Jim Daly of Digital Transactions wrote a good piece on Amazon’s Flexible Payment System (FPS) in the April 08 issue. Here are some of the key takeaways:

• Amazon’s investment in alternative payment provider Bill Me Later last December was their first public move into the payment payment processing space. Using Bill Me Later, Amazon expects to not only lower their own transaction costs (by ~.50 bps) but hopes to also increase sales by capturing more impulse buyers.
• The launch of FPS is most likely part of a larger play for Amazon, like……
• FPS pricing has some customers unhappy. For example, the 1.5% on bank transfers and amounts charged on stored value balances (Amazon essentially double dipping).
• Beta user Buxfer gave the FPS technology high reviews but cited the requirement that both buyer and seller need an Amazon account as the biggest drawback.

From my standpoint, I would call out two things. First, I wonder how many ewallet providers will be able to cross the tipping point of scale with both the consumer and merchant. If there aren’t enough consumers demanding the payment option merchants won’t offer it as an option and if merchants don’t offer it as an option consumers won’t use it.

Of the three major players, PayPal has become much more inclusive in their offering, Amazon remains exclusive (both buyer and seller must have an account), and without a larger user base to begin with, I just don’t think Google checkout will be able to pick up enough steam. Then of course there is a rush of new ewallet type providers (using a device like a mobile phone or payment instrument such as a phone number) crowding their way into the market as a preferred payment providers.

Secondly, I think the most significant thing FPS did was build sophisticated payment processing logic on their end - instead of making that the merchants responsibility. In nearly all the payment systems today, the logic is built and maintained by the merchant. At the same time, in reading through all of it’s capabilities - I’m left wondering, who again needs this?

The article is only available in pdf format and I had to post the entire April issue. If you’re interested in reading the article it starts on page 24.

For the past few years there has been nothing but positive buzz about alternative payment types PayPal and Bill Me Later in the payment processing industry. By all measures their market penetration has been disruptive and impressive. Today for the first time that I’ve seen, Kelli Grant of the Wall Street Journal has a piece out Beware of Web-Pay Alternatives that focuses on some of the more potentially unappealing aspects of these payment types for consumers. Note, for PayPal, Kelli is highlighting PayPal Pay Later which is different from their standard offering.

Here are three reasons you may want to think twice before using one of these services:

Your Credit Score Could Take a Hit. If your goal is to get away from paying with plastic, be especially cautious about services like PayPal’s Pay Later and Bill Me Later, which function as a line of credit. “Any new account, especially one that immediately carries a balance, is considered a risk on your credit report,” said Gerri Detweiler, a credit adviser at Credit.com. Opening one new account could push a credit score of 707 down to 697 for six months, according to Fair Isaac Corp.’s FICO Score Simulator.

Even worse: Your score could drop by as much as 100 points if you come close to maxing out the line of credit, said Ms. Detweiler. For someone planning to shop for a mortgage, home equity line of credit or other loan, the difference could lead to higher interest rates and thousands of dollars more in payments. Even if you aren’t planning to make a big purchase, a drop in your credit score could prompt your creditors to raise the rates on your existing accounts. PayPal clearly discloses its line of credit as a credit product, as well as the terms and conditions before consumers apply, said spokeswoman Amanda Pires. Bill Me Later didn’t respond to requests for comment.

You Will Pay High Interest Rates. If you carry a balance with alternate-payment services, you face exorbitant interest rates. PayPal’s buyer-credit option charges a variable 22.75% annual rate, while Bill Me Later has a variable interest rate of 19.99%. For comparison’s sake, standard credit cards carry an average variable rate of 13.89%, according to Bankrate.com. (For consumers with great credit, those rates could be much lower.)

You’ll Get Weaker Protections. Security is frequently touted as one of the upsides to alternate-payment programs. After all, there is no credit-card number to steal. “But that means you won’t have the same protections as if you were paying with a credit card,” said Consumer Federation’s Ms. Grant. “[Fraud] coverage is extremely limited, and whatever protections the service does give you are voluntary.”

When it comes to your credit card, federal law dictates what your liability will be if someone makes an unauthorized purchase. (At most, you will pay $50.) The law also protects a consumer’s right to dispute charges on their account for incorrect billing and defective items, among other problems. Bill Me Later, eBillme and PayPal have zero-liability policies for unauthorized charges (no matter what method you use to pay), but their policies are somewhat weaker when it comes to disputes.

Google has been pretty tight-lipped about both internal and external performance metrics surrounding Checkout since it launched 18 months ago. In an interview with Yi-Why Yen from Fortune, they finally provided some data about the impact it’s having for online merchants.

Google claims that users are 10% more likely to click on an ad that displays Checkout and 40% more likely to make a purchase once they reach the site. The 40% higher likelihood of a purchase seems high to me.

Wall Street analysts estimate that Google has spent $80 to $100 million since June 2006 to get sellers and shoppers to use the service.

While that data is better than nothing it still does not provide any meaningful information about the ROI or future viability of Checkout. Checkout makes a lot of sense for Google as they can further entrench themselves in the search to transaction value chain and layer on added value to advertisers. The big question is what happens to Checkout when it’s not free?

