In late January, NY Attorney General Cuomo made some strong moves in the battle against post-transaction marketing.  His office reached an agreement with Fandango, in which the online movie ticket retailer will no longer engage in any marketing practices that enroll consumers in membership/discount clubs – without the consumer’s approval.   Additionally, Cuomo launched an investigation into 22 well-known online retailers who deceptively enroll consumers in these membership clubs.  Cuomo stated that while the enrollments in the discount clubs weren’t “illegal per se,” they could be considered deceptive practices.  The investigation resulted from monumental consumer complaints who say they were lured by coupons or cash-back offers while buying things such as flowers and movie tickets and then enrolled in clubs which charged their cards monthly without their consent.  Complaints included the difficulty in finding out who to contact to cancel the membership once it is discovered.

Affinion, Vertrue and Webloyalty, the three main discount club sellers (all based in Norwalk, CN), have been accused of improper conduct numerous times before and have even been sued or are currently under investigation by several states over their sales tactics. Last June, a federal judge in Massachusetts approved a settlement agreement to a class action lawsuit against Webloyalty.  Up to 20 million people are eligible for refunds from the company.  In 2006, a multi-state lawsuit against Affinion (formerly Triligiant) resulted in $14.5 million in consumer restitution and penalties. They are now in the hot seat for possible violations of its settlement order.

A report on aggressive sales tactics issued by the U.S. Senate Committee on Commerce in November said the three companies have taken $1.4 billion from customers in a little more than a decade. The billing information is generally passed through to the club sellers without the consumers’ direct consent.  Online retailers linked to the sellers earned revenue as well.  According to the report, 19 online retailers generated more than $10 million and 69 online retailers generated between $1 and $10 million in revenue.  Classmates.com received more than $70 million from these practices.  The report also stated that more than 450 retailers were partnered with the three companies.

In its agreement with the NY Attorney General, Fandango has agreed to suspend contracts with all discount club sellers.  The company also agreed to pay $400,000 into a consumer redress fund. Fandango will also adopt the following reforms:

• Review and approve all Fandango incentive offers made in connection with online purchases and require any contracted discount club seller to provide the numbers of New York customers enrolled and complaints received from those customers
• Explicitly warn consumers that the incentive is offered for joining a separate company’s membership club
• Explicitly notify consumers when they are redirected to a discount club seller’s site that they are leaving Fandango’s Web site
• Ensure that all cash-back or rebate offers made by contracted membership club sellers comply with New York state rebate laws by providing redemption forms and information at the time of the offer

The subpoenas from Cuomo’s office seek information about each retailers’ practices of sharing consumers’ account information with membership program companies; their knowledge of any deceptive solicitations; and compensation from the membership companies.  The downside to Cuomo’s (or any individual state efforts) is that any resulting legislation will only affect consumers in that state.

In addition to Fandango and Barnes & Noble, retailers being investigated include Orbitz, Buy.com, Ticketmaster, MovieTickets.com, FTD, Shutterfly, 1-800Flowers, Avon, Budget, Staples, Priceline, GMAC Mortgage, Classmates.com, Travelocity, Vistaprint, Intelius, Hotwire, Expedia/Hotels.com, Columbia House, Pizza Hut and Gamestop/EB Games.

Vistaprint, Priceline, Expedia and 1-800-Flowers.com said they severed ties with the companies last fall.  William Lynch, President of Barnes & Noble.com states that they “welcome the NY Attorney General’s review because it will show that Barnes & Noble does not, nor has it ever, shared customer debit or credit card information with discount clubs.”

Some companies are staying with the clubs, despite complaints. Orbitz.com said in a statement that it had “improved its sign-up process with Webloyalty in a way that will ensure consumers know they are consenting to membership in a paid club.”

As part of a continuing investigation by the Commerce Committee, Senator Rockerfeller (D-WV) has sent letters to Visa, American Express, and MasterCard requesting information relating to cardholder inquiries about unauthorized charges stemming from “data pass” and any efforts made by the companies to reduce the number of chargeback requests from cardholders. The letters also requested information regarding continuity programs that trigger a high chargeback percentage.

