PAYMENT SYSTEMS

E-Commerce Winter 2011 Marek Maurizio

THE PAYMENT REVOLUTION

In 2011 we are still in the middle of a payment system revolution Electronic payments are taking the place of cash and checks In 2003 electronic systems surpassed the use of cash and checks in stores Similar trends occur for recurring payments, more then 75% in 2001 were made by electronic systems

THE PAYMENT REVOLUTION - II

The cashless society has been discussed for a long time

THE PAYMENT REVOLUTION - III

The demise of cash and checks is not imminent Many individuals *can* live without them In the B2C online world, we already do Credit cards plays a major role In most countries, it is dicult to start a business without supportgin credit cards

E-PAYMENT FACTORS

The short history of e-payments is littered with remains of companies that tried to introduce new payment systems Dicult: chicken and egg problem When planning or evaluating a new payment system, a span of factors must be taken into consideration

INDEPENDENCE

Most payment systems require the buyer to install additional hardware, or the seller to use specic software The most expensive/dicult are the hw/sw requirements, the less likely is the e-payment to succeed

INTEROPERAILITY/PORTABILITY

An e-payment system must mesh with existing systems and applications Must be supported by standard platforms

SECURITY

The money transfer *has* to be secure Ususally the risk for the customer must be lower then the risk for the seller

ANONIMITY

Some buyers prefer to be anonimous Cash is anonimous, credit card is not

DIVISIBILITY

Credit cards have problems addressing low or high payments Any method is likely to be address if you can buy both a candy and an airplane with it

EASE OF USE

In B2C credit cards have become the standard also for their ease of use Ease of use is important for customers

TRANSACTION FEES

The lower the transaction fees, the better For both customers and sellers Credit cards have high transaction fees (up to 3%)

INTERNATIONAL SUPPORT

E-Commerce is worldwide, so any e-payment method must be easily adopted in dierent countries

REGULATIONS

Any new payment system must adhere to a number of national and international law regulations

PAYMENT CARDS

PAYMENT CARDS
A payment card is a plastic card containing information that can be used for payment purposes Usually emitted from a nacial institute In general, payment cards oer: getting cash from ATM (bancomat in italy) pay directly to sellers with POSs pay online

CREDIT CARDS
Credit cards allow the user to buy products and services Bases on the holders promises to pay for the goods The issuer grants a line of credit to the user Credit cards allow the user to be in debt, but the debt is subject to interest

DEBIT CARD
The funds are withdrawed directly from the user bank account Used for both direct payments of for cash withdraw In Italy are known as carte bancomat from the name of the rst issuer

STORED-VALUE CARDS
Stored value cards works similary to debit cards, but the funds are not withdraw from the users bank account The funds are taken from a pre-paid monetary value One major dierence with credit and debit cards: stored value cards can be anonimous Major player in Internet payments

TYPES OF SVC

Stored value cards come in two types closed loop: issued by a specic merchant or merchant group (i.e. Ikea Gift Card) open loop: used to make any kind of transaction (Postepay)

PROCESSING CARDS ONLINE

Two major phases Authorization: determine if the buyers card is active and if there is enough money in the account Settlement: transfer of money from the buyers to the merchants account

ONLINE PAYMENTS PARTICIPANTS

Acquiring bank (Banca Sella, ...) Credit card association (Visa, Mastercard, ...) Customer Issuing Bank Merchant Payment processing service Processor

CARD FRAUDS

In the online world, merchants are held liable for fraudolent transactions Managing online frauds continues to be a signicant problem for online merchants

ANTI-FRAUD TOOLS
Address Verication: compare the entered shipping address with the card address; possible false positives Manual review: sta to manually review some orders Automatic decision models: rules to determine if a transaction is fraudolent Card verication number: CVN/CCV ask for the number on the back of the card

ANTI-FRAUD TOOLS
Card association additional verication services: Veried by Visa, SecureCode, etc. Negative lists: maintain a negative list of IPs, names, addresses, etc

In 2003 the rejection rate was about 4% Problem: a number of rejected orders are valid (lost revenue)

SMART CARDS
A smart card is a payment card with an embedded chip Can be a microprocessor or just a memory chip The chip is activated/read by some other device (i.e. ATM) Can be contact or contactless Can need a PIN before being used You *can* hack into a smart card, but it is a class 3 attack (the costs exceeds the benets)

