PAYMENT SYSTEMS
`
`E-Commerce Winter 2011
`Marek Maurizio
`
`Apple Exhibit 4188
`Apple v. SightSound Technologies
`CBM2013-00020
`Page 00001
`
`
`
`E-Commerce Winter 2011
`Marek Maurizio
`
`Apple Exhibit 4188
`Apple v. SightSound Technologies
`CBM2013-00020
`Page 00001
`
`
`
`THE PAYMENT REVOLUTION
`
`In 2011 we are still in the middle of a payment system
`revolution
`
`Electronic payments are taking the place of cash and checks
`
`In 2003 electronic systems surpassed the use of cash and
`checks in stores
`
`Similar trends occur for recurring payments, more then 75%
`in 2001 were made by electronic systems
`
`Page 00002
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`
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`THE PAYMENT REVOLUTION - II
`
`The cashless society has been discussed for a long time
`
`Page 00003
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`
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`THE PAYMENT REVOLUTION - III
`
`The demise of cash and checks is not imminent
`
`Many individuals *can* live without them
`
`In the B2C online world, we already do
`
`Credit cards plays a major role
`
`In most countries, it is difficult to start a business without
`supportgin credit cards
`
`Page 00004
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`
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`E-PAYMENT FACTORS
`
`The short history of e-payments is littered with remains of
`companies that tried to introduce new payment systems
`
`Difficult: chicken and egg problem
`
`When planning or evaluating a new payment system, a span
`of factors must be taken into consideration
`
`Page 00005
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`
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`INDEPENDENCE
`
`Most payment systems require the buyer to install
`additional hardware, or the seller to use specific software
`
`The most expensive/difficult are the hw/sw requirements,
`the less likely is the e-payment to succeed
`
`Page 00006
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`INTEROPERAILITY/PORTABILITY
`
`An e-payment system must mesh with existing systems and
`applications
`
`Must be supported by standard platforms
`
`Page 00007
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`SECURITY
`
`The money transfer *has* to be secure
`
`Ususally the risk for the customer must be lower then the
`risk for the seller
`
`Page 00008
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`
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`ANONIMITY
`
`Some buyers prefer to be anonimous
`
`Cash is anonimous, credit card is not
`
`Page 00009
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`
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`DIVISIBILITY
`
`Credit cards have problems addressing low or high
`payments
`
`Any method is likely to be address if you can buy both a
`candy and an airplane with it
`
`Page 00010
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`EASE OF USE
`
`In B2C credit cards have become the standard also for their
`ease of use
`
`Ease of use is important for customers
`
`Page 00011
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`TRANSACTION FEES
`
`The lower the transaction fees, the better
`
`For both customers and sellers
`
`Credit cards have high transaction fees (up to 3%)
`
`Page 00012
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`INTERNATIONAL SUPPORT
`
`E-Commerce is worldwide, so any e-payment method must
`be easily adopted in different countries
`
`Page 00013
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`
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`REGULATIONS
`
`Any new payment system must adhere to a number of
`national and international law regulations
`
`Page 00014
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`PAYMENT CARDS
`
`Page 00015
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`
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`PAYMENT CARDS
`
`A payment card is a plastic card containing information that
`can be used for payment purposes
`
`Usually emitted from a finacial institute
`
`In general, payment cards offer:
`
`getting cash from ATM (bancomat in italy)
`
`pay directly to sellers with POSs
`
`pay online
`
`Page 00016
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`
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`CREDIT CARDS
`
`Credit cards allow the user to buy products and services
`
`Bases on the holder’s promises to pay for the goods
`
`The issuer grants a line of credit to the user
`
`Credit cards allow the user to be in debt, but the debt is
`subject to interest
`
`Page 00017
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`
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`DEBIT CARD
`
`The funds are withdrawed directly from the user bank
`account
`
`Used for both direct payments of for cash withdraw
`
`In Italy are known as “carte bancomat” from the name of
`the first issuer
`
`Page 00018
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`
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`STORED-VALUE CARDS
`
`Stored value cards works similary to debit cards, but the
`funds are not withdraw from the user’s bank account
`
`The funds are taken from a pre-paid monetary value
`
`One major difference with credit and debit cards: stored
`value cards can be anonimous
`
`Major player in Internet payments
`
`Page 00019
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`
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`TYPES OF SVC
`
`Stored value cards come in two types
`
`closed loop: issued by a specific merchant or merchant
`group (i.e. Ikea Gift Card)
`
`open loop: used to make any kind of transaction
`(Postepay)
`
`Page 00020
`
`
`
`PROCESSING CARDS ONLINE
`
`Two major phases
`
`Authorization: determine if the buyer’s card is active and
`if there is enough money in the account
`
`Settlement: transfer of money from the buyer’s to the
`merchant’s account
`
`Page 00021
`
`
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`ONLINE PAYMENTS PARTICIPANTS
`
`Acquiring bank (Banca Sella, ...)