The club sellers claim their practices are legal but have promised changes.  Following the Commerce Committee report accusing them of acting unethically, all three club sellers began requiring customers to re-enter all 16 digits of their credit card number for enrollment.

Continuity plans, upsells /cross-sells and post transaction marketing can be a BIG benefit to online retailers and club program marketers, as long as they are executed ethically.  Consumers who get burned end up losing trust with all online retailers and marketers using similar sales tactics.  So even if an online retailer is on the up-and-up, sales and conversions can be hurt by the negative experiences customers have had with other online retailers and marketers.

Operating Guideline Changes

Visa and MasterCard both instituted changes in their operating guidelines in response to consumer disputes about card not present transactions and direct response products and services.  MasterCard’s actions followed policy changes from Visa regarding descriptor formats and disclosure of corporate entities related to direct response offers.  While the changes concern online marketers and merchants, they also affect direct mail and telephone marketing businesses.

“Remember the Columbia Record Club?  They are a prime example of negative option marketing, which shows that it has been around a long time.“

MasterCard communicated their “Direct Marketing Best Practices” guidelines to their acquirers and direct response marketers to further enforce compliance.  The guidelines focus on terms disclosure,  trial offers, marketing, endorsements and testimonials, affiliate marketing (CPA) networks, billing timeframes, refund policies, back end offers (up-sells, cross-sells), descriptors, order fulfillment, and customer service.

Of course these changes are meant to protect the consumer.  However, any business affected by these changes should think positive.  Consumer complaints can turn into negative publicity (and subsequently, reduced revenue) for any company.  Let’s not forget increased chargeback ratios, which no merchant desires.

A Little History

The Federal Trade Commission (FTC) was created in 1914 to prohibit unfair competition and practices in commerce.  The agency enforces laws targeting specific marketing practices and product promotions, such as environmental claims, free products, mail and telephone orders, and negative option offers.  Section 5 of the FTC Act prohibits unfair and deceptive practices – more specifically, advertising and marketing, in any medium, to consumers.  Section 5 describes a product or service as deceptive if it misleads the consumer or affects consumer behavior.  Additionally, product claims (i.e. “xyz product” prevents illness) must be substantiated, especially if they concern health, safety or performance.  The key marketing principles listed in the Negative Option staff report are meant to guide the industry in compliance with Section 5 of the Act.

“The FTC Act prohibits unfair or deceptive advertising in any medium”

The FTC also implemented changes to its Guides Concerning the Use of Endorsements and Testimonials in Advertising in December, clarifying that “advertisers are subject to liability for false or unsubstantiated statements made through endorsements, and that endorsers also may be liable for statements made in the course of their endorsements.”

California Is Taking Action As Well

On a similar wavelength, a new bill, SB 340, regarding automatic renewal and continuous service offers was signed into law in October in California.  SB 340 came to light following a 2006 lawsuit against Time, Inc., for automatic renewal offers and solicitations.  Twenty three states received complaints from consumers, which resulted in an extensive investigation.  Time was billing or automatically charging consumers’ credit cards for magazine subscriptions without consent.  The company had changed their renewal policy and instead of subscribers actively renewing, they instead required subscribers to actively cancel their subscriptions.  Else, the renewal was automatic. The renewal policy always appeared in fine print and was not clearly stated.

SB 340 requires businesses to state “clearly and conspicuously” the renewal terms and obtain the subscriber’s approval at the time of purchase.  Clear and conspicuous is defined as “in larger type than the surrounding text or in contrasting type, font or color.”  In the case of telephone marketers, the audio disclosure must be “audible and understandable.”  It also requires the inclusion of a cancellation policy with the renewal offer and an easy way for the subscriber to cancel.  The bill goes into effect on December 1, 2010.

