Using Cash in Online Transactions
Much has been written about the demise of cash in recent years and statistics have been produced by various organisations to show that the increased use of payment cards signals the slow death of coins and banknotes. But there is no escaping the fact that cash transactions still account for a sizeable level of payments – by both volume and value. According to the UK Association for Payment Clearing Services (APACS), London cash transactions account for over 40 per cent of consumer spending in the United Kingdom and for smaller payments – of £5 (US$9.51) and below – they represent 63 per cent of transactions by volume.
One main area where this cash is spent in the UK is on the high street in retail stores – where £90bn is spent using cash from a total annual spend of almost £260bn. It is rather strange, therefore, that merchants are not taking advantage of accepting cash for payments made for purchases online – by far the fastest growing area of retail, which totalled £18.3bn in 2003, according to market research group NOP. Sales online over November and December were 20 per cent up on the previous year, compared with a mere 2.5 per cent increase on the high street, according to figures from the IMRG (Interactive Media in Retail Group).
It is clear that merchants are missing out on a significant numbers of sales by not accepting cash for transactions made over the Internet but it is a subject that has had little said about it. The chief reason being the difficulty in getting cash online, so it has been ignored by merchants who have continued to rely on only taking payments from credit and debit cards.
However, it is not only this perceived complexity of receiving cash online that is deterring merchants but also the assumption that they are not really missing out on that many sales. This belief is helped by the fact that it is almost impossible to calculate the numbers. But ignoring this potential opportunity for incremental sales would be a major mistake because there are many millions of people in the UK who would prefer to use cash online instead of other forms of payment – and for very different reasons.
For a start, there are great swathes of people who do not even have a credit or debit card, according to APACS, whose research shows that as many as 16 per cent of adults in the UK do not have a debit card, equating to nearly 14 million people. And of the people that do possess payment cards, only 11.1 million use them regularly (making at least one payment per month), which amounts to only 23 per cent of UK adults.
There is a widespread misconception that people who mainly use cash belong predominantly to lower socio-demographic groups. While this might be the case for some people, there are many others who are relatively affluent but who deal mainly in cash such as small-business people (for example plumbers). These people happen to be most comfortable when making payments in cash and this mentality on the high street naturally extends to their behaviour on the Internet. These many millions of people could be classified as the ‘digitally excluded’ because they have the spending capacity but are not given the opportunity to play a part in transacting online and enjoying some of the lower prices that are available today.
Another widely held view is that cash payments are typically for lesser amounts. While it is true that payments of under £5 are mainly made in cash, there is no escaping the fact that these billions of small amounts ultimately add up to a very large sum that no merchants should sensibly write-off as unattractive business. In addition, there are many people who are still reluctant to use their cards online because of continued worries about security. While they might be okay using their card for spending on a well-known high street brand, they might be reluctant doing so with a lesser-known name.
It remains the case that many people still assume it is safer to use their card in a restaurant than it is with an online store. Undoubtedly adding to the concerns of these people will have been the recent publicity highlighting the growth of ID theft. Finally, there are the many transactions that people would prefer to make online without having an audit trail linked to their debit or credit card. And this is not necessarily for illicit purchases but could be as a result of a purchase of flowers or a surprise weekend away, for a husband or wife, being kept secret.
While it would be untrue to suggest that there are no solutions on the market that attempt to address this cash-paying market, they do have their limitations. The main one involves the need by virtually all the solutions for registration by the consumer before they are able to make a transaction. This requirement provides a great barrier to entry for many consumers and could deter as many as 60 per cent of people from using such a service. It also removes the instant gratification that the customer enjoys when paying for goods with cash.
Among the solutions in this category is Splash Plastic that works effectively as a top-up card that can be used on the websites of participating merchants. In the US there are also pre-pay Visa and MasterCard solutions on the market that act like pre-pay debit cards that can be used online. But again the deterrent is that these solutions have to be bought online and pre-registry is required. And since the payment for these cards requires the use of a credit or debit card the limitations are obvious.
Possibly the biggest online payments solution is PayPal – owned by eBay – that acts as a device for holding a payment before releasing it to a third-party as payment for goods bought over the Internet. However, at the moment payments can only be made into a PayPal account from a debit or credit card. For the consumer wishing to pay in cash a Western Union or MoneyGram transmission is required, but this would incur much more cost.
BT (British Telecom) has also launched an online payment method – Click & Buy – that initially requires registration and can be used to pay for goods online through an account that the consumer pays into via credit card, direct debit or through their BT telephone bill.
A particularly fertile area for the development of new payment solutions is the mobile phone market where consumers are being offered various methods for paying for content. Vodafone has developed ‘m-pay’ cards, which allow people to link their Vodafone account to a credit or debit card to pay for content. By quoting their account number they can then purchase ring tones and music downloads direct from their phone. A similar solution is Simpay, which is being developed by a consortium of mobile networks – that also holds cash amounts in anticipation of the consumer purchasing content. The drawback with both solutions is that neither currently has the facility for amounts to be paid into the accounts using cash.
The only product on the market that offers anything like a true cash alternative for purchasing goods online is the new Ukash service. Consumers can buy Ukash at any of the 12,500 PayPoint terminals located in shops throughout the UK where they will be given a unique Ukash number. By entering this 19-digit Ukash number when paying for goods online, the purchase will be completed and any change given in the form of another unique Ukash number.
Ukash works in a similar way to the mobile phone ‘top-up’ market, which it believes is proof that consumers now have the mindset to purchase goods via pre-pay. That the majority of mobile phone users probably have bank accounts and payment cards does not deter them from choosing to pay in cash for top-ups to their phones in a pre-pay manner.
Since the levels of online sales look set to increase at impressive rates for the foreseeable future and the public will inevitably use cash to pay for goods for many years to come there will undoubtedly be increasing demands by consumers for a cash alternative for online transactions. As a result various solutions will continue to hit the market but adoption levels will depend entirely on the simplicity of the product.