Entered by Gio Wiederhold, 27 February 2001, updated 11 Jan 2002, 31Jan 2002.
Discussion; understanding what's going on; analysis; business trade-offs, making predictions, but not telling what the future will bring.
Student participation: reading, arguing, writing of Web pages for an Internet Handbook.
For all projects, since it is concerned with business: Give a motivation in terms of benefits—that can be money, or public good.
If it is a public good, still who would pay for it?
If advertising is a source of income, how would you collect income:
How to pay for items in electronic commerce was the major
open issue. A variety of methods have been proposed, as listed below, but most
have not been successful. We have to consider both paying for information
services, as well as paying for tangible goods to be delivered to the customer.
Some methods focused on payment assurance. 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.
When
information or goods are purchased immediate payment is demanded. The most
common form is giving a credit card number. The supplier can rapidly verify
that the number is valid and that the amount is covered. The purchaser has to
trust that the supplier will deliver the goods. If the supplier is known to be
trustworthy the purchaser will proceed without further ado. The purchaser does
not have to pay the credit card company until billed at the end-of-the-month,
and if a zero-balance is maintained obtains in practice an interest-free loan
for the intervening period.
For U.S. customers and suppliers in the U.S. the credit card companies provide backup, in that if the purchaser claims non-receipt or misrepresentation of goods, the credit card company will withhold paying the supplier until the dispute is resolved. This is a valuable service and has some operational cost and potential loss for the credit card company. The credit card company earns it income by reimbursing the supplier a few percent less than the collected amount, and from interest charges and penalties charged slow-paying customers
The credit-card
companies have had costs of about $0.50 per transaction processed, so that it
appeared that the small amount that could be charged for minor information
services could not be handled well be them. That observation led to rise of
micro-payment schemes detailed below. However, a number of factors have kept
credit card payments in the forefront: No significant micro-payment needs
developed. Web sites offering information counted on advertising income,
justified by having many customers, rather than by awkwardly extracting
payments from customers. Credit card companies were not willing to cede their
business, even if small transactions appear by themselves to incur a loss.
Increased automation, like the prevalent credit card readers in use by 2000,
replacing the mailing and scanning of paper slips, common will into nineties,
reduced their costs.
When e-commerce
transactions are processed, that cost is also low and susceptible to
automation.
PayPal.com provides the ability to collect money (i.e., be a supplier in the sense above) to its members. You can direct credit card payments from a purchaser of your goods or information into your PayPal account. PayPal will collect the funds, acting on your behalf the supplier, but needing only a single supplier account. Since it is (potentially) a large supplier, it can negotiate a favorable rate from the credit card company. It then credits you the collected amount (minus a fee?). You can use the credits either for further purchases or you can request a check for the credited amount to be sent to you.
As pointed out
above, for information services the major income is from advertisements. The
information service is most effective when it can become a mediator between the
potential purchaser and the potential supplier, so that the advertisement becomes
a bridge between the two. various charging methods for advertising reflect this
role.
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.
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.
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:
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
precede the purchase.
Escrow refers to a third party which holds payment and/or
goods until both have been delivered and validated. Escrow of 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.
For small
payments alternatives other than audited and secured methods seem appropriate.
For instance, many information services have potentially very low transaction
prices, and there is no tangible loss if a customer does not pay. 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 for elements
of data being integrated by a mediator being a fraction of a cent.
Some people
also feel a need to protect their privacy, which can be rarely guaranteed when
credit cards or even more complex means are used. What is an electronic
equivalent of cash? Some schemes have addressed that issue, but rarely satisfactorily.
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 supplier who delays the sending of information until payment is
received is unfriendly and annoys the customer in many situations. For the
customer to mail a check to a supplier while waiting for the goods also
requires trust. A mediating agent, if employed, serves both as an information
service and increases the trust level that the consumer has in listed
suppliers.
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.
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:
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. Many 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.
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.
The suppliers
The mediators
The financial
intermediaries
The people that run the web (see Meeting 2 notes.)
.
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Retail Commerce (B2C), B2B, G2C, Education, Healthcare, ...