Transcript Slide 1

E-commerce :
Payment Systems
Traditional Payment Methods
Number of Transactions
Debit Cards,
10%
Credit Cards,
18%
Personal
Checks, 25%
US Census Bureau 2003
Electronic,
2%
Cash, 44%
Cash
• Why are so many transactions still done
by cash?
• What ramifications exist for a company
that does its business exclusively online?
Cash
• Why are so many transactions still done by
cash?
– Customers with poor credit, no credit, no bank
accounts, etc. Anonymity issues.
– Cash is easier, quicker for smaller transactions
• What ramifications exist for a company that does
its business exclusively online?
– Can’t reach or sell to many customers
– Transactions require more cognitive energy;
– Minimum 5 items must be entered.
Traditional Payment Methods
Total Transaction Amount
Debit Cards,
8%
Electronic,
5%
Credit Cards,
24%
Cash, 19%
Personal
Checks, 41%
Number of Transactions
Debit Cards,
10%
Credit Cards,
18%
US Census Bureau 2003
Personal
Checks, 25%
Electronic,
2%
Cash, 44%
Personal Checks
• Why are large value transactions done by
check?
• What ramifications (if any) does this pose
for online retailers?
Personal Checks
• Why are big (large value) transactions done by check?
– Customers are nervous about carrying large sums of cash
– “transaction reversal;”
check can be canceled if transaction goes awry
• What ramifications (if any) does this pose for online
retailers?
– Some customers are nervous about large online transactions;
security, fraud, etc.
– Funds transfer immediately; debit incurred in real time; no built-in
transaction reversal
Cash requires No Intermediation
• Unlike all the other payment methods,
cash does not require intermediation.
Payment Method
Intermediate
Personal Check
Bank
Credit Card
Visa, Master Card
Debit (Stored Credit)
Bank
Accumulating Balance
American Express
Intermediation
• Adds cost to each transaction.
– customer can directly absorb this cost.
• Some small businesses still charge more if you
use a credit card.
– costs are always indirectly absorbed by the
customer
• considered a cost of doing business.
• this cost ultimately leads to higher prices
Credit Cards 101
•
Pretend you are a merchant that wants to
accept credit cards
– Visa and Master Card have different plans
•
depends on your bank (called “acquirer”) and your business
type.
1. Monthly fee (unlimited transactions) - $1000/month
2. Set fee for each transaction - $0.30/transaction
3. Percent fee on transaction amount - 2.5%
•
Which one would be best if you’re a very small
retailer and sell very inexpensive items?
Credit Cards 101
• Credit Card transactions are not as simply
as you might think.
• How it works…
Credit Cards 101
•
•
Intermediaries (Banks/Credit Card Companies)
developed their IT over long period of time.
Banks can afford millions $$$ in IT investment
– economy of scale; they can wait a long time for
payback
•
•
Retailers/Merchants collectively paid for IT
development over long period of time.
How does this benefit new
Retailers/Merchants?
Credit Cards 101
•
•
Q: How does this benefit new
Retailers/Merchants?
A: They don’t have to pay for IT development
and overhead costs associated with supporting
credit card transactions.
– Card readers are cheap; free with some plans.
– No setup fees with some plans
•
Visa, MC, and the Banks want 0.5%-3.0% of
your business and will give you the technology
for nothing.
Credit Cards 101
• Analogy 1:
– Gillette will sell you a deluxe razor with two
replacement blades for $5.
– But, replacement blades cost about $2.50
each, so the razor handle is free, right?
• Analogy 2:
– Original Sony Playstation sold for $200, even
though it cost Sony $250 to manufacture and
distribute. Why?
Intermediation Re-visited
• During the E-commerce exuberance of the late
1990’s.
– Banks and Credit Card companies were slow
movers…
– They failed to integrate their services with the WWW
– Online retailers had to build their own web-based
information systems to support online transactions
• The costs were enormous and were not considered when
projecting profits.
Big Company = Slow mover
• Surprisingly, Visa and MasterCard were…
– not initially interested in supporting Webbased transactions;
– concerns that there would be no payback
• Online retailers/merchants were forced to
build their own systems
– PayPal emerged
– VeriSign emerged
• Early systems were not good.
Online
payment
systems were
very costly to
develop
Early Systems
Customers
Manual
Entry
Web
Server
Banks/Credit Card
Companies
Merchants
WWW
Custom
Software
Systems
Typically,
1% to 3% cost
of business
increase
Visanet:
Dot.com Bust
More Factors leading to the dot.com bust…
1. failure to recognize how many people …
• still use cash only
• won’t fill out 5 lines on the web
• unwilling to make large “non-reversible”
transactions.
2. Finally, (The Big One) failure to recognize
the intense costs of developing reliable,
secure, online payment systems.
Many merchants
are independently
developing nearly
identical systems
Early Systems
Customers
Manual
Entry
Web
Server
Banks/Credit Card
Companies
Merchants
WWW
Custom
Software
Systems
Must be
integrated with
existing
proprietary
VISA/MC systems
Visanet:
WWW vs. Visa/MC networks
WWW
• very open / flexible
• limitless options
• fully customizable
• unbounded costs
• Individual
merchants pay for IT
development costs
Visa/MC networks
• very specific
technology
• few options
• limited customizations
• set costing
• shared development
costs: VISA, MC,
Banks pay for IT
development
PayPal: B2C E-commerce Savior
• Basic Idea: develop a general web-based
system for interfacing with leading
intermediaries.
• Unlike VISA/MC networks, PayPal makes
it as easy as possible to integrate your
website with PayPal’s system.
• Small companies can now accept credit
cards online with minimal development
costs.
PayPal: Middle-man
• PayPal is yet another middle-man
– contradicts the assumption that the web could
enable friction-free commerce.
• dot.com exuberance was based on the
principle that the web would cut out the
middle man
1% + $0.30
$10
Customer
3%
$9.60
$9.30
PayPal
Visa
$0.40
$0.30
Merchant
$9.30
PayPal: Digital Cash Intermediary
• Icing on the cake: PayPal is also a Digital Cash
(e-Cash) intermediary.
• Using Credit Cards or Direct Bank Transfers,
customers can transfer money to an individual
PayPal account.
– The individual can “cash out” their account to their
own credit card or bank account.
• This allows individuals to receive payments
electronically without the need for merchant
VISA/MC account or business banking.
PayPal’s impact
• Visa, MC, Discover Card, etc. saw that they had
missed a huge opportunity.
• One on hand…
– PayPal was giving them more business…
• On the other hand…
– they could have seized all the
opportunities if they were quick to move.
• PayPal helped create a new opportunity:
P2P E-commerce.
Security and Irrefutability
•
Traditional credit card transactions have
two built in security measures.
1. You have to present the card
– Without it, no transaction can take place, or
can it?
2. You have to sign the receipt
– Even if someone steals your card, there is
still a back up?
– This protects the consumer, right?
Security and Irrefutability
•
•
•
•
Long before the WWW, merchants
wanted to accept credit cards over the
phone.
Thus, the card does not have to be
presented; only the number is needed.
Stealing the number could be easier than
stealing the card.
How do you sign the receipt?
Classic Fraud Example
•
•
•
•
•
Make a phone purchase with a credit
card.
Have the item shipped to another
location.
Intercept the item.
Claim that you never made the purchase.
Summary: You falsely refute the
purchase.