Thursday, June 19, 2008

Revisting Gartner's Report on Consumers Preference for PIN Based Transactions

Banks and credit card issuers have put significant efforts into marketing contactless and signature-based debit card payments, but they have failed to win over U.S. consumers, according to a survey by Gartner. This is important news for online and brick-and-mortar businesses. Consumers prefer alternative payment types -- such as a debit card and PIN -- that earn banks less revenue, but which consumers believe are more secure.

“Despite significant marketing campaigns by banks and card issuers to steer consumers towards using debit cards with a signature -- ostensibly so that the banks can earn more interchange revenue -- consumers prefer entering their personal identification number (PIN) to pay for groceries with their debit card over all types of signature-based card payments, whether credit or debit,” said
Avivah Litan, vice president and distinguished analyst at Gartner.

The findings are based on Gartner survey of 4,500 online U.S. adults conducted in August of 2007.

“Banks promote signature-based debit payments because they earn more fee revenue from card-accepting merchants, on the premise that they are riskier and more prone to theft, so the banks need to earn higher fees to compensate,” Ms. Litan said. “Fraud rates on signature-based debit card payments are at least 10 times higher, and banks usually eat these costs if they are incurred in a card-present (or store) environment. Higher interchange fees paid by merchants to banks and card issuers for signature-based transactions must offset these costs or else banks wouldn’t promote the signature variety.”

When shopping at grocery stories, consumers prefer debit card payments that require entry of a PIN despite the fact that only debit and credit card payments with physically signed receipts typically earn them reward points. Consumers’ least-favorite payment type when shopping for groceries is contactless (wireless) payments, and there is similarly small interest in using mobile phones for making payments.

Consumer Preferences: Gartner: If Making a Purchase at a Grocery Store, Respondents Were Asked to Rank Payment Methods

Ranking: 1 = Most Preferred and 7 = Least Preferred

Paying with Cash: 2.88
Using debit card and entering a PIN on a cash register device: 3.64
Using credit card and signing a payment receipt: 3.70
Using debit card and signing a payment receipt: 4.00
Using regular payment card (credit or debit), but not having to sign a payment receipt or enter a PIN: 4.08
Paying with a personal paper check: 4.41
Using contactless payment card that you just wave or swipe in front of a terminal: 5.28
Source: Gartner

“Brick-and-mortar businesses who accept electronic consumer payments should promote use of PIN-based debit card payments by steering consumers to them through payment terminal programs and/or by offering store-based incentive programs,” Ms. Litan said. “Businesses pay less to banks for PIN-based payments and since consumers prefer them anyway, this is a win-win strategy for all parties except credit card issuers and banks.”

Consumers who have been affected by the data breaches publicized in recent years are more prone to change their online payment behavior than other online or offline activities, such as shopping and e-mail preferences. These consumers are more likely to call the online store and give them their payment account number over the phone.

“Online businesses should therefore enhance their ability to offer secure automated phone payments,” Ms. Litan said. “For example, businesses can use a transaction number generated during the online shopping season to tie a purchase to an automated phone-based payment. For this customer base, online merchants should also promote alternative payments, such as PayPal and Bill Me Later, where interest in using them increases as age decreases.”

About this study

Additional information is available in the Gartner report “Consumer Preferences for Secure Payments Create Opportunities for Non-Banks."

Barron's on Amazon Online Payments Plans

Is Amazon Planning To Go Head-to-Head With PayPal?
Posted by Eric Savitz (AMZN) has been aggressively rolling out a variety of Web-based services, including on-demand computing power and data storage. Could the company’s next move be to go after eBay (EBAY) subsidiary PayPal’s dominant franchise on online payments?

Cantor Fitzgerald analyst Derek Brown asserts in a research note this afternoon that Amazon “may soon launch a PayPal-esque Payments service for use by consumers and merchants across the Web, potentially siphoning growth and/or profit from eBay’s crown jewel.” Brown says that Amazon could launch such a service as soon as late summer or early fall of this year.

“We believe an Amazon Payments solution for use across the Web holds real promise,” he writes. Brown contends that Amazon “long-ago demonstrated that it understands (perhaps better than any company) the needs/wants of online retailers.” And he also says the company understands - maybe better than any company - the needs and wants of online buyers. “Coupling this pool of knowledge with its massive customer base, powerful technology platform and unique skills sets, may be among the best-positioned Internet companies to attempt to challenge PayPal’s growing dominance.”

Brown says taking on PayPal successfully would be no sure thing, but adds that it seems “equally foolish” to simply disregard the idea as just another PayPal wannabe. He notes that the company already offers a site called Amazon Payments that allows users to send money to any U.S. mobile number of e-mail address using credit card info on file with to fund the transaction. He also notes that the company already also offer Amazon Flexible Payment Services, “a set of APIs that allows the movement of money between any two entities.”

Brown also notes that job listings show a number of openings in the area of external payments; he quotes one of the listings as saying “there is incredible opportunity to further leverage our payment services assets.”

Meanwhile, Brown also contends that eBay may be readying a further tweak to its business model, with an additional reduction in listing fees combined with a hike in back-end success fees. He says the result in the long run would likely be more listings. But that’s a mixed blessing: he says it would creation an “even greater strain” on the company’s searching and finding algorithms.

Concerned about both the potential competition from Amazon in payments, and the disruption from a shifting business model, Brown today repeated his Sell rating on eBay, with a price target of $25. Today, eBay is up 16 cents, or 0.6%, to $28.97 . Amazon is off $1.06, or 1.3%, to $81.91.

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