Understanding Electronic Commerce

ISV Innovation Presents: Understanding Electronic Commerce

Understanding Electronic Commerce
Tyler Hannan
Platform Evangelist, IP Commerce
6/10/2008


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


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



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.



An Industry Overview
What are some statistics about the payments industry?
Why does it matter to me?



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



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.



More than 50% of US SMBs are willing to
change their bank for better payment services.
Source: BAI Research, Small Business Payments in 2006



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



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?



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


Credit Cards Today



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.


Company Association
1
Authorization
2

2) Verification, or Approval, is sent back to the Merchant
and the Cardholder is given their purchased item.


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.


Company Association
1
Authorization
2
Batching

3

4

4) Approved transactions, over an interval, are grouped
together and submitted for payment.


Company Association
1
Authorization
2
Batching

3

4

5

5) The Merchant receives payment!



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


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



Source: Government Accountability Office



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)


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)


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



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



Automated Clearing House (ACH)
What is it?
How does it work?
Can my customers use it?
Why choose ACH?



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.



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)


How Do ACH Transactions Work?
Software
Application

1

Customer Merchant

1) Consumer initiates the purchase.


Software
Application

1
Authorization
Customer Merchant

2

ODFI
2) Merchant’s software transmits the file to the underwriting bank.


Software
Application

1
Authorization
Customer Merchant

2

ACH Network 3

ODFI
3) The bank transmits data to the ACH Network.


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.


Software
Application

1
Authorization
Customer Merchant

2

4 ACH Network 3

RDFI ODFI
5) The Merchant receives their money!


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



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



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)



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



Other Physical Tenders
A brief, too brief, overview



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



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



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



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)



What about eCommerce?
Payment methods and their benefits



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



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



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



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.


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.



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


Understanding Electronic Commerce

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