Online Payments Shackling E-Marketplaces
- 25 May, 2001 15:21
One of the largest hindrances to widespread adoption of e-marketplaces is the lack of integrated online payment services. According to one study, only 10% of registered participants become active traders. While there are many issues impeding acceptance of e-marketplaces, including low liquidity, inertia, and reluctance to jeopardize existing relationships, the fact that e-marketplace participants must settle their transactions outside the exchange means that their savings from being online are limited. They must still maintain separate offline processes for payment and settlement.
Integrating payments into an e-marketplace is difficult, because more than 70% of B2B payments are still made using paper checks. Other current payment options, such as purchasing cards, direct debits and credits, and debit cards, all have limitations that make them impractical for most B2B e-commerce. These limitations provide an opportunity for new payment systems to emerge, from start-ups as well as established financial institutions. Successful online payment systems will need to provide all the features of current ones, plus integrate well into e-marketplaces and other types of B2B e-commerce sites.
Required Attributes of Online Payment Systems At first glance, payment may seem like a simple process of moving money from one bank account to another. But a successful payment system must address a number of other needs to ensure that the right amount is transferred, from the right source, to the right destination, at the right time.
Efficiency and Reliability
Since getting paid is the most critical function of a corporation, payments must be completed efficiently and accurately. The sort of downtime that was experienced by Microsoft in January 2001, where entire Web sites and services (such as Hotmail) were simply unavailable for hours, is unacceptable for a payment application. Web technology is necessarily less mature than the legacy technology that current payment systems are built on, which makes reliability a serious concern. While online payments can be far quicker and cheaper once in operation, getting to that point will require serious investments.
Internet transactions are inherently anonymous, since users cannot see or touch the person they are working with. One of the key selling points of e-marketplaces has been that they expand the availability of trading partners, which makes reliable identification a key problem. Establishing a new business relationship requires trust and fraud safeguards before any money is exchanged.
In the offline world, commerce depends on trusted intermediaries, such as banks, to guarantee a buyer's ability to pay. A similar role will have to be filled online. Some online payment systems use an "enrollment" process, where participants are required to be authenticated to establish their identity and their legal authority to make payments before they can participate in the system. In this case, the payment system provider is assuming the role of trusted intermediary. Another approach is to use a third-party certification authority; this is easier for users, since they have to establish identity only once to receive a credential that is usable with many payment systems. However, use of such credentials is still not widespread, so ideally, the payment system will accept both third-party as well as its own credentials.
There must be a way to link the payment to its associated transaction, either by transmitting this information directly with the payment instruction, or by using a separate application to track both transaction and settlement data. The transaction and payment data must be transmitted in such a way that the trading partners can add it to their internal databases for reporting purposes. Otherwise, they have to rely on whatever reporting facilities the payment system provider offers, which will not be integrated with other payment methods the companies are using.
Financing and Risk Management
The payment system should provide a mechanism for guaranteeing that sellers will be paid, if they fulfill the terms of the transaction. This can be done through a line of credit, escrow, or insurance. If the buyers do not have sufficient cash on hand, or do not want to pay immediately, there should be a way for them to get a loan.
Similarly, there should be a way to verify that a supplier has fulfilled the terms of the contract and a mechanism for buyers to dispute bills and receive reimbursement in cases of supplier fraud or failure to perform. At present, most e-marketplaces have no way of satisfying this need; buyers are "on their own" if a trading partner does not fulfill its obligations. Understandably, this makes companies reluctant to do business with unknown entities, which is one of the main value propositions of the e-marketplace. Until some sort of guarantee or financing is generally available, businesses will be reluctant to move beyond their existing trading relationships.
New Online Payment Systems
What kinds of solutions are being proposed to fill the gap in online payments? Purchasing cards are the leading method of online payment today, but they have two key limitations: lack of transaction data and lack of integration with back-end accounting systems. Neither of these can be solved merely by adding Internet access. They require a new Web infrastructure to provide data transport and standardized integration services.
Most of the new solutions that have been proposed recognize the need for this new infrastructure and are attempting to supply it. Unfortunately, there are many companies that want to fill this role, so any prospective customer would risk having to construct several interfaces to be sure to reach all of its trading partners. This will keep most companies from using these new systems beyond the experimental stage until 2004 or later. By that time, many of the new online payment solutions will have gone out of business or been acquired, leaving a small number of leaders and a few widely accepted industry standards.
Successful online payment solutions will initially build on existing payment methods such as automated clearing house (ACH) funds transfers, with transaction data management and interfaces bolted on. In the long run, however, the existing payment infrastructure is likely to be replaced by a more flexible system of funds transfer and integrated financing, based on a single open standard. The mechanics of how the money flows will be transparent to the business customer, as is the case now with Web content. In essence, payments will become an integral part of the Internet itself and will no longer be considered a separate service. We are a long way from this ideal today, but the next 10 years will see payments evolve from a separate offline activity to take their place at the heart of B2B e-commerce.