Survey Hints at Role of Free Processing in Rise of Alternative Payments

The trend toward acceptance of so-called alternative-payment products by online merchants is going strong and will likely continue for some time, driven largely by incentives for merchants and consumers alike and by ease of use, says Adam Cohen, principal at Brulant Inc., an interactive advertising agency in Cleveland. “I would expect the trend to continue,” says Cohen, whose agency surveys online retailers twice a year regarding the payment methods they accept. “The services are still relatively new, and incentives across the board are helping.” Not only are merchants starting to adopt new alternatives to bank-issued cards, some are adding several. A survey by Brulant in November showed five out of 100 e-commerce merchants are now accepting Bill Me Later, Google Checkout, and PayPal, the three leading payment alternatives. This is the first time Brulant has found any merchants accepting all three, Cohen says. Among the five are Toys 'R' Us, PetSmart, and Rite Aid. Although factors such as consumer incentives, consumer trust, and impact on conversion rates play a role, offers of free processing seem to be making a marked difference in merchant adoption of alternative payments. Google Checkout, which processed transactions at no charge throughout 2007 in a program it now says will end Jan. 31 (Digital Transactions News, Dec. 12, 2007), saw its share among the merchants surveyed by Brulant double to 10% between February and November. Some 19% said they accept PayPal, compared to just 6% nine months earlier. PayPal in April announced it would process transactions on its Express Checkout service for free until the end of the year for merchants who also use Yahoo! Sponsored Search (Digital Transactions News, April 19, 2007). PayPal has since extended the cutoff date to June 30. Brulant's survey did not distinguish Express Checkout, which streamlines payments on merchant sites, from regular PayPal service. Ordinarily, Express Checkout transactions cost merchants 1.9% plus 30 cents. Google Checkout's normal pricing is 2% plus 20 cents. The importance of free or steeply discounted processing is such that Google Checkout may see some fall-off in traffic growth when it restores its pricing at the end of the month, Cohen says. Google has not charged for Checkout transactions since November 2006, five months after the payment service went live. “It could hurt them, especially around signing up new merchants” Cohen says. “It has been very successful for them and it's a very competitive market.” Indeed, free processing may become hard for the processors to drop. “I don't know if free processing is permanent, but right now to gain market share it's absolutely an essential tool,” he notes. Although in the lead at 21% of merchants surveyed by Brulant, Bill Me Later saw its share climb just four percentage points and now leads PayPal by just two points. The service, which allows consumers to buy online with credit, got a boost late last year when Amazon Inc. agreed to buy a minority stake in the processor and accept payments through it, further underscoring the increasing importance of alternative-payment methods for online commerce (Digital Transactions News, Dec. 11, 2007). Merchant-branded gift cards, meanwhile, were offered by 76% of surveyed retailers, according to Brulant.