This report examines the current state of the fledgling electronic payment {e-payment} industry. The objective of the research contained herein is to provide succinct but comprehensive coverage of current and emerging trends in e-payment technology, the major players in this emerging market, and the key success factors and risks associated with the diffusion of e-payment systems amongst consumers, merchants, and the financial community.
When the Internet was first open to commercial activities, buyers and sellers soon realized that it was quite easy to exchange information (one of the components of a business transaction), but it was not clear how to exchange the product and the payment. Over the years, the electronic market on the Internet has changed profoundly. In the initial stage, buyers tried to replicate what they did in the real world with little change. Buying on the Internet was analogous to buying from a catalog, and payment was remitted by sending credit card information or a check to the seller. However, there were several issues preventing this system from working, and most believed that security was probably the key. Early buyers were sending their credit card information over an insecure medium, to a seller they did not really know, and with built-in delays in the delivery of the good and the payment that added to the feeling of insecurity. In the next stage, everyone struggled for a secure payment system on the Internet. We wish to emphasize that the Internet community believed that a "secure" payment system would solve all the problems of paying for Internet purchases. This is what drove the appearance of the credit-card based systems (encryption of credit card information, and third-party off-line verification). Later, when security concerns eased a little, the Internet community realized that they were working on the wrong, or at least incomplete, assumption that all the potential consumers had just one need: to make on-line, secure, medium to large payments, using their credits cards. And we reached the next stage, the current one. Let us analyze this assumption to understand why it was wrong or incomplete:
In the last couple of years, we have seen the appearance of a variety of electronic payment systems, such as electronic checks and electronic cash, which are intended to address some of these other concerns or needs, while being on-line, secure methods. So, we can ask ourselves: What is the future of the electronic payment systems? There is no easy answer to that. Some people keep believe that just one system will survive; others believe that, as in the real world, different payments systems that address different needs will coexist. Some people look at the world history, and compare the actual situation with what happened in Medieval Europe when continent wide commerce appeared, and new payment systems such as letters of credit evolved; others prefer the comparison with the situation in the early nineteenth century United States, when each bank issued its own notes. The fact is no one knows for sure. Payment systems, and especially money, is a very sensitive issue for people, society and governments. Today, there are no clear regulations about the flows of money over Internet, but certainly the way governments regulate this issue will affect the future of electronic payments, and moreover, of electronic commerce as a whole.
Some analysts predict that Internet commerce will not become pervasive until mid to late 1998 or beyond. The fact is that for the general mainstream population, personal computers are too complicated to learn and use, and simpler, scaled-down Internet PCs are just entering the marketplace. Before widespread diffusion of Internet commerce is likely to occur, technically unsavvy as well as technically illiterate consumers must be able to comprehend and access the Internet. The following key industry players have been identified as the first movers and trend setters in the electronic and Internet commerce revolution. Collectively, they have pioneered several technologies, initiatives, standards and products that are rapidly shaping the electronic commerce industry for mass-market acceptance.
First Virtual is one of the first companies that offered a third party verification method to make payments over the Internet. The system works as follows: Customers purchase a First Virtual account by filling an on-line form. To avoid sending credit card information over the net, their credit card number are given by phone. Customers pay a small one time fee ($2), and receive a First Virtual PIN for their purchases. Each time they wants to buy something from a merchant that accepts FV, customers send their FV PIN to the seller. The seller, then, sends the FV PIN to First Virtual for verification. FV checks the availability of funds and sends a confirmation request via e-mail to the buyers. Once the buyer authorized the payment, FV confirms it to the seller and the money is transferred from the customer’s account to the merchant’s account. The merchant, however, is charged a small commission from FV. Once a month (to minimize costs), FV makes a charge to the customers’ credit card and sends them a detailed statement. The main advantages to this system are that it is very accessible and easy to use (buyers and sellers do not have to purchase/obtain software and do not have to learn how to use any software and/or related procedures, just know how to use e-mail), that there are no credit card numbers over Internet because all the credit card checking is done off-line, and that it aggregates several purchases into just one monthly charge. There are, however, also some disadvantages, such as that it takes some time to ask for and receive the e-mail confirmation of the order; that there is a cost for the merchant; that because of the two commissions involved (credit card and FV) it might not work for small transactions; that it is not appropriate for individual-to-to individual transactions; and the level of privacy is similar to this of a credit card, if not lower.
