ALTERNATIVE PAYMENTSBitcoin and Beyond

OCTOBER 2014

Bryan Yeager

Contributors: Rimma Kats, Daniel Munns

Read this on eMarketer for iPad

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 2

CONTENTS2 Executive Summary

3 Spotlight on Bitcoin

7 Alternative Payments Beyond Bitcoin

11 eMarketer Interviews

11 Related eMarketer Reports

11 Related Links

11 Editorial and Production Contributors

EXECUTIVE SUMMARY

Over the past 12 months, the virtual currency Bitcoin

has experienced major price swings and a mysterious

break-in at a major online exchange, Mt. Gox. But it

has also gained wider acceptance, with a growing

number of major brands signing on to accept Bitcoin

as a form of digital payment.

Consumer awareness and usage remains low. Many consumers have not heard of Bitcoin, and among those who have, many don’t quite understand what it is or what benefits it offers over other forms of payment. Still, the number of consumers who have actually used Bitcoin, while small, is not trivial. Separate surveys have found that a sliver of US respondents (2% or less) have used it. A small vendor and user base has been established.

Though the virtual currency has been garnering a lot of media attention, it is far from the only alternative payment method merchants are testing. Others include digital wallets, bank transfers, deferred payments and loyalty points. Merchants are deploying these methods to achieve several different goals, from improving conversion rates to eliminating fraud.

This report provides a high-level overview of consumer and merchant perspectives on the state of Bitcoin as a payment method, as well as details on other noncard alternatives being used in ecommerce. It is geared toward digital retailers interested in accepting alternative payments, as well as those interested in learning more about Bitcoin and its implications for payments.

This is a companion to eMarketer’s recent report, “US Mobile Payments 2014: Updated Forecast and Key Trends Driving Growth.”

KEY QUESTIONS ■ Why has Bitcoin generated so much buzz as an

alternative payment method?

■ What are consumers’ and merchants’ perceptions

of Bitcoin? How have these affected their adoption

of it?

■ What alternative payments beyond Bitcoin are

being used for digital commerce and why?

% of respondents

Level of Familiarity with Bitcoin Among US Adults,June 2014

Already using Bitcoin2%

Waiting to use Bitcoin3%

Heard of the term Bitcoin and understand what it is24%

Heard of the term Bitcoin but do not know what it is34%

Never heard of the term Bitcoin39%

Note: n=542 among those who are interested in mobile transactions;numbers may not add up to 100% due to roundingSource: 451 Research, "US Consumer Survey" as cited in company blog,Sep 10, 2014179451 www.eMarketer.com

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 3

SPOTLIGHT ON BITCOIN

Bitcoin has evolved from a system associated with

illicit online activities into a combination of exotic

investment asset and legitimate digital payment

method accepted by a small but growing number of

individuals and merchants.

For the unfamiliar, Bitcoin (with a capital B) is an open-source, decentralized virtual currency, comprising a digital payment system and unit of value also called “bitcoin” (with a lowercase b). Instead of relying on a central institution to issue currency and manage transactions, Bitcoin uses peer-to-peer technology to perform these functions.

HOW BITCOIN WORKS There are a number of components and steps for using Bitcoin for digital payments:

■ Obtaining bitcoins (BTC) can be accomplished in

several ways: Receiving them from other users

with existing quantities of bitcoin; swapping out

fiat currency for bitcoins on an online exchange;

or performing a similar trade at the small but

increasing number of real-world bitcoin ATMs.

Exchanges and ATMs can also be used to swap

bitcoins for fiat currency.

■ To be able to send and receive bitcoins, users create

a software-based “wallet.” The wallet generates

a public-facing token or address representing a

specific balance of bitcoins that is provided to other

users or third parties to conduct a transaction.

It also generates a private token—which should

not be shared—that acts as a digital signature for

authorizing a payment.

■ Each computer node connected to the Bitcoin

network has a copy of the “block chain,” which is

a permanent record of all transactions ever

conducted on the system and is designed to

prevent issues like spending two of the same

bitcoin (i.e., double-spending). This feature makes

Bitcoin more akin to physical cash than to other

digital payment systems because no central

entity is required to prevent double-spending

from occurring. Consequently, it also prevents

chargebacks from occurring, as transactions that

have been processed cannot be reversed.

