Are Credit Cards About To Be Dethroned?

Although retailers have loudly complained about credit card fees for years, 2007 is suddenly seeing a surge in active support for alternative payments. The credit card companies aren?t worried, but perhaps they should be.

The retail industry is traditionally slow to adopt new technology and new payment methods, but once some retail leaders get comfortable with the idea, it can snowball into a very rapid trend.

It's happened with self-checkout, buy-online-pickup-in-store and?most recently?with contactless payment. Are alternatives to credit cards next? Although Visa, MasterCard and AmericanExpress have substantial staying power, several recent events suggest a challenge to the three Princes of Payment unlike anything retail's ever seen.

Earlier this month, an analyst firm released the results of a practical survey it conducted, where the analysts visited the top 100 largest E-Commerce sites to see what payments they accepted. Alternative payments for that survey were Google Checkout, EBay's PayPal and Bill Me Later. Between a visit in October 2006 and a folo in Feb. 2007, acceptance of alternative payments soared 267 percent. Note: this wasn't an opinion survey of either consumers or retailers. This was an elegantly simple tactic of looking at their sites. For the credit card companies, that's strike one.

Then came word last week that Wal-Mart is bucking the industry trend by supporting e-Check procedures. That will allow the chain to electronically accept checks, a move that one Wal-Mart exec estimated would save a billion dollars a year. Even though most retailers had declined to support e-checks, the backing of the $345 billion chain is going to cause many retailers to reconsider. That's strike two.

This week, word came down that two major national retail chains will start accepting?on a trial basis?Bill Me Later payments in their stores. If successful, this could signal the quick migration of alternative payments from merely online to brick-and-mortar. That's strike three.

Mark Lavelle, the business development VP for I4 Commerce (which owns Bill Me Later), says his internal numbers have shown the trend. Bill Me Later today touts about 450 retailers, compared with 250 a year ago and "between 60 and 80" retailers a year before that.

They also charge retailers transaction fees, but they're lower fees. On a $100 purchase, Visa and MasterCard typically charge about $2 whereas Bill Me Later charges $1.50, Lavelle said.

An interesting aspect to this area is that these competitors are, in many ways, cheering each other on, at least for the moment. Bill Me Later is the oldest and it started to see a surge in business once Ebay made payment alternatives seem less risky by introducing PayPal. When Google later introduced GoogleCheckout, it further validated the market making retailers even more comfortable.

"In late 2005, PayPal legitimized the market," Lavelle said. "Then when Google went into the market, the whole (retail) world went hysterical."

But what about MasterCard and Visa? Surely, they must not be applauding these intruders? Lavelle argues that MasterCard and Visa absolutely love the successes of the alternative payment players because it makes them look less like a monopoly and they can therefore better hold off government regulation.

The primary three payment alternatives operate quite differently. PayPal is designed for consumer-to-consumer transactions and those payments (usually) end up being backed by a credit card. GoogleCheckout is a more elaborate process, intended to be the full checkout system for an E-Commerce site. But it, too, often has credit cards behind the scenes.

Bill Me Later is more of a loan maker. Consumers can make payments using data that, theoretically, they already have memorized (date of birth, last four digits of Social Security number, etc.). They can pay within 30 days for free or they can treat it as its own credit card, paying a minimum amount and then borrowing the rest at 19.99 percent interest.

That raises a related question. Are the so-called alternative payments replacing credit cards or are they simply turning into them?