The main difference between e-commerce and bricks-and-mortar payment methods can be seen when evaluating the natures of the two media. (School of International Business, 2004, p.82) The main payment concern among first time Internet shoppers is the concept of the ‘virtual’ (as opposed to the ‘physical’). Sometimes it may seem like your money will just disappear, lost in the space that is the World Wide Web. E-commerce encourages payment transactions which do not require physical funds (like cash) but instead involve only data transfer (credit/debit cards). (School of International Business, 2004, p.82)
When setting up an e-commerce business, the first questions one must ask is:
• How will people pay?
• What credit cards will you accept?
• How will you manage fraud?
Cashless society: The security risk of sending concealed cash is high, and thus few, if any, e-commerce stores will accept cash as a payment method. However, an alternative to this is to accept money orders (domestic and international are available), personal cheques and cashier’s cheques. These forms of payment method are more typically found in C2C transactions, as it can take awhile to obtain (if you qualify at all) for a merchant account. The advantage of this form of payment method is that it allows people without a credit card to purchase goods or services online. However, the disadvantage of this method is the time it takes for funds to be received and cleared by a bank. Including postage/delivery time of payment, this can take as long as 3 weeks.
Credit cards: Credit cards are the dominant form of payment on the Web. Everywhere from eBay to Amazon, you will be able to pay via a credit card. This allows businesses and consumers to pay and receive payment immediately, due to the electronic nature of this media. The transaction takes only seconds to complete, making credit cards fast and easy, but they do have a significant disadvantage. Businesses do not require a signature to authorize a credit card transaction, and this can lead to higher fraud rates.
Intermediaries: There are a few companies online who will facilitate your payments for you, and often protect you from, or provide relief from fraud. Money is often ‘insured’ and if you are the victim of fraud (suppose you don’t receive goods you pay for) you may qualify for reimbursement from the company itself, or they will try to get your money back on your behalf (sometimes for a small fee). Such examples of these companies are PayPal (owned by eBay) and Western Union BidPay. These are typically used for online auctions; however some businesses do accept payment through them.
“Card not present� transactions: These transactions are those discussed in the previous section – transactions where the physical card is not required to be present. Therefore, a merchant is typically unable to produce a valid sales receipt or record – a signed authorization from the customer who owns the credit card. (School of International Business, 2004, p.82) This has a great impact on businesses, as it shifts the onus of fraud away from the credit card companies and into the hands of the merchant. As opposed to offline transactions, merchants online are forced to absorb all of the costs of their ‘charge backs’ or refunds. (School of International Business, 2004, p.82)
Higher fraud rates: As can be expected, the virtual nature of online transactions allows for fraud to be more easily executed, and there are more fraudulent transactions online than off. All a thief needs to commit this type of crime is a valid credit card number, name and expiration date. There is no need for a signature or identification or even the physical card. “Credit card fraud occurs in more than 1 percent of all online transactions. This rate is at least ten times greater than the credit card fraud rate in the offline world.� (School of International Business, 2004, p.83)
Higher fees: The most significant disadvantage resulting from online payments involves the cost of using credit cards to pay a merchant. In this case it is not the customer who pays, but the person accepting payment. “Because credit card fees vary according to a merchant’s risk category, on average, e-commerce merchants pay fees that are 66 percent higher than those paid by less risky bricks-and-mortar merchants.� (School of International Business, 2004, p.83) Typically this cost is around 2.5 percent of the purchase price, plus an additional fee of 20 to 30 cents per transaction. Other costs also include connecting to credit card processing networks and fraud protection services, which can add up to 50 cents to each transaction. (School of International Business, 2004, p.83)
Security: Security is an extremely important issue in e-commerce. The increased opportunity for fraud fuels consumers’ fear of transacting online. If not secured, the data transfer process can easily be monitored or intercepted, and thus merchants must take steps to ensure the security of their transactions. (School of International Business, 2004, p.83)
Merchants must address three critical aspects of credit card security:
• The transfer of data from the customer’s computer to the merchant’s e-commerce store;
• The transfer of data from the merchant to the payment processors, and;
• The protection of customer data stored in the merchant’s database.
For more on e-commerce security, see the entry ECommerce_-_Security
Queensland University of Technology, School of International Business (2004) Introduction to e-business Australia: McGrawHill & QUT Custom Publication, ISBN 7777772570.
Melanie Mackrodt 13:56, 3 Sep 2004 (EST)
Catherine Cherry 10:24, 29 Oct 2004 (EST)
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