Web shoppers' new option: Bill me later

Some seven Internet merchants, including MyMusic.com, have been testing the new feature, which was developed by start-up company I4 Commerce, since earlier this year.

On Tuesday, payment-processing company CyberSource announced that it has integrated the "bill me later" feature into its service and has begun marketing it to its merchant clients, which include Home Depot, Overstock.com and Nike.

The service should attract customers who can't or won't use a credit card online and encourage them to return, said Steve Klebe, vice president of strategic alliances at CyberSource.

"From what I've seen, this is one of the few alternative payment types that has its act together," Klebe said.

The "bill me later" feature works much like a credit card, said Mark Lavelle, vice president of business development for I4 Commerce. After entering their billing address during the checkout process, shoppers click on the "bill me later" button. Instead of asking for a credit card number, the service asks consumers to enter their date of birth and occasionally the last four digits of their Social Security number, Lavelle said.

I4 pays the merchant, then within 10 to 15 days after the buyers complete their initial transaction, I4 will send them a bill for all of their "bill me later" transactions during that time period, Lavelle said. They can either pay the full bill at once or pay a portion of it. I4 charges 17.9 percent interest on any outstanding balances, he said. Much like a credit card company, I4 will bill customers on a monthly basis.

I4 figures its service will be attractive to both consumers and merchants, Lavelle said. Consumers will be able to purchase goods online without having to use a credit card, which should appeal to those who don't have credit cards or who are reluctant to use them online. Meanwhile, I4 charges merchants a lower transaction fee for its "bill me later" service than most credit card companies charge, he said.

"The main thing this product does is it takes the friction out of the purchasing process," Lavelle said.

Lavelle declined to name the companies that have been testing the service. Klebe said CyberSource is hoping to sign up two to four large merchants for the "bill me later" service by the end of the year. I4 plans a big marketing push for the service beginning next year, Lavelle said.

Alternatives slow to catch on
Credit cards have been an obstacle for online commerce. Around 20 percent of American adult consumers don't have a credit card, according to Avivah Litan, an online payments analyst with Gartner. Meanwhile, most purchases in the United States are made without a credit card, according to James Van Dyke, an electronic payments analyst with Javelin Strategy and Research. Additionally, many consumers have been reluctant to give out their credit cards online, for fear of having the number compromised or their identity stolen.

A number of start-up companies have tried to fill this gap by introducing alternative payment mechanisms online. Last year, Amazon, for instance, introduced a purchase-order system targeted at big businesses and institutions, such as universities. Meanwhile, 7-Eleven is testing shopping kiosks that allow customers to pay for online purchases with cash. And PayPal has proven to be one of the most popular alternative payment services; its service, which lets buyers pay for transactions out of their bank accounts or PayPal account balances, is used for millions of eBay transactions.

But many other payment models such as Flooz and Beenz have failed. Ninety percent of online purchases are still made using a credit card, according to Van Dyke.

Tricky proposition?
I4's "bill me later" feature could prove costly to the company, Van Dyke said. The company is liable for transactions where a consumer receives goods from a merchant but doesn't pay for them. Additionally, I4 will have to pay the expense of authenticating consumers. That may prove the most difficult part, because some of the target audience for "bill me later" will be consumers who don't carry any credit cards because of bad credit, Van Dyke said.

"There's an opportunity here, Van Dyke said. "Someone's eventually going to get this business. It's just going be tough for whoever does get it to make it work."

Although I4 is allowing customers without credit cards to purchase online, it's approving less than half of the "bill me later" requests from such consumers, Lavelle said. Meanwhile, the company is working closely with merchants and using their customer data to help determine credit risks, he said.

"Most of the merchants we work with don't have huge fraud problems with Visa or MasterCard," he said. But those merchants are upset because they still have to pay high credit card transaction fees, he said.

But privacy issues could be another problem for I4, said Gartner's Litan. Consumers are extremely reluctant to give out personal data online, especially social security numbers, Litan said.

"People are really nervous about it," Litan said. "They have a big uphill battle," even if they are only asking for dates of birth and the last four digits of Social Security numbers, she said.

"That's probably almost as bad if not as bad as giving your credit card out. For some people it's even worse."