■ Bitcoin transactions get processed via “mining,”

which involves the connected nodes completing

complex mathematical calculations that help

verify each pending transaction in a distributed

manner. Once all transactions in a block are

verified, the block gets added to the end of the

chain and becomes a permanent part of Bitcoin’s

ledger. Though any individual can connect to the

network and participate in mining, most so-called

bitcoin “miners” today use hardware optimized

for processing these transactions and pool their

computational resources in an effort to be the first

to verify a block.

■ Miners are incentivized to participate in the process

by the prospect of receiving new bitcoins for

completing a block. This is also the method for

introducing new bitcoins into the system. Users

can also optionally attach a transaction fee to a

payment, which the miner can accept and use as a

way to prioritize payments for faster processing.

Other important characteristics include:

■ Bitcoin payments have earned the reputation

of being anonymous, though the block chain’s

inclusion of public tokens for each transaction in its

ledger makes these payments pseudonymous at

best. If an individual’s or a company’s true identity

were somehow linked to public tokens they use,

their history of transactions could be exposed.

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 4

■ The bitcoin unit of value is divisible up to eight

decimal places, where 1 bitcoin can be divided to

0.0000001. This feature came in handy as the market

price of bitcoin grew rapidly in 2013 and fluctuated

widely through 2014. For instance, when 1 BTC was

worth $13 in January 2013, a $25 payment would

have equated to 1.92307692 BTC. When the value of

1 BTC peaked at $1,151 in April 2013, a $25 payment

equaled 0.02172024 BTC.

■ The use of cryptography via public and private

tokens, combined with Bitcoin’s distributed

network, provides its underlying security

architecture and also helps explain why it is often

referred to as a “cryptocurrency.”

■ Because Bitcoin is based on open-source software,

it can and has been used to create other virtual

currencies, commonly dubbed “altcoins.” Though

altcoins like Litecoin, Peercoin and Dogecoin have

gained some visibility, Bitcoin remains the

best-known and most heavily used virtual currency.

UPS AND DOWNS IN PERCEPTION AND PRICE Though it was first introduced in 2009, Bitcoin was thrust into the media spotlight in 2013 due to several events: acceptance among a growing number of high-profile web services like WordPress and OkCupid; hypergrowth of bitcoin’s market price relative to the US dollar, which attracted investors to the virtual currency; and the seizure of well over 100,000 bitcoins from the shutdown of online drug marketplace The Silk Road in October 2013.

Speculators trying to capitalize on bitcoin’s ever-growing market price throughout 2013 bought large quantities through exchanges at as low a price as possible in hopes that its value would continue to skyrocket. According to bitcoin stats clearinghouse Blockchain.info, trade volume in US dollars at major bitcoin exchanges spiked in April when the price grew to $238 for 1 BTC and dropped to $91 shortly thereafter. It spiked toward the end of 2013 and into 2014 as well when the price peaked and dropped again. This investment aspect of bitcoin has sometimes overshadowed its utility as a digital payments system.

Although the security of the Bitcoin network has been deemed strong, targeted attacks using malware and other tactics have been used in the past to obtain users’ private tokens, allowing an attacker to steal bitcoins from a user’s wallet. One high profile example was the February 2014 theft of 850,000 bitcoins from popular exchange Mt. Gox—then valued at close to $500 million. The incident led to the collapse of Mt. Gox, the loss of users’ bitcoins and concerns about the viability of securely using Bitcoin.

Despite these struggles, many startups, tech firms, merchants and even financial institutions have been working to evangelize and legitimize Bitcoin as an alternative digital payment method to credit cards and other available options. According to online publication CoinDesk, more than $90 million of venture capital funding flowed to Bitcoin-related companies in 2013. As of October 2014, venture funding had almost tripled to more than $250 million year-to-date.

