The Electronic Dollar?

Online transactions are gaining on credit cards and cash

December 21, 2008|By Lorraine Mirabella | Lorraine Mirabella,lorraine.mirabella@baltsun.com

Will that be cash or charge? Debit or credit? Bill Me Later, Billeo or PayPal?

Consumers have more choices than ever in how they pay for goods and services, and it is clear the days of paying by cash or check alone are long gone.

Payment choices have expanded along with Internet commerce. Consumers buying more online have sought more secure, convenient ways to pay. Meanwhile, Web-based technology allows relatively low investment from merchants who want to offer new options.

In a recession, experts predict alternatives that offer noncredit options, such as same-as-cash installment plans, likely will get renewed attention from consumers. And given the technology, more options are available online to let people pay without using credit cards.

"Everyone nowadays is worried about entering into risky transactions," said David S. Evans, a vice chairman of global consulting firm LECG Corp. and founder of Cambridge, Mass.-based Market Platform Dynamics, a consulting firm focused on the payments business. "Anything that involves regularity and certainty is more attractive now, and anything where people are uncertain about ... their bills ... is less attractive."

For years, consumers have been relying less on paper payments, which now account for just over half of all consumer purchases. Shoppers are just as likely to pay with a credit card or debit card whether they're buying groceries, stopping at a fast-food restaurant or paying bills online or via cell phone.

"You don't need cash anymore," said Bill Hardekopf, chief executive officer of Web site lowcards.com. He believes that even though card issuers are clamping down, lowering credit limits and raising interest fees, consumers are not likely to give up their plastic any time soon.

However, "credit-card issuers will be more prudent in who they grant cards to," Hardekopf said. "The days of getting a card in everyone's wallet and a house to everyone who has a pulse, those days are over. They want your business, but really only if you have good or excellent credit."

Even if they continue using credit, consumers are likely to be more careful to avoid running up huge balances on their cards, experts say. Consumers often try to use cash when they're feeling less confident about their financial future, experts say, because it helps them spend less.

"Consumers are more wary about using credit," said Chris Allen, director of consulting services in the financial services practice at Hitachi Consulting. "They are extended and have seen their home equity wiped away and may be upside down on their mortgage," which means they owe more than the house is worth. "The lessons learned about what's going on today are staying more within your means."

One increasingly popular option for consumers who want to limit use of credit - or don't qualify for a credit card - are the prepaid debit cards that are issued through check-cashing outlets, according Financial Service Centers of America, or FiSCA, the national trade association for neighborhood financial service outlets.

In 2004, the trade association formed a partnership with NetSpend Corp., a provider of prepaid debit cards, to offer a card that lets users allot part of the card's funds to savings and earn 5 percent interest on that amount.

"People can't run up credit-card debt because there's not a credit element on it," said Edward D'Alessio, deputy general counsel for FiSCA. "You can't go over your limit. It's ideal for people who would like to have that discipline."

Card users, many of whom do not have traditional checking accounts with banks, can have paychecks deposited to their account, or cash checks and load the money onto their card, which can then be used wherever credit cards are accepted. In the first eight months of the year, customers deposited more than $31 million into their savings accounts, a more than 100 percent jump over savings deposits in 2007, FiSCA said

Some online alternatives that are out there and growing include eBillme, Bill Me Later, Billeo, PayPal and ShopText, Evans said.

eBillme, a way to shop online and pay cash, lets consumers make purchases directly through an online banking account without entering a credit-card number or checking account number. The company promotes itself as a secure payment option that does not require a credit card.

Evans says this alternative appeals to consumers who prefer the security of not entering all the information on the Web but like paying through an online bank account.

Bill Me Later, a Timonium-based company that agreed to be purchased by eBay Inc. for $945 million in October, is an online payment option offered by about 1,000 retailers. When a consumer checks out with Bill Me later, he gives his name, address, birth date and last four digits of his Social Security number. Bill Me Later authorizes or denies credit within seconds. The consumer is sent a bill, which is either due on a certain date or can be paid in installments, sometimes interest-free, over a specified period.

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