Payment cards continue to take a
greater share of overall spending, but the e-commerce sector is
rapidly gaining in importance, as demonstrated by the success of
PayPal and others. What are the factors driving usage of e-commerce
channels and what are the major risks and opportunities that lie
ahead? Victoria Conroy


Although we may still be a long way
from a truly cashless society, established payment players should
remain wary of resting on their laurels as a new breed of
alternative payment players encroach on their territory by
leveraging the popularity of the internet and other e-commerce

With regulatory and cultural drivers clearing
the path of more and more hurdles, e-commerce players are gearing
up to position themselves as viable contenders to take market share
away from the big banks and payment networks – and from cards
themselves in many cases.

It has often been said that the strengths of
the big banks revolve around their established customer
relationships, their branding power and their extensive branch, ATM
and other channel networks.

However, these strengths are not exclusively
the preserve of banks as they are finding to their discomfort. In
fact, the absence of ‘physical’ networks and associated costs
appears to have helped the likes of PayPal and Google innovate much
more quickly by tailoring products exclusively to the needs of
e-commerce buyers.

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According to Francesco Burelli, a director in
the payments team at global business consultancy Deloitte, there
are several factors which differentiate the big banks and
alternative payment players.

“When considering the speed and agility to
innovate and comparing the performance of large established
financial services players versus new entrants, we have to take in
consideration the organisational characteristics of such players as
well as their business focus and priorities,” Burelli told CI.

“An incumbent financial services operator and
a start-up alternative player are two different types of
organisations in terms of their organisational and operational
complexity, number of products offered, complexity of their
regulatory regime and their financial obligations to their

“These differences drive the interest in and
ability to innovate at very different speeds. The different degree
of complexity of the business case and size of the opportunity
require different approaches to support decisions around future


US quarterly adjusted retail sales


Total ($bn)

E-commerce ($bn)

E-commerce as % of total

% change from year-ago

Q3 2009





Q2 2009





Q1 2009










Q3 2008





Source: US Census Bureau

Shares of e-commerce

Certainly, the payment networks do
not yet need to worry about being overtaken by their online rivals.
According to PayPal, its net total payment volume for 2008 (or the
total value of transactions) was just $60 billion, compared to
Visa’s $2.7 trillion total payment volume for the same year. But
PayPal’s volume rose by 27 percent during that year, and its total
payment volume in 2008 represented nearly 9 percent of global
e-commerce, and 15 percent of US e-commerce.

Further evidence of the rise of the e-commerce
players came from the US Census Bureau, which found that for the
third quarter of 2009, e-commerce sales amounted to $34 billion, an
increase of 4.5 percent from the second quarter – total retail
sales were estimated at $922.2 billion. E-commerce sales in the
third quarter of 2009 accounted for 3.7 percent of total sales.

Online shoppers already use alternative
payments for about 15 percent of the $170 billion of goods and
services purchased online, according to a report by US payment
consultancy Celent, which estimates that the major card brands and
their issuers stand to see some $345 million in volume lost to the
non-card players in 2010 and a staggering $1.7 billion in 2015.

In the UK, e-commerce retail sales reached
£49.8 billion ($80.4 billion) in 2009, a 21 percent increase from
the year-ago period. Almost 30 percent of online sales took place
in November and December, according to data from payment processor
Retail Decisions.

According to a 2009 survey commissioned by
PayPal and conducted by market analysts Experian, the recent
financial crisis has done more to spur online spending than any
other factor, and online retailers are reaping the benefits at the
expense of bricks-and-mortar retailers. The survey found that
consumers are much more cost-conscious than ever before and believe
that they will find better deals on the internet.

The survey also found that nearly 4 in 10 UK
online shoppers – or 8.7 million adults – believe it is easier for
them to purchase online rather than in the high street, while 47
percent believe their money goes further online.

Experian anticipates that from 2011 onwards,
online shopping sales will increase from £8.9 billion in 2008 to
£14.4 billion based on conservative assumptions and as much as
£21.3 billion on a more optimistic basis.

But it is not just the developed payment
markets that are showing interest in e-commerce. According to Latin
American consultancy firm Prince & Cooke, as a result of
growing internet user numbers and increasing penetration of
e-commerce services across all industry sectors, total e-commerce
in Argentina is expected to grow 25 percent to 30 percent in 2010,
compared to AXP5.24 billion ($1.36 billion) in 2009.

Almost 26 percent of Argentinian internet
users buy products and services via e-commerce channels. By the end
of 2010, their number is expected to reach 26 million. Meanwhile,
in Chile, statistics from the Santiago Chamber of Commerce revealed
that in 2009, e-commerce transactions were estimated to have grown
15 percent from 2008, to reach a value of over $430 million. The
number of Chilean internet users has now reached 8 million,
representing almost half of the country’s population.

