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January 31, 2010

Alternative ways to pay grab attention

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

By Verdict Staff

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 reports.


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 channels.

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.

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 stakeholders.

“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 innovation.”


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 spending

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 e-commerce

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 markets.

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.”

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