E-Commerce: Amazon Muscles up in Payments

Elizabeth Whalen

The online retailing giant has been processing payments for other merchants for years, and has quietly amassed more than 200 million user accounts. Now it’s offering even slicker, faster payment services.

Retail giant Amazon.com is no stranger to accepting consumer payments on its own and other Web sites, but now, after years of relative quiet, it’s offering new payment-acceptance options to e-retailers that simplify the payment process and streamline checkout for consumers.

The marketplace will decide whether that’s a winning combination for Amazon, consumers, and other online merchants. But it could set up the Seattle-based e-commerce kingpin for a major play in point-of-sale and mobile payments, experts say. That’s if Amazon can win over other merchants that aren’t so keen on cooperating with a cunning competitor.

Since 2007, Amazon has offered merchants selling on their own Web sites the option to use its Checkout by Amazon service, which includes a series of order-management functions. When merchants use the service, Amazon collects data on the items sold and emails buyers updates when, for example, merchants ship purchases, says Rich Koehler, director of product at Amazon Payments.

But Amazon has found that not all online merchants want or need those functions, he says, so this summer it added a new version of the service that only processes payment and does not collect item-level detail about purchases.

With the new service, “We don’t know what’s in the customer’s shopping cart. We don’t know what they bought. We don’t know what else they might have looked at while they were on the site,” says Koehler. “All we get is the purchase price that the merchant wants us to collect from the buyer on their behalf.”

Two months later, Amazon followed up that launch with Login and Pay with Amazon, another twist on its basic service aimed at streamlining interactions for its account holders at merchant sites. Login and Pay with Amazon lets Amazon’s 215 million users—more than PayPal Inc.—tap their credentials without having to set up accounts at each merchant.

Feeling Threatened

Amazon has come a long way from its days as an online bookseller. And that could be its biggest headache these days.

Merchants are cautious when it comes to sharing data with Amazon, says René Pelegero, president and managing director of Retail Payments Global Consulting Group LLC, which is based in Woodinville, Wash. Pelegero ran Amazon’s payments operation between 1999 and 2002, and later worked at eBay Inc.’s PayPal unit.

“Many merchants feel very threatened, they still do, by Amazon. It’s the proverbial 800-pound gorilla,” he says. “They don’t know when Amazon can turn around and become a competitor to them.”

“Amazon isn’t just a payments-platform provider. They are a merchant themselves, so they are a competitor,” adds Beth Robertson, an independent payments industry analyst. “Because they have such a wide array of things they sell, they’re a competitor to almost any type of merchant.”

She suggests that merchants concerned about the amount of data Amazon collects through its payments-processing service have the terms and conditions reviewed to ensure they’re comfortable with the privacy and confidentiality of their data.

With Amazon collecting less data and only processing payment, merchants may find the new offering more appealing, says Pelegero. Amazon is also putting itself in more direct competition with PayPal with the new offerings, says Robertson.

However, Pelegero is not yet convinced that Amazon’s payments offerings can effectively compete with PayPal’s, in part because PayPal’s costs are likely much lower than Amazon’s.

“Right now, PayPal is earning huge margins on their payments because they have been able to convince a significant number of their customers in the U.S. to use a bank account, which allows PayPal to process direct debits through ACH [the automated clearing house] at almost no cost at all,” Pelegero says. “In the case of Amazon, the huge majority of those accounts have a card as the payment or funding mechanism.”

It’s unclear if PayPal is interested in directly competing with Amazon’s payments service, Pelegero says. “But if PayPal were doing a one-on-one against Amazon, it would be very easy for PayPal to reduce its fees and still make healthy earnings, and Amazon will have a difficult time competing,” he says.

Although consumers can fund Amazon.com purchases with direct debit, that payment method is not available when they use their Amazon account on another Web site, Koehler says. Consumers in Germany, where Koehler says direct debit is very popular, do have that option through the Amazon Payments service, but an Amazon spokesperson said the company is not currently working on adding direct debit to the U.S. version of the service.

‘Pretty Good Visibility’

Amazon’s payments services are unlikely to represent a major change to Amazon’s bottom line, according to Pelegero, and they face a lot of competition, according to George Peabody, senior director at Glenbrook Partners LLC of Menlo Park, Calif.

“It is a busy marketplace,” Peabody says. “They’re late to it, but they bring a well-respected Web-services business and millions of customers who trust that one-click experience. That’s not to be underestimated.”

In addition, Amazon has amassed so much data about its customers’ shopping habits, from card numbers to shipping addresses and purchasing patterns, that its fraud rates are in the same domain as card-present rates, says Peabody.

The ability to pay online, especially on mobile devices, with as few clicks as possible is exactly what consumers want, says Alasdair Rambaud, senior vice president for merchant services at CardinalCommerce Corp., Mentor, Ohio. Cardinal’s Centinel platform allows merchants to accept many different payment brands, including Amazon Payments, through one connection.

“A lot of customers are shopping with mobile devices, and they want ease of use,” he says. “If you go through a normal checkout process, you have to type in something like 150 characters between your name, your address, your credit card number.”