Per the FTC Act, sellers are responsible for product and service claims.  Third parties, such as advertising agencies, web site designers and catalog marketers, can also be found liable for product deceptions and unfair competition practices.  Those found to be non-compliant could face enforcement by the FTC as well as civil lawsuits.  Punishment includes cease and desist orders, fines up to $16,000 (per violation), federal injunctions, and consumer refunds.

Additional Resources:

• Direct Marketing Best Practices
• FTC Negative Option staff report
• FTC staff paper, Dot Com Disclosures, about online advertising
• FTC Guides Concerning the Use of Endorsements and Testimonials

“….the algorithm used to encrypt GSM phones is over 20 years old.”

Mobile payments are a hot topic, particularly for companies and merchants targeting the unbanked – or underbanked – segment.  Research by Mercator Advisory Group shows that 68% of consumer payments (by dollar volume) will be electronic-based in 2012.  The group estimates that volume to be 75% by 2017.  Electronic payments offer huge cost savings for merchants, as well as financial institutions.  Consumers are demanding more ways to operate remotely as well as easy ways to make payments.  It’s a win-win for both sides.  However, the fraud issue cannot be ignored.  Since smartphone technology is fairly new, few anti-fraud tools have been developed and even fewer have been deployed.

As smartphones provide access to more sensitive data each year, the need for security is of monumental importance.  There is some protection available for mobile phones, such as McAfee’s VirusScan Mobile (for Windows Mobile phones) and the VeriSign(R) Identity Protection Access for Mobile.  While these programs protect the phone against viruses, worms, spyware and malware, they do not encrypt data being sent or received.  However, VeriSign’s application does use a two-factor authentication tool and iPhones are equipped with Remote Wipe, which can erase the phone’s data remotely, should the phone be lost or stolen.

There are varying levels of security issues, depending on the type of mobile payment (mobile web site, contactless, SMS, etc).  Vulnerabilities of standards, infrastructures, platforms, and technologies (i.e. GSM, NFC, SMS, Bluetooth, RFID, mobile applications, etc.) pose a complicated issue for researchers to develop protections against secure data loss.  Mobile malware and spyware, Trojans, phishing attacks and third party applications add even more threats.

The future of mobile payments, tagged sometimes as ‘m-payments’, would have credit card data embedded on the SIM card or on a chip in the phone.  (Fingerprint scanning is envisioned further into the future.)  Remote access to the phone and its payment applications would be necessary should the phone be lost or stolen.  This would require agreements between carriers, equipment manufacturers and financial institutions.  Additionally, organizations that deal with sensitive data (i.e. financial, medical, personal identification) would still have to comply with various regulatory requirements (such as HIPAA and SEC) for protecting data.

A new industry consortium, the Financial Services Technology Consortium (FSTC), formed in 2009, is tasked with developing standards for secure mobile payment transactions, regardless of the device or carrier.  Jim Pitts, managing executive of the FSTC’s Payments Standing Committee (Payments SCOM), stated that the standards may also recommend that individuals be authenticated before making a purchase.  Standards will likely include the use of a SIM card or data chip to authenticate the device and authorize the payment.  Due to various technologies and products in use today, the costs required by all parties will likely cause delays in the standards being accepted as well as compliant products and services being deployed.

In the UK, the migration to EMV technology has reduced fraud in face-to-face transactions since EMV adoption in 2003.  The EMV standard operates with EMV-compliant cards (which have embedded chips instead of magnetic stripes) and EMV-compliant POS terminals.  The chips require a PIN entry for a secure EMV transaction.  The acronym EMV is derived from the initial letters of Europay, MasterCard, and Visa, all of whom cooperated to create the technology standard.  MasterCard merged with Europay in 2002.  JCB and American Express have since joined the organization as well.

EMV is a perfect example of two-factor authentication, where two different factors are required to complete a transaction, and has been referenced as a key solution for secure, fraud-resistant transactions.   There is a strong push for EMV abroad and to encourage merchant acceptance, merchants are held responsible for fraud resulting from any non-EMV transactions.  As more countries adopt EMV technology, they are also banning signature transactions.  Australia will ban signatures by 2013.  Canada will not accept magnetic stripe transactions after 2015.  These added security layers will push payment card thieves to focus on easier targets, such as the U.S.  EMV employed as the only method for secure face-to-face transactions abroad is also altering how U.S. cardholders are conducting (or abandoning) transactions in these countries.  This could result in lost revenue for international merchants and will hopefully put the pressure on issuers and merchants in the U.S. to adopt EMV.

