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E-commerce : Payment Systems

E-commerce : Payment Systems. Traditional Payment Methods. US Census Bureau 2003. 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?

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E-commerce : Payment Systems

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  1. E-commerce : Payment Systems

  2. Traditional Payment Methods US Census Bureau 2003

  3. Cash • Why are so many transactions still done by cash? • What ramifications exist for a company that does its business exclusively online?

  4. 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.

  5. Traditional Payment Methods US Census Bureau 2003

  6. Personal Checks • Why are large value transactions done by check? • What ramifications (if any) does this pose for online retailers?

  7. 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

  8. Cash requires No Intermediation • Unlike all the other payment methods, cash does not require intermediation.

  9. 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

  10. 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. • Monthly fee (unlimited transactions) - $1000/month • Set fee for each transaction - $0.30/transaction • Percent fee on transaction amount - 2.5% • Which one would be best if you’re a very small retailer and sell very inexpensive items?

  11. Credit Cards 101 • Credit Card transactions are not as simply as you might think. • How it works…

  12. 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?

  13. 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.

  14. 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?

  15. 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.

  16. Big Company = Slow mover • Surprisingly, Visa and MasterCard were… • not initially interested in supporting Web-based 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.

  17. Customers Banks/Credit Card Companies WWW Merchants Visanet: Manual Entry Web Server CustomSoftware Systems Early Systems Typically, 1% to 3% cost of business increase Online payment systems were very costly to develop

  18. Dot.com Bust More Factors leading to the dot.com bust… • 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. • Finally, (The Big One) failure to recognize the intense costs of developing reliable, secure, online payment systems.

  19. Customers Banks/Credit Card Companies WWW Merchants Visanet: Manual Entry Web Server CustomSoftware Systems Early Systems Many merchants are independently developing nearly identical systems Must be integrated with existing proprietary VISA/MC systems

  20. 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 WWW vs. Visa/MC networks

  21. 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.

  22. $10 $9.60 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 3% $9.30 Customer PayPal Visa Merchant $0.40 $0.30 $9.30

  23. 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.

  24. 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.

  25. Security and Irrefutability • Traditional credit card transactions have two built in security measures. • You have to present the card • Without it, no transaction can take place, or can it? • You have to sign the receipt • Even if someone steals your card, there is still a back up? • This protects the consumer, right?

  26. 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?

  27. 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.

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