`
`Credit card association (Visa, Mastercard, ...)
`
`Customer
`
`Issuing Bank
`
`Merchant
`
`Payment processing service
`
`Processor
`
`Page 00022
`
`
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`CARD FRAUDS
`
`In the online world, merchants are held liable for fraudolent
`transactions
`
`Managing online frauds continues to be a significant
`problem for online merchants
`
`Page 00023
`
`
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`ANTI-FRAUD TOOLS
`
`Address Verification: compare the entered shipping address
`with the card address; possible false positives
`
`Manual review: staff to manually review some orders
`
`Automatic decision models: rules to determine if a
`transaction is fraudolent
`
`Card verification number: CVN/CCV ask for the number
`on the back of the card
`
`Page 00024
`
`
`
`ANTI-FRAUD TOOLS
`
`Card association additional verification services: Verified by
`Visa, SecureCode, etc.
`
`Negative lists: maintain a negative list of IPs, names,
`addresses, etc
`
`In 2003 the rejection rate was about 4%
`
`Problem: a number of rejected orders are valid (lost revenue)
`
`Page 00025
`
`
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`SMART CARDS
`
`A smart card is a payment card with an
`embedded chip
`
`Can be a microprocessor or just a memory chip
`
`The chip is activated/read by some other
`device (i.e. ATM)
`
`Can be contact or contactless
`
`Can need a PIN before being used
`
`You *can* hack into a smart card, but it is a
`“class 3” attack (the costs exceeds the benefits)
`
`Page 00026
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`E-MICROPAYMENTS
`
`Page 00027
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`
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`E-MICROPAYMENTS
`
`Scenarios
`
`buy a song from iTunes: 0.99$
`
`buy an archived newspaper in digital form: 1.50$
`
`play an online game for 30 minuts: 2.00$
`
`buy an image for your website: 0.80$
`
`Page 00028
`
`
`
`E-MICROPAYMENTS - II
`
`Credit cards are not well suited for payments under 5$
`
`Merchants have a fixed per-transaction fess of ~0.20$ (other
`then the ~3%)
`
`Moreover, small payments are often made by young
`customers (< 18) that do not own a credit card
`
`Page 00029
`
`
`
`ITUNES MUSIC STORE
`
`Apple’s iTunes, for instance, sell songs at 0.99$ each
`
`Also applications are ofter prices under 3$
`
`To reduce fixed costs, Apple aggregate multiple purchases
`(24h span) to charge the customer card only once
`
`Page 00030
`
`
`
`MICROPAYMENT SOLUTIONS
`
`Since 2000 a number of companies attempted to address
`the problem of micropayments
`
`Digicash, First Virtual, Cybercoin, Millicent, Internet Dollar
`
`all went bankrupt during the dot-com crash
`
`Bitpass had some success, but shut down in 2007
`
`Page 00031
`
`
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`MICROPAYMENT MODELS
`
`Currently, there are 5 micropayment models that do not
`depend directly/solely on credit cards that have some
`success
`
`Page 00032
`
`
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`AGGREGATION
`
`Payments from a single customer are batched together and
`processed after a period of time of a monetary threshold
`
`Well suited for vendors with high repeating purchases
`
`Apple iTunes
`
`Page 00033
`
`
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`DIRECT PAYMENT
`
`Micropayments are added to the bill of an existing service,
`like the mobile phone monthly bill
`
`PaymentOne, Paymo, allow to add purchases of any size to
`the phone bill
`
`Model used to sell ringtones and other services by phone
`companies
`
`Page 00034
`
`
`
`STORED VALUE
`
`Upfront payment to a debit account
`
`Used recently by Steam, and also offline by Starbucks,
`music-download services, etc.
