5 Payment Models on the Internet

5 Payment Models on the Internet
	Let's say you're surfing the Net, find a book or CD or computer that appeals and now you want to buy. How will you pay for it? There are five kinds of payment models used on the Net today and these five kinds can be put into two categories: Payment Per Transaction and Payment Through Accounts. Payment Per Transaction means that when you happen upon the CD that you can't live without, you arrange for payment on the spot. No prior arrangement between you and the merchant is necessary. The methods of Payment Per Transaction are credit card purchase and Net money. Payment Through Accounts means that you and the merchant have set up an account to which you can charge purchases. A few years ago stores on the commercial online services such as America Online, CompuServe and Prodigy had a significant advantage over stores on the Internet because the commercial online services had established accounts with each of their subscribers. When you as a subscriber bought a CD at a store on America Online it would be charged to your account and simply show up in you AOL monthly bill. Recently it has become easier for stores anywhere on the Internet to establish accounts with customers. The methods of Payment Through Accounts on the Net are subscriptions, purchase orders and Net accounts.
Per transaction
1	Credit cards The most common method of collecting payment over the Net is by credit card. It's familiar to most consumers--credit cards have been around for over forty years. It's relatively safe. It's available to most adult consumers (and the possession of a credit card is often used as proof that the Net visitor is over 21 years old). It's easy for the consumer. With current technology available at a fairly low cost to merchants, it's easy for the merchants. Credit card transactions typically cost 20-30 cents plus 2-3% per transaction. Today many Web service providers include automatic credit card verification as part of their service to businesses who wish to post Web storefronts with them. Credit card numbers are transferred from the user in encrypted form. The server then contacts a credit card verification service which verifies that the number represents a valid card within about 30 seconds. This authorizes the sale which may include electronic delivery of information products or delivery of hard goods through the mail. At the end of the day all collected charges are sent from the merchant's server for settlement. There has been some concern over the security of credit card use across the Net. Encrypted transactions available through the most popular browsers has practically eliminated the chance of card numbers being stolen as they traverse the Net (although this had never actually never happened). A new standard from the credit card companies called Secure Electronic Transactions (SET) will add a digital signature to credit cards giving merchants greater assurance that the card is being used by its owner. And although consumers are concerned about card number theft and abuse (though there liability is only $50), the greater concern is from merchants who must pay a fee of $20-30 per transaction for bogus charges which must be removed from a cardholder's bill.
2	Net money Net money is a collection of technologies that enable payments per transaction over the Net that have some of the characteristics of cash. Some Net money is designed to have a very low transaction cost. Credit card payments have transaction costs sufficiently high that purchases of less than about $10 are impractical. Some approaches to Net money are aiming to reduce the transaction cost so that individual "micropayments" would be practical--payments of less than a dollar. Some approaches to Net money are designed to provide the anonymity of cash. Purchases made with credit cards leave an audit trail...every purchase--exactly who bought precisely what--is recorded. Some approaches to Net money eliminate the audit trail yet ensure to the merchant that the Net money offered by the buyer is, in fact, authentic. If a merchant wishes to accept Net money though his online store he must set up the mechanism to accept and verify Net money from a buyer and be able to generate change in Net money to return to the buyer for overpayment (i.e., you buy a CD costing $12 with $20 worth of Net money, the merchant returns $8 worth of Net money to you along with the CD). Various forms of Net money have been around since the mid-1990s. I would expect consumer acceptance of Net money to be relatively slow...people tend to change habits slowly, especially where money is concerned. In addition, the advantages of Net money over credit cards are compelling only in certain cases for certain consumers. The widespread use of credit cards in the general economy shows that the existence of an audit trail of purchases is not widely seen as a significant problem. The strongest force in favor of Net money will probably be to enable microtransactions.
Accounts
3	Subscriptions Before automatic credit card verification and authorization was available across the Net, subscriptions were used for consumer transactions. The (then) costly step of verifying a credit card was done once when the user subscribed to a store or online service. The user with a verified credit card number would be given an ID and password which would allow him into the store. Once in the store all purchases would be changed to the credit card number on file. Subscriptions were also used to simply allow access to Web pages that change periodically, similar to a magazine subscription. Subscriptions have been tried by many and have worked for some. The benefits of subscription accounts for the commercial online services were mentioned above. Another subscription success story is Quote.com. Quote.com offers current stock market quotes (not delayed 15 minutes as is freely available elsewhere on the Net) and access to stock analysts' reports. One more aspect of subscriptions should be noted: it is far less expensive to sell to a repeat customer than to a new customer, not only because of the cost of authorizing transactions but also the cost of advertising to find first time customers. Subscriptions are a mechanism for repeat customers and may encourage customers to come back for repeat purchases. But by the same token, the overhead of initializing a subscription and the user's burden of remember IDs and passwords for all his subscriptions can create resistance.
4	Purchase orders Business to business transactions are often paid through purchase orders. Purchase orders are agreements between the buying business and the selling business authorizing a certain transaction or category of transactions. Often special pricing may be part of the purchase order agreement. The payment models supported by current electronic commerce technology do not currently provide good support for purchase orders. This technology is changing rapidly, however. If your company is interested in enabling business to business transactions through purchase orders, look for new electronic commerce technologies that can verify the existence of purchase order agreements and that can present pricing of items in the electronic store that reflect any special consideration that may be part of the purchase order agreement. A variant on purchase orders and business to business transactions is Electronic Data Interchange (EDI). EDI are structured electronic messages that allow businesses to conduct all sorts of transactions automatically...not just sales but hundreds of different sorts of transactions, many specific to certain industries. EDI transactions have been in widespread use since the early 1990s but had mostly been conducted over direct modem links or faxes between companies. Today more EDI traffic is travelling over the Net. It is unlikely, however, that EDI transactions will play much of a role in consumer transactions over the Net: they are designed for business to business transactions and are complex to set up.
5	Net Accounts Net accounts are a method of accumulating charges typically against a credit card account that my be too small to justify individual credit card authorization for the transaction (some of the approaches of Net money described above are implemented as accounts). These accounts are done in a variety of ways. A typical approach is for merchants and customers to register accounts with a Net account company. Registered customers can then charge against their Net accounts at the electronic storefronts of registered merchants. Periodically the accumulated charges and credits are reconciled against conventional credit card or checking accounts. The benefit of Net accounts is that they typically have lower overhead costs than credit card charges, so are economical for use with smaller payments.
Summary	Although some had thought that the Net would require radical new methods of payment, it appears likely that conventional payment models will work fine in most cases on the Net: credit cards for most consumer purchases and purchase orders and EDI for business to business transactions. More inventive payment models like Net money will enable micropayments but electronic commerce is not greatly hindered waiting for these to develop. In time, however, their lower transaction cost and potential for greater privacy could lead to some displacement of the credit card model. ©1997, Harry Tennant & Associates
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