Trends & Tactics

A Comeback for Credit Cards Online

Thanks in part to debit card regulation, e-commerce shoppers in the next few years will reverse a recent trend away from credit, according to new research.

General-purpose credit cards will capture 40% of online spending in 2011 and 2012, level with 2010, but that share will climb to 45% by 2016 as issuers promote credit and consumers shake off the aversion to credit cards they developed during the deep recession, says a report issued by Javelin Strategy & Research.

Online spending on credit cards hit $123 billion in 2011, up from $108 billion in 2010, and will rocket to $201 billion by 2016Ña 10.2% average annual growth rate, according to JavelinÕs forecast.

ThatÕs pretty snappy growth. Too bad the same canÕt be said for debit cards. Debit card use online will wither as issuers react to recent regulation by reining in debit, says Beth Robertson, director of payments research at Javelin. The Federal ReserveÕs interchange caps for issuers with more than $10 billion in assets, along with tighter regulation of overdraft fees, are the culprit, she says.

While Bank of America Corp.Õs notorious effort to levy a $5 monthly fee for debit card use triggered a political firestorm, forcing the banking giant to ditch the plan, banks are finding other ways to shift consumers from debit to credit. These include account fees, a withdrawal of rewards programs on debit cards, and even programs that allow cardholders to transfer debit rewards to credit cards, says Robertson, principal author of the forecast.

ÒWhen people open a new account, they will not be encouraged to get a debit card,Ó she says. Instead, they will likely be issued a generic ATM card that wonÕt work at the point of sale.

All this will add up to a loss of online share for debit. That share peaked at 30% in 2011, up from 29% in 2010, and will drift downward to 21% over the next five years, the report forecasts. Payment volume online reached $93 billion last year, will peak at $102 billion in 2014, and then lose nearly all of that gain, falling to $95 billion in 2016, for a meager 0.3% average annual growth rate over the five years.

Another rising star online is alternative payments, especially services that allow consumers to tap spot credit, like eBay Inc.Õs Bill Me Later. Already, some 49% of consumers report having used an online alternative-payment service in the past year, nearly on a par with debit cards (52%), Javelin says. Alternatives accounted for $52 billion in online spending in 2011, up 13% from 2010.

Adoption of Bill Me Later, which eBay snapped up in 2008 for $945 million, has benefited from the credit serviceÕs pairing with eBayÕs PayPal unit. Some 14% of consumers report having used Bill Me Later, up dramatically from the 1% who had adopted the service in 2010, according to Javelin research.

Now part of the PayPal wallet, Bill Me Later gains from the merchant acceptance and consumer promotion PayPal can bring it, Robertson says. It has also been helped by consumersÕ gradual turn back to credit-based products, she says.

Could nascent efforts to bring PIN debit to the Internet revive debitÕs fortunes? Not likely, Robertson says. While online merchants might be attracted to PIN debitÕs lower fraud rates, she says merchants and consumers have not so far shown enough interest in the product to warrant optimism.

A number of EFT networks have over the past couple of years introduced PIN debit for online use, but adoption so far by merchants has been limited. ÒWe just havenÕt seen that happening to date, so I donÕt think itÕs going to make a difference,Ó Robertson says.

But consumer spending during last monthÕs holiday season bodes well for online sales overall, Robertson notes. ÒPeople were concerned whether weÕd see a flat holiday season,Ó she says, but Òin fact weÕre seeing an increase, which shows some confidence in the economy.Ó

Indeed, online volume is doing quite nicely, economic woes notwithstanding. For 2011 it reached $309 billion, up 16% from $266 billion in 2010, according to the report. The forecast: Volume will grow to $346 billion this year and $444 billion in  2016.

 

Starbucks Gives Mobile Payments a Jolt

Systems based on near-field communication (NFC) technology are the tortoises of the mobile-payments industry. The hares, who arenÕt waiting for NFC to gain acceptance, use other technologies and are off to a much faster start.

Three months, ago, for example, PayPal Inc. upped its estimate for its 2011 mobile-payments volume to $3.5 billion from its earlier prediction of $3 billion.

And in December, Seattle-based coffee king Starbucks Corp. reported that it has handled a total of 26 million mobile transactions at the point of sale just since launching its barcode-based mobile program in January 2011. The total includes redemptions, reloads, and activations.

Starbucks customers made 3 million mobile transactions in the first nine weeks of the program, a number that doubled to 6 million in a nine-week period beginning in October, the company said.

Starbucks links mobile payments to its popular prepaid Starbucks Card, which had $2.4 billion loaded onto it globally in fiscal 2011 ended Oct. 2 and accounts for 25% of U.S. transactions.