“Australia will ban signatures by 2013.  Canada will not accept magnetic stripe transactions after 2015.”

Ecommerce Data Protection

According to the U.S. Census Bureau, ecommerce sales in 3Q 2009 were estimated at $32 billion, 3.7 percent of total retail sales – an increase of approximately 2.1 percent from 3Q 2008 while total sales decreased in the same period.  Visa, MasterCard and JCB already have 3-D Secure protocols in place for online purchases.  Verified by Visa, MasterCard SecureCode and J/Secure (JCB) all require the cardholder to enter a password or unique ID to complete a transaction.  Cardholders must register with the programs for the extra layer of security to be added during a transaction.  Unfortunately, these programs have not been well received or implemented due to added costs to the merchant and low acceptance from cardholders.  In response – and to support EMV online – MasterCard has developed their Chip Authentication Program (CAP) and Visa has created their Dynamic Password Authentication (DPA), a different version of CAP.  To date, deployment has been minimal.  Last week, ArcotOPT was announced as the first solution using CAP on mobile phones for ecommerce and online banking.  Although the company, Arcot, is based in California, the product was released in Europe where EMV has a strong presence. We are not likely to see deployment in the U.S. until EMV takes hold here.

Going Contactless

As contactless card adoption grows (mostly in the small ticket market – fast food, convenience stores, etc.), so does the acceptance of the added security already in place.  Contactless cards include a unique CVV for each transaction.  If thieves were to obtain the payment card data from a transaction, the CVV could not be used for another transaction.  Additionally, contactless payments do not transmit the cardholder’s name and some also do not include the account number.  MasterCard teamed up recently with RIM to deploy MasterCard PayPass contactless stickers on Blackberry phones.  After each PayPass transaction, a confirmation email with the transaction information is sent to the Blackberry phone. Verifone has combined its end-to-end encryption solution, VeriShield, with EMV to support contactless payments beginning this spring in the UK and a few other regions.  End-to-end encryption does not supply any usable cardholder data to a merchant’s POS device or network, thereby reducing fraud risk.

How About Mobile Shopping?

Smartphone technology, not to mention the iPhone, has significantly increased the interest in mobile payments.  Presently, contactless stickers can easily satisfy this demand (as mentioned above with MasterCard and RIM).  Some major card companies have also tested near field communication (NFC) as a contactless payment option. NFC is a short-range wireless technology which enables the exchange of data.  Payments using NFC also require a PIN to complete the transaction.

It is apparent that various options for added payment security are already available. As to why these new security options are not yet deployed in the U.S. rests on the concern for cost and revenue stream.  Mobile carriers want a piece of the pie when transactions are made using devices over their networks, thereby slowing the adoption in carrier channels.  EMV would certainly incur costs for merchants (new POS devices) and card issuers (new cards with chip technology).  Despite these new security protocols, a strong fraud risk still exists with merchants, processors and companies storing sensitive data (against PCI compliance), as well as physical cards being cloned or skimmed.  Costs associated with fraud in the U.S. today are written off as a cost of doing business. Pending government legislation, card association guidelines and PCI compliance appear to be the only factors pushing for faster adoption of stronger security measures.

Merchants have been complaining for years about the cost of interchange fees and unnecessary profits the banks are earning.  Interchange fees are not regulated by the federal government, which in turn provides Visa, MasterCard and the issuing banks the right to raise fees for any reason.  Merchants and advocate groups claim that capping interchange fees would lower merchant costs and help prevent – or limit – bank profits from unnecessary fees.  For example, credit card companies and the banks that sponsor gas credit cards collect as much as 8 cents per gallon for interchange fees.  The Retail Industry Leaders Association said that last year “Visa and MasterCard represented 71 percent of the credit card market and 88 percent of all interchange fees were collected by the top ten managing banks.”

