`
`E-Commerce Winter 2011
`Marek Maurizio
`
`Apple Exhibit 4389
`Apple v. SightSound Technologies
`CBM2013-00023
`Page 00001
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`THE PAYMENT REVOLUTION
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`In 2011 we are still in the middle of a payment system
`revolution
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`Electronic payments are taking the place of cash and checks
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`In 2003 electronic systems surpassed the use of cash and
`checks in stores
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`Similar trends occur for recurring payments, more then 75%
`in 2001 were made by electronic systems
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`THE PAYMENT REVOLUTION - II
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`The cashless society has been discussed for a long time
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`THE PAYMENT REVOLUTION - III
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`The demise of cash and checks is not imminent
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`Many individuals *can* live without them
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`In the B2C online world, we already do
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`Credit cards plays a major role
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`In most countries, it is difficult to start a business without
`supportgin credit cards
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`Page 00004
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`E-PAYMENT FACTORS
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`The short history of e-payments is littered with remains of
`companies that tried to introduce new payment systems
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`Difficult: chicken and egg problem
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`When planning or evaluating a new payment system, a span
`of factors must be taken into consideration
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`INDEPENDENCE
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`Most payment systems require the buyer to install
`additional hardware, or the seller to use specific software
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`The most expensive/difficult are the hw/sw requirements,
`the less likely is the e-payment to succeed
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`INTEROPERAILITY/PORTABILITY
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`An e-payment system must mesh with existing systems and
`applications
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`Must be supported by standard platforms
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`SECURITY
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`The money transfer *has* to be secure
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`Ususally the risk for the customer must be lower then the
`risk for the seller
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`ANONIMITY
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`Some buyers prefer to be anonimous
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`Cash is anonimous, credit card is not
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`DIVISIBILITY
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`Credit cards have problems addressing low or high
`payments
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`Any method is likely to be address if you can buy both a
`candy and an airplane with it
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`Page 00010
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`EASE OF USE
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`In B2C credit cards have become the standard also for their
`ease of use
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`Ease of use is important for customers
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`TRANSACTION FEES
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`The lower the transaction fees, the better
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`For both customers and sellers
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`Credit cards have high transaction fees (up to 3%)
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`INTERNATIONAL SUPPORT
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`E-Commerce is worldwide, so any e-payment method must
`be easily adopted in different countries
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`REGULATIONS
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`Any new payment system must adhere to a number of
`national and international law regulations
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`PAYMENT CARDS
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`PAYMENT CARDS
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`A payment card is a plastic card containing information that
`can be used for payment purposes
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`Usually emitted from a finacial institute
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`In general, payment cards offer:
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`getting cash from ATM (bancomat in italy)
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`pay directly to sellers with POSs
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`pay online
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`CREDIT CARDS
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`Credit cards allow the user to buy products and services
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`Bases on the holder’s promises to pay for the goods
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`The issuer grants a line of credit to the user
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`Credit cards allow the user to be in debt, but the debt is
`subject to interest
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`DEBIT CARD
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`The funds are withdrawed directly from the user bank
`account
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`Used for both direct payments of for cash withdraw
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`In Italy are known as “carte bancomat” from the name of
`the first issuer
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`STORED-VALUE CARDS
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`Stored value cards works similary to debit cards, but the
`funds are not withdraw from the user’s bank account
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`The funds are taken from a pre-paid monetary value
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`One major difference with credit and debit cards: stored
`value cards can be anonimous
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`Major player in Internet payments
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`TYPES OF SVC
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`Stored value cards come in two types
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`closed loop: issued by a specific merchant or merchant
`group (i.e. Ikea Gift Card)
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`open loop: used to make any kind of transaction
`(Postepay)
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`Page 00020
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`PROCESSING CARDS ONLINE
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`Two major phases
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`Authorization: determine if the buyer’s card is active and
`if there is enough money in the account
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`Settlement: transfer of money from the buyer’s to the
`merchant’s account
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`ONLINE PAYMENTS PARTICIPANTS
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`Acquiring bank (Banca Sella, ...)
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`Credit card association (Visa, Mastercard, ...)
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`Customer
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`Issuing Bank
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`Merchant
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`Payment processing service
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`Processor
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`CARD FRAUDS
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`In the online world, merchants are held liable for fraudolent
`transactions
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`Managing online frauds continues to be a significant
`problem for online merchants
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`ANTI-FRAUD TOOLS
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`Address Verification: compare the entered shipping address
`with the card address; possible false positives
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`Manual review: staff to manually review some orders
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`Automatic decision models: rules to determine if a
`transaction is fraudolent
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`Card verification number: CVN/CCV ask for the number
`on the back of the card
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`ANTI-FRAUD TOOLS
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`Card association additional verification services: Verified by
`Visa, SecureCode, etc.
