More Related Content Similar to Understanding Electronic Commerce (20) Understanding Electronic Commerce1. ISV Innovation Presents: Understanding Electronic Commerce
Understanding Electronic Commerce
Tyler Hannan
Platform Evangelist, IP Commerce
6/10/2008 2. ISV Innovation Presents: Understanding Electronic Commerce
Who is Tyler Hannan?
Agenda
Platform Evangelist for IP Commerce
Agenda one
11+ years experience in the software sector
Agenda two
Network Administrator, DBA, Part-time
Agenda three
Developer, 5 years focused on Enterprise
Agenda four
Retail and Payments Industry
Agenda five
Agenda six
Aspires to have Visual Studio Guy’s haircut
6/11/2008 © Microsoft Corporation 2007 2 3. ISV Innovation Presents: Understanding Electronic Commerce
Agenda
or, what are we doing?
Agenda
Agenda
Agenda one
• Why do I need to know about payments?
Agenda two
• Credit Cards, I have one…how do they work?
Agenda three
• Are there other payment types?
Agenda four
• But what about eCommerce?
Agenda five
• So, what do I do now?
Agenda six
6/11/2008 © Microsoft Corporation 2007 3 4. ISV Innovation Presents: Understanding Electronic Commerce
Objectives
or, why am I here?
• Develop an understanding of the prominent payment tenders
currently used in the market.
• Ensure you have familiarity with a tender when a customer
mentions, or requests, information.
• Learn details about payments that you may have not previously
known.
• Above all, gain valuable insight into an important industry.
6/11/2008 © Microsoft Corporation 2007 4 5. ISV Innovation Presents: Understanding Electronic Commerce
An Industry Overview
What are some statistics about the payments industry?
Why does it matter to me?
6/11/2008 © Microsoft Corporation 2007 5 6. ISV Innovation Presents: Understanding Electronic Commerce
2003 2006 CAGR
Total (billions) 81.4 93.3 4.6%
Checks (paid) 37.3 30.6 -6.4%
Debit Card 15.6 25.3 17.5%
Signature 10.3 16.0 15.8%
PIN 5.3 9.4 20.6%
Credit Card 19.0 21.7 4.6%
ACH 8.8 14.6 18.6%
EBT 0.8 1.1 10.0%
The number of noncash payments was 93.3
billion in 2006, with a value of $75.8 trillion.
Source: The 2007 Federal Reserve Payments Study
6/11/2008 © Microsoft Corporation 2007 6 7. ISV Innovation Presents: Understanding Electronic Commerce
2003 2006
1% Checks 1% Checks
11% (paid) 16% (paid)
Debit Card Debit Card
33%
46% Credit Card Credit Card
23%
23%
ACH ACH
19% 27%
EBT EBT
Electronic payments now exceed two-thirds of
all noncash payments.
Source: The 2007 Federal Reserve Payments Study
6/11/2008 © Microsoft Corporation 2007 7 8. ISV Innovation Presents: Understanding Electronic Commerce
More than 50% of US SMBs are willing to
change their bank for better payment services.
Source: BAI Research, Small Business Payments in 2006
6/11/2008 © Microsoft Corporation 2007 8 9. ISV Innovation Presents: Understanding Electronic Commerce
Interesting, but who cares?
45% of SMBs rely on their ISV to give them
advice about payment acceptance.*
Payment service providers need you, and will
pay for your services.
*Source: PayPal
6/11/2008 © Microsoft Corporation 2007 9 10. ISV Innovation Presents: Understanding Electronic Commerce
Credit Card Processing
How did we get here?
How do they work?
What is Credit vs. Debit vs. PIN Debit vs. EBT?
Why choose credit cards?
6/11/2008 © Microsoft Corporation 2007 10 11. ISV Innovation Presents: Understanding Electronic Commerce
The First Credit Card
● Diners Club was founded in 1950
– Stores already extended credit to their customers
– Each store had their own rules and regulations for payment terms
● Frank McNamara, founder, had a revolutionary idea
– One card can be used to pay multiple merchants
– The first cards were given to 200 associates of McNamara
– The cards were accepted at 14 restaurants in New York City
● By the end of 1950, Diners Club was successful
– 20,000 customers
– over 1,000 restaurants
6/11/2008 © Microsoft Corporation 2007 11 12. ISV Innovation Presents: Understanding Electronic Commerce
Credit Cards Today
6/11/2008 © Microsoft Corporation 2007 12 13. ISV Innovation Presents: Understanding Electronic Commerce
How Do Credit Card Transactions Work?
