Payment Options and Services, Online

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PAYMENT OPTIONS AND SERVICES, ONLINE

As online shopping grew in popularity throughout the late 1990s and early into the 21st century, so did the number of methods by which shoppers could make online payments. Some methods were quickly adopted by electronic merchants and their customers, while other methods, due to issues surrounding security and ease of use for both payers and payees, were rather short-lived. By 2001, along with more traditional credit card payments—which accounted for roughly 50 percent of all online payments—options for online shoppers included making online payments via electronic withdrawals from a checking account or from a prepaid debit card.

CREDIT CARD PAYMENT

After selecting products or services they wish to purchase, the majority of online shoppers opt to make payment via credit card. They begin an online credit card transaction by completing a merchant commerce application. To ease consumer concerns regarding the risks involved in transmitting credit card numbers via the Internet, most merchants use secure electronic transaction (SET) or Secure Sockets Layer (SSL) technology, which encrypts personal information sent over the World Wide Web.

An online merchant who receives a completed commerce application sends it to an acquiring bank, which then sends a request for credit card authorization to an acquiring processor, a firm that supplies credit card processing, billing, reporting, and settlement services. The acquiring processor transmits the request to the card-issuing bank, the bank that actually issued the credit card to the customer, which responds with either an approval or denial code that the acquiring processor then relays to the merchant. Thanks to Real Time Online Processing technology, this entire process usually takes less than 15 seconds. Although a shopper's credit card account is not actually charged at the time of purchase, the card-issuing bank does put a hold on the account for the transaction amount. Typically, credit card transactions are settled at the end of each business day, at which time the shoppers's credit card is charged. The card-issuing bank sends the fund to the acquiring bank which deposits those funds into the merchant's bank account.

For online merchants, one downfall of the credit card payment method is the higher fees credit card companies tend to charge for online transactions. In a traditional retail transaction, the merchant typically makes contact with both the credit card and the consumer, reducing the likelihood of fraud. Because online transactions are completed without the customer or the credit card present, both merchants and credit card companies are more susceptible to chargebacks, which occur when a card holder disputes a charge appearing on his or her credit card statement. If a chargeback is issued after the claim is investigated, the credit card company must withdraw the payment from the merchant and return it to the shopper's account. To combat this, many merchants use address verification service (AVS) technology to verify the first four numbers of a U.S.-based street address and zip code supplied to the online merchant by the consumer at the time of purchase. Shoppers who provide a billing address that does not match their credit card billing address are prevented from completing their purchase. In 2001, 40 of the top 50 Visa and MasterCard credit card issuers in the U.S. used Merchant Express LLC's FraudScreenNet. To improve a merchant's ability to pinpoint fraud, the software application goes beyond simply verifying addresses, by also scrutinizing each shopper's email address, shipping method history, product purchasing pattern, payment method history, work and telephone number patterns, and typical purchasing frequency and time.

DIGITAL CASH

Another downfall of the credit card payment method is that it excludes anyone without a credit card. To allow individuals without credit cards to make purchases online, many firms began devising online cash payment systems. A prime example of a digital cash payment method provider is InternetCash, which was founded in March of 2000. InternetCash users purchase a cash card at a retail outlet, such as a convenience store. Using a credit card reader, the retailer who sells the cash card sends notice to Internet-Cash that the card has been purchased. The next time the InternetCash cardholder goes online, he or she logs onto the InternetCash Web site, activates the account, and selects a password. From that point forward, the shopper can use the money in the InternetCash account to purchase goods and services from any merchant that accepts InternetCash. To be equipped to accept InternetCash payments, merchants simply install software that operates in the same fashion that credit card payment processing applications work. For shoppers, one major benefit of using InternetCash to pay for online purchases is the anonymity it offers. According to PC World writer Karen Bannan, "Merchants benefit as well. They not only increase their potential buying audience, but they also gain the ability to offer inexpensive items ($10 and under) that are not profitable when handled via credit card transactions. May e-cash vendors charge merchants lower fees than credit card companies do and have a simpler sign-up process."

Some digital cash firms have even gone so far as to attempt to create a new form of online currency. For example, Beenz.com, founded in March of 1998, was based on a system that allowed users to accrue points by doing things like completing surveys, registering at Web sites, and spending a certain amount of money at a particular online store. Users who had accumulated enough "beenz" could redeem them for merchandise. Using a similar tactic, Robert Levitan, co-founder of leading women's Internet hub iVillage.com, created Flooz.com in September of 1999. According to an August 2001 article in American Banker, the firm sold "a digital currency that was meant primarily for online gift certificates. A consumer could charge, say, $50 worth of flooz on a credit card, e-mail it to a friend, and let the friend use the flooz (which could not be turned back into cash) to buy things online from merchants that accepted it." The article points out that while both firms "must have had visions that consumers would be as eager to collect their products as housewives of yore were to amass S&H Green Stamps, they systems they set up did not mesh well with the existing payment systems." As a result, by mid-2001, Flooz.com and Beenz.com had halted operations.

