Tech Industry

Commentary: Credit cards rule online, but e-currencies remain

Programs that protect against credit card theft have calmed consumer fears about online purchases, and credit cards have become the accepted payment in online transactions, but some types of e-currencies are still flourishing.

Alternative Web currencies emerged to capitalize on the belief that consumers would be reluctant to use credit cards online. By positioning themselves as third parties insulating consumers from potential loss, these "e-currencies" attempted to move the traveler's check model to cyberspace.

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Credit cards pushing
e-currency out of the picture
However, credit card companies, with their robust electronic payment infrastructures, have moved quickly to provide protection against online theft of credit card numbers. Creative approaches such as the American Express "onetime use" credit card number program, designed specifically to protect customers from credit card theft, was another nail in the coffin for the idea of alternative e-currencies gaining mainstream use. These types of programs have calmed consumer fears relating to online credit card purchases. As a result, credit cards have become the generally accepted payment facilitator in electronic business-to-consumer transactions.

Despite this overall trend, some types of electronic currencies are still flourishing in specific situations and market niches.

For example, Amazon.com and other prominent consumer sites are selling gift certificates successfully. These could evolve into a sort of "site currency" as companies like Amazon become electronic malls. These portals could provide access to other consumer-oriented Web sites, enabling consumers to spend the gift certificates at those sites as well. This would be a direct equivalent to the gift certificates sold by some brick-and-mortar malls today that are redeemable in any store in that mall.

The purpose of currency is to facilitate trading between commodities that are not easily traded against each other directly--or where a degree of anonymity in the transaction is desired. On the Internet, where information about goods can travel at the speed of light, alternative forms of currency may evolve to address these issues in niche markets.

For example, one problem with credit card purchases is that you need to provide a lot of information about yourself--at least to the credit card company. One benefit that electronic currencies can offer is a greater degree of anonymity for the purchaser, and this desire for more anonymity may help to drive the evolution of some forms of e-currency.

Several forms of alternative payment mechanisms, ranging from debit cards to e-currencies, are currently available. Some consumer groups--such as teens, who do not have their own credit cards, and individuals with strong privacy or credit fraud concerns--prefer them. Whether any of these--and if so, which--are appropriate for a retail site depends entirely on its target consumer group. Therefore, businesses with business-to-consumer sites need to assess these various credit card alternatives individually, based on the needs of their customers. What works for one site may be entirely inappropriate for another.

We recommend that companies that wish to sell to the public via the Web should first concentrate on working with at least one (if not all) of the credit card companies. If a company has extra resources to devote to facilitating purchasing, it may want to consider offering "site currencies" built on the gift certificate model or other site-specific alternatives to direct credit card purchases. In general, however, e-currencies should not be considered as a replacement for credit card e-commerce transactions.

Meta Group analysts Dale Kutnick, Gene Alvarez, Peter Burris, Val Sribar, David Cearley and William Zachmann contributed to this article.

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