High transaction and charge-back fees from Visa and MasterCard, as well as the desire to cater to consumers who don't use credit cards, have prompted many e-merchants to consider alternative payment mechanisms for their sites. Focusing on payment methods whereby the consumer's telephone, Internet service provider (ISP), or wireless provider bill is charged, this article is the first in a series examining the various services available for conducting online transactions by means other than credit cards.
Why Credit Cards Alone Don't Work
Many e-merchants would like to offer their customers more payment options than just credit cards. They're tired of paying the bill for online credit card fraud and the exorbitant charge-back fees that card associations charge.
They also want to reach the substantial number of consumers who don't pay with credit cards, such as teens and consumers in those countries where credit cards are not commonly used. According to a recent report by Forrester Research, 39% of Internet users who have never made an online purchase point to the lack of owning a credit card as the primary reason for not buying. This is a significant percentage, representing a huge loss of revenue for e-merchants.
A number of companies are creating businesses that provide safe, secure, cost-effective alternatives to the credit card payment method. One new online alternative payment method makes use of existing relationships between consumers and "trusted billing intermediaries" (TBIs) - such as telephone companies, ISPs, and wireless providers that already bill and receive regular payment from consumers.
How It Works
Here's how payment services use TBIs to bill consumers for online purchases:
- The merchant signs up with the payment service.
- The consumer decides to pay for a product with this method by clicking on the payment service icon on the merchant's checkout page.
- Software provided by the payment service charges the price of the product to the consumer's local telephone, ISP, or wireless provider bill.
- The consumer pays the TBI bill (which includes the charge for the purchase), the TBI pays the payment service, and the payment service pays the merchant.
In order to work, these payment services need both TBIs and merchants to subscribe. It takes time to establish wide networks, and the payment services are scrambling to create them. But the current reality is a fragmented system, where merchants' payment offerings and consumers' ability to use the services offered don't always match.
Many start-ups are gunning to become the payment service of choice using TBIs. But two companies - eCharge Phone and WiSP Classic - currently stand out as the most viable companies in this arena. Here is how they work and the features they offer:
eCharge Phone has been able to secure a strategic deal with AT&T that gives it access to a huge existing network of TBIs - local telephone companies. That means that any consumer should be able to use eCharge to pay for an online purchase through his or her local telephone bill. But consumers' shopping choices are limited to those sites that have signed up with eCharge. Building a network of merchants is one of eCharge's largest challenges.
- Payment mechanism and timing. Consumers' purchases are charged to their local telephone bill. The consumer pays the local telephone company, the local telephone company pays the customer's long-distance carrier, the long-distance carrier pays eCharge, and eCharge pays the merchant.
- Availability. eCharge offers its service in the United States, U.K., and Sweden to any consumers who access the Internet via a dial-up connection. It is not available to consumers who access the Web via DSL or cable modem.
- Merchant implementation. Merchants subscribe to the service and then install the free eCharge software onto their servers. eCharge will either send a representative to complete the installation or will walk the merchant through the process.
- Consumer implementation. Consumers who wish to pay via eCharge must download the necessary free software onto their PC.
- Merchant fees. eCharge's fees vary, based on percentage of transaction. The percentage depends on factors such as the volume of transactions a site produces per month.
- Consumer fees. Consumer fees vary, based on the size of the transaction.
- Telephone company relationship. eCharge pays the telephone companies a commission for every transaction processed.
- Goods covered. Only Internet-delivered products and services may be purchased with eCharge at this time. eCharge plans on expanding to cover tangible goods.
- Minimum/maximum charge. Charges can be as low as $1 and as high as $300.
- Fraudulent orders. To commit a fraudulent transaction, someone would have to connect his/her computer to another person's telephone line, which would involve breaking and entering as well as fraud -- difficult, indeed.
WiSP is in the process of developing a network of ISPs and wireless providers that will subscribe to its service. It has two advantages that may help it build a network of merchants more quickly than eCharge: WiSP is closer to launching payment services for the purchase of tangible (hard) goods, and it pays merchants as quickly as credit card companies do.
- Payment mechanism and timing. Consumers' purchases are charged to either their ISP or wireless provider bill. WiSP pays the merchant immediately. Behind the scenes, the consumer pays the ISP or the wireless provider, and the ISP or wireless provider pays WiSP.
- Availability. WiSP offers its services in the United States and Israel and is ready to launch in a number of countries in Asia and Europe. In order for consumers to pay via WiSP, their ISP or wireless provider must be part of the WiSP network. A consumer may use any type of connection (i.e., dial-up, DSL, wireless, etc.) to use this payment method.
- Merchant implementation. Merchants subscribe to the service and then install the free WiSP software onto their servers. WiSP will walk the merchant through the installation process.
- Consumer implementation. The consumer only has to point and click on the WiSP icon on the merchant site. There is no software to download.
- Merchant fees. There is a combination of per-transaction percentages and fees.
- Consumer fees. There are no consumer fees.
- ISP/wireless provider relationship. The ISP or wireless provider receives a commission for every transaction processed.
- Goods covered. Only Internet-delivered products and services may be purchased with WiSP at this time. WiSP will cover the sale of tangible goods in the near future.
- Minimum/maximum charge. There are no minimum or maximum limits to the charges that can be made with WiSP.
- Fraudulent orders. To commit a fraudulent transaction, someone would have to use another person's line or device for accessing the Internet, which would involve theft and breaking and entering as well as fraud -- another difficult scenario.
Services such as eCharge Phone and WiSP Classic are viable, secure means of payment for consumers wishing to buy online without using a credit card and for the merchants who wish to provide this option. These services address some major problems before they become major players in the alternative payment market. But as their networks strengthen and they become able to handle the purchase of tangible goods, these payment methods are likely to become a popular means of conducting online transactions.
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