CS99I Meeting 9 Notes: Payment

Started by Gio Wiederhold, 2 March 2000.

Paying

How to pay for items in electronic commerce is the major open issue. A variety of models exist. Some of them are only applicable to information services, others include payment assurance for tangible goods to be delivered to the customer. We will briefly list here alternatives seen or contemplated, focusing on the intermediary information services, although many schemes apply for direct purchase reimbursement as well [LynchL:96]. A full analysis of electronic payment schemes is beyond the scope of this report; our point here is that information technology tools must be flexible enough to accommodate several of them at the same time and all of them at some time.

Incremental

The referred supplier pays the mediator for each actual purchase made by a customer. This approach assumes that there is a clear path from the mediated information provided to the eventual purchase. Today amazon.com provides such a service to specialist selection services [PapowsPM:98] [Amazon:99]. In settings where the actual purchases occur later, and can be assigned to a variety of information sources, the audit trail needed to justify payment may be hard to follow.

Reference

The referred service pays for each reference made to its site, whether it leads to a purchase or not. This approach assumes that the benefits for vendors, as airlines, restaurants, etc., are high enough that the mediator can get paid a small amount for each specific reference. However, in that case suspicions of bias are likely, whether justified or not.

Advertising

The information provided by the mediating service is adjoined with advertisements directed towards the customer. This approach is prevalent today, and shows the importance of advertising in modern commerce. Here the cost to the customer is annoyance and distraction: i.e., attention. A suspicion of bias will also arise.

Reimbursement of the information provider from the advertiser can take any or all of several schemes:

Pay per page view: Everytime a page is presented with an ad a small payment, on the order of 1 cent, is made. This arrangement is similar to advertisement in newspapers and magazines, where the advertiser pays according to the circulation of the paper or magazine. The on-line approach has some advantages for the advertiser: one is assured that the page is at least opened, and the ads can be presented selectively to a potentially relevant audience. The latter is then similar to the advertisements placed in focused audience magazines, as Motor Trend, Modern Bride, Apartment Living, etc.
Pay per click through: If the on line reader clicks on the ad and moves to the advertisers own pages, a higer payment is warranted, on the order of 10 cents or more. This is similar to a person making a call or sending a coupon in, but the on-line overhead is much less.
Pay for purchase: If an actual purchase of goods or information results, then the payment can be based on a fraction of the purchased items value. These partnership arrangements make the page provider a participant in the purchase. For instance, pages from a mathematics club may refer to books, and clicking on the book title would get you to the pages of a book vendor. If the book is purchased then, the club might see a reimbursement on the order of a dollar. Here an audit trail is required.

It remains difficult, just as it is outside if the Internet, to link most purchases to advertising, since for many purchases many page impressions and information requests preceed the purchase.

Escrow

Escrow payment is appropriate when the information or the goods provided have a substantial value. The payment by credit card or bank transfer goes to an intermediate `escrow' agent, as does the information or a token for the merchandise. The escrow agent will match guaranteed delivery to the customer of the actual merchandise with guaranteed payment to the supplier. When both delivery and payment cannot to be repudiated the escrow agent will release goods and funds simultaneously. The escrow agent must be trusted, and is complementary to the information agent.

Trusted

Transactions requiring modest payments, as discussed earlier, are handled adequately without explicit escrow services, based on trust and tolerable losses if the trust is violated. A mediating agent, if employed, serves both as an information service and increases the trust level that the consumer has in listed suppliers.

Wallets

Very small transactions could be handled in the same way, and many credit-card companies do not now limit the minimum charge, and may in fact not allow vendors to set minimum limits. However, many information services have potentially very low transaction prices, and those are unattractive for these companies. Examples are copyright fees for papers (on the order of $1.-), participation in a game, or single instances of newsletters. We can envisage incremental charges being a fraction of a cent.

Since the cost of processing transactions includes careful audit trails and assumption of risk, those costs can be greatly lowered by transferring the risk of loss from the credit-card company to the other parties:

a. Risk is assumed by the vendor: If the consumer fails to pay, the vendor is not reimbursed. Since the increase in market should greatly offset any losses, most vendors would gladly accept such a risk.
b. Risk is assumed by the customer: The customer provides a `wallet', with limited content, and has no recourse if the goods are not delivered.

Subscriptions

Subscriptions are suitable when the customer and vendor intend to establish a long-term interaction. However, the initial contact is inhibited, since a long-term obligation requires more thought and trust. Manyme companies provide for a step-up to a subscription [Morningstar:99].

Many publications provide a free on-line service for customers that pay for print subscriptions. As an inducement, there is often some access, or delayed access available to the material to anyone, or it least to people willing to register.

Summary

All of these techniques are inappropriate in some domains. Payment may differ based on representation. A low resolution image may be cheap or free, but one suitable for exposition can carry a high price. An author may offer his material free for perusal on the web, but want to charge if many printed copies are distributed in a training course. For many information services the highest level of payment guarantee is not needed. There is no loss of tangible or irreplaceable value when the customer avoids payment for the information. For instance, much copyrighted information is xeroxed, without reimbursing the actual sources.

A reservation made for an item in limited supply, say, a flight, a restaurant, or a concert, which was subsequently not attended and paid for has a cost to the supplier if other customers were rejected or dissuaded. Schemes to avoid a payment that is due to a vendor or to default on delivery to a customer exist for all practical techniques. If the loss due to a failure to pay is small and such events are likely to be infrequent, then it is best to ignore them.

Many of these schemes can be understood using a single model, helping an innovator to select what methods are best in a specific customer-vendor domain [KetchpelGP:97]. Many of the software pieces and services are available as well. However, integrating them into an electronic commerce system is still hard. We find that the majority of corporate web-sites provide product information, but no path for on-line purchasing, largely defeating the move towards Internet-based commerce.

Who gets paid

Payment schemes also have to assure that all who are setlled with costs are reimbursed.

The vendor of information. Often the public expectation is that information is free. However, valuable, or value-added information, that has higher quality, more precision and completeness, and wastes less of the clients attention may well be worth paying for. Unfortunatly, convenient payment schemes for the small amounts appropriate for snippets of onfgormation have not found broad acceptance. Today (2000), the advertisement model dominates.

The vendor of goods: described as above. For goods the payments are more substantial, so that credit card schemes are acceptable.

The Internet access services: The ISPs. The purchase bandwidth from backbone transmission providers or other, larger ISPs. ISPs oversubscribe, trusting statistical random behavior of their customers. A large ISP will have multiple interconnections with a backbone, and may also try to move much traffic internally. Major ISPs are AOL, Earthlink, Mindspring, but there are a plethora of local ones as Erols (DC area), WNET (Bay area), etc.

The backbone providers: paid by the ISPs for long-distance transit services. There is not just a single backbone, but many suppliers (list to come). The original settlement among them was by free Peering. There are now at least two tiers, as newer companies enter the transmission provider market. Top tier providers include UUnet (derived from UNIX-based intercomputer services), AT&T (based on POTS transmission capabilities) now with cable TV lines from TCI, Sprint (started with the Southern Pacific railroad right-of-way for transmissions), MCI (an early POTS long-distance competitor to AT&T), Cable&Wireless (of British origin, strong in Asia), PSI, Worldcom (grown by mergers of ..). Closely following are Williams, Letter3, Qwest, etc.

All of them have multiple interconnect points, and will add or close interconnections as demand and their profitability mandates. Two major interconnection points, freely available to all are MaeWest, in the SanFrancisco Bay Are (where?) and MaeEast (Tysons Corner, VA, near DC)

Moving service to the edge of the net

AKEMAI.

Notes

See
See also the references.