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`Negative lists: maintain a negative list of IPs, names,
`addresses, etc
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`In 2003 the rejection rate was about 4%
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`Problem: a number of rejected orders are valid (lost revenue)
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`SMART CARDS
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`A smart card is a payment card with an
`embedded chip
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`Can be a microprocessor or just a memory chip
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`The chip is activated/read by some other
`device (i.e. ATM)
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`Can be contact or contactless
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`Can need a PIN before being used
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`You *can* hack into a smart card, but it is a
`“class 3” attack (the costs exceeds the benefits)
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`E-MICROPAYMENTS
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`E-MICROPAYMENTS
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`Scenarios
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`buy a song from iTunes: 0.99$
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`buy an archived newspaper in digital form: 1.50$
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`play an online game for 30 minuts: 2.00$
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`buy an image for your website: 0.80$
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`E-MICROPAYMENTS - II
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`Credit cards are not well suited for payments under 5$
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`Merchants have a fixed per-transaction fess of ~0.20$ (other
`then the ~3%)
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`Moreover, small payments are often made by young
`customers (< 18) that do not own a credit card
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`ITUNES MUSIC STORE
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`Apple’s iTunes, for instance, sell songs at 0.99$ each
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`Also applications are ofter prices under 3$
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`To reduce fixed costs, Apple aggregate multiple purchases
`(24h span) to charge the customer card only once
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`MICROPAYMENT SOLUTIONS
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`Since 2000 a number of companies attempted to address
`the problem of micropayments
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`Digicash, First Virtual, Cybercoin, Millicent, Internet Dollar
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`all went bankrupt during the dot-com crash
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`Bitpass had some success, but shut down in 2007
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`MICROPAYMENT MODELS
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`Currently, there are 5 micropayment models that do not
`depend directly/solely on credit cards that have some
`success
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`AGGREGATION
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`Payments from a single customer are batched together and
`processed after a period of time of a monetary threshold
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`Well suited for vendors with high repeating purchases
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`Apple iTunes
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`Page 00033
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`DIRECT PAYMENT
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`Micropayments are added to the bill of an existing service,
`like the mobile phone monthly bill
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`PaymentOne, Paymo, allow to add purchases of any size to
`the phone bill
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`Model used to sell ringtones and other services by phone
`companies
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`Page 00034
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`STORED VALUE
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`Upfront payment to a debit account
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`Used recently by Steam, and also offline by Starbucks,
`music-download services, etc.
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`SUBSCRIPTIONS
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`A single payment is made for a period of time of access to a
`service
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`Used by online gaming companies and a small number of
`online newspapers
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`À LA CARTE
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`Vendors negotiate for lower credit or debit fees
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`Page 00037
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`RESPONSE TO MICROPAYMENTS
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`In response to the growing of micropayments alternatives
`Visa and Mastercard lowered their fees in 2005
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`Also Paypal entered the mp market with an alternative fee
`structure for payments under 7$
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`PAYPAL
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`Page 00039
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`PAYPAL
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`Paypal is an online payment processor
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`Now owned by eBay
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`The first successfull Internet-based e-commerce payment
`system
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`Page 00040
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`HOW PAYPAL WORKS
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`Trusted third-party between sellers and buyers
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`Securely stores credit cards data
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`Process both one-time and recurring payments
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`Page 00041
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`PAYPAL NUMBERS
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`Growth from an hanful of users in 1999 to 87Millions in
`2010 (active accounts, in 190 nations)
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`In 2009 Paypal processed $71 Billion in payments (roughly
`half from eBay)
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`15% share on e-commerce payments in USA, 9% outside
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`PAYPAL SUCCESS
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`Viral effect
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`Commissions are more or less the same of credit cards
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`0.30$ + 1.9% - 2.9%
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`Merchants do not have to own a bank account
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`Consumers are not charged directly
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`PAYPAL INCOME
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`Transaction fees
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`Interests on stored values
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`PAYPAL COMPETITORS
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`Google Checkout
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`Amazon Payments
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`Twitter, Facebook, Apple are also planning new services
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`Page 00045
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`MOBILE PAYMENTS
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`Page 00046
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`MOBILE PAYMENTS
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`Instead of using cash or cards a consumer can use a mobile
`phone to pay for a wide range of services and goods
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`You already have the hardware in your pocket!
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`Page 00047
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`MOBILE PAYMENTS - II
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`There are 5 billions of cell phones around the world
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`More prevalent then smartcards
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`Major payment system in Japan
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`Embedded RFID chips for contactless payments with PIN
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`Smartphone can be equipeed with NFC (Near Field
`Communication) to communicate with readerd anout 4cm
`away
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`Page 00048
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`MOBILE PAYMENTS - III
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`Other approaches
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`Freecash: make the payment from your phone, show a
`barcode to the merchant (does not require new hardware)
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`Paypal Mobile
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`Obopay
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`Google gPay, based on text messages
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`MOBILE PAYMENTS - IV
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`Mobile payments will be probably growing fast in the next
`years
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`Japan is the leading country
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`Page 00050
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`PAGAMENTI MOBILI IN ITALIA
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`PosteMobile di Poste Italiane: associare un conto
`Bancoposta o carta PostePay con la SIM del cellulare
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`ATM SostaMilanoSms: parcheggio via sms
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`Sky e Mediaset Premium: pay-per-view via sms
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`Trenitalia, CartaSi, Movicon, ...
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`Page 00051
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`CONCLUSIONS
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`We are in the middle of a payment revolution
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`Smartphone could have a mojor role
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`Page 00052
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