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ISV Innovation Presents: Understanding Electronic Commerce




Understanding Electronic Commerce
Tyler Hannan
Platform Evangelist, IP Commerce
6/10/2008
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
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
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
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
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
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
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
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
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
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
ISV Innovation Presents: Understanding Electronic Commerce


Credit Cards Today




6/11/2008           © Microsoft Corporation 2007             12
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
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
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
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
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
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
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
ISV Innovation Presents: Understanding Electronic Commerce




  Source: Government Accountability Office

6/11/2008           © Microsoft Corporation 2007             20
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
ISV Innovation Presents: Understanding Electronic Commerce




     Other Physical Tenders
     A brief, too brief, overview




6/11/2008               © Microsoft Corporation 2007         37
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
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
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
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
ISV Innovation Presents: Understanding Electronic Commerce




     What about eCommerce?
     Payment methods and their benefits




6/11/2008            © Microsoft Corporation 2007            42
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
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
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
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
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
ISV Innovation Presents: Understanding Electronic Commerce




6/11/2008           © Microsoft Corporation 2007             Slide 48
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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Understanding Electronic Commerce

  • 1. ISV Innovation Presents: Understanding Electronic Commerce Understanding Electronic Commerce Tyler Hannan Platform Evangelist, IP Commerce 6/10/2008
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. ISV Innovation Presents: Understanding Electronic Commerce Credit Cards Today 6/11/2008 © Microsoft Corporation 2007 12
  • 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. 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. 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. 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. 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. 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. 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. ISV Innovation Presents: Understanding Electronic Commerce Source: Government Accountability Office 6/11/2008 © Microsoft Corporation 2007 20
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. ISV Innovation Presents: Understanding Electronic Commerce Other Physical Tenders A brief, too brief, overview 6/11/2008 © Microsoft Corporation 2007 37
  • 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. 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. 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. 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. ISV Innovation Presents: Understanding Electronic Commerce What about eCommerce? Payment methods and their benefits 6/11/2008 © Microsoft Corporation 2007 42
  • 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. 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. 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. 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. 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. ISV Innovation Presents: Understanding Electronic Commerce 6/11/2008 © Microsoft Corporation 2007 Slide 48
  • 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