Payments - Lecture 6


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Payments - Building Innovative Subscription-based Businesses Lecture 6

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Payments - Lecture 6

  1. 1. Building InnovativeSubscription-basedBusinessesBUS-185Lecture 6: PaymentsMartin Westhead
  2. 2. Overview Payment and trust Credit Card payments How they work Details PCI, AVS, CSC Chargebacks Refunds Alternative payment methods PayPal Wiretransfer Electronic transfers BitCoin Payment Failures Enforcement policies
  3. 3. Payment and Trust
  4. 4. Classification of Payment TypesReversible by Payer Non-Reversible by PayerAsynchronous ACH (Automated ClearingHouse)CheckWire transferBit CoinBoletoSynchronous(immediate)Credit cardsPayPalCash• National / International
  5. 5. Payment DefinitionA payment is the transfer of value from one party(such as a person or company) to another. Apayment is usually made in exchange for theprovision of goods, services or both, or to fulfilla legal obligation.Payer Payee$$$Goods/Services
  6. 6. Barter Trust issues: None – both parties able to examine goods Convenience: Very Low Buyer and seller need to be present Need to find timely match in needs and supply forboth partiesParty 1 Party 2GoatGrain
  7. 7. Cash Trust issues: Need to trust value of currency (Level 1) Cash can be anything so long as everyone agreeson its value Convenience: Low Buyer and seller need to be present to do transactionPayer Payee$$$Goods/Services
  8. 8. Escrow Trust issues Need to trust value of currency (Level 1) Need mutually trusted third party (Level 2) Convenience: High Allows parties to be separated in space and timePayer Payee1. $$$3. Goods/Services3rdParty2. “Funds secured”3. “Goods received” 4. $$$
  9. 9. Trust Convenience => more sophisticated Trust Why are payments complicated? Need for chains of trust within the transaction Need to handle failures of any link in that chain Cost: Each link in the chain takes a cut Size of the cut depends on volume of payments Escrow model – just one solution Different payment methods use different models Alternative to holding funds in escrow is to reclaim Issue is to support trust Levels of trust depend on the amount of money/value
  10. 10. Credit Card Payments
  11. 11. Credit Card Payment FlowPayerProcessor/Gateway1. Card #, etc.6. Goods/ServicesPayee2. “Make payment”5.“Payment Accepted”7. $$$ PayerCardIssuerPayeeMerchantAccount3a “SecureFunds”3b “FundsSecured”4a “TransferFunds”4b “PaymentAccepted”AuthorizationPayment
  12. 12. Pre-authorization Card check Is the card number valid? Will it accept payments? (Does it have funds?) How does it work? First part of a payment (Authorization) executed Then automatically/immediately reversed Best practice to use a $1 charge Drawback: Can be used by fraudsters To check stolen CC numbers
  13. 13. International Weaker trust Considered higher fraud risk More likely payment will be refused Cost of intermediaries Many more links in the chain Cost of currency conversion Spread and conversion charge Born by customer and merchant Credit card penetration Credit cards not widely in some regions For high international volume Consider providers with international financial presence
  14. 14. PCI – Payment Card Industry PCI Compliance Standard Multi-level security protocols Required for handling credit card numbers Industry, not legal requirement Requirement level depends on Volume Transfer or Storage Avoid PCI compliance issues by Using a payments provider services Secure credit card number storage iFrame/JavaScript to transfer direct to secure store
  15. 15. CSC – Card Security Code AKA: CSC / CVV / CVV2 / CVD / CVVC / CVC /V-code / CCV / SPC 3-4 digits on the back of your card Cannot be stored PCI compliance rule Therefore cannot be used for recurring billing Should only be available to the cardholderWikipedia: CSC
