Alternative Payment Solutions

By Paul Lang, Editor, Sell It!
May 23rd, 2001

If you’re a seasoned Internet shopper like I am, you are probably quite happy to use your credit card for paying for online purchases. And you’re in good company as credit cards are by far the most popular online payment method. However, as an e-tailer you need to give consideration to those shoppers who do not have a credit card or have a credit card but are unwilling to use it because of security or other concerns.

Credit cards also have some major disadvantages for the e-tailer: they offer very little by way of fraud protection and are too expensive to use for low value transactions. This latter point is of increasing importance, as interest in so-called micropayments has recently been rekindled because content sites are struggling to make enough revenue through advertising and are now looking to find some way of charging visitors for accessing their content.

Over the last couple of years a number of alternative payment systems have appeared online and in this article I’m going to look at two of these, PayPal and the Amazon Honor System.

PayPal

Launched at the end of 1999, PayPal was the first Web-based payment service. It is also the largest, with over 8 million members and having processed over $1 billion in payments since its debut.

The reason that PayPal has grown so rapidly is undoubtedly because of the major advantages it offers consumers. They can fund their PayPal account either by check, electronic transfer from a checking account or, of course, by credit card, and if they choose to use a credit card they have the reassurance of knowing that only PayPal will have access to their credit card details. Any other lingering security concerns are quickly eliminated because consumers are automatically insured against any unauthorized withdrawals from their PayPal account or linked checking account. And, best of all, it’s free!

PayPal is now available in a variety of flavors, however the service that is likely to be of most interest to e-tailers is Web Accept. To use this service, all merchants need to do is add buttons to their Web site that customers can then click on in order to pay using their PayPal account. Customers are then transferred to the PayPal site where they enter and confirm their payment details before being automatically returned to the originating Web store. There are no fees involved for the customer whilst fees for the merchant are competitive in comparison with normal credit card processing rates: currently, there are no set up or recurring monthly fees and merchants simply pay a per transaction fee of 2.2% plus $0.30.

PayPal now supports international merchants and customers too. Non-US customers can fund their PayPal accounts by credit card only and have to pay a surcharge of 2.6% plus $0.30 to cover currency conversion costs. Non-US merchants pay no additional fees (apart from a small charge to withdraw funds to their local checking account) but need to accept payments in US dollars.

PayPal has now inspired several competitors, for example Yahoo! PayDirect, eMoneyMail, ecount and NOCHEX (for merchants with UK bank accounts only).

Amazon Honor System

As I outlined at the top of this article, there is currently a revival in interest in micropayment solutions as a means of helping Web sites fill the income gap caused by reduced ad revenues.

Typically, low value goods or services such as Web site content or access to online games have been given away free online because of two major stumbling blocks: there has been considerable resistance from consumers to paying for such material and also it was very difficult for e-tailers to collect such micropayments cost effectively. The Amazon Honor System has been designed to overcome these two hurdles.

The Amazon Honor System is a micropayment solution with a difference: in order to avoid the fairly widespread objections to paying for content, Amazon has designed it so that all payments by customers are voluntary. And not only are these payments voluntary, but a customer may refund themselves for any reason and with no questions asked up to 30 days after a payment is made. There is no process by which a merchant can contest a customer-initiated refund.

Although at first glance this may seem a rather wacky solution, it is actually based on a sound principle, that is, if your content is truly valuable then people will be willing to pay for it. And those people who don’t pay probably wouldn’t have paid anyway even if the payment had been mandatory.

To use the system, content providers simply place a small graphic on their Web site inviting visitors to pay a small sum (minimum $1) in return, for example, for downloading a file or accessing a restricted area of a Web site. If a visitor decides to pay they are transferred to a co-branded page on the Amazon Web site where they make their payment via Amazon’s well-known 1-Click system. There are no fees payable by customers, while e-tailers pay 15% plus $0.15 per transaction.

Alternative Payment Solutions – Product Review

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