NetBill is a dependable, secure and economical payment method for purchasing digital goods and services through the Internet. It is the result of a partnership between Carnegie Mellon University and Visa. NetBill acts as a third party to provide the authentication, account management, transaction processing, billing, and reporting services for network-based clients and users. With a NetBill account and client software, users can buy information, software, CPU cycles, or other services from NetBill-authorized service providers, under a variety of payment schemes. NetBill acts like an electronic debit card service to provide financial services in support of electronic commerce. The system focuses on reducing the cost of making transactions for very small amounts of information--a page or less--to about one-cent for a 10-cent item. It also features a unique, certified delivery mechanism that guarantees customers will be charged for information goods if and only if, they have been successfully delivered. The system uses modern cryptographic techniques to protect against fraud and provide consumer privacy. Typically, a customer will first find information of potential interest, such as a catalog from a merchant or a listing of journal articles. When he finds an item of interest, he can request a price quote from the merchant. Once the merchant returns the price, the customer must decide whether to buy the item. The customer can individually approve each purchase, or can configure his system to automatically approve purchases below a certain dollar amount. The merchant computes a checksum, and sends the encrypted goods with a time stamp, to the consumer. The consumer's software computes a checksum of the goods, and sends this, along with the accepted price, the product identifier, and the timestamp back to the merchant. Once the goods have been received and verified, the merchant software appends the decryption key to the EPO and then endorses it with the merchant's digital signature. The merchant then sends this to the NetBill server. The NetBill server verifies that the product identifiers, prices and checksums are all in agreement. If the customer has the necessary funds or credit in his account, the NetBill server debits the customer's account and credits the merchant's account, logs the transaction, and saves a copy of the decryption key. The NetBill server operates transactionally to ensure that the consumer does not get billed for goods he cannot decrypt or receive goods without paying for them. The transaction is atomic, meaning that all actions occur or none do. If for any reason the transaction is incomplete, NetBill guarantees that the consumer will not be charged. The advantages of NetBill are that transactions are safe for both parties (this system ensures that both the buyer and the seller receive their end of the bargain), that the information passed is encrypted, and finally that there are no credit card numbers over Internet. One disadvantage of NetBill, besides the fact that it requires specific software thus reducing the number of potential buyers and sellers using the system, is the centralization of information about its participants (some users do not want a central authority to have so much information about their transactions).
CyberCash was founded in 1994 by Bill Melton (who previously founded Verifone). CyberCash offers a full range of Internet payments options including the "CyberCash/Checkfree Wallet" designed to protect credit card payments, the "CyberCoin" to handle microtransactions ranging from $.25 to $10, and the new "PayNow Secure Electronic Check Service". The CyberCash system links merchants and consumers to the banking system and involves separate software packages for both groups. To pay via the CyberCash system for credit card transactions, the user first has to download the Cybercash Wallet from the company’s Web site (www.cybercash.com). The user registers with the system and then chooses to have funds drawn from a credit card or tied to a checking account, even if the customer’s account is not tied to a bank participating in the CyberCash program (participating banks include NationsBank, First Union, First USA and PNC Bank). The consumer’s account information is stored on his personal computer and not at Cybercash and the information is encrypted by the CyberCash Wallet once the final pay button is hit. The buyer's credit card number is encrypted and sent to the merchant. The merchant's computer adds data and forwards the transaction to CyberCash. The merchant never sees the buyer's credit card number (unless the bank that offers the credit card chooses this option) and CyberCash does not collect information about the goods ordered. CyberCash only sees the information necessary to process the transaction. CyberCash decrypts the information passed over the Internet, performs error checking and sends along all the information to regular credit card authorization and settlement networks. CyberCash then sends an electronic receipt, which includes credit card authorization data, to the merchant. The merchant then sends the purchased goods to the buyer. Merchants who use the CyberCash system benefit through lower transaction costs and a decrease in potential liability. For credit card transactions, the merchant never sees (or stores) a credit card number which prevents the possibility of a security breach and reduces the merchant’s startup and management costs. The advantages of the CyberCash system are that it guarantees consumer privacy and receipts of transactions (the central server does not collect information about who is purchasing what), and that the software is easy to use and compatible with all the browsers (the only technical thing a user must do to get started is download the software from the Internet). The main disadvantage is, however, that users have to send credit cards over the Internet (and since no encryption or software security is fool-proof, it involves some potential risk).