Through the course of 2014, well-known brands like Dell, Expedia, Intuit and Overstock.com started accepting Bitcoin as a payment method, primarily through payment gateways that enable merchants to accept the virtual currency and help defer risks like price fluctuations when conducting settlements and exchanging bitcoins for fiat currency like US dollars.

Additionally, in September 2014, PayPal made two announcements related to bitcoin acceptance. The company’s Braintree subsidiary, which is used by companies like Airbnb and Uber to accept and process payments, partnered with payment gateway and digital wallet Coinbase to support bitcoin acceptance for its merchants. Later that month, PayPal itself announced a partnership with three gateways—BitPay, Coinbase and GoCoin—to let its North American merchants accept bitcoin for digital product purchases, like music and apps.

One of the key advantages of Bitcoin is that it’s designed with the internet in mind, according to Stephanie Wargo, vice president of marketing for BitPay. “Credit cards were designed for you to walk into a place and swipe the card, and have a physical presence there,” Wargo explained. Bitcoin gives consumers the ability to conduct digital transactions “without providing anyone access to your full line of credit history or bank, just like you were paying for the item in cash,” she added.

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 5

Advantages like the pseudonymous transactions described by Wargo, as well as zero or minimal fees and the ability to send and verify payments globally in a matter of minutes, are some reasons why individuals and businesses alike have been drawn to Bitcoin. Its distributed architecture, which sits outside the purview of any government or corporation, has also been appealing to some, especially since Bitcoin was, in part, created as a response to the 2008 global financial crisis.

CONSUMER AWARENESS AND USAGE OF BITCOIN Even as announcements and media attention help increase awareness of Bitcoin among consumers, many struggle to understand why they should use it instead of another form of digital payment. Specifically, concerns around price volatility and security are keeping many potential users on the sidelines.

A December 2013 Harris Interactive poll conducted on behalf of financial technology provider Yodlee found 48% of US adults were familiar with Bitcoin. A separate December 2013 survey of US internet users conducted by consultancy PricewaterhouseCoopers (PwC) found that while most respondents had at least heard of Bitcoin, just 1% used it and another 27% knew specifically what it was.

% of respondents in each group

Knowledge and Usage of Bitcoin According to USInternet Users, by Age, Dec 2013

Know what it is and have used it at least onceKnow what it is but have not used itHeard something about itNever heard about it

Source: PricewaterhouseCoopers (PwC), "Digital Distruptor: How Bitcoin isDriving Digital Innovation in Entertainment, Media and Communications,"Feb 7, 2014174388 www.eMarketer.com

18-242% 30% 29% 39%

25-341% 31% 30% 38%

35-491% 22% 32% 45%

50-591% 29% 33% 37%

Total1% 27% 31% 41%

More recent surveys show some increase in awareness. A May 2014 study by the Massachusetts Division of Banks and Conference of State Bank Supervisors (CSBS) found 51% of US adults had heard of Bitcoin or another virtual currency, mostly from sources like the internet and television. However, just 3% had purchased or used virtual currency, with 18% reporting they would likely do so in the future.

In a June 2014 survey of US adults conducted by 451 Research, more than 60% had heard of Bitcoin, though more than half of those who had heard of it didn’t know what it was. Just 2% reported already using Bitcoin, with another 3% waiting to use it.

% of respondents

Level of Familiarity with Bitcoin Among US Adults,June 2014

Already using Bitcoin2%

Waiting to use Bitcoin3%

Heard of the term Bitcoin and understand what it is24%

Heard of the term Bitcoin but do not know what it is34%

Never heard of the term Bitcoin39%

Note: n=542 among those who are interested in mobile transactions;numbers may not add up to 100% due to roundingSource: 451 Research, "US Consumer Survey" as cited in company blog,Sep 10, 2014179451 www.eMarketer.com

Respondents in PwC’s study said that they could see benefits like identity protection when making payments (15%), easily conducting worldwide transactions (12%) and instant peer-to-peer transactions without the involvement of a central authority (11%).

