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

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

Understanding Electronic Commerce

Understanding Electronic Commerce

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