In 2008, U.S. merchants paid an average interchange rate of 1.82 percent per transaction, according to the Nilson Report, a Carpinteria, Califorinia-based newsletter that tracks the industry.  “A significant advantage of capping or limiting interchange fees would be that it would reduce interchange fee costs most directly,” the report said.  However, this type of legislation could create fees elsewhere in the cycle.

“U.S. card issuing banks receive an estimated $40 billion to $50 billion in income annually from interchange fees.”

A 2003 law to curb credit card fees in Australia was initially intended to lower costs for merchants – hopefully creating a more competitive pricing market.  The law has backfired a bit.  Australian consumers are seeing new costs associated with using a credit card.  Banks have added annual card fees, cut card perks and reduced rewards programs, like frequent-flier miles. The Australian central bank also allowed merchants to impose surcharges to card users.  Merchant fees for American Express and Diners’ Club were not affected because interchange fees are only related to Visa and MasterCard.  However, both card companies decided to reduce merchant fees to avoid losing customers to Visa and MasterCard.

Following the introduction of the Credit Card Interchange Fees Act, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009, which directed the Government Accountability Office (GAO) to conduct a study of credit card interchange fees.  In November, the GAO released their report.  The GAO assessed four options to address merchants’ concerns:

• Limit or cap interchange fees
• Require the disclosure of interchange fees to consumers
• Prohibit card networks and other entities from imposing rules on merchants that limit their ability to discriminate among the different types of cards, or levy a card surcharge
• Allow merchants and issuers to directly negotiate interchange fees

The GAO determined that proposals to cut credit card merchant fees will be hard to implement.  The report did not conclude, however, if merchants were likely pass on any savings they obtained through lower fees to consumers or encourage consumers to decrease their use of higher rate cards.  They did conclude that disclosing interchange fees to consumers could be confusing and, of no surprise, interchange fees “account for the largest portion of the [merchant] fees for [the] acceptance of Visa and MasterCard credit cards.”

Congress is currently considering three bills that would regulate interchange.  If U.S. regulators put limits on fees or rates, the banks will find another way to generate revenue.  U.S. card issuing banks receive an estimated $40 billion to $50 billion in income annually from interchange fees.  The banks and card companies are obviously against any bill proposing fee and rate limits.  Reflecting on the aftermath of the new credit card rules in Australia, the U.S. Congress has the difficult task of deciding what to do.

MasterCard also presented on the change in debit and credit card volume and transactions.  According to their research, both debit and credit card usage declined from Q3 2008 to Q4 2008.  Debit card usage has since increased, almost to the Q3 2008 level, while credit card usage has remained close to flat.   Between 2007 and 2009, debit card usage has increased 15-18%, while credit card usage has remained flat; cash usage declined 12-14%; and check usage declined as much as 5%.  (Retail categories included supermarket/grocery, department store, sit-down dining, gas/gas station and drug store.)

“Between 2007 and 2009, debit card usage has increased 15-18%, while credit card usage has remained flat”

This movement from credit to debit could be closely related to the closure of credit lines. The Equifax Credit Trends Report (September 2009), indicated that bankcard issuers are continuing to close accounts and reduce credit lines.  It might be assumed that credit lines are being closed mostly due to the increased in card issuer charge-offs (loans the companies do not expect to be repaid on), as well as to the lack of usage on some accounts.  The Dec 16 charge-offs report included:

• JPMorgan (JPM) charge-offs increased to 8.81% from 8.02%.
• Charge-offs at Capital One (COF) increased to 9.6% from 9.04%.
• Bank of America (BAC) saw a slight decrease to 13% from 13.22%.
• Discover Financial (DFS) saw an increase to 8.9% from 8.5%.
• American Express (AXP) saw a slight decline to 7.6% from 7.8%.