However, PwC’s data also highlighted many of the concerns consumers have about using Bitcoin, including the unpredictability of its price, the experimental nature of the virtual currency and the fact transactions cannot be reversed. Not having chargebacks may be an attractive feature for online merchants that are often victims of chargeback fraud, but not as intriguing for consumers who might legitimately need to reverse a transaction.

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 6

% of respondents

Concerns About Using Bitcoin for Online Purchases/Sales Transactions According to US Internet Users, Dec 2013

The price of a Bitcoin can unpredictably increase or decrease over a short period of time

83%

Bitcoin is an experimental new currency that is in active development, and therefore is unpredictable

80%

Any transaction issues with Bitcoin cannot be reversed,they can only be refunded by the person receiving the funds

76%

Bitcoin is not an official currency; most jurisdictions still require you to pay income, sales, payroll and capital gains taxes onanything that has value—including Bitcoin

72%

All Bitcoin transactions are stored publicly and permanently on the Bitcoin network, which means anyone can see the balance and transactions of any Bitcoin address

66%

Would be more likely to trust Bitcoin if it were distributed by a well-known third party

50%

Note: ages 18+; respondents who are "highly" or "somewhat concerned"Source: PricewaterhouseCoopers (PwC), "Digital Distruptor: How Bitcoin isDriving Digital Innovation in Entertainment, Media and Communications,"Feb 7, 2014174392 www.eMarketer.com

Security is another consumer concern related to using Bitcoin. The Massachusetts Division of Banks/CSBS survey found that security was the most important factor among consumers in deciding whether or not to purchase or use Bitcoin, followed by insurance and regulation related to the virtual currency.

According to BitPay’s Wargo, another adoption challenge on the consumer side that still needs to be addressed is access. “It’s still a process [for consumers to obtain bitcoin], and there are companies out there that are simplifying that process and making it a lot easier. As that gets better, you will see more consumer adoption.”

MERCHANT ACCEPTANCE AND PERCEPTIONS Bitcoin promoters have put it forward as a way for merchants to lower their transaction fees, protect themselves against fraud and securely accept payments on a global scale. Though a handful of major brands have jumped on board and established providers offer services to process transactions and minimize risk, Bitcoin is still in the early adopter phase among merchants.

The global accessibility of virtual currencies like Bitcoin is indeed one reason why some merchants have been early adopters. March 2014 research from information services provider LexisNexis found just 1% of domestic-only merchants that conducted business in the US accepted virtual currencies as a payment method, compared with 11% of merchants that operated internationally.

% of respondents

US Merchants Who Accept Virtual Currencies* as aPayment Method, by Merchant Type, March 2014

International-selling 11%

Domestic-only1%

Note: n=684 domestic-only merchants who only sell in the US; n=437international-selling merchants who sell both inside and outside the US;*e.g., Bitcoin, Amazon CoinsSource: LexisNexis, "True Cost of Fraud Study" conducted by JavelinStrategy & Research, Sep 15, 2014180449 www.eMarketer.com

Even among merchants that accepted virtual currencies, an average of just 6% of their transaction volumes could be attributed to this alternative payment method.

BitPay’s Wargo contended that early adopters benefit from the publicity that can be generated by starting to accept Bitcoin. “The first merchant in a category to come out is seeing a pretty substantial increase in the number of customers that are visiting their site,” she explained.

That was one reason why Overstock.com decided to start accepting Bitcoin in partnership with Coinbase at the beginning of 2014, according to the company’s CEO, Patrick Byrne. “We knew there was a small but growing sliver of the market that wanted to spend in bitcoin, and we wanted to attract them.” Byrne said lower fees were another consideration. The first $1 million processed on Coinbase is free, after which it charges 1% for local currency conversion.

In terms of Bitcoin’s performance for Overstock.com thus far, “it has averaged about a quarter of one percent of sales since we started taking it,” according to Byrne, with dozens of transactions processed daily. Byrne detailed that the average Bitcoin transaction is $240, and he projects that $6 million to $8 million worth of sales will be conducted in bitcoin by the end of 2014.

Though the virtual currency makes up a tiny percentage of overall payments, Byrne said accepting Bitcoin has exceeded his expectations, especially on the public relations front. “It has brought global awareness to Overstock.com.”

