by Tim Attinger
eCom 301 (elective): Evolution of Online Commerce
Lesson 1 Discussion Board: How has the evolution of eCommerce fostered innovation and competition? Click here to respond.
In this class, we will explore the basics of eCommerce, how the segment has evolved to where it is today, who have been the major players in that evolution, where it may be headed, and what might that mean for the segment in particular and for the payments industry in general going forward. In this course, we will explore how commerce facilitation engines have evolved from basic merchant checkout functions and simple wallets into more complex commerce generators that identify consumer demand and drive purchase traffic to convert sales. We will study how organizing consumer purchase intent, stimulating conversion, and closing the loop with post-purchase information may drive incremental value to consumers and merchants, increasing the relevance and adoption of integrated checkout facilities.
Shopping Online – Small But Dynamic: In the payments industry, eCommerce is a significant area of interest for analysts, reporters, investors, pundits, venture capitalists, executives, authors, and armchair quarterbacks. Why would a payments segment that represents less than 5% of all consumer spending garner such massive attention and interest from so many quarters? Well, one reason for all the interest from folks who are engaged in the electronic payments industry is that, unlike with the overall marketplace for consumer spending — where cash and check payments still hold a high share of consumer purchases — the eCom segment is by its very nature almost exclusively electronic. In addition, the channel has tended to grow at or above twice the rate of electronic payments in general, and high growth always attracts interest. But more than this, the eCom segment is one where access to consumers and merchants doesn’t require anything close to the level of distribution and integration of electronic payments at the point of sale. Throw up a website, sign up with a merchant acquirer/gateway processor, load some electronic payments acceptance pages, market your services, and then wait for the world to beat a path to your (virtual) door.
On the surface, it would certainly seem that barriers to entry for new acceptors, and for new payments vehicles, are relatively low. And, with a number of subtle qualifications, for eCommerce this is true. However, it wasn’t always that way, nor is it truly that way today. Behind that checkout button on your favorite online shopping site lies a payments ecosystem that is both familiar to traditional payments operators and yet more complex. On the checkout page, a range of payment options are arrayed, both old and new, enabled by a small but critical component that makes the eCom stakeholder chain different from the payments chain that supports brick-and-mortar. Let’s take a look at the subtle difference in that payments stakeholder value chainmn and how it may enable the innovation we see in the eCommerce marketplace today.
eCommerce Value Chain: To understand how competition has evolved in eCommerce, it helps to look at the core payments infrastructure that underpins eCom transactions. We’ll begin with an overview of the traditional payments value chain and how new online payments players enter the marketplace. In the traditional electronic card payments flow, transactions are processed from the merchant point of sale back through to the consumer’s financial institution along a basic flow that typically works like this:
MERCHANT ⇒ ACQUIRER ⇒ NETWORK ⇒ ISSUER
In this process, the Acquirer is the financial institution that presents the merchant request for payment for a consumer sale into the payment network, and the Issuer is the financial institution that receives the request and pays it from the consumer account. Often, Acquirers and Issuers have processors who help facilitate the establishment, processing, risk management, and servicing of accounts. However, many of the largest players in the acquiring business have their own processing systems and specialize in building customized solutions for specific segments of merchants.
In the eCommerce segment, this traditional payments value chain has a slight nuance in the way transactions are processed. Merchants have built sophisticated order capture and management systems to facilitate transaction processing between their front-end Web services and the processing systems that connect to merchant acquirers. Often these systems have a specialized gateway processing mechanism to speed and optimize authorization traffic from websites where consumer payment information is captured electronically. These gateway services often include risk management and information/reporting services.
MERCHANT ⇒ GATEWAY ⇒ ACQUIRER ⇒ NETWORK ⇒ ISSUER
In some cases, the gateway provider may be a function within, or a subsidiary of, the acquirer. eCommerce acquirer processing and checkout process management have become increasingly integrated for key eCommerce processors to the point where it has made sense for gateway capabilities to be acquired by major eCommerce payments companies. Processors are then in a position to sell bundled solutions to the marketplace that provide a more seamless integration of eCommerce-specific transaction processing and the integration of that capability with traditional payment network processing. This was a driver behind PayPal‘s acquisition of VeriSign, and more recently, Visa‘s acquisition of CyberSource.
In our next class, we will discuss how merchants and commerce engine providers have migrated the business from these basic checkout functions to integrated checkout facilities. Those checkout functions began as a way to streamline merchant processing. Some have evolved to become branded checkout solutions, processing payments across multiple merchants. In our next class, we will review the basics of how these checkout functions have evolved.
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Driving Payments Innovation through Education- PYMNTS University
Durbin Debit 101 (required): Retail Deposits Have Changed Radically Overnight
Debit 201 (Required. Debit 101 prerequisite): Is Prepaid “Debit-Lite?”
Point of Transaction 201 (required): Competition for Consumer Choice
Mobile 205 (required): GPC Payments Value Proposition
Mobile 206 (elective. Mobile 205 prerequisite): Emerging Payments Value Proposition.
Cloud Payments 210 (required): Building Value in the Network
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