4. Classification of Payment Types
Reversible by Payer Non-Reversible by Payer
Asynchronous ACH (Automated Clearing
House)
Check
Wire transfer
Bit Coin
Boleto
Synchronous
(immediate)
Credit cards
PayPal
Cash
• National / International
5. Payment Definition
A payment is the transfer of value from one party
(such as a person or company) to another. A
payment is usually made in exchange for the
provision of goods, services or both, or to fulfill
a legal obligation.
Payer Payee
$$$
Goods/Services
6. Barter
Trust issues:
None – both parties able to examine goods
Convenience: Very Low
Buyer and seller need to be present
Need to find timely match in needs and supply for
both parties
Party 1 Party 2
Goat
Grain
7. Cash
Trust issues:
Need to trust value of currency (Level 1)
Cash can be anything so long as everyone agrees
on its value
Convenience: Low
Buyer and seller need to be present to do transaction
Payer Payee
$$$
Goods/Services
8. Escrow
Trust issues
Need to trust value of currency (Level 1)
Need mutually trusted third party (Level 2)
Convenience: High
Allows parties to be separated in space and time
Payer Payee
1. $$$
3. Goods/Services
3rd
Party
2. “Funds secured”
3. “Goods received” 4. $$$
9. Trust
Convenience => more sophisticated Trust
Why are payments complicated?
Need for chains of trust within the transaction
Need to handle failures of any link in that chain
Cost: Each link in the chain takes a cut
Size of the cut depends on volume of payments
Escrow model – just one solution
Different payment methods use different models
Alternative to holding funds in escrow is to reclaim
Issue is to support trust
Levels of trust depend on the amount of money/value
12. Pre-authorization
Card check
Is the card number valid?
Will it accept payments?
(Does it have funds?)
How does it work?
First part of a payment (Authorization) executed
Then automatically/immediately reversed
Best practice to use a $1 charge
Drawback: Can be used by fraudsters
To check stolen CC numbers
13. International
Weaker trust
Considered higher fraud risk
More likely payment will be refused
Cost of intermediaries
Many more links in the chain
Cost of currency conversion
Spread and conversion charge
Born by customer and merchant
Credit card penetration
Credit cards not widely in some regions
For high international volume
Consider providers with international financial presence
14. PCI – Payment Card Industry
PCI Compliance
Standard
Multi-level security protocols
Required for handling credit card numbers
Industry, not legal requirement
Requirement level depends on
Volume
Transfer or Storage
Avoid PCI compliance issues by
Using a payments provider services
Secure credit card number storage
iFrame/JavaScript to transfer direct to secure store
15. CSC – Card Security Code
AKA: CSC / CVV / CVV2 / CVD / CVVC / CVC /
V-code / CCV / SPC
3-4 digits on the back of your card
Cannot be stored
PCI compliance rule
Therefore cannot be used for recurring billing
Should only be available to the cardholder
Wikipedia: CSC
16. AVS – Address Verification System
Verifies address info vs. billing address
Only considers numeric portions of address
E.g. 101 Main Street, Highland, CA 92346
Checks 101 and 92346
Increases likelihood card user is valid
Drawbacks
Introduces additional friction in signup flow
Difficult to use internationally
Wikipedia: AVS
17. Charge Backs
Four categories of chargeback reason
Technical: Expired authorization, non-sufficient funds, or bank
processing error.
Clerical: Duplicate billing, incorrect amount billed, or refund
never issued.
Quality: Consumer claims to have never received the goods as
promised at the time of purchase.
Fraud: Consumer claims they did not authorize the purchase or
identity theft.
Cost: $15-$20 charged to merchant
Huge safety net for consumers
Solves Level 2 Trust
Helps consumer confidence with online transactions
Tends to penalize merchants
Wikipedia: Chargebacks
18. Refunds
Credit cards support automatic refunds
Save on time vs. a reverse payment
Refund must be against a payment
Can be up to the payment amount
Refunds cannot be used for Payouts
19. Recurring Payments
Recurring payments is bolt-on
Once vendor has Credit Card details
Can charge what they want
Whenever they want
Customer can reverse invalid charges
(but has to find them)
There is a payment type “Recurring”
Not always used
Should be used on successive payments (not first)
Increases chances of payment success (up to 15%)
21. More straightforward than Credit Cards
Customer can pay multiple ways
cash, credit card or bank transfer
you don’t know/care
Supports recurring payments
Can be cancelled
Alternatives
Stripe (CC only), WePayKushCash, TextPayMe, obopay,
Bill Me Later, Alipay, Wesabe, Mpayy, noca, Paymate,
OpenCuro Inc., Dwolla, ClientBiller.com, ORCA, Inc.,
Transfercel
22. Wire Transfer
Point to point cash transfer
Can be immediate
Sometimes will take longer (e.g. internationally)
Works internationally (SWIFT)
No reversal (even if you get account numbers wrong)!
Expensive
November 2011,Bank Of America:
Domestic: $25 to send, $12 to receive
International: $35–$45 outgoing, $16 incoming
Security
bank-to-bank wire transfer, each party requires proven identity
cash office transfers are essentially anonymous:
designed for parties who trust each other
Essentially a cash transfer difficult to reverse
Wikipedia: Wire Transfers
23. Electronic Funds Transfers
Examples
US: ACH (Automated Clearing House),
UK: “Direct Debit”
Germany: ELV (ElektronischesLastschriftverfahren)
All payments accumulated during the day
Cleared between banks in batch overnight
Much cheaper than wire transfer
Takes longer
Only between banks that share clearing system
Wikipedia: ACH
24. Local payments: Boleto
Brazilian cash
payment system
Boleto: “Ticket”
Print out
Pay at ATM, store,
post office, bank
Very asynchronous
Penalties for late
payments
25. Mobile Payments
expected to reach more than $600B globally by
2013
Four primary models:
Premium SMS based transactional payments
Direct Mobile Billing
70% digital content online some parts of Asia
Mobile web payments (WAP)
Contactless NFC (Near Field Communication)
Starbucks apps
Barcode
Strategic partnership with Square
Wikipedia: Mobile payments
26. Bit Coin
New electronic currency
Security from cryptography not institutions
Highly volatile
(Level 1 trust issue)
Cash transactions
Non-reversible (Level 2 trust issue)
Asynchronous (1 hour to confirm transfer)
Competitors: Litecoin, PPCoin
Faster transaction validation
Alternate mining schemes
30. Next week
Exercise 2: Innovate
Your team has been hired as
Innovation Consultants
Innovation strategy, e.g.:
Pricing / Pricing Model changes
Promotions
New products
Outline a financial model for your changes
Present to the board (i.e. class)
Prizes!