Understanding Electronic Commerce

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Your customers are demanding new ways to accept payments. Do you understand the difference between credit card transactions (including debit and EBT) and ACH transactions? What about check conversion flows and gift vs. loyalty programs? Join us for an overview of the payments industry including a discussion of payment methods, major players, and what you need to know to develop the proper solution for your customer.

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Understanding Electronic Commerce

  1. 1. ISV Innovation Presents: Understanding Electronic Commerce Understanding Electronic Commerce Tyler Hannan Platform Evangelist, IP Commerce 6/10/2008
  2. 2. ISV Innovation Presents: Understanding Electronic Commerce Who is Tyler Hannan? Agenda Platform Evangelist for IP Commerce Agenda one 11+ years experience in the software sector Agenda two Network Administrator, DBA, Part-time Agenda three Developer, 5 years focused on Enterprise Agenda four Retail and Payments Industry Agenda five Agenda six Aspires to have Visual Studio Guy’s haircut 6/11/2008 © Microsoft Corporation 2007 2
  3. 3. ISV Innovation Presents: Understanding Electronic Commerce Agenda or, what are we doing? Agenda Agenda Agenda one • Why do I need to know about payments? Agenda two • Credit Cards, I have one…how do they work? Agenda three • Are there other payment types? Agenda four • But what about eCommerce? Agenda five • So, what do I do now? Agenda six 6/11/2008 © Microsoft Corporation 2007 3
  4. 4. ISV Innovation Presents: Understanding Electronic Commerce Objectives or, why am I here? • Develop an understanding of the prominent payment tenders currently used in the market. • Ensure you have familiarity with a tender when a customer mentions, or requests, information. • Learn details about payments that you may have not previously known. • Above all, gain valuable insight into an important industry. 6/11/2008 © Microsoft Corporation 2007 4
  5. 5. ISV Innovation Presents: Understanding Electronic Commerce An Industry Overview What are some statistics about the payments industry? Why does it matter to me? 6/11/2008 © Microsoft Corporation 2007 5
  6. 6. ISV Innovation Presents: Understanding Electronic Commerce 2003 2006 CAGR Total (billions) 81.4 93.3 4.6% Checks (paid) 37.3 30.6 -6.4% Debit Card 15.6 25.3 17.5% Signature 10.3 16.0 15.8% PIN 5.3 9.4 20.6% Credit Card 19.0 21.7 4.6% ACH 8.8 14.6 18.6% EBT 0.8 1.1 10.0% The number of noncash payments was 93.3 billion in 2006, with a value of $75.8 trillion. Source: The 2007 Federal Reserve Payments Study 6/11/2008 © Microsoft Corporation 2007 6
  7. 7. ISV Innovation Presents: Understanding Electronic Commerce 2003 2006 1% Checks 1% Checks 11% (paid) 16% (paid) Debit Card Debit Card 33% 46% Credit Card Credit Card 23% 23% ACH ACH 19% 27% EBT EBT Electronic payments now exceed two-thirds of all noncash payments. Source: The 2007 Federal Reserve Payments Study 6/11/2008 © Microsoft Corporation 2007 7
  8. 8. ISV Innovation Presents: Understanding Electronic Commerce More than 50% of US SMBs are willing to change their bank for better payment services. Source: BAI Research, Small Business Payments in 2006 6/11/2008 © Microsoft Corporation 2007 8
  9. 9. ISV Innovation Presents: Understanding Electronic Commerce Interesting, but who cares? 45% of SMBs rely on their ISV to give them advice about payment acceptance.* Payment service providers need you, and will pay for your services. *Source: PayPal 6/11/2008 © Microsoft Corporation 2007 9
  10. 10. ISV Innovation Presents: Understanding Electronic Commerce Credit Card Processing How did we get here? How do they work? What is Credit vs. Debit vs. PIN Debit vs. EBT? Why choose credit cards? 6/11/2008 © Microsoft Corporation 2007 10
  11. 11. ISV Innovation Presents: Understanding Electronic Commerce The First Credit Card ● Diners Club was founded in 1950 – Stores already extended credit to their customers – Each store had their own rules and regulations for payment terms ● Frank McNamara, founder, had a revolutionary idea – One card can be used to pay multiple merchants – The first cards were given to 200 associates of McNamara – The cards were accepted at 14 restaurants in New York City ● By the end of 1950, Diners Club was successful – 20,000 customers – over 1,000 restaurants 6/11/2008 © Microsoft Corporation 2007 11
  12. 12. ISV Innovation Presents: Understanding Electronic Commerce Credit Cards Today 6/11/2008 © Microsoft Corporation 2007 12