Software Acquirer Card Issuer(s)
Company Association
1
1) A purchase is initiated and a request for approval, or
Authorization, is sent to the card issuer.
6/11/2008 © Microsoft Corporation 2007 13 14. ISV Innovation Presents: Understanding Electronic Commerce
How Do Credit Card Transactions Work?
Software Acquirer Card Issuer(s)
Company Association
1
Authorization
2
2) Verification, or Approval, is sent back to the Merchant
and the Cardholder is given their purchased item.
6/11/2008 © Microsoft Corporation 2007 14 15. ISV Innovation Presents: Understanding Electronic Commerce
How Do Credit Card Transactions Work?
Software Acquirer Card Issuer(s)
Company Association
1
Authorization
2
Batching
3
3) Approved transactions are stored in a “Batch” for
sending to the Card Issuer at the end of the day.
6/11/2008 © Microsoft Corporation 2007 15 16. ISV Innovation Presents: Understanding Electronic Commerce
How Do Credit Card Transactions Work?
Software Acquirer Card Issuer(s)
Company Association
1
Authorization
2
Batching
3
4
4) Approved transactions, over an interval, are grouped
together and submitted for payment.
6/11/2008 © Microsoft Corporation 2007 16 17. ISV Innovation Presents: Understanding Electronic Commerce
How Do Credit Card Transactions Work?
Software Acquirer Card Issuer(s)
Company Association
1
Authorization
2
Batching
3
4
5
5) The Merchant receives payment!
6/11/2008 © Microsoft Corporation 2007 17 18. ISV Innovation Presents: Understanding Electronic Commerce
What About All the People in the Middle?
● Acquirer
– A member of one, or more, card associations
– Typically owns the merchant relationship and receives all
transactions from the merchant
● Card Association
– A network of Issuers and Acquirers that process payments
– e.g. Visa, MasterCard
● Issuer
– The bank that extends a line-of-credit to the customer
– Risk, or liability, is shared between the issuer and the Acquirer
6/11/2008 © Microsoft Corporation 2007 18 19. ISV Innovation Presents: Understanding Electronic Commerce
What is interchange?
● A volatile topic regarding the costs associated with
Credit Card transactions. This includes legislative
discussions, customer suits, and a fair amount of
industry heartburn.
● How does it work?
– The fee that an Acquirer pays the Issuer when the merchant
accepts a credit card
– The merchant, ultimately, pays for interchange through deduction
of the purchase price
6/11/2008 © Microsoft Corporation 2007 19 20. ISV Innovation Presents: Understanding Electronic Commerce
Source: Government Accountability Office
6/11/2008 © Microsoft Corporation 2007 20 21. ISV Innovation Presents: Understanding Electronic Commerce
What else can be considered Credit Processing?
● Offline, or Signature, Debit
– Will have the logo of a card association
– Authorizes against the user’s bank account
– Typically has an associated line-of-credit (overdraft)
● Electronic Benefits Transfer (EBT)
– Allows the customer to authorize transfer from a Federal benefits
account to a merchant
– An electronic replacement for food stamps and other Federal
benefits programs
– Typically requires a separate terminal (though not with software)
6/11/2008 © Microsoft Corporation 2007 21 22. ISV Innovation Presents: Understanding Electronic Commerce
What about when I’m asked for a PIN?
● Online, or PIN, debit
– A different beast altogether than a traditional credit card (although
some cards are dual-purpose)
– The transaction is secured using a Personal Identification
Number (PIN).
• Something you have, the card
• Something you know, the PIN
– Handled through a separate network (ATM or “Debit)
● Why is it popular?
– Enhanced security
– The merchant pays a MUCH lower rate (35 – 50 cents, instead of
a percentage of transaction amount)
6/11/2008 © Microsoft Corporation 2007 22 23. ISV Innovation Presents: Understanding Electronic Commerce
Sector Percentage Change
Convenience Stores 140%
Department Stores 116%
General Retail 94%
(Overall) 80%
Food Retail 68%
Petroleum Retail 13%
Increase in PIN-Debit Acceptance
1st Quarter 2000 vs 1st Quarter 2006
Source: First Annapolis Consulting
6/11/2008 © Microsoft Corporation 2007 23 24. ISV Innovation Presents: Understanding Electronic Commerce
Why do My Customers Care About Credit Cards?
● Improved speed of service
● Higher average ticket prices
● Less dependency on cash
● Increased revenue
● Easy processing and quick payments
6/11/2008 © Microsoft Corporation 2007 24 25. ISV Innovation Presents: Understanding Electronic Commerce
Automated Clearing House (ACH)
What is it?
