By  on July 24, 2008

Retailers from Polo Ralph Lauren to American Eagle Outfitters are adding different payment systems to their online stores and reporting a lift in sales as high as 6 percent.

Alternative payment systems are expected to be used in 30 percent of online transactions by the year 2012, according to Glenbrook Partners, a payments strategy consulting firm. Examples of alternative payment systems include PayPal, Bill Me Later, Google Checkout and eBillMe.

PayPal began in 1998 as a way to beam money from one Palm Pilot to another. That didn’t take off, but the service did become popular among eBay sellers, who couldn’t qualify for merchant credit card accounts, as a faster and more reliable alternative than personal checks.

Now retailers that have taken credit cards for years are adding new payment services such as PayPal and Bill Me Later to their online stores. Penetration could be as high as half of all online retailers, said analyst Sucharita Mulpuru of Forrester Research Inc., although no formal study has been done.

“I definitely think they’re at the phase now that virtually every online retailer should consider them,” she said.

One Stop, a Los Angeles-based e-commerce services provider with more than 25 fashion brands as clients, including Miss Sixty, Catherine Malandrino and Betsey Johnson, saw on average a 6 percent sales lift when it added PayPal to its clients’ sites.

The sales increase was no coincidence, as the company did A-B testing, and the lift occurred only on versions of the sites that offered PayPal, said co-founder John Tomich. Of the additional sales, 90 percent were new customers.

One reason for the popularity of alternative payment systems is security. “There’s a perception that it’s safe to use,” Tomich said. “People are still hesitant to take their credit card number and put it on a Web site.”

PayPal also has a “float” of $3 billion in its system that PayPal users have earned selling things online. Mulpuru called it a “slush fund” that sellers can use to buy products online.

“Our customer spends aggressively and that $3 billion turns over every two weeks in our system,” said PayPal senior director of merchant services Tyler Hoffman. “It fuels impulse purchases. It almost feels like a gift certificate.”

Alternative payment systems appeal to customers who don’t have or want to use credit cards, said Mulpuru. Plus, they are fast and convenient to use — in essence, offering the equivalent of express checkout — because returning users don’t have to fill out any information, even if they are buying at a new store.

The convenience factor has been a draw for customers at ShoeMall, said Jodi Bresina, ShoeMall Internet director. “It’s a quick, convenient way to buy shoes online,” she said. “The ShoeMall customer is an Internet-savvy woman shopper who doesn’t have a lot of time. This lets them check out quickly.”

When the online-only retailer added Bill Me Later to its site at the end of February, new business and average order size increased. Three out of four Bill Me Later users are new customers to ShoeMall, which opened in 1999 and offers more than 300 brands. Thirty percent of the new customers have returned and bought again, said Bresina. Average order value has increased 7 percent.

In a study of Bill Me Later, Forrester found that the payment method increased sales by 2 to 3 percent. And with payment systems that offer financing or a draw on earned cash, as in the case of PayPal, “you can load up the shopping cart and don’t have to worry about the financial consequences,” said Mulpuru.

The typical user of alternative payment systems is older and more financially secure than one might expect. On average, she is female, age 40, with an income of around $80,000, and spends $300 to $500 online every three months, according to Forrester.

One downside to alternative payments might be for multichannel retailers who have separate sale systems in their brick-and-mortar stores and might have trouble processing returns. Some retailers, such as Polo, require customers who pay with PayPal and other online systems to send returns back through the mail. American Eagle issues gift cards for in-store PayPal returns.

Alternative payment systems typically cost less or no more than merchant credit card fees. Depending on volume, PayPal charges retailers approximately 1.9 to 2.9 percent plus 30 cents a transaction. (Merchants do not have to pay credit card interchange fees on top of that if a card is used to pay.)

If one alternative payment system is good, two might be better.

One Stop is planning to add Bill Me Later to its client sites. ShoeMall plans to introduce Bill Me Later’s 90-day financing during the holiday period, and is mulling adding PayPal or Google Checkout, as well.

Still, retailers might not want to add too many.

“Some sites have eight or 10,” said Tomich. “That might be overkill.”

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