After downloading an app to an iPhone from Apple Inc. or a smart phone running Google Inc.Õs Android operating system, U.S. cardholders can use their mobile devices to pay at Starbucks if theyÕve registered their prepaid card.

To pay, they open the app, which displays a 2-D barcode that contains the card data. The clerk scans the code with a reader to deduct the transaction amount from the prepaid account. Customers also can use the app to send electronic gifts and get rewards based on their purchases.

In addition to nearly 7,000 U.S. standalone stores, the mobile program is accepted at Starbucks locations in more than 1,000 Target Corp. stores and since June at nearly 1,000 Safeway Inc. grocery stores.

Ò2011 was a year of great mobile exploration and expansion for Starbucks and an opportunity to give our customers a new way to connect with Starbucks through a variety of mobile experiences,Ó Adam Brotman, senior vice president and general manager of Starbucks Digital Ventures, said in a statement.

While StarbucksÕs program is the most successful U.S. merchant-based mobile system so far, mobile payments are still a small portion of its overall sales, notes Rick Oglesby, a senior analyst with Aite Group LLC, Boston.

For example, the 26 million transactions comprise only about 6% of all its redemption, reload, and activation transactions in the last three quarters of fiscal 2011. Starbucks said users reloaded $110.5 million onto Starbucks cards since January through mobile devices, which would represent about 10% of global reload value in the fiscal yearÕs last nine months.

Ò[Mobile] is still a pretty small number in terms of what their overall run rate is,Ó Oglesby says. ÒItÕs not huge, itÕs not taking off like a rocket ship, but itÕs a slow, steady clip.Ó

Backers of NFC-based mobile payments might prefer a slow, steady clip to the problems theyÕre encountering in getting widespread buy-in from telecommunications companies, banks, merchants, and other players.

For example, a new Samsung NFC-enabled smart phone, the Galaxy Nexus, apparently wonÕt be configured to handle the Google Wallet when consumers buy the phone from Verizon Wireless, the No. 1 U.S. mobile carrier.

Verizon Wireless happens to be a partner in a Google Wallet rival, the Isis mobile-payments joint venture with AT&T Mobility and T-Mobile USA. Isis has only one announced merchant so far and is not expected to go national until 2013. Google Wallet had about 30 merchants on board in late 2011 after a September commercial launch.

Verizon Wireless denied reports it would block the Google Wallet application from being installed on the Galaxy Nexus phone, but the company issued a statement saying Google Wallet is Òis different from other widely available m-commerce servicesÓ and that it Òneeds to be integrated into a new, secure and proprietary hardware element in our phones.Ó Verizon Wireless said it is continuing its talks with Google.

 

Look WhatÕs Brewing in Des Moines

Dwolla Corp. is out to prove that not all the hip payments startups come out of Silicon Valley.

Lately, the 1-year-old startup based in Des Moines, Iowa, has been making all sorts of news. Last month, it eliminated its transaction fee on all payments under $10. And it introduced a credit product called Instant that can fill usersÕ Dwolla accounts without the pesky waiting time imposed by the automated clearing house.

But the startupÕs ambitions donÕt stop there. It also wants to speed up ACH paymentsÑa lot. Like, to near real-time settlement.

ACH transactions cost mere pennies but typically settle the day after they are originated. Then there can often be another dayÕs delay as banks make the funds available to customers. ÒEverybody wants it to be real-time,Ó says Ben Milne, who officially launched Dwolla after spending several years looking for ways to cut merchantsÕ payment-acceptance costs.

Dwolla (it\'s a conjunction of the words \”dollar\” and \”Web\”) is ÒprototypingÓ its ACH solution with two financial institutions, one of which is Veridian Credit Union, based in Waterloo, Iowa, and known until five years ago as John Deere Employees Credit Union. Milne wonÕt name the other institution. VeridianÕs investment arm, Veridian Group Inc., invested $1 million in Dwolla in December 2010, along with The Members Group (TMG), a Des Moines-based credit union service organization.

As it happens, faster settlement time is of interest to the ACH itself. A proposed rule change that would allow for same-day settlement emerged this fall from NACHA, the regulatory body for the ACH. If approved by NACHA members, the change would go into effect in March 2013.

Still, Milne says same-day settlement is fine but not fast enough. ÒSame-day has a ton of value, but itÕs kind of a Band-Aid,Ó he says. ÒThe ultimate goal is really instant [transfers].Ó

Milne says Dwolla is working on replacing the ACHÕs transfer of conventional batch files with Web services and its own application programming interface (API). Web services refer to protocols for computer-to-computer communication.

Currently, Dwolla uses the ACH to transfer funds from usersÕ bank accounts to their Dwolla accounts. With these accounts, users can pay merchants or other individuals with a few PIN-protected clicks. Once the money is in Dwolla accounts, transfers occur in real time.