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 7

Aunkur Arya, the general manager of mobile for PayPal’s Braintree subsidiary, said his company partnered with Coinbase to enable Bitcoin acceptance on its platform to provide more choice and flexibility. “What we’ve been hearing from merchants and developers is, ‘Hey, Bitcoin is interesting. We’d love to be able to accept Bitcoin.’” He added that “we’ve been watching Bitcoin for some time now, and as we’ve seen merchants continue to adopt it, it’s something we’ve become more interested in.”

One major risk and concern among merchants is the volatility of Bitcoin’s price index compared with dollars or other fiat currencies. BitPay’s Wargo explained how her company helps insulate merchants from this risk by locking in the exchange rate from dollars to bitcoins for a 15-minute window.

“At the end of that 15 minutes, if a shopper hasn’t completed the process of checking out, then a new rate will be calculated for them,” she said. “If the merchant chooses to get paid in local fiat currency, and they’re selling their item for $100, they will actually receive $100 in their bank account.” Wargo added that “if the merchant chooses to receive some or all of their deposit in bitcoin, then we will guarantee the price of bitcoin at the time of the transaction, but they still hold the volatility risk of what happens to it the next day.”

Wargo detailed that while most BitPay merchants take their full payment deposits in fiat currency, around 10% take their deposits entirely in bitcoin, and the remainder take a mix, such as 90% local currency and 10% in bitcoin. Those taking all deposits in bitcoin are typically players in the virtual currency’s ecosystem, such as ATM providers that let people exchange dollars for bitcoins and vice versa at designated kiosks.

One final consideration: Bitcoin adoption has been driven in part by enthusiasm for a payment ecosystem that exists outside of government control. Indeed, Overstock’s Byrne is outspoken about the political implications of Bitcoin. “Bitcoin creates a peer-to-peer, one-to-one settlement relationship that bypasses … corrupt central institutions,” he said in an interview with eMarketer. And at a Bitcoin conference in May 2014, Byrne said, “As much as I love Bitcoin, I am all about the cryptorevolution.”

ALTERNATIVE PAYMENTS BEYOND BITCOIN

Though Bitcoin garners a lot of attention, many other

alternative payment methods—which eMarketer

defines as noncard-based digital transactions—are

currently in use in digital commerce environments.

Merchants use them to achieve various goals,

including providing more options to shoppers to

help increase conversion rates and reducing fees and

fraud tied to traditional credit card transactions. This

section of the report will look at three specific types

of alternative payments: deferred payments, loyalty

points and bank transfers.

Globally, cards comprised the largest share of ecommerce transactions compared with other methods in 2012. They are projected to maintain that lead—albeit narrowly—through 2017, according to data from payment services provider WorldPay.

billions

Ecommerce Transaction Amounts Worldwide, byPayment Method, 2012 & 2017

Cards$979

$1,679

Ewallets$295

$1,656

Bank transfers*$122

$245

Cash on delivery$93

$93

Direct debits$42

$54

Mobile$18

$117

Other**$164

$209

2012 2017

Note: *includes real-time and offline bank transfers; **includes local cardschemes, pre-pay cards or vouchers, post-pay methods requiring paymentat an affiliated outlet or store, e-invoices and digital currencySource: WorldPay, "Your Global Guide to Alternative Payments" incollaboration with First Annapolis Consulting, Jan 17, 2014171847 www.eMarketer.com

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 8

The firm expects ewallet payments to skyrocket over the next few years, along with increases for other alternatives like bank transfers and mobile. As a result, alternative payments will be used for 59% of global ecommerce transactions, up from 43% in 2012 and surpassing the use of credit and debit cards. Note that the widespread use of cards, as well as the growing penetration of digital wallets and other alternative payments, all pose challenges to broader acceptance and adoption of Bitcoin for payments in digital commerce.

For more insight on digital wallets and mobile payment trends in the United States, check out eMarketer’s October 2014 report, “US Mobile Payments 2014: Updated Forecast and Key Trends Driving Growth.”

