Tue, Nov 20, 2007 page10

• FEATURE: Changing habits propel PayPal into mainstream

  • NY TIMES NEWS SERVICE
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  A decade ago, PayPal was best known as the payment method of choice for Beanie Babies purchases on eBay. This holiday season, it could pay for a diamond ring on the online jeweler Blue Nile.

  Blue Nile and several other high-end Web retailers are introducing discount promotions with PayPal, now a subsidiary of eBay, in hopes of attracting consumers who are willing try methods other than credit cards to pay for their online purchases.

  Retailers are also looking to PayPal -- and competing credit card alternatives like Google Checkout and Bill Me Later -- to help them lower credit card processing costs. In tighter economic times, retailers say such savings can mean the difference between a profit and a loss.

  "Merchants are definitely focused on generating more volume for alternative payments in the holiday season," said Bruce Cundiff, an analyst with Javelin Strategy and Research, a consulting firm. "It comes down to changing consumer behavior."

  That, Cundiff and other Web analysts said, is where the Blue Nile promotion comes in. Starting next Monday, customers who buy with PayPal will save 20 percent on their purchases, with a maximum discount of US$50. More than 15 merchants, including BarnesandNoble.com and SharperImage.com, will follow suit. Other sites, like Shoebuy and Zales, will offer other discounts and shipping promotions to PayPal customers.

  Cundiff said PayPal was the major reason that credit card alternatives have gained roughly 14 percent market share.

  PayPal said about 150 million people and an undisclosed number of merchants "in the hundreds of thousands" use its service. The subsidiary's revenue jumped to US$470 million, an increase of 35 percent in the most recent quarter over the same period a year ago.

  Only in the last year has PayPal become popular enough to use on Blue Nile, said Darrell Cavens, senior vice president for marketing and technology at the online jeweler.

  "They're not so alternative anymore," Cavens said. "It's becoming mainstream."

  Blue Nile offered the PayPal option to its customers last month, but he declined to say how many buyers had used the service.

  "But we've certainly seen much higher sales through PayPal than I had expected," he said.

  PayPal has lots of competition from Google Checkout and Bill Me Later, among other companies.

  Michael Kirkland, a Google spokesman, said Checkout would soon announce holiday promotions similar to those offered by Bluefly, Buy.com and other merchants during the back-to-school shopping season. At that time, the merchants provided free shipping and other discounts for Checkout's customers, Kirkland said.

  Bill Me Later, which allows merchants to extend short-term credit to customers, has enjoyed similar growth. Gary Marino, chief executive of Bill Me Later, said more than 700 companies offered the company's service, more than twice last year's figure.

  "There's a bit of a herd mentality when it comes to this," Marino said. "But it seems to be working well for us."

  The big question for retailers that take the time to try alternative payment services is whether customers who opt for Bill Me Later or PayPal would have otherwise bought the goods anyway with their credit cards. If that is the case, money saved on payment processing fees is not necessarily enough to offset the time and expense of changing a Web site's payment technology.

  Marino, though, contends that Bill Me Later delivers new, wealthy customers. The average yearly income of a Bill Me Later user, he said, is US$75,000, well above that of the typical Internet shopper.

  Alternative payment companies can charge less for processing fees than credit card companies partly because they spend much less on marketing. Frank Sui, an analyst with Deloitte Consulting, said companies like Pay Pal, Bill Me Later and Google Checkout spend less than US$5 to acquire each new customer, compared with more than US$250 spent by credit card companies. Sui said credit card companies have also struggled to invent new services at the pace of their Internet competitors.

  Still, the traditional credit card companies are not idle. MasterCard, for instance, is working with PayPal. The companies said that this week they would announce a service called PayPal Plug-In, allowing PayPal users to shop with any merchant that accepts MasterCard. The service, which PayPal has tested for much of the last year, requires users to download a software application.

  Michael Wagner, chief executive of eToys, the online toy retailer, said he had resisted offering PayPal and other services. Now, a month after the company began to use PayPal, the service accounts for nearly 9 percent of the site's purchases, with no discounts or other promotions to entice customers.

  "We're truly surprised, and very pleased with it," Wagner said.

  PayPal transactions cost eToys at least 0.3 percent less than those processed by credit card companies. And PayPal does not require eToys to compensate the company for fraudulent transactions, as the major credit card companies do, he said.

  "So we're a big supporter of these other payment methods," Wagner said. "Somebody has to keep the MasterCards and Visas honest."
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