September 15, 2009
Credit cards aren’t the only way for consumers to pay for online purchases. Should your site offer one or more of these alternate payment methods?
Read this article for an introduction to the major types of alternative online payments. Includes an analysis of which options work best for different types of businesses, and three questions to ask before choosing a provider.
The Internet changed how consumers research, shop and interact with businesses. They’re more likely to research the best product to buy, check multiple sites for prices, and provide feedback on their experience.
"Payment mechanisms have also evolved with this change in the consumers’ behavior," says Bala Janakiraman, Principal Product Manager, Litle & Co. "That’s why you’re seeing a lot of innovation beyond the traditional methods of payment."
Janakiraman has worked with alternative online payments -- those that are not made directly with a credit card, debit card, prepaid card, or check -- for 12 years. He and the team at Litle & Co. provide card-not-present transaction processing and merchant services.
We spoke with Janakiraman to better understand the types of alternative online payments that marketers can offer customers, and why they would want to. Below, find out more about payment options and how to select a provider.
Major Types of Alternative Payments
The easiest way to categorize the types of alternative online payments is by the funds they access to make purchases. Here are the four categories Janakiraman highlights:
-> Online payment wallets
Services such as a PayPay, Google Checkout and Amazon Payments work like digital wallets. Consumers create an account and pool multiple sources of funding, such as a credit card and a checking account, and use the funds to make online purchases.
Several of these services have relationships with other companies, which provide a benefit for marketers. PayPal, for example, is owned by eBay and is the dominant method of payment at the online auction site. Many consumers build a balance on PayPal by selling on eBay.
"The opportunity to spend that money on sites other than eBay is a huge incentive for these consumers," Janakiraman says.
-> Instant lines of credit
Services such as Bill Me Later give shoppers instant credit to make a purchase. After the purchase is finalized, shoppers receive a bill from the service provider. If the bill is not paid on time, the interest rates on the credit can jump.
Janakiraman has seen these types of payment options work well to increase the sales from an existing customer base -- especially in the luxury goods market where the down economy has made it harder to pull in new customers.
-> Checking account charges
These payment services tie directly to consumers’ checking accounts, where the deductions are made. Examples include eBillme and Moneta.
These services are often used by consumers who are concerned about their credit, or are unable to use credit cards, Janakiraman says. Having a service directly pull from their checking account prevents them from spending money that they don’t have.
-> Mobile phone charges
Some consumers are able to make purchases through their phones and have the charges added to their wireless service’s monthly phone bill.
This method is particularly useful for merchants who are selling digital products such as ring tones and phone-based games, Janakiraman says.
Selecting a Payment Option
Most websites offer two or three methods of payment -- which have to be selected from a field of dozens of potential providers. Here are three questions marketers should ask themselves before choosing a partner:
Question #1. Does my target audience use this service?
Most alternative payments services have well-defined user demographics. For example, the typical PayPal user, Janakiraman says, is a tech-savvy male, in his 20s or 30s, with about $50,000 in annual income.
This information is not typically available in the public domain, Janakiraman says. However, your payment processor who handles your credit and debit card purchases will likely have this information and be willing to share it.
"It’s in their best interest to show where the consumers are going to come from, because the worst thing they want to do is to try to pitch their services to a merchant where the demographic fit is not ideal," he says. "The merchant will see soon after launch that they’re not getting the results they anticipated."
Question #2. How many people use this service?
The leaders in this space have millions of people using their services daily. Adding one of these services will make shopping with your business more attractive to a large number of consumers.
There are many startup companies with far fewer customers. Even if one of these providers has a demographic that's a perfect fit for your businesses, it might not be worth the cost or the trouble to add the option if you’re only appealing to a tiny percentage of your audience.
Question #3. Is the rest of my company ready to add this option?
Adding a new payment option can affect everyone in your business. Each service is unique and has different requirements.
Here are a few of the departments you should reach out to when considering adding an option:
The reports provided by some of these services look very different than the reports that are generated from credit and debit card sales, Janakiraman says. The finance team may also need to adopt new accounting measures if the sales are not immediately credited to your account.
- Customer service
Representatives should be trained on how customers use the service, typical problems that occur, and how to address them.
Your team should prepare a campaign to introduce the new option to customers and pull more sales from the target demographic after launch.
Useful links related to this article:
Bill Me Later
Litle & Co.