InformationWeek
Defining The Business Value Of Technology
May 31, 1999
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Businesses are deploying new online payment technologies in lieu of credit-card systems
By Amy K. Larsen
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n the high-tech world of electronic commerce, a low-tech piece of plastic--the credit card--drives most business-to-consumer transactions. Online sales reached $3.3 billion last year, and credit cards were used for about 90% of those purchases. For years, Web merchants have experimented with alternative payment mechanisms, but they've been slow to catch on. That's changing, as companies look for ways to keep the cash flowing at their Web sites--and as vendors offer new payment options.The continuing popularity of credit cards is easy to understand. Most people have them, they're relatively easy to use on the Web (or should be), and they're a convenient way to combine physical-store and Web purchases in a single account. "People are happiest in the virtual world when it's like the real world," says Hudson La Force, director of finance for Dell Computer's Home Systems consumer business. Dell's online sales, which now average more than $14 million per day, are primarily through credit-card transactions, though a few are paid by checks that come in the mail.
But there are also drawbacks to credit cards. They're not well-suited for impulse purchases--if only because there's an element of deliberation that goes with using the cards. Nor are they convenient for making many small purchases--say for spending $5 per transaction 10 times during an hour of Web surfing. "Credit cards work fine in E-commerce for buying most hard goods, but they aren't necessarily the best way to purchase smaller-ticket items," says Steve Buck, VP of business development for iPin, which will begin offering a service within a few weeks to handle "micropayments," online purchases that are measured in pennies or a few dollars.
Vendors such as iPin are introducing online payment alternatives that, if they catch on, could give credit cards a run for their money. Earlier this month, Trivnet Inc., an Israeli company with offices in Santa Clara, Calif., unveiled a micropayment service. Trivnet's system records charges for content, such as articles, music, and software, and bills consumers through their Internet service provider. Trivnet gets from 10% to 30% of the transaction's value for its service. One of the company's first customers is Tucows (The Ultimate Collection of Winsock Software), an Internet distribution site for Windows, Macintosh, Linux, and PDA software.
In March, Cybergold Inc. introduced a system that gives consumers credits for reading ads, answering market surveys, and registering at Web sites. A person can use this "incentive" money to pay for online content such as music downloads or news articles. Users who run out of credits can transfer credit from a charge card into an online "wallet" managed by Cybergold.
Qpass Inc. introduced an online processing system in March that's also designed for purchasing content rather than hard goods. The system bills a user's credit card for content purchased on the Web, a model that relies in part on electronic-wallet software from vendors such as Microsoft and eWallet Inc. Qpass was founded by D. Chase Franklin, an ex-Microsoft developer who was involved in the development of Microsoft's Merchant Server and the company's support of the Secure Electronic Transaction protocol (see story, "It Pays To Be Secure").
Digital wallets are database files that store a person's payment information, including credit-card numbers and bank information, in a single, secure place, so buyers don't have to re-enter data each time they make a purchase. In June, online music vendor CDNow Inc. will start accepting payments from customers using America Online's digital wallet, which AOL developed with First USA and began testing late last year with a handful of retailers. "There are both convenience and security benefits for the customer," says Michael Krupit, VP of technology and creative services for CDNow.
Here's how it will work: When an AOL customer with a digital wallet makes a purchase from CDNow, the music vendor's Web site will communicate with AOL's wallet server to verify the user's identity. The wallet site verifies the consumer has enough credit with the creditor bank to cover the transaction cost and communicates an authorization back to CDNow. The consumer's credit-card information is transmitted between the wallet and the creditor bank only once--when the wallet is first set up. After that, only the card's expiration date is shared during transactions. The idea is to eliminate the need for consumers to re-enter a 16-digit credit-card account number each time they make a purchase--simplifying the ordering process and adding a level of security because the credit-card number isn't transmitted across the wire.
Krupit expects the convenience factor to count. "We compete head-to-head against brick-and-mortar businesses, so we have to make transactions as straightforward as possible," he says.
Online merchants and financial services companies are also increasingly offering bill presentment and payment services via the Internet (InformationWeek, April 19, 1999). The services are not alternatives to credit cards--they support after-purchase payment of online and physical-store transactions--but they're evidence of the growing interest and comfort that both businesses and their customers have with online payment.
First Internet Bank, an online bank, and Scotia Bank in Toronto debit money from a customer's account and then transfer payment to the biller's bank via electronic check. The funds are transferred over the Net.
continued...page 2, 3, 4
Illustration by Hank Onsuna
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