Consumers using Amazon Payments enter far fewer characters, says Rambaud, and have access to the same information. “If you’re shopping on a device that’s small, or you’re in a hurry, it makes the shopping experience a lot easier. That’s really what consumers are asking for,” he says.

Making the checkout process faster and easier is what merchants want, too, he adds.

“A lot of merchants noticed they have high abandonment rates,” says Rambaud. “People go through the checkout process, and when they see everything they have to fill out, they go, ‘Oh, forget it, I’ll do it later when I get home.’ Guess what, when they get home, it was an impulse buy, and they think twice about it, and they don’t buy it. What the merchants really want is to be able to capture that impulse buy, the person who wants it right now in the minimum number of clicks. That’s really where Amazon comes in.”

The speed at which a customer gets through checkout is one of two things merchants comment on to Rambaud about Amazon Payments. The other is that the payment method helps merchants attract new customers. “Merchants often say to me, ‘People who come in from Amazon Payments are often people I’ve never seen on my site before,’” he says.

Rambaud would like to see Amazon increase its advertising efforts to consumers, because he doubts most of them realize their Amazon account now functions essentially as an electronic wallet.

“If I asked someone, do you have an Amazon wallet, they would say, ‘No, I don’t,’” Rambaud says. “But if I said, ‘Do you have an Amazon account?’ they would say, ‘Yeah, I do.’ The reality is that now, if you have an Amazon account, you have an Amazon wallet. Most people don’t know that.”

Amazon is not planning on marketing its payments services directly to consumers and is instead focusing on the merchant community, says the spokesperson. “Our customers understand what Amazon is,” adds Koehler. “I think they see the logo, they see the button, and that’s pretty good visibility already.”

Psychological Advantage

That visibility extends to the new Login and Pay with Amazon service, which combines payments processing with account management. Announced in October, it allows customers with Amazon accounts to use their Amazon login credentials instead of creating a new account on a merchant’s site.

The new service gives consumers the benefits of having an account with an online merchant, such as the ability to see order history, without needing to create a new user name and password, says Koehler. Login with Amazon has been available since May, but Login and Pay with Amazon, the combined service, is new.

It’s designed to allow merchants that accept Amazon Payments to create and develop a long-term relationship with customers using the service, Koehler says. If a customer uses the Login and Pay with Amazon function, the merchant is notified of the customer’s name, email address, and postal code, which it can use to send marketing or other communications.

Amazon tracks customers using their Amazon credentials on other sites, and collects the login email address, site, time, and transaction amount, says the Amazon spokesperson.

The system offers a psychological advantage over other social logins, especially when it comes to commerce, says Koehler. “If I log in with Amazon, I am getting in the mindset to buy because Amazon is an account you use when you’re shopping. You associate Amazon with buying things online and shopping online,” he says.

Other service providers may be ideal for sharing pictures with friends or for making professional connections. “And those are great in certain situations. We think logging in with Amazon is the perfect way to sign in to a site when you intend to engage in a commercial relationship,” Koehler says.

POS Next?

As mobile payments grow, it’s possible that Amazon’s long-term payments strategy will expand to include the physical point of sale, says Peabody.

“If you’re providing payments services to the e-commerce world, you’re almost by definition on that track,” he says. “The same tools we use for payments in e-commerce, we are going to carry many of them with us on our mobile phones into the physical world.”

The sheer number of brick-and-mortar transactions means any company providing payments services can benefit by expanding beyond e-commerce, says Robertson.

“The e-commerce environment accounts for about 7% of U.S. consumer payments,” she says. “There’s a much larger volume of transactions accessible if you can also support the physical point of sale.”

Before that can happen, though, merchants would need a way to be able to accept the system at the POS, she adds. Consumers would also need to express greater interest in new mobile wallets, Pelegero says. Many aren’t demanding a new mobile-payments solution. “John Doe in Omaha and Mary Smith in Kansas City, they don’t care,” he says. “Their cards work well for them.”

An App Opportunity

However, Pelegero does see a potential mobile-payments opportunity for Amazon: payments that integrate seamlessly into merchants’ mobile applications. “Every merchant of any size is trying to put out some kind of an app that is going to increase consumer engagement with the store,” he says.

But those apps do not have integrated payments capabilities, he adds, and retailers, especially large retailers, may be very interested in adding those capabilities to their apps without having to develop them. If Amazon developed that functionality, Pelegero believes it could succeed.

“It’s a different approach than what Isis or Google or PayPal, to some extent, have taken,” he says. “With PayPal, you need to launch the PayPal app, which means the store, if you were using their app, just lost you.”

If, however, Amazon developed an application programming interface (API) that integrated with other apps and incorporated discounts and loyalty programs, it could find many interested clients, he says.

Whether Amazon pursues that solution or not, its new, lighter-weight payments solution is likely to appeal to software developers, says Peabody. “Software developers are as influential as, if not more so than, treasury about which payment method to use,” says Peabody.

Amazon had no comment on its plans regarding either the POS opportunity or the idea of developing an API.

Merchants should remain focused on which payment method consumers want to use and on minimizing friction in the payments process, says Rambaud. “That’s the future of payments,” he says. “It’s really customizing the payments experience to the consumer and not offering something mega-generic.”