According to the Equifax report, new accounts, opened between July, 2008 and July, 2009 were 54 percent lower.  “American consumers are making the most fundamental change in the way they handle their finances we have seen in a decade,” said Dann Adams, president of Equifax’s U.S. Consumer Information System. “They are conserving cash and reducing debt across the board. We haven’t seen savings rates this high since shortly after the third quarter of 2001 – just after 9-11 – when they were at 3.25 percent.”

While consumer may be losing credit lines, they are not going back to checks and cash.  These bank activities have created a push towards debit cards, since consumers today prefer cards to cash and checks.  Consumers are either using check debit cards (tied to their bank accounts) or switching to open loop, reloadable prepaid cards.  The latter card type is especially increasing in popularity amongst teens, college students and the unbanked segment.

All reports on bank card usage make it pretty clear that card usage is not declining and shows no signs of disappearing.  With checks soon becoming a payment method of the past, payment cards usage will increase even more. The most recent action comes from the UK Payments Council, the body for setting payment strategy in Britain.  Comprised of Britain’s leading banks, the council agreed on Dec 16 to set a target date of October 31, 2018 for closing the check clearing system. UK supermarkets, high street retailers and petrol stations have stopped accepting checks, but they are still a popular form of payment among elderly people, many of whom find the idea of using automated cash machines intimidating.  “The next generation probably won’t even have a checkbook,” said Addy Frederick, a spokeswoman at the payments council.  Checks have all but disappeared in high-tech countries like Sweden and Norway and their use is under review in Ireland, South Africa and Australia, Frederick at the council said.

By forging relationships with well-known companies who have a substantial online presence and customer base, direct marketing companies are selling club memberships, which incur monthly fees, to online shoppers at checkout. Unfortunately, not all of the online shoppers are aware that they purchase these memberships.  The memberships, masked by offers such as cash back rewards, future purchase discounts or free magazine subscriptions, are frequently tied to trusted web sites.  Shoppers only discovered they were enrolled in the clubs after finding unauthorized charges, ranging from $9 to $20, on their credit card statements – sometimes after they had been charged these fees for a few months.

“The memberships, masked by offers such as cash back rewards, future purchase discounts or free magazine subscriptions, are frequently tied to trusted web sites. “

After discovering and investigating these unauthorized charges, most online shoppers found the club enrollment process deceptive and misleading.  What is angering cardholders most is that their credit card information was passed on to third parties without their consent.  Unfortunately, the consent was hidden in the small print (they likely did not read) when they accepted the online offer.

High volumes of consumer complaints to the Better Business Bureau, state attorney generals and consumer advocate groups about these controversial sales tactics prompted an investigation by the U.S. Senate Committee on Commerce, Science, and Transportation, chaired by Senator John D. (Jay) Rockefeller (D-WV).  The investigation, launched in May, 2009, researched three Connecticut-based direct marketing companies – Webloyalty, Affinion and Vertrue – their online retail partners and the web sites which sell club memberships to online shoppers.  Their findings thus far were published on November 16, 2009.

Some of their findings discovered:

• These business practices have created over $1.4 billion in revenue from online consumers
• More than 450 e-commerce sites have partnered with Webloyalty, Affinion and Vertrue
• E-commerce companies who partner with these direct marketers also share in revenues from these memberships
• 88 e-commerce companies have earned more than $1 million of the $1.4 billion in revenue
• Since 1999, online shoppers have been enrolled in more than 35 million memberships
• A majority of consumers contact the call centers for the 3 leading direct marketing companies to question the unauthorized charge on their cards and subsequently request cancellations

These offers are called “post-transaction” because they appear after online shoppers enter their billing information but before a transaction is confirmed.  Misleading “yes” and “no” buttons cause consumers to think they are completing the original transaction, but instead they are entering into a separate financial purchase.  If the shopper accepts the offer, the billing information is passed on to the third party who manages the monthly memberships.  These offers have been found on well-known – and trusted – sites such as Expedia, Orbitz, Priceline, Hotels.com, Fandango, Buy.com, and Classmates.com (who reported more than $70 million in revenue from the memberships).

