How the End of E-Commerce As We Know It Spawns Opportunity

This is the second installment of a six-part series on how Web 2.0 developments are likely to transform the payments business. Web 2.0 is still in its infancy, and skeptics about its business models abound. Meanwhile, most online merchants are still scrambling to shore up and extend their current Web operations?focused mainly on driving top-line results. With growing competition in this newly maturing market, the focus of nearly all merchants has shifted to alternative payments, whose leading providers are setting the stage for a new generation of online transacting. The day after Christmas, Internet retailing giant Amazon.com reported that its 2008 holiday season was its “best ever,” and cited huge peak-day volumes of transactions, though it offered no dollar sales figures or comparisons. Some analysts pointed out that, while e-commerce overall experienced its first ever holiday-season volume setback, Amazon?and other big e-retailer sites?fared much better, and continued to consolidate market share. That's bad news for just about everyone else in the online-retailing business, and underscores the problem the industry is facing now: The first generation of e-commerce is running out of gas. And while hopes are high in some circles for revolutionary shots-in-the-arm from monetizing next-generation Web 2.0 technology and business models, most e-retailers are simply hunkering down to weather the economic storm. What most of them fail to realize is that their business models have become a bigger and longer-lasting problem.

As the online-retailing industry has grown to nearly $300 billion in annual sales and 4% of the consumer economy, its development focus and marketing priorities have shifted more and more from e-commerce basics to pounding out top-line performance. Thus, most mature e-retailers are now focused on a laundry list of revenue-enhancing initiatives, including, for example, reducing shopping-cart abandonment rates and seeking relief from unproductive bottom-line distractions and costs, such as compliance with the Payment Card Industry data-security standard (PCI). Competition has grown intense among the bigger online players. Multichannel retailers are pushing synonymous transacting from online to in-store and back, including accommodation of refunds, exchanges, purchase credits, and loyalty points. Big online-only e-retailers continue to drive for more customer personalization and capture of preferences that the multi-channels can't easily manage with legacy IT systems. The one underlying factor that is driving all of these top-line initiatives is the accommodation of alternative payments and the more flexible, economic business models they offer. The Hitachi/Dove/BAI 2008 Payments Study reported that one in four online transactions are now being done by something other than a signature-based bank card and that penetration by alternative-payment types is growing quickly.

Given the slower organic market growth (an estimated 4% to 5% for online in 2008 overall?much better than retail sales overall, but down markedly from several years of 20+% annual growth), and the still-promised emergence of ATM debit card use online, the prospects for continued signature-card profits for banks and payment providers are dimming perceptibly now. Even they are pushing new payment options to capture more business. Until recently, though, only the bigger online merchants bothered with alternative payments. But in today's hyper-competitive online market, e-retailers of just about every size are scrambling to accept a growing array of new payment options, most of which offer upfront merchant-fee discounts from bank cards, as well as guaranteed payments. For profit-strapped e-retailers, those advantages are no longer optional. For example, one of the biggest bangs for the buck in terms of top-line impact?BillMeLater?was bought by PayPal Inc. last year, after PayPal's own, rival offer, PayLater, failed to achieve a commensurate impact in the marketplace (Digital Transactions News, Oct. 6, 2008). BML, which offers instantaneous lines of credit to qualified consumers with as much as 90 days to pay, has attracted an estimated 1,000 merchants, which claim to enjoy anywhere from 15% to 50% increases in purchase-basket sizes.

But BML has so far provided a top-line boost only for larger merchants, including Amazon, which?in its rivalry with eBay/PayPal?just decided to stop accepting BML (Digital Transactions News, Dec. 31, 2008). ISOs and smaller merchants are also looking for a top-line lift from on-the-spot credit, and rival offerings to BML are beginning to emerge to serve this broader demand.

With everyone chasing top-line performance in an increasingly competitive market, and with most of the cards seemingly stacked against smaller e-retailers, the Big Three online-payment innovators?Google, PayPal, and Amazon?have recognized the opportunity to build their own ecosystems of collaborating merchants around them. They are fielding differentiated strategies for handling payments within these ecosystems. Google buries payments beneath paid search and advertising services, making them free up to a point. PayPal lowers overall transacting costs and offers services that once were only available to bigger merchants by arbitraging the bank networks to obtain preferential transaction costs. And Amazon now makes not only its payment platform, but also its global-scale computing, storage, and data-reporting services, available to more than a million affiliates?a veritable turn-key outsourcing arrangement for those Web-based companies that decide that if they can't compete with the giant, they should join him! Joining one of these ecosystems earlier rather than later is becoming even more attractive with the onset of Web 2.0 technology. Investments in Web 2.0 infrastructures, such as mobile-commerce-embedded virtual wallets and integrated identity-management conventions, will be daunting and risky for cash-strapped merchants.

Most e-retailers (and most conventional payment providers) don't know how to compete for business on social networks and interactive venues yet. But the Big Three seem to, and their evolving business models are moving the online payments marketplace toward a new generation of transacting.

Next week's article will probe the directions of these three competing ecosystems, and will explore whether these affiliations really level the playing field for smaller e-retailers or, rather, threaten to draw them like proverbial moths to the flame. One thing is clear, though: Business as usual in the first generation of e-commerce came to an end in 2008. ?-Steve Mott