E-MICROPAYMENTS

E-MICROPAYMENTS
Scenarios buy a song from iTunes: 0.99$ buy an archived newspaper in digital form: 1.50$ play an online game for 30 minuts: 2.00$ buy an image for your website: 0.80$

E-MICROPAYMENTS - II

Credit cards are not well suited for payments under 5$ Merchants have a xed per-transaction fess of ~0.20$ (other then the ~3%) Moreover, small payments are often made by young customers (< 18) that do not own a credit card

ITUNES MUSIC STORE

Apples iTunes, for instance, sell songs at 0.99$ each Also applications are ofter prices under 3$ To reduce xed costs, Apple aggregate multiple purchases (24h span) to charge the customer card only once

MICROPAYMENT SOLUTIONS

Since 2000 a number of companies attempted to address the problem of micropayments Digicash, First Virtual, Cybercoin, Millicent, Internet Dollar all went bankrupt during the dot-com crash Bitpass had some success, but shut down in 2007

MICROPAYMENT MODELS

Currently, there are 5 micropayment models that do not depend directly/solely on credit cards that have some success

AGGREGATION

Payments from a single customer are batched together and processed after a period of time of a monetary threshold Well suited for vendors with high repeating purchases Apple iTunes

DIRECT PAYMENT
Micropayments are added to the bill of an existing service, like the mobile phone monthly bill PaymentOne, Paymo, allow to add purchases of any size to the phone bill Model used to sell ringtones and other services by phone companies

STORED VALUE

Upfront payment to a debit account Used recently by Steam, and also oine by Starbucks, music-download services, etc.

SUBSCRIPTIONS

A single payment is made for a period of time of access to a service Used by online gaming companies and a small number of online newspapers

 LA CARTE

Vendors negotiate for lower credit or debit fees

RESPONSE TO MICROPAYMENTS

In response to the growing of micropayments alternatives Visa and Mastercard lowered their fees in 2005 Also Paypal entered the mp market with an alternative fee structure for payments under 7$

PAYPAL

PAYPAL

Paypal is an online payment processor Now owned by eBay The rst successfull Internet-based e-commerce payment system

HOW PAYPAL WORKS

Trusted third-party between sellers and buyers Securely stores credit cards data Process both one-time and recurring payments

PAYPAL NUMBERS

Growth from an hanful of users in 1999 to 87Millions in 2010 (active accounts, in 190 nations) In 2009 Paypal processed $71 Billion in payments (roughly half from eBay) 15% share on e-commerce payments in USA, 9% outside

PAYPAL SUCCESS
Viral eect Commissions are more or less the same of credit cards 0.30$ + 1.9% - 2.9% Merchants do not have to own a bank account Consumers are not charged directly

PAYPAL INCOME

Transaction fees Interests on stored values

PAYPAL COMPETITORS
Google Checkout Amazon Payments Twitter, Facebook, Apple are also planning new services

MOBILE PAYMENTS

MOBILE PAYMENTS
Instead of using cash or cards a consumer can use a mobile phone to pay for a wide range of services and goods You already have the hardware in your pocket!

MOBILE PAYMENTS - II
There are 5 billions of cell phones around the world More prevalent then smartcards Major payment system in Japan Embedded RFID chips for contactless payments with PIN Smartphone can be equipeed with NFC (Near Field Communication) to communicate with readerd anout 4cm away

MOBILE PAYMENTS - III

Other approaches Freecash: make the payment from your phone, show a barcode to the merchant (does not require new hardware) Paypal Mobile Obopay Google gPay, based on text messages

MOBILE PAYMENTS - IV

Mobile payments will be probably growing fast in the next years Japan is the leading country

PAGAMENTI MOBILI IN ITALIA

PosteMobile di Poste Italiane: associare un conto Bancoposta o carta PostePay con la SIM del cellulare ATM SostaMilanoSms: parcheggio via sms Sky e Mediaset Premium: pay-per-view via sms Trenitalia, CartaSi, Movicon, ...

CONCLUSIONS

We are in the middle of a payment revolution Smartphone could have a mojor role