PAYMENT PLANS

Jan 01, 2006 10:30 PM  By

Pretty much every merchant accepts sales via major credit cards and checks — that’s how the business works. But a number of other payment methods and billing options are available as well, including third-party deferred billing services, prepaid banks cards, and wire services. And increasing numbers of merchants are offering these additional options to their customers.

Given the ubiquitousness of credit cards, does your company need to offer other payment methods? It might not need to — but doing so can attract business from potential buyers who for a variety of reasons can’t or won’t use credit cards. More than 50 million adults in the U.S. do not have credit cards, according to Mountain View, CA-based payment services provider CyberSource. Of those who possess credit cards, 40% are within 5% of their credit limit. And more than 10 million U.S. households do not have bank accounts.

Among retailers who responded to a survey from CyberSource, 75% of those that offered payment methods besides credit cards said that doing so had boosted their sales, with 21% describing the impact on revenue as “significant.”

BEING FLEXIBLE

Many consumers have a love/hate relationship with shopping: They love to put off paying for goods and services, but they hate delaying instant gratification. Giving them additional options of buying now and paying later will encourage them to spend more with you. So particularly for customers without credit cards, alternate payment plans can open sales, says Kurt Goodwin, senior vice president of sales and support for Crutchfield, a Charlottesville, VA-based merchant of consumer electronics. “It makes it easier to rationalize buying a higher-ticket item.”

Since it started offering a flexible financing option to customers last April, Crutchfield has seen its average order size triple. The cataloger/retailer is providing customers with the ability to spread payments out over 18 months with no interest. Crutchfield implemented the service to better compete with the big-box retailers, such as Circuit City and Best Buy, which already offered similar deferred-payment plans.

Chatsworth, CA-based Lamps Plus has also seen order sizes swell since it began offering another billing option, Bill Me Later, a service of Timonium, MD-based payment solutions provider I4 Commerce. Angela Hsu, director of Internet marketing and business development for Lamps Plus, says that between April, when it began testing Bill Me Later, and August average order sizes have enjoyed a double-digit lift.

Vince Talbert, Bill Me Later’s vice president of marketing, explains how the program works: Instead of entering a credit-card number at the point of sale, the consumer who selects Bill Me Later as a payment option provides some basic information such as date of birth. Assuming that the consumer is approved for credit, he will receives a bill directly from I4 Commerce, rather than from the merchant. Like credit-card companies, I4 Commerce funds the merchant immediately and assumes the responsibility for collecting the money from the consumer.

Talbert says that offering Bill Me Later can add 10%-15% to a merchant’s average order size. Bill Me Later typically represents 3%-7% of sales for most merchants.

Beyond boosting average order values, Bill Me Later has helped Lamps Plus convert new homeowners into buyers. “Frequently, new homeowners run on a budget,” Hsu says, so they may not have cash or credit available for ancillary purchases. And if they’re in the throes of remodeling, “consumers might not have as big a budget, so this gives them a better option.”

Lamps Plus promotes the Bill Me Later option online on the home page and product pages of its Website and in its catalogs. Hsu would not provide specifics, but says results are encouraging enough the marketer plans to offer the payment option via store kiosks within the next 12 months.

Lamps Plus also offers Internet Check Acceptance Service and Checks by Phone from TeleCheck, a subsidiary of Greenwood Village, CO-based First Data Corp. By screening the check writer’s information against its in-house records, TeleCheck assesses whether the merchant can safely accept the payment. TeleCheck differs from a credit card in that the funds aren’t transferred immediately and consumers can’t get their merchandise until the money has cleared, says Gerry Gilbert, senior product manager, payments for CyberSource.

