Alternative Payment Methods: Electronic Wallet Based APMs

Electronic wallet based APMs operate proprietary platforms that act as the intermediaries between the consumer and the merchant while utilizing standard credit card and ACH networks. Payments for goods and services are taken by the APM directly from the consumer’s credit card or checking account. We consider these schemes wallets because these sales transactions generally pass through the APM to a conventional payment processor or the Federal Reserve (NACHA). PayPal Website Payments Standard, Mazooma and Google Checkout are some good examples of this model. Under these schemes, the consumer creates an account (“wallet”) on the APM’s Web site or when they first select the APM on a participating merchant’s check-out form. When the consumer makes a purchase, the amount is deducted from their checking or credit card account by the APM. In the case of PayPal, most deductions are made from checking accounts. Google Checkout charges the consumer’s credit cards.

In this category, merchants too, must create an account not unlike a standard merchant account. As has already been stated, however, all transactions pass to the APMs payment processor (or the Fed in the case of checking account-based consumers), not the merchant’s. Disputes and other situations requiring mediation are handled by the APM. In most cases, the APM restricts the merchant from seeing some or all of the payment data, providing the consumer with varying levels of anonymity, privacy, and enhanced security. This feature makes this type of APM attractive to consumers who are concerned about using their credit card with an unknown merchant or consumers with general privacy concerns. Wallet-based APMs also offer express check-out features, making the check-out procedure quicker and easier for the consumer.

Each of these two leaders also has its own primary advantage. PayPal for instance enjoys a large consumer base of 150 MM users, although the number of active users is certainly less and varies over time. Google, of course, enjoys its dominance in the paid search space, offering an integrated Adword payment conversion strategy. What’s more, Google has offered Adword fee incentives to Checkout users.

Regardless of our definitions, both examples (PayPal and Google Checkout) are effectively payment processors. While PayPal is also available through established payment processors, it has diversified and now functions as payment processor itself, offering conventional credit card payments as well. These APMs are priced comparably with credit cards at approximately 2% plus $0.30 per transaction. The only caveat lies with APMs that include relatively high per-item fees. This portion of the rate has a negative impact on merchants selling products with low average ticket values.