Amazon.com Inc. has decided to drop Bill Me Later as a payment option. The e-retailer issued a statement Dec. 30 saying the deferred billing service would no longer be offered beginning at midnight Dec. 31.

The move comes after competitor eBay Inc. bought Bill Me Later in October to complement its PayPal alternative payment service. Amazon did not go into detail in its statement about why it dropped Bill Me Later, in which it maintains a minority stake. A spokeswoman says Amazon.com does not comment on vendor relationships. While the reason may seem obvious, there’s more to the move than meets the eye, some experts say.

Amazon’s decision is primarily about cost rather than competition. Amazon is among retailers pushing most aggressively for lower costs, and contrary to what many think, not all alternative payment methods lower costs, says James Van Dyke, founder and president of financial services research firm Javelin Strategy & Research. Deferred billing methods generally increase interchange costs substantially over the traditional debit or credit payments, with interchange of six percentage points not unheard of.

For higher-margin merchants that wish to use deferred billing methods to increase revenue-by further extending customer credit-this may be acceptable, Van Dyke adds. But Amazon is increasingly a reseller of other retailers’ goods, he says, which drives their margins down and forces them to look for lower-cost methods.

Bill Me Later, however, says its fees are lower than those of credit and debit cards. Bill Me Later charges 15 cents per transaction, plus 1.5-3% of transaction value based on volume. For credit card transactions, medium-sized to large retailers typically pay around a 2% fee per transaction, which includes interchange, processing and network costs, experts say. But credit card fees to merchants can vary based on transaction volume.

For its part, Bill Me Later issued a statement shortly after Amazon.com, No. 1 in the Internet Retailer Top 500 Guide, released its own. Based on the change of control of Bill Me Later, Amazon exercised their right in deciding to discontinue offering Bill Me Later as a payment option, the statement says. More than 1,000 online stores, catalogs and travel partners currently offer Bill Me Later. We think Bill Me Later provided a valuable service to shoppers on Amazon.com, and we would welcome the chance to work with Amazon.com in the future.

With the acquisition of Bill Me Later, eBay has cornered the market on online deferred billing payment methods. Early in 2008, eBay launched PayPal Pay Later, which gives customers 90 days to pay for purchases. A Bill Me Later spokeswoman says Bill Me Later and Pay Later have joined forces and plan to create an even stronger service for merchants and consumers. Prior to the Bill Me Later acquisition, Pay Later was the only direct competitor with Bill Me Later, other than merchants’ own private-label credit offerings. The two services enable consumers to defer payments-Pay Later for 90 days and Bill Me Later for 30 days or per special merchant terms, which typically defer payment for 90 days.

Other alternative payment services do not let consumers defer payment. Amazon.com’s Amazon Payments secures and streamlines the checkout process for consumers purchasing goods from members of Amazon.com’s marketplace but does not offer deferred billing. ELayaway bills over time, but unlike Bill Me Later and Pay Later, consumers do not receive merchandise until it is paid for in full. EBillme sends bills via e-mail so consumers can pay through their online banking bill-pay process, but does not defer billing. And PayPal enables users to fill an account with funds from credit or debit cards or directly from a checking account and then use the PayPal account to pay for merchandise.

PayPal had Pay Later as a competitor to Bill Me Later, but it didn’t go anywhere. So rather than make the expensive investment needed to build up Pay Later, they bought Bill Me Later-which has an established brand and great merchant relationships-and have cornered the market on this small area of alternative payments, Van Dyke says.

And that small area may be a great place to be in the years ahead. According to a November 2008 report from Javelin Strategy & Research, use of credit cards to complete online retail purchases will have a compound annual growth rate of 5.6% between 2008 and 2013; debit cards, 14.5%; PayPal, 14.5%; and Bill Me Later, Pay Later and merchant financing, 22.8%.

Consumers are now faced with an ever-tightening credit market, the report says, which invariably means a drive to debit and alternative payment methods.

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