Arsdale, senior consultant/director of research for First Annapolis Consulting, a Linthicum, MD-based payment products consultancy, also sees the growth of bank involvement. “Merchants are exploring ACH payments, which take the form of e-checks, and other ways to debit from bank accounts,” he says. “Merchants like this because these transactions are quite a bit less expensive that some other forms of payments, especially credit cards.”

  Secure-eBill is one such option. Consumers who pay via Secure-eBill receive an e-mail invoice confirming their purchase, then pays online through their bank, just as they might pay their utility bills. Once the merchant receives the payment, it ships the merchandise. Secure-eBill, which doesn't store any financial information from the consumers, minimizes the risk of hacking. “The only information customers need to disclose to merchants are their e-mail addresses,” says MODASolution's Forzley.

  Merchants that accept Secure-eBill payments pay MODASolutions 1%-1.5% of the value of each transaction, depending on their volume; there are no set-up fees. In comparison, credit-card processing fees generally range from 1.7% to 3.5% of the value of each transaction. Because the consumer moves funds from his bank to the merchant's bank, these are considered “good funds,” and there are no chargebacks.

• Push payments

  These are fund transfers initiated by the buyer to the merchant. Wire services are an example. Say a customer wants to pay for an online purchase via Western Union. He'll complete his order and receive a reference number from the merchant. He then generally has up to 48 hours to go to a Western Union branch and pay cash; Western Union subsequently informs the merchant that payment has been made, and the merchant ships out the merchandise. This is a very low-cost — sometimes even free — transaction for the merchant, as the customer is the one who pays a fee to Western Union.

• New payment options

  This is pretty much a catch-all category for APSs that are neither true pull or push payment options and for new players that are unaffiliated with traditional providers. “There aren't many providers in this category,” Burg says, “because it takes time to build a lot of awareness among merchants and customers.”

Three of the most popular methods in this category are PayPal, Google Checkout, and Bill Me Later.

PayPal has more than 100 million accounts worldwide and represents about 10% of U.S. online sales volume. Merchant fees start at $0.30 per transaction plus 2.9% of the total payment.