  13. 13. ISV Innovation Presents: Understanding Electronic Commerce How Do Credit Card Transactions Work? Software Acquirer Card Issuer(s) Company Association 1 1) A purchase is initiated and a request for approval, or Authorization, is sent to the card issuer. 6/11/2008 © Microsoft Corporation 2007 13
  14. 14. ISV Innovation Presents: Understanding Electronic Commerce How Do Credit Card Transactions Work? Software Acquirer Card Issuer(s) Company Association 1 Authorization 2 2) Verification, or Approval, is sent back to the Merchant and the Cardholder is given their purchased item. 6/11/2008 © Microsoft Corporation 2007 14
  15. 15. ISV Innovation Presents: Understanding Electronic Commerce How Do Credit Card Transactions Work? Software Acquirer Card Issuer(s) Company Association 1 Authorization 2 Batching 3 3) Approved transactions are stored in a “Batch” for sending to the Card Issuer at the end of the day. 6/11/2008 © Microsoft Corporation 2007 15
  16. 16. ISV Innovation Presents: Understanding Electronic Commerce How Do Credit Card Transactions Work? Software Acquirer Card Issuer(s) Company Association 1 Authorization 2 Batching 3 4 4) Approved transactions, over an interval, are grouped together and submitted for payment. 6/11/2008 © Microsoft Corporation 2007 16
  17. 17. ISV Innovation Presents: Understanding Electronic Commerce How Do Credit Card Transactions Work? Software Acquirer Card Issuer(s) Company Association 1 Authorization 2 Batching 3 4 5 5) The Merchant receives payment! 6/11/2008 © Microsoft Corporation 2007 17
  18. 18. ISV Innovation Presents: Understanding Electronic Commerce What About All the People in the Middle? ● Acquirer – A member of one, or more, card associations – Typically owns the merchant relationship and receives all transactions from the merchant ● Card Association – A network of Issuers and Acquirers that process payments – e.g. Visa, MasterCard ● Issuer – The bank that extends a line-of-credit to the customer – Risk, or liability, is shared between the issuer and the Acquirer 6/11/2008 © Microsoft Corporation 2007 18
  19. 19. ISV Innovation Presents: Understanding Electronic Commerce What is interchange? ● A volatile topic regarding the costs associated with Credit Card transactions. This includes legislative discussions, customer suits, and a fair amount of industry heartburn. ● How does it work? – The fee that an Acquirer pays the Issuer when the merchant accepts a credit card – The merchant, ultimately, pays for interchange through deduction of the purchase price 6/11/2008 © Microsoft Corporation 2007 19
  20. 20. ISV Innovation Presents: Understanding Electronic Commerce Source: Government Accountability Office 6/11/2008 © Microsoft Corporation 2007 20
  21. 21. ISV Innovation Presents: Understanding Electronic Commerce What else can be considered Credit Processing? ● Offline, or Signature, Debit – Will have the logo of a card association – Authorizes against the user’s bank account – Typically has an associated line-of-credit (overdraft) ● Electronic Benefits Transfer (EBT) – Allows the customer to authorize transfer from a Federal benefits account to a merchant – An electronic replacement for food stamps and other Federal benefits programs – Typically requires a separate terminal (though not with software) 6/11/2008 © Microsoft Corporation 2007 21
  22. 22. ISV Innovation Presents: Understanding Electronic Commerce What about when I’m asked for a PIN? ● Online, or PIN, debit – A different beast altogether than a traditional credit card (although some cards are dual-purpose) – The transaction is secured using a Personal Identification Number (PIN). • Something you have, the card • Something you know, the PIN – Handled through a separate network (ATM or “Debit) ● Why is it popular? – Enhanced security – The merchant pays a MUCH lower rate (35 – 50 cents, instead of a percentage of transaction amount) 6/11/2008 © Microsoft Corporation 2007 22
  23. 23. ISV Innovation Presents: Understanding Electronic Commerce Sector Percentage Change Convenience Stores 140% Department Stores 116% General Retail 94% (Overall) 80% Food Retail 68% Petroleum Retail 13% Increase in PIN-Debit Acceptance 1st Quarter 2000 vs 1st Quarter 2006 Source: First Annapolis Consulting 6/11/2008 © Microsoft Corporation 2007 23
  24. 24. ISV Innovation Presents: Understanding Electronic Commerce Why do My Customers Care About Credit Cards? ● Improved speed of service ● Higher average ticket prices ● Less dependency on cash ● Increased revenue ● Easy processing and quick payments 6/11/2008 © Microsoft Corporation 2007 24
