Credit Cards Accused of Holding Back Online Sales
Listen to Gary Marino and he’ll tell you not to be too impressed by the 25 percent growth in annual online sales.
“That’s not good enough,” he told Forbes. “E-commerce should be growing 50 percent a year. We’re going to help it get there.”
The “we” Mr. Marino is talking about is his company, I4 Commerce, and his plan for growing online sales comes down to this: Consumers do not buy online for a number of reasons, including security concerns and the hassle of searching for a credit card. I4 claims to have an answer for both. It enables consumers to pay online without disclosing personal financial information and without a credit card because, with its system, shoppers can buy now and pay later.
Today, less than one percent of purchases made on the web are made with something other than a credit card. Visa (50 percent), Mastercard (30 percent), Amex (15 percent) and Discover (4.5 percent) own the internet, so-to-speak.
The I4 service, Bill Me Later, works like this. When a shopper goes online, they click a Bill Me Later button rather than one for a credit card. The service asks the shopper for the last four digits in their Social Security number along with date of birth. I4 does a quick credit check, okays the purchase and pays the merchant. Two weeks later, the shopper receives a bill that can be paid through online banking or a check. I4 doesn’t take credit cards.
For those wondering about I4’s ability to run a credit check in less time than it takes to okay a credit card purchase, Mr. Marino said, fewer than two percent of those using Bill Me Later try to stiff the company. That number, he said, is below the industry average.
This year, I4 expects to process roughly $1 billion in online purchases. Walmart.com, Overstock.com, Continental.com, Bluefly.com and Orvis.com are among those companies offering customers the Bill Me Later option.
Visitors to the Wal-Mart site will find Bill Me Later at the top of their payment options.
Brad Wolansky, head of e-commerce at Orvis Co., is among the fans of I4 and Bill Me Later.
According to Mr. Wolansky, I4’s service “puts pressure on Visa and MasterCard to lower their fees. Before Bill Me Later, there wasn’t anything from a free-market point of view to keep the credit card companies in check.”
Among the services offered by Bill Me Later is interest-free financing. The Orvis site, for example, includes an offer of “no payments for 90 days” when consumers make their purchase with Bill Me Later.
Orvis likes the interest-free financing option of Bill Me Later for a very profitable reason. Although the merchant will pay three percent of the sale, the average order on the Orvis site takes a big leap from $150 to $250.
Bradford Matson, head of marketing at Bluefly.com, said the site launched Bill Me Later a year ago and has been pleased with the results. The Bill Me Later shopper buys from the site four times a year versus three times for a typical Bluefly shopper. And, not only do Bill Me Later shoppers visit to make purchases more often, they also spend 15 percent more on each shopping trip.
Discussion Questions: Have credit cards in some ways impeded the growth of online sales? Will the mainstreaming of services such as Bill Me Later significantly
increase what consumers spend online? Why and how?
This process could help online retailers. What it won’t do is create 50% growth in online sales. Many consumers still like to touch and feel. Gen X and Gen Y aren’t as concerned about using credit cards online as perhaps baby boomers. Online sales have actually grown faster than was predicted in the early days of this century. Perhaps the suggested slowdown in growth is an evening out of what had been predicted.
The retail community will welcome more payment options, especially for their online and catalog purchasers. But the solution must cost the retailers less than credit cards, settle quicker, lead to incremental sales, be more secure, protect the consumer’s privacy and be compatible with existing infrastructure.
These tough requirements have been met many times over the last forty years giving us the rich array of electronic payments solutions that retailers enjoy today. I agree that they are a major driver of Internet sales. The better the payment options, the more commerce is carried out.
In the November issue of Bank Technology News, they ranked ATM Direct™, an online PIN debit offering, No. 5 in its sixth annual listing of the 25 most significant people, companies and technologies bringing about vast change in banking. No mention of the other payment mechanisms discussed here.
PIN debit would cut retailers interchange fees dramatically, while at the same time make the transaction more secure. Interestingly, this PIN debit internet solution is being offered by Pay By Touch, which also recently introduced TrueMe, a biometric authentication service. Combined, Pay By Touch and their ATM Direct division seem to have come up with a solution that can save e-tailers on their processing, back-end and risk management costs, while doubly authenticating the user and providing payment to the e-tailer in quicker fashion. Pay By Touch also mentions that they will introduce a mobile service in 2007 as well.
I agree that more options are generally a good thing, but this isn’t a particularly compelling one. Most consumers would rather make the payment and be done with it, rather than dragging out the process and dealing with the payment aspects at two different times. Of course there are exceptions, e.g., folks who don’t have credit cards, but I doubt these factors would double the growth of online sales. My suspicion is that it won’t move the needle at all. The current online payment system is working just fine and doesn’t need a fix like this one.
This could be a major innovation, but only if major merchants promote it. Those without credit cards, or those who prefer not to use them for a variety of reasons, will be engaged, and it appears the company has thought through the ticket-building opportunities. Credit cards have had a virtual monopoly on online sales and they’ve made it less than easy for the consumer, and VERY expensive for the merchant, to use their plastic.
Increasing the number of payment options (credit cards, gift cards, debit cards, I4, electronic checks, coupons, PayPal, etc.) certainly increases sales. The additional complications come at a price, so it’s up to the retailer to determine if the additional overhead is worthwhile. Thoughtful retailers determine the profits of their suppliers. Almost any computerized online retailer should be able to run their own Bill Me Later procedure, on a test basis, to determine the costs, loss ratio, and profit. Why use I4?
The Federal Reserve says credit card debt topped $800 billion in 2005 – up nearly 600 billion in just six years. The average per household tops out at about $9,300. For many it’s proving to be too much and perhaps too easy. With this kind of debt is it really in our interest to make it even easier than it already is? If you are among the majority who “roll” the balance, how good of a deal did you really get if you have an easier method to accumulate debt? The national average rate for credit card interest is now around 13%. The social economic consequence of carrying this level of debt is staggering and irresponsible.
It would interesting to discover what impact using a convenient/easy billing method like I4 would have on online sales if it were based on a PIN debit card as mentioned above.