Payments - Lecture 6

Building Innovative
Subscription-based
Businesses
BUS-185
Lecture 6: Payments
Martin Westhead

Overview
 Payment and trust
 Credit Card payments
 How they work
 Details
 PCI, AVS, CSC
 Chargebacks
 Refunds
 Alternative payment methods
 PayPal
 Wiretransfer
 Electronic transfers
 BitCoin
 Payment Failures
 Enforcement policies

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

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

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

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

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. $$$
3. Goods/Services
3rd
Party
2. “Funds secured”
3. “Goods received” 4. $$$

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

Credit Card Payment Flow
Payer
Processor
/Gateway
1. Card #, etc.
6. Goods/Services
Payee
2. “Make payment”
5.“Payment Accepted”
7. $$$ Payer
Card
Issuer
Payee
Merchant
Account
3a “Secure
Funds”
3b “Funds
Secured”
4a “Transfer
Funds”
4b “Payment
Accepted”
Authorization
Payment

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

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

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

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

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

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

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

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%)

 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

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

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

Local payments: Boleto
 Brazilian cash
payment system
 Boleto: “Ticket”
 Print out
 Pay at ATM, store,
post office, bank
 Very asynchronous
 Penalties for late
payments

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

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

Enforcement Policy
 Goals:
 Increase revenue by pushing customers to resolve billing
issues
 Expose hidden churn
 Basics
 Notification
 Warning
 Shut down access
 Details vary by industry/product
 Ning
 56 days to shutdown
 Two levels of customer/user
Overdue Enforcement (Charge Thru)

Guest Lecturers
Doug Caviness
Head of SaaS solutions,
Cleverbridge

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!

Payments - Lecture 6

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Payments - Lecture 6