My suspicions tell me that Checkout has been a disappointment internally and that the long term viability could potentially be in question. Their challenge will obviously be to gain broad enough demand from both consumers and merchants to justify their presence.

I wish that they would share some more detailed information but their unwillingness to do so is probably a good indication of what’s really going on.

Mercator Advisory Group, an independent research firm in the payments industry, recently completed a study on alternative payments. This is a partial abstract of the report that I thought was very helpful in putting the online and alternative payment space in perspective with the payments industry as a whole:

While retail point of sale continues to be the largest area for consumer payments, online consumer spending has yet to reach its potential from the payment perspective. In 2000 less than 1 percent of sales were via the internet. Today, that spending is likely to be $116 billion in the United States, a full 5% of retail spending. But this annual growth is predicted to slow from 20 percent to 16 percent by year end and further to 13 percent by 2008. As these rates slow, online merchants must meet their customers “where they are” with the right payment mechanisms to maintain the highest possible growth and the widest possible sales funnel. Alternative payment systems are fast becoming an important way for merchants to sustain and accelerate that online sales flow.

This report and most others that analyze the affect of alternative payments show that by implementing additional payment types such as PayPal, Google Checkout, and Bill Me Later, merchants can increase sales by lowering shopping cart abandonment rates.

The study is much more extensive in the approach and analysis than what I’ve called out and these guys have a great reputation for quality work.

PayPal is a great story. In less than 8 years they’ve been able to sign up 133 million users in over 100 markets. In 2006, they generated nearly 30% of eBay’s (PayPal is owned by them) $1.4 billion operating income.

But Amazon is about to rain on their parade.

The secret to PayPal’s lucrative business model is that they charge the equivalent of credit card fees for transactions that really amount to ACH (electronic check) transactions. The cost of an electronic check transaction is substantially less than a credit card transaction. (Click here to see where credit card fees come from.)

For example if you take payment from a PayPal user who’s pulled funds from their checking account, you’re going to pay 2.90% and .30 cents. PayPal’s cost on that is very small percent. In contrast, if someone uses a credit card to fund their PayPal account, PayPal jacks up the rate and charges the receiver 4.9% and .30 cents. PayPal has been making huge profits for years now using this model.

Amazon has squarely set their crosshairs on PayPal’s making machine of processing electronic check transactions at credit card rates. Amazon is the only player in the online payments space that could pull this off. They are leveraging 69 million registered and active Amazon users who can immediately replace their PayPal account with one from Amazon.

So with a third and probably final major entrant into the online payment processing space, PayPal, Google, and Amazon will have to hash it out between themselves. Google’s attempt at buying market share by waving fees has not been successful and their inability to access funds from a checking account has been a shortcoming. We’ll just to wait and see if this is a space they really want to play in.

Until then, most merchants are trying to gauge demand for each different payment type to determine if integrating all of these different methods makes sense.

PayPal had the sandbox all to themselves for quite sometime but they better start brainstorming about ways to replace the income they are going to lose when Amazon starts raining on their parade.

Tempo Payments, Inc. is shaking up the debit card processing industry, and at the same time, sending a loud message to the larger incumbent banks and financial institutions that have dominated (in near monopoly style) the payment processing space for decades.

Tempo’s innovation is a pin based debit card that works on the ACH network, which let’s them circumvent the issuing banks and therefore the high priced interchange that they charge. They’ve built out their own network and are now providing the platform for retailers, financial institutions, and others to issue their own private labeled Tempo cards to their customers. Prior to Tempo, it was largely cost prohibitive for all but the largest banks to issue their own cards because of the high costs of building the inhouse processing capabilty.

Tempo is providing a hosted solution that will allow retailers and financial institutions (banks, and non-bank card issuers) to issue and manage their own portfolio.

Now retailers such as Wal-Mart, Sam’s, CVS and others (who are currently signed up with Tempo) can issue their customers private labeled debit cards and and offset some of the transaction fees by the revenue they are generating. Financial institution’s are now able to do the same and effectively compete with the largest industry incumbents.

In April of this year Tempo secured an agreement with ChasePaymentech to make their debit card available to an additional 600,000 merchants. That was in addition to the existing 200,000 they already had.

One of the advantages offered to consumers is that they can now get a pin-based debit card that does not have to tied to a certain bank account, which is also advantageous to whomever is issuing the card because then they don’t have to be a bank.

What’s interesting about this is how a start up with only $17 million from venture capital firms Integral Capital Partners, Cardinal Venture Capital and Selby Venture Partners could successfully overcome the long standing barriers and gain admittance into the industry.

Others trying to enter the alternative payment processing space like Gratis Card should take note of their market penetration model. By inking a deal with ChasePaymentech they avoid the hassle that Gratis Card is dealing of signing up merchants one at a time. This is the chicken and the egg problem. Tempo is heading down a path of eliminating the supply problem which puts them in a much stronger position.

Tempo’s early success will surely attract a lot of attention from the large incumbents in the industry who are threatened by this such as the existing pin-based debit networks such as NYCE, Pulse, and Shazam as well players like Visa and MasterCard who see that disruption is coming.