Founded in 1990, DigiCash has pioneered development of electronic payment mechanisms for open, closed and network systems that provide security and privacy. DigiCash has developed a number of other technologies, in each case working with leading organizations in the field, such as Amtech (the worldwide leader in automatic road toll collection), MasterCard (which has licensed DigiCash technology for a demonstration system implementing the first smart card chip mask technology), VISA International, IBM and Siemens, as well as various European telecommunication operators. Digicash is currently pursuing market opportunities in the areas of : point of sale (prepaid cards, credit cards, vending), telepayment (phone cars, teleshopping and telebanking, access, network payments), and transportation (automatic toll collection, parking systems, public transit). DigiCash’s main product is called "Ecash", which is designed for secure payments from any personal computer to any other workstation, over e-mail or Internet. It allows anonymous on-line purchasing through the exchange of virtual coins, each stamped with a unique serial number and validated by a participating bank using a private-key digital signature. In addition, it allows to exchange money over the Internet. Ecash has the privacy of paper cash, while achieving the high security required for electronic network environments exclusively through innovations in public key cryptography. With e-cash you can pay for access to a database, buy software or a newsletter by e-mail, play a computer game over the net, receive $5 owed to you by a friend, or just order a pizza. The advantages of the system are that it guarantees payer anonymity (no information about the payer is divulged to either the payee or a third party, transactions are untraceable, replicating paper cash, and there is not a central system accumulating information on purchases), that no credit card numbers are sent over Internet, that it is ideal for small transaction fees, and that users are always aware of the money they spend (the coinage the user has to spend is graphically represented on his/her hard drive The system developed by Digicash has some disadvantages too, for instance, one could argue that the payer anonymity could provide a haven for money launders, and maybe the government and financial institutions are not willing to support this system as much as others; in addition, it requires company specific software and some users might find more appealing the simplicity of credit rather than dealing with coins and exact change.
VeriFone is a leading global provider of Transaction Automation solutions supported by four U.S. banks (acquirer/processor) including Bank of America, First USA Paymentech, Novus Services and Wells Fargo Bank. Their systems are used to deliver electronic payment services to financial institutions, retail merchants and consumers, as well as government agencies, healthcare providers and benefit recipients. VeriFone's Internet Commerce Division is extending their product leadership in transaction automation to the Internet. The division provides Internet payment solutions, payment terminals, network systems, printers, and other peripherals and payment security products - including PIN pads and smart card reader/writers. To date, VeriFone has shipped more than 5 million systems to locations around the world. VeriFone's offers end-to-end Internet commerce solutions that enable transactions to move securely from the consumer to the merchant - and on to the transaction processor. VeriFone currently offers the vGATE and vPOS products. vGATE is Internet gateway software residing at the acquirer processor which allows transactions to be accepted from the merchants and connected to the current host financial system. vPOS is the point of sale application residing on the merchant’s server which connects the bank with the consumer. vPOS, which can be purchased from the supporting banks, supports authorization, capture, settlement and other functions. VeriFone’s vWALLET product allows the storing of shipping and billing information and credit card numbers. VeriFone’s software complies with industry standards, such as the MasterCard and Visa Secure Electronic Transaction (SET) protocol for credit card transactions. VeriFone has established several business and technology partnerships with a variety of companies to support its aggressive move into the Internet commerce arena. Business partnerships with Wells Fargo, Royal Bank of Canada, NOVUS, First USA Paymentech, Bank of America, and Citibank Card Acceptance Europe were forged to provide market opportunities for VeriFone’s secure end-to-end Internet commerce solution based on the SET protocol. In addition, VeriFone will receive active marketing, selling and distribution for its branded software to merchants as a core preferred Internet payments solution. Technology partnerships with GTE CyberTrust, Hewlett Packard, Microsoft Corporation, Netscape, Oracle, VeriSign are predominantly strategic alliances for joint development, delivery, and distribution of comprehensive Internet commerce solutions involving each firms’ offerings.