`
`Page 00035
`
`
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`SUBSCRIPTIONS
`
`A single payment is made for a period of time of access to a
`service
`
`Used by online gaming companies and a small number of
`online newspapers
`
`Page 00036
`
`
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`À LA CARTE
`
`Vendors negotiate for lower credit or debit fees
`
`Page 00037
`
`
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`RESPONSE TO MICROPAYMENTS
`
`In response to the growing of micropayments alternatives
`Visa and Mastercard lowered their fees in 2005
`
`Also Paypal entered the mp market with an alternative fee
`structure for payments under 7$
`
`Page 00038
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`PAYPAL
`
`Page 00039
`
`
`
`PAYPAL
`
`Paypal is an online payment processor
`
`Now owned by eBay
`
`The first successfull Internet-based e-commerce payment
`system
`
`Page 00040
`
`
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`HOW PAYPAL WORKS
`
`Trusted third-party between sellers and buyers
`
`Securely stores credit cards data
`
`Process both one-time and recurring payments
`
`Page 00041
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`
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`PAYPAL NUMBERS
`
`Growth from an hanful of users in 1999 to 87Millions in
`2010 (active accounts, in 190 nations)
`
`In 2009 Paypal processed $71 Billion in payments (roughly
`half from eBay)
`
`15% share on e-commerce payments in USA, 9% outside
`
`Page 00042
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`
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`PAYPAL SUCCESS
`
`Viral effect
`
`Commissions are more or less the same of credit cards
`
`0.30$ + 1.9% - 2.9%
`
`Merchants do not have to own a bank account
`
`Consumers are not charged directly
`
`Page 00043
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`
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`PAYPAL INCOME
`
`Transaction fees
`
`Interests on stored values
`
`Page 00044
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`
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`PAYPAL COMPETITORS
`
`Google Checkout
`
`Amazon Payments
`
`Twitter, Facebook, Apple are also planning new services
`
`Page 00045
`
`
`
`
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`
`
`MOBILE PAYMENTS
`
`Page 00046
`
`
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`MOBILE PAYMENTS
`
`Instead of using cash or cards a consumer can use a mobile
`phone to pay for a wide range of services and goods
`
`You already have the hardware in your pocket!
`
`Page 00047
`
`
`
`MOBILE PAYMENTS - II
`
`There are 5 billions of cell phones around the world
`
`More prevalent then smartcards
`
`Major payment system in Japan
`
`Embedded RFID chips for contactless payments with PIN
`
`Smartphone can be equipeed with NFC (Near Field
`Communication) to communicate with readerd anout 4cm
`away
`
`Page 00048
`
`
`
`MOBILE PAYMENTS - III
`
`Other approaches
`
`Freecash: make the payment from your phone, show a
`barcode to the merchant (does not require new hardware)
`
`Paypal Mobile
`
`Obopay
`
`Google gPay, based on text messages
`
`Page 00049
`
`
`
`MOBILE PAYMENTS - IV
`
`Mobile payments will be probably growing fast in the next
`years
`
`Japan is the leading country
`
`Page 00050
`
`
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`PAGAMENTI MOBILI IN ITALIA
`
`PosteMobile di Poste Italiane: associare un conto
`Bancoposta o carta PostePay con la SIM del cellulare
`
`ATM SostaMilanoSms: parcheggio via sms
`
`Sky e Mediaset Premium: pay-per-view via sms
`
`Trenitalia, CartaSi, Movicon, ...
`
`Page 00051
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`
`
`CONCLUSIONS
`
`We are in the middle of a payment revolution
`
`Smartphone could have a mojor role
`
`Page 00052
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`
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