Consumer online transactions will more than double to reach $355.2 billion over the next five years, sparking a dramatic shift in how Americans pay for all purchases, according to a nationwide study by Javelin Strategy and Research. By 2012, 30 percent of Americans will turn to online alternative payments -- such as stored-value, email payments, and instant credit -- instead of using traditional credit cards, checks, or cash.

The alternative online alternative payments will be provided by traditional brands -- such as Visa, MasterCard, American Express, Discover -- and alternative challengers, such as PayPal and Green Dot.

The study predicts that online alternative transactions will more than double by 2012 as consumers increasingly view these methods as a vehicle for secure and convenient transactions. Javelin researchers also believe this is not a niche trend. The growth of alternative payment methods will precipitate the evolution of credit cards and decline of cash and checks.

“Although it took nearly a decade for alternative payment methods to secure their position in the online world, it’s apparent that everyday consumers are ready to view them as a trusted and viable way to buy online,” said Bruce Cundiff, a senior analyst with Javelin Strategy & Research. “Given the recent online surge, we expect to see some of these trends transfer to offline buying over time. For example, more consumers may prefer to use alternative payment methods instead of credit cards, online and in person. But overall, we see continuing growth of online transactions and a decline of paper payment methods.”

Javelin researchers found that as alternative payment methods win new customers, credit cards will lose some of their dominance online. Traditional brands and methods will endure representing the largest dollar amount and percentage of total online transactions, but that percentage will slip to 44% by 2012, according to the study. Debit card reward programs and promotions continue to lure younger consumers and will help to nearly triple the debit card transaction volume to $93.9 billion by 2012.

Why will three out of every ten Americans be using alternative payments by 2012? The makeup and demographics of online consumers will not significantly change during the next five years, but Javelin researchers found that increased popularity of alternative payments is due to attitudes and concerns. Online consumers will voluntarily embrace alternative payments for their convenience and security features, rather than a lack of access to credit or debit cards.

The study also predicts that of all the alternative payment options, email payment accounts, primarily PayPal, will see the biggest growth jumping from 5% to 11% by 2012. PayPal accounts surged to 150 million in 2007 with the help of “off-eBay” business efforts. According to the study, increased PayPal transaction sizes will also contribute to growth. Javelin researchers also predict that prepaid and gift cards will grab 5% more of all online transactions, due to increased acceptance and availability. Customer loyalty will help fuel a 4% online transaction increase for store-branded credit cards by 2012. Instant credit services, such as Bill Me Later, will likely see a small jump and may experience a boom with the emergence of PayPal’s Pay Later service.

Key findings from this research study include:

• Online transactions will grow from $150.4 billion to $355.2 billion by 2012
• Alternative payment methods will increase to gain 30% of all online transaction volume by 2012, up from 14% in 2007
• Credit card use will continue to represent the largest dollar amount growth, but the percent of online transaction volume will decrease from 60% to 44% by 2012
• Email payment account methods, such as PayPal, will jump from 5% of all online transaction volume to 11% by 2012
• Debit cards remain steady at 27% of all online transaction volume

About this study

Visit the Javelin Strategy & Research website for additional information and purchasing a copy of the complete Online Payments Forecast: Alternative Payments to Go Mainstream as Consumers Seek Security and Convenience.

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