April 22 2008

Alternative payments growing in popularity

Alternative payments will account for an increasing percentage of U.S. online transactions by 2012, according to a study from Javelin Strategy and Research

The credit crunch is forcing US internet retailers to think again about the number of payment options they offer and is reducing their reliance on credit cards as the main source of payment.

A US consumer study by Javelin Strategy & Research shows that online transactions will more than double to reach $355.2 billion over the next five years, sparking a dramatic shift in how Americans pay for all purchases. By 2012, 30% of Americans will turn to online alternative payments, instead of reaching to their wallet for a traditional credit card. Individuals will use options such as stored-value, email payments and even instant credit, provided by companies that include traditional brands (Visa, MasterCard, American Express, Discover) and alternative challengers (PayPal, Green Dot). The study predicts that online alternative transactions will more than double by 2012 as consumers increasingly view these methods as a vehicle for secure and convenient transactions. Javelin researchers also believe this is not a niche trend. The growth of alternative payment methods will precipitate the evolution of credit cards and decline of cash and checks.

“Although it took nearly a decade for alternative payment methods to secure their position in the online world, it’s apparent that everyday consumers are ready to view them as a trusted and viable way to buy online,” said Bruce Cundiff, a senior analyst with Javelin Strategy & Research. “Given the recent online surge, we expect to see some of these trends transfer to offline buying over time. For example, more consumers may prefer to use alternative payment methods instead of credit cards, online and in person. But overall, we see continuing growth of online transactions and a decline of paper payment methods.”

Javelin researchers found that as alternative payment methods win new customers, credit cards will lose some of their dominance online. Traditional brands and methods will endure representing the largest dollar amount and percentage of total online transactions, but that percentage will slip to 44% by 2012, according to the study. Debit card reward programs and promotions continue to lure younger consumers and will help to nearly triple the debit card transaction volume to $93.9 billion by 2012.

The makeup and demographics of online consumers will not significantly change during the next five years, but Javelin researchers found that increased popularity of alternative payments is due to attitudes and concerns. Online consumers will voluntarily embrace alternative payments for their convenience and security features, rather than a lack of access of credit or debit cards.

The study also predicts that of all the alternative payment options, email payment accounts, primarily PayPal, will see the biggest growth jumping from 5% to 11% by 2012. PayPal accounts surged to 150 million in 2007 with the help of “off-eBay” business efforts. According to the study, increased PayPal transaction sizes will also contribute to growth. Javelin researchers also predict that prepaid and gift cards will grab 5% more of all online transactions, due to increased acceptance and availability. Customer loyalty will help fuel a 4% online transaction increase for store-branded credit cards by 2012. Instant credit services, such as Bill Me Later, will likely see a small jump and may experience a boom with the emergence of PayPal’s Pay Later service.

It will be interesting to see if this is also going to happen in the UK, and what impact direct debit services such as eBillme, Poli and eWise have on credit cards. We’d also be interested to hear from anyone who has tried out any of the new alternative payment services.

by Marcus Austin (Web Editor)