Online cash payments on the cards?

Knowing your customers is a mantra of retail. But when HMV ran an online promotion for the band McFly to its great surprise it failed to generate the expected revenue because it had not fully realised the band's audience was too young to have access to debit and credit cards in order to pay online.

A spokesman at HMV explains: "We could not understand why it did not fly and then we realised that they weren't able to buy online as they were too young."

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To date it has had to rely on these younger customers using their parents' cards but for future promotions HMV might look at how it can empower them and make them less dependent on 'pester power'. HMV is not alone in the retail sector in making it hard for the cash customers to purchase goods online.

And this group not only comprises younger consumers but also many older people who are cautious of giving out their financial details online. Add to this the millions of people who do not have a bank account and the necessary plastic cards to buy online. These customers have been excluded from the benefits of the internet shopping boom and retailers have been missing out on many billions of pounds of potential sales.

According to Ukash - one of the first online cash payment products on the market - this potential amount of missed sales adds up to a massive £18bn per year, based on current online retail sales figures.

Despite this big number Mark Chirnside, chief executive at Ukash, says it is not really a surprise UK retailers have not tapped into this market given the exponential growth in online sales in recent years. "Retailers have been focusing on the daily challenge of delivering the basics of customer service and fulfilment for the customers they already have. Extending into new markets is not top of their to-do list," he explains.

However, he predicts that once the growth in online sales starts to slow retailers will have to seriously consider focusing on the millions of digitally excluded consumers out there. There is already evidence that this is starting to happen as a number of major retailers are considering adding alternative payment methods to the standard debit and credit card.

New Look is one of the first retailers to include PayPal as a payment option, which Shaun Wills, business and strategy director at New Look, says will be useful for young shoppers who want to use the cash held in a PayPal account to pay for goods online. This is especially useful for New Look as Wills says the company has a "huge" market among teenagers who could easily have their pocket money put into PayPal accounts, avoiding using their parents' card details.

Wills says the company also has a high proportion of customers who still prefer to use cash so they would find a cash-alternative payment method useful.

He says: "We still take a high proportion of cash in-store so the worry is that we are excluding them from buying online. It's an issue and there are lots of options to consider including pre-paid cards, gift cards, Google Checkout and so on."

Having such a choice is an issue, according to Wills, who adds: "The problem for us is that there are so many alternatives, it's like Betamax and VHS, so we'll see which the customers prefer."

Chirnside questions this strategy: "We concur that the market is relatively new and that there will be winners and losers over time but retailers should be asking whether they can afford to wait and miss out on the revenue from the currently excluded cash consumers."

For example, he suggests PayPal is ideal for people who have concerns about the risk of identity theft because they do not have to disclose their details to retailers but because such accounts are still linked to a customer's bank account they are not a "pure cash alternative". So the likes of Ukash can sit alongside PayPal.

Others, such as PayOffline, which allows online customers to print off a bar-coded invoice during the checkout process to pay at the nearest payzone outlet, believe there are signs of retailers researching alternative payment methods as they seek to attract those new customers that to-date they have been unable to reach.

Steve Berry, managing director of PayOffline, suggests it is a "no-brainer", adding: "They can see the potential market is there and I think the attitude of retailers is now changing."

This is certainly the case for pure-play internet merchants because unlike multi-channel New Look, where cash-only customers can easily go into one of the group's stores to purchase, at an online-only store this is not an option for shoppers.

In sectors such as fashion where attracting and keeping the loyalty of young consumers is vital to long term revenue generation this is particularly important. Leading online-only fashion chain ASOS is among those in research mode.

Jon Kamaluddin, finance director at ASOS, says the company is always looking at alternative payment mechanisms even though there has not been much feedback from customers saying they can't shop with the company.

He says: "We are currently looking at PayPal and pre-paid cards. We think PayPal has gained traction, with many people now familiar with it, and although pre-paid cards are niche we see them as an emerging payments method. We're not working to a date on this but within the next six-to-12 months it is likely."

But not all retailers see the need to target those currently excluded. For instance, online gadgets retailer Firebox says the need to attract cash customers will remain secondary. According to Christian Robinson, managing director at Firebox, the company's target audience does not need to pay by cash because they are all online at home or work, are typically over 18 years of age, are tech-savvy, and predominantly in the ABC1 (middle class) demographic.

In addition, the company would also expect the alternative payments provider to market Firebox as part of its promotional activities and the issue for Robinson with some of the smaller providers is that they are unlikely to have sufficient resources to deliver on this requirement.

Despite the reservations of certain online merchants there is growing evidence to suggest large retailers are now beginning to recognise it is no longer sensible to exclude the cash-only customer from the advantages of shopping online.

Accepting alternative payments opens up 24-hour shopping to all their potential customers, not just those who own cards and are prepared to use them, and can deliver significant sales revenue that will be vital when online sales growth slows.