WorldPay’s study also highlighted how prominent card use is for ecommerce in the US compared with many other countries. In 2012, 71.5% of ecommerce transactions in the US were attributed to cards, compared with 65.0% in Canada, 59.0% in Brazil and just 30.5% in Mexico. Ewallets ranked second, comprising 17.6% of US digital payments.

% of total

Payment Method Share of Ecommerce Transactions inSelect Countries in North America and Latin America,2012

Directdebits

US 1.9%

Canada 1.0%

Brazil 5.0%

Mexico

Card

71.5%

65.0%

59.0%

30.5%

Ewallets

17.6%

23.3%

4.5%

17.3% 1.2%

Mobile

1.2%

0.3%

0.6%

0.1%

Banktransfers*

0.7%

3.3%

4.9%

29.9%

Other**

7.1%

7.2%

26.0%

21.0%

Note: read as 59.0% of ecommerce transactions in Brazil were by creditcard; numbers may not add up to 100% due to rounding; *includesreal-time and offline bank transfers; **includes local card schemes,pre-pay cards or vouchers, post-pay methods requiring payment at anaffiliated outlet or store, e-invoices and digital currencySource: WorldPay, "Your Global Guide to Alternative Payments" incollaboration with First Annapolis Consulting, Jan 17, 2014171854 www.eMarketer.com

One reason digital merchants provide alternative payment methods at checkout is to provide users with as many options as possible to convert them from shoppers to buyers. March 2014 research from UPS and comScore found that while factors like cost and not being ready to purchase were some of the top reasons why digital buyers abandoned their shopping carts, one in four did so because their preferred payment option was not available.

Conversion rate is an intently watched metric among US online retailers, according to July 2014 research from marketing technology provider Retention Science. Merchants want to give shoppers as many options as possible to check out and pay for their items while being careful not to overwhelm them.

% of respondents

Retail Ecommerce Metrics Tracked by US OnlineRetailers, July 2014

Conversion rate 88.5%

Average order value 71.2%

Shopping cart abandonment 53.8%

Cost of acquiring customer (CAC) 47.1%

Per visit value 41.3%

Customer lifetime value 36.5%

Customer satisfaction rate31.7%

Churn % 23.1%

Note: actively trackedSource: Retention Science, "Marketer Survey," Aug 21, 2014178622 www.eMarketer.com

DEFERRED PAYMENTS Merchants selling big-ticket items and looking to boost their average order value—another key ecommerce performance indicator—have embraced the use of deferred payments to provide shoppers with more flexible payment options.

Deferred payments typically involve a third-party provider underwriting a line of credit to the user for the amount of the purchase and creating a payment installment plan. The merchant receives the payment in full, while the third-party provider assumes the risk of financing, including collections and defaults.

Deferred and other alternative payment methods are gaining favor among merchants, based on data from consultancy firm the e-tailing group. It found that the use of alternative or deferred payment options increased in value by 11 percentage points from 2013 to 2014 among US omnichannel retailers—the third-strongest year-over-year increase, which put alternative payments as the second most-valuable feature among respondents.

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 9

% of respondents

Leading Ecommerce Features with the Largest Gain inValue* in the Past Year According to US OmnichannelRetailers, 2013 & 2014

Incentives to buy (gift with purchase, buy one,get one, etc.)

Ask & answer/Q&A (ability to ask questions of the site moderator or other customers)

Alternative or deferred payment methods (PayDay, BillMeLater, etc.)

Gift center/gift suggestions

Sales/specials/outlet

Frequent buyer programs

Limited hour promotions (4-hour sales, etc.)

