Alternative-payment systems are flowing into the payment processing industry. During the last two years, many new options have been announced, re-announced, tested, trialed, released or re-released. Many others are in development.
Marc Abbey, a Partner of First Annapolis Consulting, said this innovative surge in alternative payments means that firms processing credit-card transactions (Independent Sales Organizations or ISOs) and merchant-level salespeople (MLSs) will have greater sources of revenue, but their businesses will also be more complex.
“The development of alternative payment systems is well ahead of merchant demand at this time,” Abbey said. “So it is an extremely difficult time for ISOs and MLSs to pick the winners and losers. Most of these companies are completely speculative right now.”
Ken Musante, president of Humboldt Merchant Services, agreed. “Which one of these systems the consumers will accept will be the driving force for which solutions merchants will demand,” he said. “It’s hard to predict what it will be.” Big names likeMicrosoft Corp. and Yahoo! have made false starts: Microsoft scratched plans to turn Passport into a payment service, and Yahoo! gave up on its PayDirect Network service in 2004. Regardless of which products survive, everyone in the industry will be affected.
Dan Schatt, a senior analyst with Celent LLC, forecasts that credit- and debit-card payments, which accounted for more than 90 percent of online payment volume in 2000, will take a nose dive. “Innovative alternative online-payment initiatives will grow to over a quarter of all U.S. online-payment volume within the next three years,” he said. “Credit-card volume will drop below 50 percent of online-payment volume by 2009.”
New players in the field
Abbey said most innovations used to come from acquirers or ISOs developing new products. “Right now many of the entrepreneurs in this arena are coming from outside the payments field and creating a new layer, if you will, under the acquirers,” he said. How unsettling is this? To provide clues, here are snapshots of emerging alternative- payment products offered by Debitman Card, Inc., FastLane Secure Payments, Google Checkout, Pay By Touch, PayPal and Secure-eBill.
Debitman is an electronic-payment network for retailer- issued debit cards. It operates like any other PIN-debit network. Cards are swiped at the point-of-sale (POS) and routed through a processor for authorization and settlement. Debitman collects payment through the automated clearinghouse network and guarantees the retailer all payments that have been authorized.
“What’s important is that any retailer using our primary- processing partners, Fifth Third, [Chase] Paymentech and RBS Lynk, can simply request that Debitman acceptance be turned on for their locations. They don’t need to change anything at the point of sale in order to accept Debitman cards,” said Mike Grossman, Debitman’s chief executive officer. “Any merchant can enjoy our lower interchange rates even if they opt not to issue Debitman network cards.”
According to Grossman, more than 200,000 locations nationwide accept Debitman cards, including sites for Wal-Mart Stores Inc., Sam’s Club, CVS/Pharmacy, Dollar General Corp., The Kroger Co., T.J. Maxx, Piggly Wiggly Carolina Co., andWalgreen Co. These retailers are at various stages of implementation, ranging from pilot stage to complete implementation.
“The near-term strategy is to increase card issuance and card acceptance and to extend our product line beyond PIN debit to other PINsecured products,” Grossman said. “That might include PIN credit, stored value, prepaid debit or whatever the market requires. We also expect that our recently announced partnership with HSBC will accelerate our plans for rapid growth in card-issuing and card-accepting retailers.”
To be properly identified by the FastLane network, consumers swipe their driver’s licenses or state-issued ID cards through merchants’ payment terminals. FastLane works like an electronic wallet, debiting funds from consumers’ checking accounts to pay for purchases. FastLane also offers POS loyalty and gift-card services.
Launched in April at the Electronic Transactions Association’s Annual Meeting & Expo, FastLane is a division of Boulder, Colo.- based Combined Payments, LLC. It has spent more than $5 million developing the technology behind this single-swipe product.
“Our goal was to work with ISOs to board 20,000 to 40,000 of their existing merchants by the end of fourth quarter 2006, and we are solidly on track for that,” said Linda Bryant, FastLane’s senior vice president. “We started our live transactions with existing customers in August and then later roll out to new customers through our ISOs’ existing MLS channels.” Within 12-to-24 months, FastLane plans to introduce a credit line accessible to its customers. According to Bryant, the pricing will be very competitive with MasterCard Worldwide and Visa U.S.A.
Google introduced its long-awaited Google Checkout (formerly dubbed Google Wallet and GBuy) online payment service on July 3. Users provide Google with their credit-card and shipping information, which is stored by Google. Users then purchase goods and services at participating merchants without sharing credit-card information with merchants. Checkout supports credit cards from Visa, MasterCard, American Express Co. and Discover Financial Services.
This service is similar to PayPal, except users cannot maintain an account balance with Google Checkout for future transactions, make payments using online bank withdrawals or make consumer-to-consumer payments. Google’s transaction fees are lower than PayPal’s. Google Checkout charges merchants $0.20 and 2 percent per transaction.
Google Checkout’s strategy
One week after launch, Checkout was accepted at about 100 merchants including Starbucks Corp., Jockey International, Zale Corp., Ace Hardware Corp. and Buy.com, Inc. It is only available in the United States.