  25. 25. ISV Innovation Presents: Understanding Electronic Commerce Automated Clearing House (ACH) What is it? How does it work? Can my customers use it? Why choose ACH? 6/11/2008 © Microsoft Corporation 2007 25
  26. 26. ISV Innovation Presents: Understanding Electronic Commerce Number Value 1% Checks 16% (paid) Checks Debit Card 41% (paid) 33% Debit Card Credit Card 23% 55% Credit Card ACH 27% ACH EBT 3% 1% ACH Payments were only 15.6% of noncash transactions but were 41% of the value. Source: The 2007 Federal Reserve Payments Study 6/11/2008 © Microsoft Corporation 2007 26
  27. 27. ISV Innovation Presents: Understanding Electronic Commerce What is Automated Clearing House? ● ACH is an electronic network used for processing bank- to-bank financial transactions ● Rules and regulations for the network are established by governing entities – NACHA • A not-for-profit association that oversees the network – The Federal Reserve ● ACH payments include direct deposit, vendor payments, consumer bill payment, online payments (debit) 6/11/2008 © Microsoft Corporation 2007 27
  28. 28. ISV Innovation Presents: Understanding Electronic Commerce How Do ACH Transactions Work? Software Application 1 Customer Merchant 1) Consumer initiates the purchase. 6/11/2008 © Microsoft Corporation 2007 28
  29. 29. ISV Innovation Presents: Understanding Electronic Commerce How Do ACH Transactions Work? Software Application 1 Authorization Customer Merchant 2 ODFI 2) Merchant’s software transmits the file to the underwriting bank. 6/11/2008 © Microsoft Corporation 2007 29
  30. 30. ISV Innovation Presents: Understanding Electronic Commerce How Do ACH Transactions Work? Software Application 1 Authorization Customer Merchant 2 ACH Network 3 ODFI 3) The bank transmits data to the ACH Network. 6/11/2008 © Microsoft Corporation 2007 30
  31. 31. ISV Innovation Presents: Understanding Electronic Commerce How Do ACH Transactions Work? Software Application 1 Authorization Customer Merchant 2 4 ACH Network 3 RDFI ODFI 4) The ACH Network sends payment information to the customer’s bank. 6/11/2008 © Microsoft Corporation 2007 31
  32. 32. ISV Innovation Presents: Understanding Electronic Commerce How Do ACH Transactions Work? Software Application 1 Authorization Customer Merchant 2 4 ACH Network 3 RDFI ODFI 5) The Merchant receives their money! 6/11/2008 © Microsoft Corporation 2007 32
  33. 33. ISV Innovation Presents: Understanding Electronic Commerce There were some terms there I don’t know... ● ODFI – Originating Depository Financial Institution – The bank responsible for generating an ACH File and submitting it for processing ● RDFI – Receiving Depository Financial Institution – The bank that processes the payment instruction indicated in the ACH File 6/11/2008 © Microsoft Corporation 2007 33
  34. 34. ISV Innovation Presents: Understanding Electronic Commerce What types of transactions are there? ● ARC (Accounts Receivable Entries) – Checks received by a merchant through mail or drop box and converted to ACH ● BOC (Back Office Conversion) – Paper checks are converted to an electronic debit in a central location (i.e. back office or bank) ● POP (Point-of-Purchase) – A check presented in-person is converted to an ACH transaction 6/11/2008 © Microsoft Corporation 2007 34
  35. 35. ISV Innovation Presents: Understanding Electronic Commerce What types of transactions are there? ● PPD (Prearrange Payments and Deposits) – Used primarily for direct deposit and for preauthorized bill payment ● TEL (Telephone Initiated-Entry) – Verbal authorization to issue an ACH transaction. Such as a check payment over the phone. ● WEB (Web Initiated-Entry) – Internet authorization to create an ACH transaction (i.e. PayPal) 6/11/2008 © Microsoft Corporation 2007 35
  36. 36. ISV Innovation Presents: Understanding Electronic Commerce Why do My Customers Care About ACH? ● Lower clearing fees ● Reduced return handling costs and time ● Increased transaction security (no lost checks) ● Funds for purchases can be settled directly to a retailer’s account 6/11/2008 © Microsoft Corporation 2007 36
  37. 37. ISV Innovation Presents: Understanding Electronic Commerce Other Physical Tenders A brief, too brief, overview 6/11/2008 © Microsoft Corporation 2007 37
  38. 38. ISV Innovation Presents: Understanding Electronic Commerce Checks: Remote Deposit Capture (RDC) ● Deposit checks into your bank account without having to physically deliver the check to the bank ● Managed by the Check Clearing for the 21st Century Act (Check 21) – September 11, 2001 results in a new payment methodology – A digital image of the check is considered a legal document ● Why RDC? – Decrease cost due to no longer having to go to the bank – Reduce paperwork and potential for losing checks 6/11/2008 © Microsoft Corporation 2007 38
