Booz Allen report on E-Payments

E-Payments To Become Mega-Market

Success will depend on reach, pricing, and strategic partnerships with online retailers.

London, July 18, 2006 — The recent launch of Google Checkout bolsters the growth of the e-payments market. In the UK, internet sales increased by 350% in the five years to 2005 and are estimated to reach GBP26bn in 2006, with shoppers spending on average GBP1,000 online. According to Booz Allen Hamilton, online retailers could be controlling 15% of private customer transactions by 2010 equating to GBP60bn of spend.

• The volume of online card payments in the UK has increased five-fold over the last five years, reaching 310 million transactions in 2005 for a total of GBP22bn and accounting for 5% of all personal card payments.
• The UK is currently the largest e-commerce economy in Europe, with an estimated 28 million of us using our plastic cards to buy online, which of course is set to grow further in the next twelve months.
• A growing number of traditional high street retailers have jumped on the internet bandwagon so as not to lose sales to their virtual competitors and for every GBP100 of sales over the Internet, GBP71 is spent on physical products, GBP26 on services and GBP2 on digitized products.

Online Competition for Established Financial Service Providers

Default payment mechanisms, such as credit cards and bank transfers – which currently make up 90% of all consumer transactions – will become increasingly threatened by new ePayment solutions. These solutions will offer a compelling proposition of easy, security and low transaction charges.

If existing providers (predominantly the card issuers and acquirers) do not find an effective counter strategy we believe they could lose 10-20% by 2008 and in the long term up to 30%. "The development of the e-payment market will be driven by the big players, Pay Pal and Google. We believe in the long-term they will succeed in getting sufficient critical mass to be attractive to retailers," said Booz Allen Vice President Victor Koss.

Pricing and Partnerships Will Be Critical

For the new online payment systems to gain wide acceptance by retailers they will need to have an attractive pricing policy. This will be determined by big retailers, such as Amazon, which already have a range of payment options in place. According to Nicolas Reuttner, Booz Allen Principal, "e-payment service providers will have to get exclusive partnerships and services in place, to ensure that online retailers are not able to disintermediate them in the long term, for example by offering their own solutions, or pushing credit cards to lower their charges to meet the new market prices."

Security Standards a Prerequisite for Driving Consumer Adoption

Security is a key concern with 20% of consumers in 2005 deterred from shopping online for security reasons. However, secure e-payment systems mean that consumers don't need to share credit card details with merchants. In addition to being able to buy with only one or two clicks consumers may be able also able to view a transaction history of all purchases they have made, often with live links through to retailers.

The e-payment Market Will Consolidate with 3-4 Players Controlling the Market

Paypal has gained more than a hundred million customers in only a few years since its launch in 1999 and handles more than US$17bn annually. Booz Allen predicts that Google Checkout will take even less time to establish itself as a major player. However, with enormous growth expected in this market there is likely to be room for a further one or two players.