  16. 16. AVS – Address Verification System Verifies address info vs. billing address Only considers numeric portions of address E.g. 101 Main Street, Highland, CA 92346 Checks 101 and 92346 Increases likelihood card user is valid Drawbacks Introduces additional friction in signup flow Difficult to use internationallyWikipedia: AVS
  17. 17. Charge Backs Four categories of chargeback reason Technical: Expired authorization, non-sufficient funds, or bankprocessing error. Clerical: Duplicate billing, incorrect amount billed, or refundnever issued. Quality: Consumer claims to have never received the goods aspromised at the time of purchase. Fraud: Consumer claims they did not authorize the purchase oridentity theft. Cost: $15-$20 charged to merchant Huge safety net for consumers Solves Level 2 Trust Helps consumer confidence with online transactions Tends to penalize merchantsWikipedia: Chargebacks
  18. 18. Refunds Credit cards support automatic refunds Save on time vs. a reverse payment Refund must be against a payment Can be up to the payment amount Refunds cannot be used for Payouts
  19. 19. Recurring Payments Recurring payments is bolt-on Once vendor has Credit Card details Can charge what they want Whenever they want Customer can reverse invalid charges (but has to find them) There is a payment type “Recurring” Not always used Should be used on successive payments (not first) Increases chances of payment success (up to 15%)
  20. 20. Alternative Payment Methods
  21. 21.  More straightforward than Credit Cards Customer can pay multiple ways cash, credit card or bank transfer you don’t know/care Supports recurring payments Can be cancelled Alternatives Stripe (CC only), WePayKushCash, TextPayMe, obopay,Bill Me Later, Alipay, Wesabe, Mpayy, noca, Paymate,OpenCuro Inc., Dwolla,, ORCA, Inc.,Transfercel
  22. 22. Wire Transfer Point to point cash transfer Can be immediate Sometimes will take longer (e.g. internationally) Works internationally (SWIFT) No reversal (even if you get account numbers wrong)! Expensive November 2011,Bank Of America: Domestic: $25 to send, $12 to receive International: $35–$45 outgoing, $16 incoming Security bank-to-bank wire transfer, each party requires proven identity cash office transfers are essentially anonymous: designed for parties who trust each other Essentially a cash transfer difficult to reverseWikipedia: Wire Transfers
  23. 23. Electronic Funds Transfers Examples US: ACH (Automated Clearing House), UK: “Direct Debit” Germany: ELV (ElektronischesLastschriftverfahren) All payments accumulated during the day Cleared between banks in batch overnight Much cheaper than wire transfer Takes longer Only between banks that share clearing systemWikipedia: ACH
  24. 24. Local payments: Boleto Brazilian cashpayment system Boleto: “Ticket” Print out Pay at ATM, store,post office, bank Very asynchronous Penalties for latepayments
  25. 25. Mobile Payments expected to reach more than $600B globally by2013 Four primary models: Premium SMS based transactional payments Direct Mobile Billing 70% digital content online some parts of Asia Mobile web payments (WAP) Contactless NFC (Near Field Communication) Starbucks apps Barcode Strategic partnership with SquareWikipedia: Mobile payments
  26. 26. Bit Coin New electronic currency Security from cryptography not institutions Highly volatile (Level 1 trust issue) Cash transactions Non-reversible (Level 2 trust issue) Asynchronous (1 hour to confirm transfer) Competitors: Litecoin, PPCoin Faster transaction validation Alternate mining schemes
  27. 27. Payment Failures
  28. 28. Enforcement Policy Goals: Increase revenue by pushing customers to resolve billingissues Expose hidden churn Basics Notification Warning Shut down access Details vary by industry/product Ning 56 days to shutdown Two levels of customer/userOverdue Enforcement (Charge Thru)
  29. 29. Guest LecturersDoug CavinessHead of SaaS solutions,Cleverbridge
  30. 30. Next weekExercise 2: Innovate Your team has been hired asInnovation Consultants Innovation strategy, e.g.: Pricing / Pricing Model changes Promotions New products Outline a financial model for your changes Present to the board (i.e. class) Prizes!