To attract consumers, Google is offering $10 rebates to people who use Checkout to complete online purchases from participating merchants. Checkout offers discounts to merchants who buy AdWords (for every $1 merchants spend on Google AdWords, they can process $10 for free), and merchants will have a Checkout shopping-cart icon next to their listings to indicate they accept Checkout.
Google versus PayPal
Although Google denies Checkout is meant to compete with PayPal, experts say it does, indeed, challenge the 100-million-customerstrong PayPal, and it wouldn’t be hard for Google to roll out a consumer-to-consumer service. For now, it appears it is cherry-picking the higher end of the market. Demographic and sales-pattern information garnered through Checkout could prove much more valuable to Google than transaction fees for small, individ ual-to-individual payments.
Checkout bundled with AdWords could be a powerful incentive for merchants to advertise with Google, boosting AdWord sales. Additionally, analysts and investors have criticized Google for being heavily dependent on online ad sales, so a recurring revenue stream that relies on ecommerce is a strong response to that criticism.
PayPal could, in theory, be a payment option within the Checkout platform. Indeed, Google is rumored to have provided eBay, Inc. (PayPal’s parent company) with information about Checkout.Will the olive branch work? EBay currently has a loophole (its Safe Payments Policy introduced last October) that allows it to ban mention of Checkout in merchants’ eBay listings, which it has done, citing that Checkout is unproven. Experts predict a clash of the online Titans as PayPal and Google Checkout go headto- head over consumers’ e-wallets.
Pay By Touch
Pay By Touch uses front-end biometric authentication in the form of fingerprint scans for payment, age verification, check cashing and loyalty programs. At checkout, shoppers place a finger on a reader and enter a search number (usually their phone number). They are then authenticated and presented with a list of financial accounts from which they select their payment method. Transactions are then processed as if a card or check were present. Loyalty programs are automatically recognized.
Pay By Touch’s strategy
Pay By Touch launched its product in Piggly Wiggly stores in 2004. It now has 154,000 retail clients across the country. In addition to Piggly Wiggly, it has implementations and pilot programs at such retailers as Supervalu, Inc.’s Albertsons, Cub Foods, Farm Fresh, bigg’s, and Jewel-Osco stores, Lowes Food Stores, Inc.; and Quiznos restaurants. Pay By Touch alsomanages opt-in shopper rewards programs for Food Lion, LLC, Sally Beauty Co., Inc.,United Parcel Service of America, Inc. and Winn-Dixie Stores, Inc.
According to Shannon Riordan, Pay By Touch director of marketing, the company has also established “solid, strategic partnerships with top global category leaders” such as IBM, Accenture, Discover Financial Services, VeriFone, Ingenico, Hypercom Corp., Radiant Systems, Inc., Cogent Systems, Inc., NCR Corp., Certegy, Inc. and MTXEPS, Inc., among others.
Consumers sign up online for PayPal accounts. They can then draw cash from their online checking accounts or credit cards and send it to merchants or individuals. In addition, PayPal recently announced it intends to roll out a “virtual debit card” to “hundreds of thousands” of users by the end of August. Its virtual debit card is software the consumer downloads that generates a one-time MasterCard debit account number.
This can be used at online merchants who accept MasterCard (even if they don’t accept PayPal). PayPal isn’t charging merchants to handle these transactions. This, some sources say, is one shot in its battle with Google for online commerce dominance.
PayPal has more than 100 million users, and it reached $1 billion in revenue last year. According to Schatt, PayPal is now accepted by about a quarter of all merchants and represents approximately 10 percent of U.S. online sales volume. It also has accounts in 55 countries and can accept payment in multiple currencies. Its transaction fees start at $0.30 plus 2.9 percent of the total payment.
Schatt expects PayPal’s merchant services capabilities to deepen its relationships with online merchants and allow new online merchants to lower their overall cost of sales by bundling various merchant services with Web hosting and payment processing. PayPal spokeswoman Sara Bettencourt recently said the company is targeting small to mid-size businesses for growth. It’s likely to face a fierce challenge for that market from Google Checkout.
Secure-eBill is an online payment service owned by MODASolutions Corp. It appeals to consumers who bank online but don’t have credit cards or who don’t want to reveal personal financial information to online merchants. Consumers select the Secure-eBill icon when purchasing online. Seconds later, an invoice confirming the purchase arrives in their e-mail, and shoppers use online bank accounts to make payments. Merchants pay MODASolutions a 1 percent to 1.5 percent fee (depending on merchant volume) for SecureeBill transactions.
Secure-eBill was launched May 2005. It has a number of merchants live including Tool King, LLC, BigAlsOnline, Inc., www.nextwarehouse. com and CompSource, Inc. “The traction with the merchant community has been strong, including merchants that are in the top tier that cannot be disclosed at the moment,” said Marwan Forzley, Secure-eBill’s president and CEO. Forzley also said Secure-eBill has channel relationships with a number of companies such as Cardinal Commerce Corp., Novator Systems Ltd., ScanAlert, Inc. and Devix Group, LLC.
“In the next five years, the alternative paymentsmarket will see significant growth, and payment options like Secure-eBill, PayPal, Google’s Checkout and Bill Me Later will be available on many shopping carts,” Forzley said. “Secure-eBill extends online banking to the shopping cart, and we believe that we have a great opportunity … to help merchants tap into this large, growing and active base of online banking users.”