Another option that’s widely used for Web purchases is PayPal, which was founded in December 1998 and acquired by San Jose, CA-based online auction site eBay in 2002. Consumers need to register an e-mail address and a credit card to set up a PayPal account, which is connected directly to the user’s bank account or credit card. Users can also “store” money in their PayPal account for future transactions. For merchants, there’s no set-up fee to begin accepting PayPal. According to PayPal’s Website, the merchant rate to receive payments is 2.5% of the transaction plus $0.30 per transaction. Accepting PayPal won’t help you gain customers who don’t already have a credit card, but because their credit-card data are not transmitted to the merchant, it may appeal to those who are concerned about repeatedly transmitting those data over the Internet.

OLD-SCHOOL SOLUTIONS

Some alternative payment options predate e-commerce. Cash on delivery (C.O.D) is one example. As the term indicates, a merchant ships a C.O.D. order before it has received payment; upon receiving the order, the customer hands over payment to the parcel carrier. The popularity of this option has waned over the decades, in large part because of the risk it presents to marketers: 40% of all C.O.D. orders are returned. What’s more, consumers must be present when the order is delivered.

The 130-year-old Englewood, CO-based Western Union offers another option for consumers who prefer to pay with cash, says Donna Kennedy, director of business development. The customer walks into one of Western Union’s 50,000 domestic locations, fills out a form, and hands over his cash payment along with a fee that ranges from $3.95 to $9.95. The Western Union agent then wires the funds to the merchant’s bank, which sends the merchant confirmation of receipt.

Kennedy says that marketers can use cash-based alternate payment options as a means of attracting singles with modest incomes, middle-aged parents with low incomes, and college students. And because credit cards have not traditionally been a part of Hispanic culture and commerce, these sort of alternatives can be especially effective in winning over the growing Hispanic market. According to Western Union research, Hispanics account for 49.7% of the all money transfers.

That’s exactly why Crutchfield is offering the Western Union payment option on its new Spanish-language Website, Goodwin says. Although Western Union represents a very small percent of the orders, he notes, “we expect more activity offering this option because of the cultural difference and the fact that there’s less major credit-card penetration in the Hispanic community.”

INTERNATIONAL OPTIONS

If you accept orders from Europe, bear in mind that bank transfers and direct debit are often more popular payment methods than traditional credit cards. Not accepting them could hinder your ability to expand overseas.

Direct debit works similarly to the way electronic checks work here, Gilbert says. Merchants submit certain data elements related to the account number and the bank itself to a payment services provider such as CyberSource. The service provider can validate some portions of those elements, offering guidance as to whether the merchant should go ahead and accept the payment. But it is not a complete authentication of the amount or the consumer: Once the transaction makes it to the bank, the bank may find that there are insufficent funds in the consumer’s account.

To prevent fraud, some merchants use a feature of the banking system called a mandate that allows them to get a written statement from the consumer with his banking information and express consent to the charges. The mandate offers the merchant more protection, but not all payment processors support them.

While studies have shown that offering more payment options results in incremental sales, doing so can carry some additional risks. Each company needs to assess its tolerance to risk and make informed decisions, Gilbert advises.

Your choice of service providers should be another informed decision. If you work with a vendor that supports only traditional credit card in U.S. dollars, it is unlikely to be able to help you understand all your options. It may also be unaware of the associated risks for certain types of alternative or international payments.

But provided you do your homework and select your payment services providers as carefully as you do any other vendor, you are likely to find that the risk of offering alternative payment options to customers is well worth the reward.

More payment choices = better conversions

The statistics speak for themselves. The more payment options you offer the consumer, the better the chance you have to strengthen his relationship with you — and the more they’ll spend with you. According to Mountain View, CA-based services provider CyberSource, merchants that offer two to four payment methods have a 20% greater conversion rate than those that offer just one method.

Which demographics are more likely to use alternative payment methods? A study conducted by Conway, AK-based Acxiom in 2003, identified four target groups most apt to use options other than credit cards and checks — and they’re not all subprime consumers. They are:

  • Middle-class single renters age 30-40 living in cities
  • Middle-aged, low-income parents
  • Low-income singles, including college students
  • Young professional parents with high incomes