When Amazon.com first started selling books in July 1995, many potential customers were reticent. What would happen if someone were to intercept their credit card number? Or the site’s security was cracked and someone stole their debit card details? Yet while many held back, it nevertheless managed to persuade some 180,000 people to sign up and achieved sales of just over $16 million in its first 18 months of business.
Amazon’s subsequent success, not just in the US and the UK but in markets around the world, demonstrates how people have overcome their security fears and embraced online commerce. As the company has rolled from one territory into another, though, it will have found that the world of online payments is far from homogeneous.
In the UK, for example, traditional payment methods such as debit and credit cards remain the preferred payment option. According to Forrester Research, these two forms of plastic are used to make payments by more than 90 per cent of UK internet shoppers.
Yet in some parts of Europe, such as Germany, regular debit cards cannot be used for online payments, and credit cards are not widespread. As a result, until 2010 the most common form of online payment in Germany was the electronic bank transfer, until it was surpassed in popularity by PayPal. In France, 10 per cent of users still pay by cheque. But the underlying trend is clear: what customers most want from online payment, alongside security, is ease of use.
Of all the “alternative” payment systems that have arisen in the internet age, only PayPal has made significant headway globally. That has partly been driven by its use on auction site eBay, which happens to own the brand, and partly by adoption by third-party merchants using PayPal as a low-cost alternative to debit and credit systems. It can also be used to pay for goods on the websites of established companies, including Topshop, Zara and British Airways.
It is the merchant that decides the payment types but the consumer that actually decides what to use
As a result, PayPal is growing annually by some 30 per cent or more. In the third quarter of the year, it conducted $29.3 billion of payments worldwide, putting it on course to achieve more than $100 billion before the end of the year. Apart from PayPal and, perhaps, Skrill – formerly Moneybookers – the rest of the online ayments industry outside of debit and credit cards is largely focused on niche markets; principally dating, gaming, gambling and adult entertainment, says Benjamin Ensor, vice president and research director at analyst Forrester Research.
Skrill’s approach differs from Pay-Pal’s by appealing to merchants over consumers. It offers some 100 different payment systems to those that sign up to its services, covering 41 currencies and 200 countries and territories, including not just Visa and MasterCard debit and credit cards in the UK, but also Carte Bleue in France and iDeal in the Netherlands.
“It is the merchant that decides what the consumer flow is and the payment types offered but it’s the consumer that actually decides what to use,” says Skrill co-chief executive Martin Ott. The company also offers a digital wallet to consumers to enable them to store their payment details on the internet and to pay for goods using just their email address and a password.
It is in consumers’ wallets where the next big payment battle is set to be fought, with mobile operators in particular keen for customers to shred their plastic and keep their payment details on their phones. “Mobile is clearly the big prize. Online commerce is growing rapidly, but if you look at where the volume is in payments, the bulk is split between the high street and bill payments,” says Mr Ensor.
The question is, though, where will consumers choose to store their wallets? Mobile operators are keen to convince consumers that the safest place for their debit, credit, loyalty cards, and other payment and transaction details is on the SIM card of their mobile phone. Google is currently in the process of merging its online payment wallet, Google Checkout, with its mobile payments system, Google Wallet. This will see it offer both options: payments on a wallet stored both in the cloud and on the phone.
Neither Visa nor MasterCard is taking this new competition lying down, says Phil Curtis, general manager of First Data Merchant Solutions. “There is some vertical integration going on and the card schemes are stepping into the actual processing side, too,” says Mr Curtis. “MasterCard has bought DataCash and Visa bought CyberSource.” For business-to-business payments, though, the environment remains much more subdued. BACS remains the preferred payment option, partly because much of the cost of corporate payments lies in the processing – the corporate bureaucracy – rather than the payment method.
One area, however, where companies such as Skrill have made headway is in international payments. A typical £100 cross-border bank payment at the moment might cost as much as £30 in charges and take up to five days. Alternative providers such as Skrill enable such transfers to be made instantly at much lower cost.
A transfer of pounds sterling from the UK to Poland, for example, will involve little more than a foreign exchange conversion. Skrill will debit the sterling amount from its account holder in the UK and use its reserves of Polish zloty to credit its account holder in Poland. Photo website Fotolia uses Skrill to pay royalties to contributors around the world, benefiting both parties.
Of course, the imminent introduction of the Single European Payments Area (SEPA) may help to cut the cost of such transactions in the European Union. Indeed, Dominic Broom, a managing director in treasury services EMEA (Europe, the Middle East and Africa) at banking group BNY Mellon, believes that SEPA will cut the cost of cross-border payments in the EU to mere pennies when it is finally bedded in.
Regardless of how consumers – and businesses – choose to make payments in the future and whether they keep their wallets in their pocket, on their phone or in the cloud, it appears banks have most to lose in the gathering battle for payments.