And in China, e-commerce enjoyed an almost
doubling of sales volume during the first nine months of 2009,
indicating that consumer confidence continues to soar. During the
January-September period, Chinese internet users spent CNY168.9
billion ($25 billion) online, up 90 percent from the corresponding
period of 2008.

In 2009, e-commerce retail sales reached $36.6
billion in China, representing nearly 2 percent of all domestic
retail. It is estimated that almost 100 million Chinese consumers
make online purchases, mostly through consumer websites.

Main drivers of

Globally, the growing ease and
declining cost of access to high-speed broadband internet access is
facilitating the growth in e-commerce, particularly in emerging

As Burelli explains, the ability of consumers
to purchase goods online, as well as enabling local companies to
offer their goods and services to a greater pool of customers, is
broadening the reach of e-commerce. According to Burelli, the
following elements need to be considered when considering the
uptake of e-commerce:

• Internet availability: This is a function of
the telecom infrastructure within the country and the bandwidth
available through each specific channel and geography.

• Internet connection/set-up costs: This may
differ greatly by channel and speed of connection logistical
infrastructure – this is applicable only to the purchase/sale of
physical goods but it is a key requirement for the ability to
fulfil the orders.

• Language: A key enabler to reach specific
markets and demographic segments on their basis of interact and
transact in domestic and foreign languages. Language remains a
significant barrier for cross-border e-commerce for large parts of
the population in many countries.

• Availability of goods and price sensitivity:
Price sensitivities are key drivers for demand and uptake.

“Overall increasing internet penetration is
expected to develop in parallel to the evolution and growth of
economic systems, both as an enabler as well as a consequence of
increasing economic activity and raising available income for
consumers,” Burelli told CI. “BRIC countries have all been
experiencing significant economic growth in recent years, with the
Brazilian, Indian and Chinese economies showing continuous growth
despite the current economic crisis.

“E-commerce is a channel to market with
limited investment required compared to others, like developing
distribution agreements, in foreign countries. Given the reduced
cultural legacy of start-ups in developing countries versus
established businesses in developed economies, I would expect
e-commerce to have a deeper degree of penetration within the small
and medium-sized enterprise sector in BRIC [Brazil, Russi, India
and China] and other developing countries.”

Risks and challenges

However, the ever-present threat of
fraud is something that all payment players, no matter how big or
small, need to be mindful of. Although initiatives like EMV
migration and the introduction of online authentication systems
like Verified by Visa and MasterCard SecureCode have helped to
reduce the level of fraud in some areas, other areas have witnessed
a spike.

“Card-not-present fraud has been increasing
significantly over the past few years as electronic crime migrates
from card skimming to internet and MOTO [mail order, telephone
order] fraud. This is a direct consequence of the migration of card
from magnetic stripe and signature transaction capture to EMV chip
and PIN,” Burelli says.

Distinctions need to be made between two
different environment weaknesses in e-commerce transaction fraud,
he adds – that of between buyer/consumer and seller/merchant.

“In the buyer/consumer scenario, the risks
include the interception or disclosure of sensitive payment
information either to third parties or to fraudulent merchants.
There are a number of solutions at various stages of
implementation, such as the application of second factor
authentication like the 3-D secure programmes of the international
schemes, or the fraud prevention measures implemented by banks such
as neural networks or rule-based transaction authorisation filters
designed to catch fraudulent transactions,” Burelli told CI.

“This list is not exhaustive but it is to be
said that consumer education plays a significant role in preventing
fraud on the buyer/consumer side. Awareness and understanding of
internet threats is, in most cases, low and there is still a
significant degree of adoption of common sense and sensitive
behaviour on the side of consumers. This benefits the payment
security of e-commerce transactions regardless of the payment
method in use.

“On the seller/merchant side, we see a range
of risks to be addressed, ranging from the risk of fraudulent
purchases from compromised payments accounts, to the risk of
compromised payments infrastructure on the acceptance side whenever
sensitive payment details are either intercepted during the
transaction or stored data is breached and compromised.

“Once again, there are a number of measures
adopted by merchants, acquirers, processors and payment schemes to
minimise these risks, with the cost of risk management and
compliance increasing alongside the increase of the size and
complexity of the retailers’ operations.”

He adds: “Practices like address verification,
black-lists management and delayed order fulfilment are among the
measures implemented by merchants to control risks on their side,
but the implementation of the schemes’ second factor authentication
would be highly advisable especially in view of the liability shift
related to migration to EMV.

“Good business practice would also need to be
applied in this case, with proper due diligence on behalf of
acquirers performed at the point of merchant recruitment, the
request from merchants of guarantees of good standard business
management from their acceptance providers – for example, SAS70
audit of security of card processing.Compliance to scheme
requirements, such as PCI where applicable, is not an option.”