According to a new report from
VRL Publishing*, alternative payment services and products are
being used by an increasing number of consumers around the world –
and the threat these upstart channels pose to more established and
traditional payment models and banking groups has never been

Use of – and interest in – alternative
payments is growing significantly year-on-year and these competing
business models now threaten traditional bank payment revenue like
never before. A new breed of brands such as PayPal, Wizzit and
M-Pesa are slowly but surely seeping into the mainstream, fuelled
by online and mobile commerce, with the potential to decrease the
fee income banks earn from cards and payments portfolios.

There continues to also be a growing
discontent with interchange rates among merchants, who have begun
to actively lobby governments. Regulatory authorities in, to name a
few, Australia, Brazil, Israel, Mexico, New Zealand, Poland, South
Africa, Spain, Sweden, Switzerland, the UK, and the US have either
taken action on interchange rates and merchant restraints or are
reviewing them with an eye towards doing so.

In such an environment, the rise of
alternative payments seems natural, despite merchants often simply
being content to steer customers to the lowest-cost credit cards
rather than away from card-based payments altogether.

In the US, the most successful alternative
payments model is PayPal, which now processes over 12 percent of
online payments in the US and 9 percent worldwide, largely fuelled
by its cornering of the lucrative eBay market. That market
dominance began when the firm paid users between $5 and $10 for
every new user they signed up, allowing it to benefit from the
effects of social networking.

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However, both PayPal and others have struggled
to harness the power of pre-existing social networks: as of
November 2008 PayPal had just 1,265 active monthly users of its
Facebook payment application (out of 66 million active PayPal
accounts at the time).

Nonetheless, PayPal’s payment volume is
currently growing faster off its auction site than it is

The company has obtained an EU banking license
in order to market its services more effectively – though it
insists it is a complementary player rather than a threat to banks.
It has a PayPal Plus Credit Card issued by GE Money Bank and has
pushed into other alternative payment spaces such as mobile POS
services and the wider mobile payments sector.

In the mobile payments space, successful
initiatives have typically been found in areas with significant
numbers of underbanked and unbanked consumers, such as in M-Pesa in
Kenya [see case study, RBI 608], Smart Money and GCASH in
the Philippines, and Wizzit Bank in South Africa.

In contrast, take-up of mobile payments
services in mature markets such as the US remains limited despite
the considerable amount of money being spent on such services.

Opportunities for banks

Of course, the opportunity is also
there for issuing banks to expand their debit card franchises
without tying them to current accounts, though take-up across the
board remains limited. Decoupled debit cards, for instance, a trial
of which was launched in a blaze of publicity by Capital One in
2006, could severely affect the current account-debit card
relationship in future. Already a number of third-party decoupled
vendors allow loyalty cards and even drivers’ licenses to function
as debit cards, using proprietary networks such as ACHs to lower
transaction fees for retailers.

Increasing the penetration of other
alternative payments is also in the interest of the industry as a
whole, not least in the area of contactless payments. Surveys by
MasterCard regarding its PayPass service show that PayPass
cardholders spend 23 percent more per PayPass account; PayPass
increases transaction frequency per account by 32 percent; and
PayPass users’ frequency of visit to PayPass enabled stores goes

Chase Bank reports that its Blink contactless
card, rolled out in 2005, has yielded similar results, including
increasing the average ticket sale by 40 percent over cash
purchases and the frequency of everyday purchases by 35 percent
over credit cards at many merchants. American Express claims
contactless buyers spend 20 to 30 percent more than cash

Nevertheless, the arrival of a cashless
society is still a long way off. Indeed, in the UK cash usage
increased from 54 percent of transactions in 2006 to 60 percent in

Online, it is of course a different story: the
potential for alternative payments remains huge, given the current
levels of checkout abandonment seen at online merchants. According
to a May 2008 survey by PayPal, two-thirds of consumers abandon an
online retailer before completing transactions.

Payment-based reasons were often cited: 22
percent said the site did not offer the payment method they wanted
to use; 21 percent said their credit cards were not easily
accessible; and 16 percent said they feared the site could not keep
their data safe.

* The above is a very brief,
edited extract from a new report from VRL Publishing, Alternative
Payments. Written by Ray Cain, the report looks at the growing
number of new payments models and products coming into play around
the world, and is supported by case studies, statistics, interviews
and key take-aways. Contact Kirsten Lamb at for more details

Market change

Worldwide – percentage of online
retail transaction volume


Credit cards

Debit cards

E-mail payment

Store-branded credit

Prepaid or gift card

Bill Me Later or similar credit





























Notes: totals may not add up to 100% due to
rounding. (1) forecasts Source: Javelin Research (published in
November 2008)