Started by Gio Wiederhold,
27 February 2001.
Started by Gio Wiederhold,
27 February 2001.
How to pay for items in electronic commerce was the major open issue. A variety of methods have been proposed, as listed below, but most have not been successful. We have to consider both paying for information services, as well as paying for tangible goods to be delivered to the customer. Some methods focused on payment assurance. We will briefly list here alternatives seen or contemplated, focusing on the intermediary information services, although many schemes apply for direct purchase reimbursement as well [LynchL:96]. A full analysis of electronic payment schemes is beyond the scope of this report; our point here is that information technology tools must be flexible enough to accommodate several of them at the same time and all of them at some time.
When information or goods are purchased immediate payment is demanded. The most common form is giving a credit card number. The supplier can rapidly verify that the number is valid and that the amount is covered. The purchaser has to trust that the supplier will deliver the goods. If the supplier is known to be trustworthy the purchaser will proceed without further ado. The purchaser does not have to pay the credit card company until billed at the end-of-the-month, and if a zero-balance is maintained obtains in practice an interest-free loan for the intervening period.
For U.S. customers and suppliers in the U.S. the credit card companies provide backup, in that if the purchaser claims non-receipt or misrepresentation of goods, the credit card company will withold paying the supplier untill the dispute is resolved. This is a valuable service and has some operational cost and potential loss for the credit card company. The credit card company earns it income by reimbursing the supplier a few percent less than the collected amount, and from interest charges and penalties chraged slow-paying customers
The credit-card companies have had costs of about $0.50 per transaction processed, so that it appeared that the small amopunt that could be charged for minor information services could not be handled well be them. That observation led to rise of micro-payment schemes detailed below. However, a number of factors have kept credit card payments in the forefront:
PayPal.com provides the ability to collect money (i.e., be a supplier in the sense above) to its members. You can direct credit card payments from a purchaser of your goods or information into your PayPal account. PayPal will collect the funds, acting on your behalf the supplier, but needing only a single supplier account. Since it is (potentially) a large supplier, it can negotiate a favorable rate from the credit card company. It then credits you the collected amount (minus a fee?). You can use the credits either for further purchases or you can request a check for the credited amount to be sent to you.
As pointed out above, for information services the major income is from advertisements. The information service is most effective when it can become a mediator between the potential purchaser and the potential supplier, so that the advertisement becomes a bridge between the two. variouys charging methods for advertising reflect this role.
The referred supplier pays the mediator for each actual purchase made by a customer. This approach assumes that there is a clear path from the mediated information provided to the eventual purchase. Today amazon.com provides such a service to specialist selection services [PapowsPM:98] [Amazon:99]. In settings where the actual purchases occur later, and can be assigned to a variety of information sources, the audit trail needed to justify payment may be hard to follow.
The referred service pays for each reference made to its site, whether it leads to a purchase or not. This approach assumes that the benefits for vendors, as airlines, restaurants, etc., are high enough that the mediator can get paid a small amount for each specific reference. However, in that case suspicions of bias are likely, whether justified or not.
The information provided by the mediating service is adjoined with advertisements directed towards the customer. This approach is prevalent today, and shows the importance of advertising in modern commerce. Here the cost to the customer is annoyance and distraction: i.e., attention. A suspicion of bias will also arise.
Reimbursement of the information provider from the advertiser can take any or all of several schemes:
Escrow payment is appropriate when the information or the goods provided have a substantial value. The payment by credit card or bank transfer goes to an intermediate `escrow' agent, as does the information or a token for the merchandise. The escrow agent will match guaranteed delivery to the customer of the actual merchandise with guaranteed payment to the supplier. When both delivery and payment cannot to be repudiated the escrow agent will release goods and funds simultaneously. The escrow agent must be trusted, and is complementary to the information agent.
For small payments alternatives other than audited and secured methods seem appropriate. For instance, many information services have potentially very low transaction prices, and there is no tangible loss if a customer does not pay. Examples are copyright fees for papers (on the order of $1.-), participation in a game, or single instances of newsletters. We can envisage incremental charges for elemnts of data being integrated by a mediator being a fraction of a cent.
Some people also feel a need to protect their privacy, which can be rarely guaranteed when credit cards or even more complex means are used. What is an electronic equivalent of cash? Some schemes have addressed that issue, but rarely satisfactorly.
Transactions requiring modest payments, as discussed earlier, are handled adequately without explicit escrow services, based on trust and tolerable losses if the trust is violated. A supplier who delays the sending of information unitil payment is received is unfriendly and annoys the customer in many situations. For the customer to mail a check to a supplier while waiting for the goods also requires trust. A mediating agent, if employed, serves both as an information service and increases the trust level that the consumer has in listed suppliers.
Very small transactions could be handled in the same way, and many credit-card companies do not now limit the minimum charge, and may in fact not allow vendors to set minimum limits.
Since the cost of processing transactions includes careful audit trails and assumption of risk, those costs can be greatly lowered by transferring the risk of loss from the credit-card company to the other parties:
Subscriptions are suitable when the customer and vendor intend to establish a long-term interaction. However, the initial contact is inhibited, since a long-term obligation requires more thought and trust. Manyme companies provide for a step-up to a subscription [Morningstar:99].
Many publications provide a free on-line service for customers that pay for print subscriptions. As an inducement, there is often some access, or delayed access available to the material to anyone, or it least to people willing to register.
All of these techniques are inappropriate in some domains. Payment may differ based on representation. A low resolution image may be cheap or free, but one suitable for exposition can carry a high price. An author may offer his material free for perusal on the web, but want to charge if many printed copies are distributed in a training course. For many information services the highest level of payment guarantee is not needed. There is no loss of tangible or irreplaceable value when the customer avoids payment for the information. For instance, much copyrighted information is xeroxed, without reimbursing the actual sources.
A reservation made for an item in limited supply, say, a flight, a restaurant, or a concert, which was subsequently not attended and paid for has a cost to the supplier if other customers were rejected or dissuaded. Schemes to avoid a payment that is due to a vendor or to default on delivery to a customer exist for all practical techniques. If the loss due to a failure to pay is small and such events are likely to be infrequent, then it is best to ignore them.
Many of these schemes can be understood using a single model, helping an innovator to select what methods are best in a specific customer-vendor domain [KetchpelGP:97]. Many of the software pieces and services are available as well. However, integrating them into an electronic commerce system is still hard. We find that the majority of corporate web-sites provide product information, but no path for on-line purchasing, largely defeating the move towards Internet-based commerce.
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See also the references.