Internet Payment Services

ABSTRACT

Research on Internet Economics attempts to improve our understanding of the Internet as an economic system. Recently proposed and implemented payment methods follow one of three models: electronic currency, credit-debit, and secure credit card transactions. Such payment services have different strengths and weaknesses with respect to the requirements of security, reliability, scalability, anonymity, acceptability, customer base, convertibility, efficiency, ease of integration with applications, and ease of use. Within this paper I shall analyze these payment services as well as their respective strengths and weaknesses. This paper discusses some of the desired characteristics of payment systems for an open networks and the benefits and drawbacks of alternative approaches, and describes how the different methods can be used together to provide financial infrastructure for the Internet.

INTRODUCTION

The bursting of technology-based stock bubbles occurred repeatedly at the turn of the 20th century, a time when major innovations of the Industrial Age dramatically changed business and individual lives, but only after slow incubation periods that lasted decades. Such as the introduction of the telephone, electricity, the car and the radio. Each of these inventions spawned the creation of hundreds, if not thousands, of enterprises seeking to cash in on the new technology, only to result in a wave of business failures and then consolidation among the relatively few survivors. Collectively, these experiences demonstrated that it takes an extensive supporting infrastructure for users to realize the benefits of these technologies (i.e., roads and tires for cars, and power plants and transmission lines for electricity), and major changes in consumer or business behavior to adapt to and make full use of the new technologies. The result, an incubation period of 20-30 years. When the Internet, including e-payments, first burst onto the scene, enthusiasts claimed that it would be different. The world was now operating on "Internet time", so history was no longer a guide to how fast the Internet would produce its benefits. It might well be true that the length of the incubation period of the "Information Age" would be compressed due to virtual distribution and faster market adjustments enabled through instant communications. But the enthusiasts were wrong to totally dismiss past historical changes. Revolutionary inventions do take time to generate their full effects. And that time is turning out to be longer than some of those enthusiasts originally thought.

A closer look at the dot-com failures in the e-payments industry reveals that, while promoting innovation, the firms sold applications for which there was little demand and, more important, required major consumer behavior shifts. This was impractical to expect, especially when e-commerce is still less than 10 percent of all retail activity and when only a fraction of consumer bills and payments are transmitted electronically. But, while the market has been consolidating, there has been significant successes with consumer applications that do not require major behavior changes or process shifts. Driving these new applications is a renewed emphasis by services providers on reducing costs.

Consumer adoption of Internet-based billing and payment applications has continued to steadily increase, in ways initially unexpected by most industry observers. Specifically, applications in which consumers interact directly with billers have earned at least 20 times the adoption of the recent bill-consolidator model that requires consumers to change normal interaction patterns. Newly created authentication and identity services, in which consumers strongly identify themselves to Web services or payment systems through a digital certificate after an extra enrollment process, have also failed. On the other hand, identity services that are mainly transparent to consumers, such as Microsoft Passport, have been successful in gaining millions of adopters.

DISCUSSION

Consumer e-billing finally took off in 2001, although success has been under the radar screen of most industry watchers. Most adoption occurred in next generation e-billing applications, i.e. online account management. All told, in 2001, 32 million Americans, or 16 percent of the adult population, viewed bills and managed creditor accounts online. The overwhelming success, largely unnoticed in the market, has been in the credit-card industry where, in 2001, 26.7 million U.S. card holders used Web-based applications offered by card issuers that take the concept of the monthly bill presentment to the next level, online account management. E-billing is traditionally defined as the online interactive communication of customer account data and, therefore, have much more value than old paper-based processes and batch delivery of monthly bills. Credit-card issuers are the most savvy of marketers and the most advanced in customer service relative to the other four major sectors that generate 70 percent of U.S. consumer bills: telecommunications, loans, utilities and insurance.

When the e-billing and e-payment consolidator model was launched in 1997, the conventional wisdom was that consumers would flock in large numbers to their banks or other financial-services provider (FSP) sites, such as brokerages or portals, to view and pay all of their major bills at once. However, years later, the dreams of a successful consolidator model have largely fizzled and have been replaced by a reality most did not expect, consumers preferring viewing and paying their e-bills directly at biller Web sites rather than going through the inconvenience of registering for a consolidated model at their bank's ( or other service provider's) Web site, only to be able to receive two or three of their major bills. The traditional e-bill consolidator model, where consumers go to a single Web site, such as a bank's, to sign up for consolidated electronic bill presentment and payment, ahs been a major market disappointment. There are several reasons for this including: complex user interfaces, enrollment difficulties, no critical mass of available e-bills, cost and lag time in bill payments. Instead of the consolidator model, direct consumer e-billing and e-payment at the Web sites of individual billers continues to be the most-popular method. Credit-card issuers and telecommunication companies have been the most aggressive in developing e-billing Web sites and developing customer service functionally around them.

Take the case of an average large company