In an interview with MSNBC, Webloyalty CEO Rick Fernandez stated that Webloyalty made sure the terms and conditions were clear to online shoppers in the post transaction process.  However, online consumers who have been enrolled in the club memberships without their knowledge don’t agree.  These marketing and sales practices are causing negative effects on e-commerce and tarnishing consumer loyalty in the web sites and companies who employ these marketing practices.  Complaints from online shoppers, and now the release of the Senate report, are forcing e-commerce companies to revise these marketing tactics towards a more conservative approach – or to end the partnerships with these firms all together.  Affinion claims that the activities in the Senate report describe Webloyalty’s practices and claims that Affinion has changed their business practice but did not describe what changes were made.  Vertrue, also known as Adaptive Marketing LLC, stated that they are “strengthening” its practices to provide consumers with “clear, conspicuous and repeated disclosure” of their terms and conditions.

Online merchants should consider the effects of similar marketing and sales tactics before deploying them.  Online shoppers prefer to shop with merchants they can trust – a strong influence contributing to online shopping behavior and consumer loyalty.

Announced yesterday was American Express’ deal to purchase Revolution Money, launched by AOL Co-founder Steve Case’s Revolution LLC in 2007.

The acquisition, estimated at $300 million, will give American Express a foray into new payment channels and, hopefully, will provide Revolution Money customers (merchants and cardholders alike) access to American Express’ existing network.

The RevolutionCard contains no imprinted cardholder data and require a PIN to authorize transactions.  Revolution Money also provides an innovative payment platform and low-cost merchant services, which is highly attractive to business owners – and has provided some strong competition against the larger payment networks (i.e. Visa, MC).

Network availability and matching (cardholders would only be able to use cards at merchants who also processed Revolution Money payments) was one challenge that was facing Revolution Money.  Hopefully, Revolution’s new parent will continue the low-cost business model as well.  With credit card issuers adding new cardholder finance charges  before the credit card act goes into effect and merchants up against unavoidable service fees, a company sticking to a plan to help the economy recover rather than hinder it’s growth would be, well, revolutionary.

American Express plans to add Revolution Money as the first subsidiary to its new Enterprise Growth organization.

As one of the first brick and mortar retailers go to online, 1-800-Flowers continues to lead the pack in thinking outside the box. Started as a single flower store in the 70s, the company launched a toll-free brand in the 80s and then evolved into one of the first online retailers in the mid-90s. Already utilizing mobile phone apps and Twitter, Facebook adds another avenue where the company is finding ways to go directly to the consumer, rather than waiting for the consumers to come to their web site.

“Facebook was the world’s fourth most visited web site in June… “

According to Alexa, a web information research company, Facebook users spend, on average, 30 minutes a day on the site. This gives online retailers, with at least a Facebook “fan” page, more opportunity to capture the attention of their current and future customers. It’s about allowing the consumer as many avenues for purchase as possible.

In addition to 1-800-Flowers’ fan page, followers can also post comments, provide feedback and publish links on their profiles. The company also provides apps for iPhones, Blackberrys and Androids, as well as a basic mobile site, where consumers can shop the Mobile Gift Center and receive SMS offers via their mobile phone.

Besides being a company which seems to forge new marketing paths, 1-800-Flowers needs to throw a pretty wide net out there to catch consumers. 1-800-Flowers’ target market is larger than consumers looking to send flowers, since the acquisition of several companies over the years has expanded its basic product line to include popcorn and specialty treats, cookies and baked goods, premium chocolates and confections, gourmet foods, wine gifts, gift baskets, home décor and children’s gifts.

With its 250 million member base, Facebook was the world’s fourth most visited web site in June, according to figures from comScore, an Internet marketing research firm. So far, Facebook has become a very strong marketing platform (hence the word “viral” that has been added to the original “social networking” term). However, based on other known security issues, the site’s payment platform still has analysts and developers wary of using the site for payment checkout. 1-800-Flowers uses an embedded transactional advertising widget, which operates as a fully functioning storefront. To serve its new e-commerce channel, Facebook is developing a new electronic payments system that might compete with Paypal. Facebook’s Vice President of Product, Christopher Cox, said “software developers who sell applications on Facebook are testing the payments system, but it is unclear whether the company will manage e-commerce transactions across the Web.”