Facebook page (merchant oriented page thatis maintained on Facebook)

Color change (see a product in different colors)

Shop by outfit/shop by solution/view in a room

2013

64%

61%

74%

58%

86%

62%

65%

56%

75%

57%

2014

82%

74%

85%

69%

96%

70%

72%

63%

81%

63%

% change

18%

13%

11%

11%

10%

8%

7%

7%

6%

6%

Note: read as 82% of respondents in 2014 found "incentives-to-buy"features to be valuable from an ROI perspective vs. 64% of respondents in2013; reflects top 2 box choices on a 5-point scale ranging from5="valuable" to 1="not at all valuable"; *from an ROI perspectiveSource: the e-tailing group, "Investing For Impact in an Omni-ChannelClimate: Merchant Survey 2014," April 30, 2014173075 www.eMarketer.com

One of the most prominent deferred payment providers is PayPal Credit (formerly Bill Me Later), which a number of top online retailers offer as a payment method. Other firms are also trying to offer new approaches to the same concept, with many specifically geared at mobile commerce. One such company is Affirm, which was started by PayPal co-founder and entrepreneur Max Levchin.

Affirm touts many of the same benefits to merchants that PayPal Credit and others do, including improving conversions and increasing average order value. One difference is that Affirm relies on custom models that can quickly assess a shopper’s creditworthiness after they submit just a few pieces of personal information, and then generate different payment plans and interest rates depending on the result.

Another difference is that Affirm’s target audience is not subprime borrowers, but younger shoppers with limited credit history—hence the custom credit model, as well as initially partnering with merchant brands that target millennials, including mattress seller Casper, men’s clothing retailer TouchOfModern and longboard maker Boosted.

In Western Europe, Klarna, which provides a similar product and experience as Affirm, has become a popular alternative payment method among merchants and shoppers. Around 45,000 ecommerce sites in Europe accept Klarna, and users who have an established buying history with Klarna only need to enter an email address and postal code to complete a purchase.

Klarna has proven to be quite successful in Europe, with 25 million users as of September 2014. It is especially popular in its home country of Sweden. July 2014 data from researcher Insight Intelligence found Klarna was the most popular digital payment method among internet users in the Nordic country, with 44% reporting its use, compared with 29% who used PayPal and 19% who used Swish—a bank-operated payment platform.

% of respondents

Awareness and Usage of Select Digital PaymentMethods According to Internet Users in Sweden, July 2014

Klarna

PayPal

Swish

WyWallet

iZettle

Facebook credits

Betalo

Payair

Bitcoin

SEQR

I use it

44%

29%

19%

7%

3%

1%

0%

0%

0%

0%

I'm aware ofit, but don't

use it

32%

43%

52%

42%

14%

7%

2%

4%

47%

12%

I'm notaware of it

20%

22%

24%

45%

75%

85%

90%

88%

46%

80%

Don't know/no answer

4%

5%

5%

7%

8%

8%

8%

8%

7%

8%

Note: n=1,000 ages 16-74; numbers may not add up to 100% due toroundingSource: Insight Intelligence, "Sverige Betalar" sponsored by .SE (Stiftelsenför Internetinfrastruktur), EY (formerly Ernst & Young) and Bankomat AB,Sep 11, 2014179931 www.eMarketer.com

The company is expected to unveil a product in the US market in 2015, and it has already recruited executives from PayPal, Apple, Green Dot and others to help launch and support its domestic operation.

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 10

LOYALTY POINTS In addition to deferred payments, the use of loyalty points as a payment method is something that more merchants are exploring. Many travelers and rewards credit card users are familiar with redeeming earned loyalty points through a custom storefront provided by the issuing entity, such as a bank, hotel or airline brand. Worldwide airline executives surveyed by WorldPay reported that loyalty points were accepted more than other select alternative payment methods in that industry.

% of respondents

Alternative Payment Methods Accepted by AirlinesAccording to Airline Executives Worldwide, 2012 &2013

Air miles/loyalty points/FFP45%

54%

Ewallets33%

38%

Mobile payments10%

25%

2012 2013

Source: WorldPay, "Alternative Payment and Distribution Landscape:Airlines and Alternative Payments - The Facts," Dec 19, 2013168545 www.eMarketer.com

Through a loyalty program’s custom storefront, users typically have a limited selection of products and services for which they’re able to redeem points. Several companies are trying to go beyond the virtual walls of these storefronts to let users redeem their points in more places for a broader array of purchases.