How does it work?
Can my customers use it?
Why choose ACH?
6/11/2008 © Microsoft Corporation 2007 25 26. ISV Innovation Presents: Understanding Electronic Commerce
Number Value
1% Checks
16% (paid) Checks
Debit Card 41% (paid)
33% Debit Card
Credit Card
23% 55% Credit Card
ACH
27% ACH
EBT 3% 1%
ACH Payments were only 15.6% of noncash
transactions but were 41% of the value.
Source: The 2007 Federal Reserve Payments Study
6/11/2008 © Microsoft Corporation 2007 26 27. ISV Innovation Presents: Understanding Electronic Commerce
What is Automated Clearing House?
● ACH is an electronic network used for processing bank-
to-bank financial transactions
● Rules and regulations for the network are established by
governing entities
– NACHA
• A not-for-profit association that oversees the network
– The Federal Reserve
● ACH payments include direct deposit, vendor
payments, consumer bill payment, online payments
(debit)
6/11/2008 © Microsoft Corporation 2007 27 28. ISV Innovation Presents: Understanding Electronic Commerce
How Do ACH Transactions Work?
Software
Application
1
Customer Merchant
1) Consumer initiates the purchase.
6/11/2008 © Microsoft Corporation 2007 28 29. ISV Innovation Presents: Understanding Electronic Commerce
How Do ACH Transactions Work?
Software
Application
1
Authorization
Customer Merchant
2
ODFI
2) Merchant’s software transmits the file to the underwriting bank.
6/11/2008 © Microsoft Corporation 2007 29 30. ISV Innovation Presents: Understanding Electronic Commerce
How Do ACH Transactions Work?
Software
Application
1
Authorization
Customer Merchant
2
ACH Network 3
ODFI
3) The bank transmits data to the ACH Network.
6/11/2008 © Microsoft Corporation 2007 30 31. ISV Innovation Presents: Understanding Electronic Commerce
How Do ACH Transactions Work?
Software
Application
1
Authorization
Customer Merchant
2
4 ACH Network 3
RDFI ODFI
4) The ACH Network sends payment information to the customer’s bank.
6/11/2008 © Microsoft Corporation 2007 31 32. ISV Innovation Presents: Understanding Electronic Commerce
How Do ACH Transactions Work?
Software
Application
1
Authorization
Customer Merchant
2
4 ACH Network 3
RDFI ODFI
5) The Merchant receives their money!
6/11/2008 © Microsoft Corporation 2007 32 33. ISV Innovation Presents: Understanding Electronic Commerce
There were some terms there I don’t know...
● ODFI
– Originating Depository Financial Institution
– The bank responsible for generating an ACH File and submitting
it for processing
● RDFI
– Receiving Depository Financial Institution
– The bank that processes the payment instruction indicated in the
ACH File
6/11/2008 © Microsoft Corporation 2007 33 34. ISV Innovation Presents: Understanding Electronic Commerce
What types of transactions are there?
● ARC (Accounts Receivable Entries)
– Checks received by a merchant through mail or drop box and
converted to ACH
● BOC (Back Office Conversion)
– Paper checks are converted to an electronic debit in a central
location (i.e. back office or bank)
● POP (Point-of-Purchase)
– A check presented in-person is converted to an ACH transaction
6/11/2008 © Microsoft Corporation 2007 34 35. ISV Innovation Presents: Understanding Electronic Commerce
What types of transactions are there?
● PPD (Prearrange Payments and Deposits)
– Used primarily for direct deposit and for preauthorized bill
payment
● TEL (Telephone Initiated-Entry)
– Verbal authorization to issue an ACH transaction. Such as a
check payment over the phone.
● WEB (Web Initiated-Entry)
– Internet authorization to create an ACH transaction (i.e. PayPal)
6/11/2008 © Microsoft Corporation 2007 35 36. ISV Innovation Presents: Understanding Electronic Commerce
Why do My Customers Care About ACH?
● Lower clearing fees
● Reduced return handling costs and time
● Increased transaction security (no lost checks)
● Funds for purchases can be settled directly to a retailer’s
account
6/11/2008 © Microsoft Corporation 2007 36 37. ISV Innovation Presents: Understanding Electronic Commerce
Other Physical Tenders
A brief, too brief, overview
6/11/2008 © Microsoft Corporation 2007 37 38. ISV Innovation Presents: Understanding Electronic Commerce
Checks: Remote Deposit Capture (RDC)
● Deposit checks into your bank account without having to
physically deliver the check to the bank
● Managed by the Check Clearing for the 21st Century Act
(Check 21)
– September 11, 2001 results in a new payment methodology
– A digital image of the check is considered a legal document
● Why RDC?