Visa is the most widely used payment card in the world with a wide range of consumer transactions being handled through Visa, including credit purchases, automated cash withdrawals, electronic point-of-sale debit transactions, monthly utility payments, installment loan payments, and even taxes. Visa's goal is to be the preferred consumer payment system worldwide for all types of financial transactions. Visa, an international brand issued by local financial institutions, is owned not by stockholders in a conventional sense, but by its Members - more than 19,000 financial institutions around the world. This structure allows Visa to be more in tune with and cater specifically to local markets. Visa divides its membership into six regions: Asia-Pacific, Canada, Europe (European Union), Central and Eastern Europe, Middle East and Africa, Latin America, and The United States. Visa offers a wide range of payment products and services including commercial card products, debit cards, travellers cheques, Visa TravelMoney, Visa Cash, Electronic Banking and Bill Payment, and Visa Health Care Payment Options. VISA Cash, their flagship Internet commerce offering, is a stored value application that allows you to load money on to your chip card, and then use your chip card to access this pre-loaded money to pay for small-value transactions. Examples of typical transactions may include pay phone calls, bridge or expressway tolls, parking fees, and Laundromat services, a cup of coffee, a newspaper, cinema tickets, or public transportation. The chip card will also allow you to access various accounts from your primary financial institution, obtain account balances, and transfer funds between accounts. The chip card may also facilitate electronic banking and bill payment. Additional memory will increase security in using your chip card. It will also make it possible to securely store non-financial information on the card. There are two main types of VISA Cash cards: Disposable and Reloadable. Disposable cards are loaded with a pre-determined value. These cards typically come in denominations of local currency, such as US $10. When the value of the card is used, the card is discarded and a new card may be purchased. These cards may be dispensed from machines called Card Dispensing Machines(CDMs) which accept a variety of payment methods. Reloadable cards come without a predefined value. Cash value is reloaded onto the card at specialized terminals and Automated Teller Machines (ATMs). When the value is used up, you can load the card again. VISA Cash is a plastic card that works like cash. A microchip embedded in each card stores a specific amount of money. To use your VISA Cash card, simply insert it into the merchant's VISA Cash card reader. Your current balance will be displayed to let you know in advance how much VISA Cash you have to spend. The cashier will enter the amount of your transaction, which is displayed to you. When you press the "yes" or "accept" button on the card reader, the amount of your purchase is automatically deducted from your card balance. Your new card balance is then displayed. It's fast. It's convenient. It's easy.
On February 1, 1996, Visa International and MasterCard announced, with others in the industry, the development of a single technical standard for safeguarding payment card purchases made over open networks. This standard is called SET and stands for Secure Electronic Transaction. SET, which includes digital certificates - a way of verifying the actual cardholder is making the purchase - will provide financial institutions, merchants, and vendors with a new and secure way of getting the most from the emerging electronic commerce marketplace. Participants in this effort with MasterCard and Visa are: GTE, IBM, Microsoft, Netscape Communications Corp., SAIC, Terisa Systems and Verisign. A single standard limits unnecessary costs and builds a better business case for electronic commerce. Visa and Microsoft have entered into a strategic partnership to provide home banking and bill payment services via the personal computer. More than 30 financial institutions have committed to implement the VISA Interactive and Microsoft Money program. The agreement, which links Microsoft Money with VISA Interactive's processing services, is expected to significantly increase consumer acceptance of home banking and electronic bill payment due to high consumer awareness and adoption of Money, and to the demonstrated reliability, speed and global reach of the VISA network. Money is designed to make it easy for consumers to perform financial tasks quickly and efficiently. The agreement is also designed to incorporate the newly patented VISA ePay system, which electronically connects consumers and their financial institutions to billing organizations. The result is a seamless electronic highway for bill payment.