Similar to offering alternative payments, merchants can stay ahead of the curve by regularly finding new ways to maintain their current customer base and reach new consumers. They need to be thinking – “where is my target customer spending their time?” The old adage of “build it and they will come” doesn’t apply in every situation – especially in today’s virtual world.

Okay, so what exactly does that mean?  Well, traditionally, merchants only had the option of accepting electronic payments online in the form of bank drafts, and debit and credit cards from the major card brands – Visa, MasterCard, American Express, Diners Club and JCB.  That is until payment product innovators discovered that merchants were losing potential business from consumers who did not have bank accounts or credit cards.  Most importantly, in the ecommerce space, some consumers are simply wary of using cards and bank account information for online transactions because of the fraud risk.  Most of this concern stems from consumers’ lack of trust in web site security.  Additionally, with card companies cutting cardholder credit limits, alternative payment methods are the only option.

Merchants:  Think Outside the Credit Card Box

Merchants not offering alternative payment options online are limited to accepting cash, money orders or checks from those customers.  Checks require clearing and cash can only be paid in person.  Those options can delay revenue (or limit or restrict revenue in the case of a check not clearing) for the merchant. Merchants offering payment alternatives reach a wider consumer base and satisfy more customers as a result.

Merchants operating ecommerce portals should consider two avenues when researching and implementing alternative payment options:

• Offering a variety of payment methods, such as PayPal^™, Bill Me Later^®, Google^™ Checkout and RevolutionCard (a physical card and new payment network)
• Enabling the acceptance of foreign currency

PayPal^™ has a large consumer base of roughly 150 million users.  Bill Me Later^® was acquired by eBay (PayPal’s parent) last year.  RevolutionCard^™, the first PIN-based credit card, is not embossed, so no personal data is stored on it.  There are smaller players in the market as well, but they have yet to take as much hold as these industry leaders.

Click and Buy, a payment system based in London, offers 126 different currencies and 46 different payment methods to their merchants.  According to an alternative payment study conducted by YouGov for Click and Buy, more than 50% of regular online shoppers will cancel a potential purchase if their preferred payment method is not available.  Although U.S. online retailers are not pressured as much for foreign currency acceptance (major brands are accepted internationally, but cardholders are charged foreign exchange fees), it would certainly enable a merchant to grow globally.

Ecommerce merchants are becoming favorable to alternative payment offerings, simply to reduce their expenses in relation to interchange fees, which have risen 25 to 90 percent (depending on card type and a merchant’s business operations) over the last 20 years.  PayPal doesn’t pass along interchange fees and Revolution Money’s RevolutionCard saves merchants money by charging no interchange fees and lower processing fees per transaction than major card brands.  Merchants are turning these savings into loyalty and cash-back programs for their customers.

Looking Forward:  The Future is a Bright Alternative

Innovation in alternative payment products has been primarily outside the banking world.  Research consulting firm Celent estimates that by 2012, banks will see a decline of $1.2 billion in interchange revenue due to increasing acceptance of online alternative payments. Banking institutions are adopting alternative payment options of their own – for their customers as well as merchants.  Secure Vault Payments, a new payment solution, is now offered by NACHA, the electronics payment association that oversees the Automated Clearing House (ACH) network, (the electronic network for financial institution transactions in the U.S.)  Labeled NACHA SVP, it is an up and coming contender in the alternative payment space.  It is helping banks to retain customers and expand their merchant offerings.  Still in its infancy, it has become popular in the education industry.  The University of Georgia launched SVP in April as a new tuition payment option.  Other educational institutions are following suit.

Celent also estimated that by 2013, online payments will climb to $268 billion and 30% of those payments will come from alternative payment sources.  This increased market acceptance will certainly move alternative payments into the mainstream.