Alternative Payment Methods and the Credit CARD Act of 2009

Alternative Payment Methods

With the passing of The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 [H.R. 627/S. 414] many merchants will start looking more closely at accepting alternative payment types. This landmark bill, signed by the President in May, will most certainly diminish the ranks of credit card holders, especially those under 21. What’s more, a crippling recession and a general tightening of credit due to the credit crunch, will further decimate credit card nation. Three of the most popular APMs discussed are Bill Me Later®(BML), PayPal™ and Google™ Checkout. Bill Me Later was acquired by eBay Inc. (the owner of PayPal) in November 2008. All three of these APMs have pros and cons of their own, as well as with respect to each other. All three of these APMs typically live up to most of their claims, but very importantly, not for every type of merchant.

Case studies have become a very popular marketing tool for these payment methods, as results – although generally positive – vary significantly between different types of merchants. Although most APMs make blanket claims, they are also very careful to supplement these assertions with some relatively hard facts based on real merchant experiences. It would therefore be safe to say that if your company’s profile and business model were similar to one of these case studies, then you should seriously consider testing the particular APM.

Understanding APMs

Before looking at specific claims, we should understand how these APMs work. There are two basic types of APMs, and it is worthwhile to understanding how these schemes operate in comparison to the credit card networks:

Proprietary Credit-based: Proprietary Credit-based APMs operate proprietary platforms that complete sales transactions by offering the consumer credit terms. They operate exclusively without the domain of the credit card networks. Examples of this type of APM are Bill Me Later, PayPal Pay Later, and eLayaway®. Under this model, the APM grants credit and later invoices the consumer for any purchases. The APM then pays the merchant via ACH less any applicable fess. Generally speaking, consumers are granted credit during a brief application process the first time they check-out choosing that APM. Consumers may also apply for an account by going to the APMs Web site.

The term “apply” is important here because the consumer must be granted credit. The application asks for summary personal information such that the APM can quickly run the customer against a credit bureau or other risk assessment tools. According to most claims, the underwriting decision takes less than thirty seconds. Merchants must consider that some of their customers might be denied credit, which can result in abandonment. Also, credit inquiries at any of the major bureaus may affect a consumer’s credit score.

Once the customer has been approved he or she can use an express check-out process at participating merchants, which only requires an account number and a PIN. If the account number is stored locally on the consumer’s computer, then only PIN entry is required, making the check-out process much faster than the ordinary credit card check-out process. It should be noted, however, that many merchants have developed their own express check-out processes for returning credit card customers.

Like most credit-based programs (e.g., private label store cards), these APMs are effective when the consumer may not have the money, or may wish to defer from paying at the time of purchase. This allows merchants, for instance, to offer their customers 90-day payment terms. Solutions like eLayaway will allow customers to pay over time for their purchase – up to 13 months. If promoted correctly, these types of promotions offer merchants significant uplift.

Value Added Proprietary Gateways: Value Added Proprietary Gateways operate proprietary platforms that act as the intermediaries between the consumer and the merchant while utilizing standard credit card and ACH networks. Payments for goods and services are taken by the APM directly from the consumer’s credit card or checking account. We consider these schemes gateways because these sales transactions generally pass through the APM to a conventional payment processor or the Federal Reserve. PayPal Website Payments Standard and Google Checkout are perhaps the best examples of this model. Under these schemes, the consumer creates an account on the APM’s Web site or when they first select the APM on a participating merchant’s check-out form. When the consumer makes a purchase, the amount is deducted from their checking or credit card account by the APM. In the case of PayPal, most deductions are made from checking accounts. Google Checkout charges the consumer’s credit cards.

In this category, merchants too, must create an account not unlike a standard merchant account. As has already been stated, however, all transactions pass to the APMs payment processor (or the Fed in the case of checking account-based consumers), not the merchant’s. Disputes and other situations requiring mediation are handled by the APM. In most cases, the APM restricts the merchant from seeing some or all of the payment data, providing the consumer with varying levels of anonymity, privacy, and enhanced security. This feature makes this type of APM attractive to consumers who are concerned about using their credit card with an unknown merchant or consumers with general privacy concerns. Gateway APMs also offer express check-out features, making the check-out procedure quicker and easier for the consumer.

Each of these two leaders also has its own primary advantage. PayPal for instance enjoys a large consumer base of 150 MM users, although the number of active users is certainly less and varies over time. Google, of course, enjoys its dominance in the paid search space, offering an integrated Adword payment conversion strategy. What’s more, Google has offered Adword fee incentives to Checkout users.