– Decrease cost due to no longer having to go to the bank
– Reduce paperwork and potential for losing checks
6/11/2008 © Microsoft Corporation 2007 38 39. ISV Innovation Presents: Understanding Electronic Commerce
Checks: Other
● Check Verification
– Used to identify potential bounced checks quickly
– Transaction is processed at the POS to authorize, or decline,
check presentation
– In essence, a database compare of personal identities to
bounced checks creating a “blacklist”
● Check Guarantee
– A program in which the merchant is guaranteed to be paid for all
checks regardless of returns (Could you have guessed?)
– Typically works in conjunction with verification
6/11/2008 © Microsoft Corporation 2007 39 40. ISV Innovation Presents: Understanding Electronic Commerce
Gift Cards
● Commonly referred to as a Stored Value card (or Stored
Value Account)
● Closed loop cards
– Most common form of gift card
– Usually branded by the merchant (i.e. Home Depot card)
● Open loop cards
– Pre-Paid cards that can be used at a variety of merchants
– Money is deposited to the card, and it can be recharged
6/11/2008 © Microsoft Corporation 2007 40 41. ISV Innovation Presents: Understanding Electronic Commerce
Gift Card Benefits
● Gift card sales boost (average 30% more than paper)
● No change is given, 100% purchase value
● Increased float (10-15% of cards are never redeemed)
● Encourages return visits
● Customer retention (for all parties)
6/11/2008 © Microsoft Corporation 2007 41 42. ISV Innovation Presents: Understanding Electronic Commerce
What about eCommerce?
Payment methods and their benefits
6/11/2008 © Microsoft Corporation 2007 42 43. ISV Innovation Presents: Understanding Electronic Commerce
PayPal
● You already know who they are.
– An online SVA that can be funded either directly from a bank
account (ACH transaction) or from a credit card
● Why PayPal?
– Easy online, international, acceptance
– Increased online sales an average of 14%
– Consumer security increased by not entering credit, or bank
details online
– 60.2 Million active PayPal users
6/11/2008 © Microsoft Corporation 2007 43 44. ISV Innovation Presents: Understanding Electronic Commerce
Google Checkout
● An online wallet where a user stores their credit, debit,
and shipping information.
– Enables one-time payments from a customer to a merchant
– Does not have a Stored Value component
– Does not allow payments from person to person
● Why Google Checkout?
– Google Checkout users click on ads 10% more when the ad
displays the Checkout badge
– Free transaction processing when using Google AdWords
– Payment guarantee system that protects order even when a
chargeback is issued
6/11/2008 © Microsoft Corporation 2007 44 45. ISV Innovation Presents: Understanding Electronic Commerce
Amazon Flexible Payments Service
● A web service that allows the transfer of money between
two “entities.”
– Ability to pay by credit card, bank account, and Amazon
Payments account
– Support for multiple and recurring payments
● Why Amazon FPS?
– Support for micropayments by grouping small transactions into a
larger transaction
– Simple integration into the rest of the AWS suite
6/11/2008 © Microsoft Corporation 2007 45 46. ISV Innovation Presents: Understanding Electronic Commerce
A Summary:
● Payments are of the highest priority for the SMB and
represents an untapped market for Payment
Companies. They need you and are willing to
compensate you accordingly.
● The SMB requires multiple payment types and tight
integration into their existing workflow.
– software solutions not just hardware
● The ISV is uniquely positioned to provide value-added
payment services to their existing solutions. This will
create a “stickier” customer.
6/11/2008 © Microsoft Corporation 2007 46 47. ISV Innovation Presents: Understanding Electronic Commerce
What Do I Do Next?
● We have barely scratched the surface...your learning
has just begun.
● The best primer on the industry is called “Paying With
Plastic” by David Evans.
● Now that you have a basic understanding
of payments, attend “Commerce Security
Fundamentals” for a discussion about
protecting your customers data.
6/11/2008 © Microsoft Corporation 2007 47 49. ISV Innovation Presents: Understanding Electronic Commerce
Thank You, For More Information:
Agenda
thannan <at> ipcommerce <dot> com
Agenda one
http://tylerhannan.blogspot.com
Agenda two
http://commercelab.ipcommerce.com
Agenda three
Agenda four
Agenda five
Agenda six
6/11/2008 © Microsoft Corporation 2007 49