One prominent example announced in June 2014 was a partnership between American Express (AmEx) and on-demand car service Uber, which let certain US AmEx card members redeem their points to pay for rides or earn double points for using their AmEx to pay for an Uber trip. This initiative built on a separate partnership that AmEx rolled out in October 2013, which let cardholders use their reward points to pay for taxi rides in New York City cabs with VeriFone point-of-sale terminals.

Additionally, in September 2014, MasterCard announced its “Pay with Rewards” offering, which is designed to let cardholders on its network that are enrolled in loyalty programs use their points at any merchant that accepts MasterCard—both in-store and online. Users will be able to activate this option via mobile app so that the next time they use their card, points will be used instead of credit.

According to Braintree’s Arya, “All the players in the points space love to have different ways where they can actually have users redeem that currency.” Even so, he emphasized these applications need to provide convenience and create additional value to gain traction among consumers, especially when it comes to mobile commerce.

BANK TRANSFERS Just like with Bitcoin, some merchants are interested in using various alternative payment methods because they provide lower transaction fees compared with credit cards. Most credit card transaction fees range between 2% and 4% of the final purchase price, so options that can undercut those fees are generally desirable for merchants.

One option some US merchants use is bank transfers via the Automated Clearing House (ACH) electronic payments network. Commonly used for applications like payroll direct deposits and bill payments, ACH payments are essentially electronic checks that require consumers to enter their bank routing and checking or savings account number at checkout to complete a transaction. PayPal also leverages the ACH as a key way to have users fund their digital wallets.

Merchants that offer this method often require consumers to verify their bank account credentials to reduce the risk of a declined transaction, as ACH payments typically take a few business days to clear. This factor makes the method more ideal for sites with regularly returning customers or recurring orders. Nevertheless, most payment companies that support ACH charge a small, flat rate for processing each transaction as opposed to a price percentage, typically making the option more cost-effective for purchases greater than $20.

According to December 2013 research from the US Federal Reserve Board, 22.1 billion ACH transactions (5.1% compound annual growth from 2009) totaling $48.4 trillion (9.2% compound annual growth) were processed in 2012. The study noted that the number of consumer online payments using ACH have ramped up faster than the method’s overall growth rate.

ALTERNATIVE PAYMENTS: BITCOIN AND BEYOND ©2014 EMARKETER INC. ALL RIGHTS RESERVED 11

EMARKETER INTERVIEWS

Why Do Merchants Accept Bitcoin as Payment?

Stephanie Wargo Vice President, Marketing

BitPay Interview conducted on September 5, 2014

Aunkur AryaGeneral Manager, Mobile

Braintree Payments, a PayPal Company Interview conducted on September 9, 2014

Patrick ByrneCEO

Overstock.com Interview conducted on September 2, 2014

Bailey ReutzelReporter

PaymentsSource Interview conducted on September 17, 2014

RELATED EMARKETER REPORTS

US Mobile Payments 2014: Updated Forecast and Key Trends Driving Growth

Shopping Cart Abandonment: How Retailers Are Using the Metric to Drive Better Results

US Retail Ecommerce: 2014 Trends and Forecast

RELATED LINKS

451 Research

Affirm

American Express

BitPay

Blockchain.info

Braintree Payments

Coinbase

CoinDesk

comScore

Conference of State Bank Supervisors

Federal Reserve Bank Services

Harris Interactive

Insight Intelligence

Klarna

LexisNexis

Massachusetts Division of Banks

MasterCard

Overstock.com

PaymentsSource

PayPal

PricewaterhouseCoopers (PwC)

Retention Science

the e-tailing group

Uber

UPS

WorldPay

Yodlee

EDITORIAL AND PRODUCTION CONTRIBUTORS

Cliff Annicelli Managing Editor, ReportsBen Clague Chart Data SpecialistJoanne DiCamillo Senior Production ArtistNoah Elkin Executive EditorStephanie Meyer Senior Production ArtistDana Hill Director of ProductionKris Oser Deputy Editorial DirectorEzra Palmer Editorial DirectorHeather Price Senior Copy EditorKatharine Ulrich Copy Editor

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