DIGITAL WALLETS

Like the digital cash firms that attempted to create an alternate currency for the Internet, digital wallet services proved particularly short-lived. Companies like American Express Co. and Wells Fargo & Co. ventured into digital wallet technology in late 1999 and early 2000, only to discontinue those offerings in 2001. Essentially, a digital wallet allows online shoppers to save in a single place all of the address and payment information they'd need to supply an online merchant with before making a purchase. The impetus behind the technology was that increasing convenience and reducing the amount of time shoppers spent filling out lengthy forms would encourage online shopping. However, consumers failed to embrace the idea for a variety of reasons. Some analysts claim the technology was poorly marketed by the sites that adopted it. Some point to the fact that consumers were uncomfortable with the idea of storing so much personal information in a single place. Others cite the inconvenience of having to download the technology, particularly since sites like retailing giant Amazon.com saved each shopper's information automatically anyway.

ELECTRONIC CHECKS

Electronic checks offer another method of online payment. Fidesic Corp., founded as CheckSpace Inc. in February of 2000, allows small businesses to make and receive payments via email. In short, Fidesic clients may present bills and make payments to other Fidesic clients via a simple email message. Using the bank account and routing data provided by its clients, Fidesic is able to transfer money between its clients' accounts. Clients are also able to download transaction data to spreadsheets like Excel and Quicken. To make money, the upstart charges 95 cents per transaction. As stated in a March 2001 issue of Oregon Business, digital checks offer a variety of benefits to companies, particularly smaller businesses. "For the average small business, say analysts at Internet research firm Gomez, the 50 percent reduction in the labor required to process payments would drop the total cost of payments nearly $600 per month. Cash flow also could benefit by speedier receipt of money owed. And there's not discounting the convenience of not having to stand in line at the bank or post office."

Operating with technology similar to that used by Fidesic, Achex, Inc. has offered electronic check payment services to consumers since its inception in mid-2000. Online shoppers making purchases at BlueLight.com, Bizland, Yakpak, and Netgrocer.com can use Achex Online Checks to submit payment electronically. Funds are then debited via an electronic clearinghouse operated by Achex from the shopper's checking account and deposited into the merchant's account; although both shoppers and merchants receive instant notification that payment has been made, the process of transferring funds typically takes two to three days. Like most other online payment methods, this electronic checking service is free to shoppers. Achex makes money by charging online merchants a small per-transaction fee. In July of 2001, First Data Corp. bought Achex, and a few months later, merged it into MoneyZap, its peer-to-peer (P2P) online payment service arm, which operates as a subsidiary of Western Union.

PEER-TO-PEER PAYMENT

Other than credit card transactions, the most popular online payment option is the peer-to-peer (P2P) option by which individuals can send one another payment via a third party. PayPal is the leader in this category, boasting the largest Internet-based payment network in the world with roughly 8 million customers. Founded in November of 1999, PayPal began to attract attention from the millions of users buying and selling merchandise on auction site eBay. By March of 2000, when PayPal merged with online banker X.com, the firm was signing up nearly 15,000 newclients a day.

To sign up for online payment services, PayPal customers are required to key their name, daytime phone number, home address, and email address into an online form. Users can opt to charge purchases to a credit card, or they can provide PayPal with the account information necessary to allow PayPal to withdraw funds from a bank account. Once their account is activated, PayPal members can send funds to any other PayPal account holder via an automated email message with the subject line, "You've Got Cash!" Compared to the 2.9 percent monthly fee typically charged by credit card firms, along with an additional charge of 30 cents per transaction, PayPal simply charges 1.9 percent of each transaction completed for e-businesses bringing in more than $100 per month.

In June of 2000 PayPal diversified into payments between businesses and consumers (B2C). The firm also began allowing clients to conduct transactions via cell phones. P2P customers exceeded 3 million in August. When PayPal began focusing on business-to-business (B2B) payments, the value of transactions conducted via the firm multiplied, prompting the launch of fraud protection services, similar to that offered by credit card companies. As part of its new Cybersource Fraud Scan, the firm also established a member information guide, to allow buyers to verify that sellers had been reviewed by the firm.

By the year's end PayPal had secured 4 million P2P customers and conducted nearly 50 percent of the transactions competed on eBay, more than conducted by eBay's own payment service, Billpoint Inc. International expansion efforts included allowing Internet users outside the U.S. open PayPal accounts. By March of 2001, PayPal offered e-mail based payment services in 26 countries. To help shoppers more easily find merchants that supported PayPal transactions, the firm compiled a listing of 5,600 "PayPal Shops," which it posted on its Web site. Hoping to entice more customers to abandon their credit cards in favor of P2P online services, PayPal began paying interest on funds deposited into a PayPal account.

Although PayPal was the first firm to gain critical mass in the online payment arena, a P2P payment competitor emerged in March of 2001. Banking and insurance behemoth Citigroup joined forces with Microsoft Corp. to offer its c2it online payment service on Microsoft's MSN.com Internet gateway. With a daily visitor rate of roughly 7 million, MSN.com hoped it would quickly attract a large base of c2it clients.

In 2001, Gartner Group predicted that debit cards, such as those offered by InternetCash, would be the payment method used by roughly 30 percent of all online purchases by 2003. With roughly 10 million individuals online without credit cards, the potential for alternative online payment methods certainly seems promising.