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Why Credit Cards Are Not the Future of Online Payment
by BIll Zielke
The concept of credit has been around for centuries. Starting in the early 1800s, local merchants allowed trusted customers to make purchases without paying the total cost upfront. This intuitive concept allowed sellers to reach a larger base of customers who could then pay their debt over time. The idea of enabling purchases by extending credit spread quickly, and in the early 1950s, a seminal moment occurred: the invention of the credit card.
Over the next half century, the credit card and buying on credit concept became entrenched in countries across the globe, particularly so in the United States. Today, we’re beginning to see signs of changing consumer behavior when it comes to making purchases, particularly in the online world.
In fact, I’d argue we’re now at an inflection point, as recent global economic woes have combined with the continued rise of alternative payment methods to finally mount a serious threat to the traditional credit card. In fact, in a recent report by Javelin Strategy & Research noted that “online use of credit cards continues to decline, representing a sustained and ongoing change in consumer behavior,” before going on to state that total payment volume from credit cards fell from 44% in 2009 to 40% in 2010.
As the Internet emerged as a global marketplace where people can purchase goods and services without ever leaving their homes, the credit card, with its snazzy designs and black stripe on the back, has become outmoded. Today’s savvy consumer expects a different experience, and the bottom line is the credit card wasn’t designed with the Internet in mind (and certainly not with an Internet-connected mobile device).
Using a credit card to complete an online transaction is riddled with functional deficiencies. One of the most basic examples: we can all agree that it’s downright painful to have to repeatedly type in your credit card number and security code every time you go to make a purchase online, right? And from a merchant’s perspective, the cost of accepting credit cards — and the associated hidden fees — can make accepting payments online prohibitively expensive. Clearly it’s easy to see why credit-based products that were designed from the beginning for the online experience are rapidly gaining market share.
When it comes to mobile commerce the differences between credit cards and alternative payment methods are even more pronounced. Sure, a little device that allows you to take credit card transactions via a mobile phone is nice, but it’s far from revolutionary.
Meanwhile, so-called alternative payment providers with their digitized, multicurrency networks are enabling consumers to transact by simply swiping a mobile device or even bumping mobile phones together. This is the notion of the “mobile wallet” starting to be realized.
The mobile device holds the key to the future of payments, for both consumers and merchants, because it blurs the lines between online and offline. I predict it won’t be long before the credit card will be the alternative payment method and services that were designed for the online experience from the start will become the norm.
Consider the following from the Javelin report:
- The total dollar volume of online alternative payments sales grew to almost $43 billion in 2010, up from approximately $34 billion in 2009.
- The total dollar volume of online alternative payments sales is projected to reach $86.6 billion by 2015.
- 46% of online consumers have used an alternative payment within the past year.
- 36% of online shoppers use an online alternative payment option due to “greater protection from fraud or other misuse of my information.”
- 91% of online consumers have used PayPal, while 24% have used Checkout by Amazon and 9% have used Google Checkout.
So what do you think? Will you still be using a credit card in five years or will the mobile wallet be your reality?
Bill Zielke is senior director of Merchant Services at PayPal, which recently announced the initial rollout of Mobile Express Checkout. Bill is responsible for the development and marketing of product strategies related to PayPal, and for counseling merchants with product recommendations.