MasterCard, headquartered in New York City, is a global payments franchise of nearly 22,000 member financial institutions worldwide. Through its family of brands, MasterCard offers a full range of credit and debit products and services supported by a global transaction processing network. The MasterCard/Cirrus ATM network, which is composed of nearly 190,000 ATMs in 65 countries and territories, provides cash access to more than 360 million credit and debit cards worldwide. In addition, MasterCard offers the Maestro point-of-sale program, with more than 145 million committed edc/Maestro debit cards, of which more than 82 million cards are live. In 1993, MasterCard's credit and debit cards generated 3.6 billion transactions, totaling $320 billion in sales volume, at 12 million acceptance locations worldwide. MasterCard consumer product offering serves to globally facilitate purchases and payment with millions of merchants. With MasterCard, Gold MasterCard, The MasterCard/Cirrus network, Maestro, and MasterMoney you can pay for travel, restaurant and retail purchases at over 13 million locations all over the world. MasterCard Business Products are targeted to small, midsize, and large companies. MasterCard BusinessCard, MasterCard Corporate Card, and MasterCard Purchasing Card work to manage expenses, and provide comprehensive travel and business services. MasterCard International Incorporated and Netscape Communications Corporation have entered an agreement to bring transaction processing capabilities for electronic commerce via the Internet to millions of MasterCard cardholders. Under the terms of the agreement, the two companies will develop the interface for authorizing and clearing transactions on credit and debit cards in a secure environment on the Internet. With this agreement, MasterCard will leverage Netscape's experience in providing secure Internet-based software solutions with their own expertise in processing financial transactions to offer expanded ways to pay that are fast, safe and convenient.
As new electronic payment systems continue to appear and evolve, they will modify consumers’ needs and expectations, as well as the nature of the financial products and services that financial institutions provide. For instance, new electronic payment systems lower the barriers for non-banks to participate into the payment process as new service providers, creating a new paradigm in the financial services industry. As a consequence, the relationship among consumers, merchants, banks and other commercial organizations will be redefined. The current situation of change and transformation is pushing companies in the industry to rethink their strategies, and to identify what are the critical factors of success in this industry. We believe there are several risk and success factors that are crucial to the future of the "industry" of electronic payments as a whole, and to the predominance of certain companies or systems over the others. However, we also believe that different systems will coexist as they meet different customers needs.
Consumer acceptance of electronic payment initiatives may be slow. It took twenty years for consumers to become accustomed to using Automatic Teller Machines and direct deposit. It is likely that e-payment and e-commerce will experience network bandwagon effects whereby demand and usage will gain momentum gradually and will eventually reach a critical mass through word of mouth of consumers and merchants, acceptance among financial institutions, and favorable government regulation.
The process, for now, resembles the free-for-all that surrounded the U.S. banking industry in the 19th century, until the creation of the Federal Reserve. Before the Fed, banks circulated their own private currency and bank checks weren’t as widely accepted, since you couldn’t trust the solvency of the issuer. The same pattern is being repeated in the digital marketplace; government agencies like the Federal Reserve, Department of the Treasury, and the Office of Technology Assessment have no official opinion on how e-cash should be implemented. Without clear ground rules, uncertainty will undermine e-cash’s usefulness. What’s at stake here? At worst, we’ll be left with an inflexible currency that’s costly to use, easy for marketers to trace, and hard to trade between individuals; at best, we’ll get the digital equivalent of a dollar bill -- the benefit of cash without the cost of paper. As the e-payment industry cycle begins, firms have begun to and will continue to take advantage of market opportunities in this revolutionary age of information. Who the winners will be is difficult to assess. What is evident now is that enough momentum has built behind the Internet and the World Wide Web that electronic commerce will continue to evolve and will someday be commonplace in society. It’s just a matter of when.
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