Past, present and future of online payments

 

Pioneers sometimes pay more than their followers. It’s harder to be the first in any field, and in any industry as well. To be The First of course means  you’re also The Best, at least at the beginning.

Pioneers invest heavily in R&D, infrastructure and they find methods to do what they do cheaper. The followers could profit from it and do it better and more effective. At some point you can see that pioneers are still busy with their old infrastructure at the moment when the followers are going further.

It’s not a secret, that in 19-21 century the USA is a pioneer in a number of industries. Americans did something first and let other learn from their successes and mistakes. This happened with railroads, this happened with mobile telephony, this also is happening with online payments.

The Past

How can consumers pay for products before Internet era. There was, of course, cash. There were bank transfers, there were different types of cheques. And there were a credit cards. Which of those method were suitable for online payments.  You can’t send cash or a cheque online, via a web-form or email. There were no online banking services. So we’re stick with:

  • Credit Cards

You only need to transfer a number per Internet and “virtually” give permission to a e-shop to charge you. Almost no authentication, only identification (for difference between those to click on links).  The major plus is – very easy procedures. Client fills the number in a form, “one click” and payment is done, the rest is up to the merchant.

The Present

Presently there are dozens of different online payment methods available. I’m going to focus only on business transactions between a consumer and official business – e-shop. So, I’m not going to cover Pay Pal,  Western Union, etc. Those are designed to transfer money between individuals without legal entities and sometimes without even bank accounts. Let us assume that the e-shop is a corporation, which pays taxes as a business and can register itself as a merchant with all rights and responsibilities, provided by government and financial institutions.

Online payments were changed a lot by online banking. Almost all banks in the world now allow to perform transactions online. It requires a person to log in (Now we do have authentication, good!) and perform some operations manually. Not exactly “one-click payment”, but it could be done from your arm-chair.

Here came the “Pioneer problem”. Who was the first in providing online banking? USA, of course. At that moment the philosophy of information security  told us, that one factor authentication (currently known as weak authentication)  is enough.  Most of the banks required only user name and password to access those services. This created the whole generation of computer viruses, designed to stole those passwords. It was so insecure that people didn’t wanted even to integrate in with e-shops. How do you automate the process of online payments with password? Give your password to the merchant?

Europe was a bit late and had luxury to learn from American mistakes. Banks started to develop tools with Two-factor authentication (or Strong Authentication). All people need to use a special device, which looks like a small calculator.

 

ing-homebank-device

Here you can find some information about such services in a Belgian ING bank

They have some strong crypto inside, which helps you to generate one-time passwords. The procedure is more complex, but it’s so secure that Payment Service Providers started to help merchants to automate it. Now with some magic and some web-services customers can pay via Internet in e-shops.

Summarising. there are 3 types of online payments available:

  • Credit Cards
  • Bank transfers
  • Payment methods based on modern online banking, like iDEAL, Bancontact/Mister Cash, etc.

 

The Future

In order to try to predict the future let me show, which methods are used by our clients in Netherlands on our e-shop:

online_payments_2008

iDEAL is winning and will continue it’s growth.  Currently such systems are local to an European country (actually to a bank) and not compatible with each other. But I hope that with introduction of SEPA Single Euro Payments Area this type of payment will be accepted in all EU-countries. 

Conclusion

At the end let me summarize 3 types of payment with their pluses and minuses

Payment method Credit Cards Bank transfer Online banking payments
Authentication weak mostly weak very strong
Usability for the client very good bad moderate
Technical implementation for the e-shop very easy moderate moderate
Chargeback procedures very easy hard hard

There are still some difficult es with those new payment methods, I’ll cover them in later posts. Europe is  “the pioneer” this time and I’m sure USA will come a bit later with better solution.

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