Payments in ECommerce

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Payments in E-Commerce

• Presentation to Conference on
• Entrepreneurship and E-Commerce
• Oklahoma City, OK
• by
• Richard J. Sullivan
• Payments System Research
• Federal Reserve Bank of Kansas City
• May 18, 2005

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Topics

• Retail payment systems pipelines to settlement
• Current research focus of the Payments System
  Research Department
• Options for payments in E-Commerce
• Advantages and disadvantages
• Micropayments

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Payment Clearing and Settlement
Federal Reserve Bank
Payment messages payments out of and deposits to
bank accounts
Clearing
Settlement
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Retail Payment Options
ACH
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Payments System Research Department

• Established in 1999
• Overarching objective
• Develop a thorough understanding of payments
  system developments and related public policy
  implications
• Participate in System and Bank studies
• Recent examples nonbanks in the payments system
  and interchange fees

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Trends in U.S. Noncash Retail Payments
Electronic payments include debit card, credit
card, and ACH.
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Whats happeningwith interchange fees?

• May 2003 Merchants, led by WalMart, win a
  class-action lawsuit against Visa and MasterCard
• Eliminated the honor-all-cards rule
• Mandated a lower signature (offline) debit
  interchange fee charged by MC and Visa until the
  end of 2003

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Interchange and Merchant Processing Fees
Acquirer processes payment
Issuer
Acquirer
Interchange 1.50 Issuer sends 98.50 to acquirer
Merchant sends charge information to acquirer
Issuer obtains 100 from customer account
Processing fee .50 Acquirer adds 98 to
merchant account Total merchant discount 2
Customer
Merchant
Customer makes purchase and pays 100 with
signature debit
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Source Fumiko Hayashi, A Puzzle of Card Payment
Pricing Why Are Merchants Still Accepting Card
Payments?, Payments System Research, Federal
Reserve Bank of Kansas City Working Paper WP04-02
(December 28, 2004), p. 4.
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Payment Market Share in E-Commerce 2001
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Accepting Credit Cards in E-Commerce Transactions

• Advantages
• Many people have credit cards
• Credit cards facilitate impulse purchases
• Consumer like to use credit cards online
• Protection against fraudulent merchants
• Provides merchants with information useful to
  marketing
• Disadvantages
• Costly set-up fees
• Must qualify for merchant status
• Not suitable for sales of downloadable soft goods
• Some customers do not have credit cards
• Some customers fear credit cards online
• High interchange fees for card not present
  transactions
• Chargebacks

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E-Commerce Merchantsas Victims of Fraud

• Costs in 2003
• Direct loss 1 of orders
• Suspicious orders rejected 3-4 of orders
• Manual review 23 of orders
• Costs are declining
• Fraud loss as percent of online revenues
  20003.6 20031.7
• Security options
• Dont accept cards
• Use delivery tracking on shipments
• Use security measures
• Address Verification Service (AVS) and Card
  Verification Number (CVN)
• Verified by Visa, MC Secure Code

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Offering Multiple Options for Payments Can
Improve Likelihood of a Sale
CyberSource, The Insiders Guide to eCommerce
Payment, 2004.
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Other Options for E-Commerce Payments

• PayPal
• No set-up fee, easy to qualify
• Easy to integrate in Web site
• Chargeback protection program
• Fee at most 2.9 of sale plus 30
• 40 million users (good or bad?)
• Requires customer registration at PayPal
• E-Check
• Low fees payments processed on ACH network
• Settlement faster than a paper check
• Can reduce merchant risk by guaranteeing payment
  (for a fee!)
• Requires consumer to enter bank and account
  information online
• Fewer consumer protections compared to credit
  cards
• Potential for consumer repudiation (chargeback)

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Other Options for E-Commerce Payments

• Bill Me Later
• Instant loan invoicing
• Can increase sales and average ticket
• 30-40 less expensive than credit cards
• Signature debit cards
• Many consumers hold these cards
• Processed similar to credit cards but can have
  somewhat lower fees
• PIN-less debit cards
• Low fees
• Useful only to certain industries
• Checks (personal, money orders, cashiers)
• Many consumers still prefer these options
• Can slow completion of sale if shipment is
  delayed until check clears

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Sales Volumeand Options for Payments
Source www.wilsonweb.com/wct4/pg-merchacct.htm
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Other considerations

• Security and privacy
• Policymakers are concerned over ID theft and
  security breeches that facilitate online fraud
• Micropayments
• Single purchase sales for online content is
  becoming more popular (e.g., online music)
• Processing fees for established payment options
  are prohibitive for small dollar purchases
• Promising alternative aggregation schemes

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Questions?

• Contact information
• Rick Sullivan
• Payments System Research
• Federal Reserve Bank of Kansas City
• 925 Grand Boulevard
• Kansas City, MO 64198
• 816-881-2372
• Web site http//www.kansascityfed.org/FRFS/PSRhom
  e.htm
• email Rick.J.Sullivan_at_kc.frb.org