Except for those free payments under $10, transactions cost a flat 25 cents each. With transactions originating from PCs, the sender can choose whether he or the recipient pays the fee. With mobile payments, the recipient pays. Using DwollaÕs software, users can integrate payments with social networks, letting friends in on where theyÕre shopping, what theyÕve bought, and what theyÕve paid.

The startup has attracted 70,000 users so far, the vast bulk of whom have signed up in the 13 months since the launch. It has recruited more than 3,000 merchants and is signing up new ones at the rate of more than 100 a day, Milne says, from storefronts to Web stores to individuals selling services.

Part of DwollaÕs strategy is to work with The Members Group to recruit financial institutions to offer the service as part of the accounts they open for customers and members. Brian Day, Dwolla product leader at TMG, says six credit unions now have live integrations with Dwolla Òand several others are in the queue.Ó

But the biggest challenge facing the startup is that users looking to use their smart phones to buy coffee and other low-end goods donÕt usually arrange for the necessary transfers two or three days in advance. They want access to the money now.

ThatÕs where the new Instant feature comes in, with immediate transfers available up to a $500 limit. Those who opt in for Instant pay $5 a month and are expected to pay the money back within 30 days.

As TMG officials point out, itÕs a bridge to the day when the faster ACH service is available. Says Day: ÒWeÕre in tune with and in favor of anything that speeds [the ACH] up.Ó

 

A Mobile Wallet for Power Shoppers

These days, it seems as if everybody and his uncle is launching a mobile wallet (ÒA Wealth of WalletsÓ). Now a mobile comparison-shopping app that launched a digital wallet around Thanksgiving says it has signed up more than 10,000 wallet users and is adding new ones at the rate of 2,500 a week. All this in a nascent business that has attracted major players like Google Inc. and Visa Inc.

Such has been the walletÕs appeal that Alexander Muse, chief executive of ShopSavvy Inc., a 3-year-old startup based in San Francisco, predicted in December it would be one of the biggest commercially available e-wallets by the end of the year.

The wallet is part of a new version of ShopSavvyÕs app, which works on both Android and Apple Inc. phones and lets users scan product barcodes to look up competing prices on merchandise they find in stores. The appÕs pricing results include rival stores both nearby and online. ShopSavvy boasts more than 10 million active users, up from 1.3 million two years ago.

Besides the wallet, ShopSavvy 5.0 also delivers more deals and offers from local merchants to help trigger transactions. The single-click capability made possible by the wallet has simplified payment and thus boosted conversion rates, Muse says.

Before, users who responded to lower prices they found on ShopSavvy grew frustrated with the process of entering payment details on merchantsÕ mobile checkout pages. ÒThis [new] model allows you to do an immediate transaction and take advantage of the deal,Ó says Muse.

So far, some 49 retailers have agreed to accept payments from the new ShopSavvy app, and new ones are signing up at the rate of five a week, Muse says. These include major merchants such as Buy.com and Barnes & Noble. ÒWe havenÕt done a lot of the small guys yet,Ó Muse says. ÒWeÕll get to them next.Ó

With the wallet, users can create an account, including credit or debit cards they want to use, and then make all subsequent purchases with a single tap on their phone screen. In a process called transcoding, ShopSavvy delivers the payment details and credentials to merchantsÕ front-end systems as if users had submitted the merchantÕs conventional online forms.

While ShopSavvy delivers the transaction to the merchant, it doesnÕt process payments, stand in for the merchant, or collect a transaction fee. Instead, it charges a conventional affiliate fee, which Muse says ranges from 4% to 8% of the purchase amount.

ÒOur real business is advertising-based,Ó Muse says. ÒOn the payment side, you can only make about 2% [of the transaction]. WeÕre limited to the interchange.Ó

This represents a major shift from the startupÕs original strategy, which involved building back-end integrations to merchantsÕ systems. The company was one of the first developers on the open platform PayPal Inc. unveiled two years ago. It hoped to use PayPal let users buy merchandise they settled on after checking prices on the ShopSavvy app.

But Muse says the integration work proved time-consuming for merchants that had a range of other priorities. After a year, ShopSavvy had signed just one chain, Toys ÔRÕ Us. ÒRetailers just donÕt have the resources,Ó Muse says. So a year ago ShopSavvy began working on its transcoding approach, which links to retailersÕ front-end systems instead, minimizing integration work.

ShopSavvy shifted away from PayPal, as well, Muse says. Its new wallet works only with major-brand credit and debit cards, though Muse adds, ÒWeÕll add PayPal later.Ó

Now itÕs attracting money. In November, it announced completion of a $7 million Series A funding round led by Eduardo Saverin, one of the founders of Facebook Inc., who joined the ShopSavvy board.