Just over a year ago, I wrote a column in which I promised to review some of the alternative payment methods that merchants had available to them ... the next week! I quickly found that the world of alternative payment systems was exploding. Reviewing them all would take (and has taken) more than a year, and I haven't even gotten to all of them.
However, this coming year of reviews should be easier, because the industry is contracting rather than expanding. We're beginning to see some solutions reaching critical mass, while other solutions that entered the market intending to be all things to all people, with B2C, B2B, and C2C payment systems, have narrowed their focus. We've also seen the logical integration of alternative payment systems with EBPP (electronic billing presentment and payment) or eBilling systems.
Why Alternative Payment Systems Are Necessary
Credit cards are a great way to make payments - at least in the United States. Most merchants accept them, they offer an itemized list of purchases at the end of each month so consumers can see where their money is going, and they offer a better level of consumer protection in the United States than does cash or checks. Credit cards also have the advantage of permitting consumers to spend money they don't have yet: a bonus for merchants anxious to move inventory.
However, in the digital world where a merchant can't scan the card, can't look at the signature on the back of the card, or look the shopper in the eye, credit cards are far from the optimal solution. The main problem with credit card purchases, from the merchant's perspective, is that consumers in the United States have the ability to easily deny having made any purchase where the card was not physically present. This includes both telephone sales and online purchases.
Between outright fraud - criminals getting their hands on fraudulent credit card numbers and using them to make purchases online - and rightful owners of credit cards who make purchases and deny it, either out of malice or from faulty memory, online merchants are in a tough spot.
In fact, merchants are in even worse shape than I'm describing, because on top of not getting paid for sales made with fraudulent cards and those denied by actual purchasers, merchants are also assessed fines by their merchant banks for having chargebacks. In fact, new regulations from Visa and MasterCard impose stiff fines on those who have greater than 2% of monthly purchases that result in chargebacks. On the Web, where the attempted rate of fraud is estimated at over 30%, with the actual rate of fraud being much lower, 2% is an optimistic target, but a very low ceiling.
Features Merchants Need
Payment systems offer a variety of different features. Typically, the fee structure dictates whether the payment system is more appropriate for accepting micropayments or for large purchases. Also, the existence of an upfront fee might be fine for a system that's private-labeled to suit the merchant, but not for a system that's branded for an unknown payment system. Here is a partial list of the features that merchants will encounter, and what's to be made of them. The rest of the list, along with an explanation of each of the types of alternative payment systems providers will be in next week's column.
Fees
The first question is generally: how does the fee structure compare to accepting credit cards? Actually, many payment systems price themselves in the same ballpark with a modest set-up fee (comparable to the application fee charged by the merchant bank), and a per-transaction fee. Few payment systems have monthly fees (the bane of merchant accounts). Many systems that have a per-transaction fee will consider going with a percentage fee, if the percentage is large enough (around 25-30%) for merchants accepting micropayments. Some systems do charge a hefty setup or consulting fee. This should be factored into the expected volume of transactions likely to be seen. Private-labeled solutions typically have the most burdensome setup fees.
Network of Consumers
As a merchant, you know that when you indicate that you accept Visa and MasterCard, you are opening your doors to millions of customers who already have those cards, but what about the alternative payment systems? One of the first questions you should ask is how many active accountholders are in the system. Some micropayments/incentive systems like MagnaCash will tell you they have millions of accounts in their system, but only a tiny fraction are active, with most having been created by a merchant promotion that deposited a penny or two into them and have never been accessed by the accountholders. Get into the details about how many active users of the system there are, how much money goes through the system, and what the budget and plans are for future marketing.
Changes to Your Database
Alternative payment systems sometimes boast that their systems are more secure because the merchant doesn't actually receive or store any payment information - just an authorization code from the payment system. Make sure that whatever information you get from the payment system is easily stored in your existing order-management system, particularly if you use a commercial shopping-cart system.
To Be Continued ...
Next week I'll give you the rest of my list of merchant features to consider, along with an explanation of the different types of payment systems you're likely to come across, with examples of vendors from each type.
Alexis D. Gutzman is an E-commerce Technology Author and Consultant and author of The HTML 4 Bible, FrontPage 2000 Answers!, and ColdFusion 4 for Dummies. Her newest book, The E-commerce Arsenal: 12 Technologies You Need to Prevail in the Digital Arena is now available. She can be reached at agutzman@internet.com
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