  39. 39. ISV Innovation Presents: Understanding Electronic Commerce Checks: Other ● Check Verification – Used to identify potential bounced checks quickly – Transaction is processed at the POS to authorize, or decline, check presentation – In essence, a database compare of personal identities to bounced checks creating a “blacklist” ● Check Guarantee – A program in which the merchant is guaranteed to be paid for all checks regardless of returns (Could you have guessed?) – Typically works in conjunction with verification 6/11/2008 © Microsoft Corporation 2007 39
  40. 40. ISV Innovation Presents: Understanding Electronic Commerce Gift Cards ● Commonly referred to as a Stored Value card (or Stored Value Account) ● Closed loop cards – Most common form of gift card – Usually branded by the merchant (i.e. Home Depot card) ● Open loop cards – Pre-Paid cards that can be used at a variety of merchants – Money is deposited to the card, and it can be recharged 6/11/2008 © Microsoft Corporation 2007 40
  41. 41. ISV Innovation Presents: Understanding Electronic Commerce Gift Card Benefits ● Gift card sales boost (average 30% more than paper) ● No change is given, 100% purchase value ● Increased float (10-15% of cards are never redeemed) ● Encourages return visits ● Customer retention (for all parties) 6/11/2008 © Microsoft Corporation 2007 41
  42. 42. ISV Innovation Presents: Understanding Electronic Commerce What about eCommerce? Payment methods and their benefits 6/11/2008 © Microsoft Corporation 2007 42
  43. 43. ISV Innovation Presents: Understanding Electronic Commerce PayPal ● You already know who they are. – An online SVA that can be funded either directly from a bank account (ACH transaction) or from a credit card ● Why PayPal? – Easy online, international, acceptance – Increased online sales an average of 14% – Consumer security increased by not entering credit, or bank details online – 60.2 Million active PayPal users 6/11/2008 © Microsoft Corporation 2007 43
  44. 44. ISV Innovation Presents: Understanding Electronic Commerce Google Checkout ● An online wallet where a user stores their credit, debit, and shipping information. – Enables one-time payments from a customer to a merchant – Does not have a Stored Value component – Does not allow payments from person to person ● Why Google Checkout? – Google Checkout users click on ads 10% more when the ad displays the Checkout badge – Free transaction processing when using Google AdWords – Payment guarantee system that protects order even when a chargeback is issued 6/11/2008 © Microsoft Corporation 2007 44
  45. 45. ISV Innovation Presents: Understanding Electronic Commerce Amazon Flexible Payments Service ● A web service that allows the transfer of money between two “entities.” – Ability to pay by credit card, bank account, and Amazon Payments account – Support for multiple and recurring payments ● Why Amazon FPS? – Support for micropayments by grouping small transactions into a larger transaction – Simple integration into the rest of the AWS suite 6/11/2008 © Microsoft Corporation 2007 45
  46. 46. ISV Innovation Presents: Understanding Electronic Commerce A Summary: ● Payments are of the highest priority for the SMB and represents an untapped market for Payment Companies. They need you and are willing to compensate you accordingly. ● The SMB requires multiple payment types and tight integration into their existing workflow. – software solutions not just hardware ● The ISV is uniquely positioned to provide value-added payment services to their existing solutions. This will create a “stickier” customer. 6/11/2008 © Microsoft Corporation 2007 46
  47. 47. ISV Innovation Presents: Understanding Electronic Commerce What Do I Do Next? ● We have barely scratched the surface...your learning has just begun. ● The best primer on the industry is called “Paying With Plastic” by David Evans. ● Now that you have a basic understanding of payments, attend “Commerce Security Fundamentals” for a discussion about protecting your customers data. 6/11/2008 © Microsoft Corporation 2007 47
  48. 48. ISV Innovation Presents: Understanding Electronic Commerce 6/11/2008 © Microsoft Corporation 2007 Slide 48
  49. 49. ISV Innovation Presents: Understanding Electronic Commerce Thank You, For More Information: Agenda thannan <at> ipcommerce <dot> com Agenda one http://tylerhannan.blogspot.com Agenda two http://commercelab.ipcommerce.com Agenda three Agenda four Agenda five Agenda six 6/11/2008 © Microsoft Corporation 2007 49

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