Third-Party Processing - Will Credit Give Way to Debit?
 Credit cards are the most common method of collecting payments online, but many alternatives have sought to give plastic a run for its money. Some debit-based ones are now catching up, and might even win.
The vast majority of online shoppers currently use credit cards to pay for products and services. It's an established, familiar system with a ubiquitously huge installed base that migrated to the online world pretty easily-naturally, even-and there's no doubt that plastic is king of the e-commerce hill - But not necessarily by choice. While porting the credit cards from bricks-and-mortar to the Web provided an almost effortless transition to e-commerce, they have also held it back because of customers' fears about privacy, security, and fraud.
Those fears have little basis in fact. Christopher Heun, writing in InformationWeek (LINK), says that, "First, it's rare that thieves snatch credit card numbers during online transactions. Chances are, the numbers came from paper, thanks to a dishonest waitress or a receipt fished out of a garbage can, or perhaps they were randomly generated by a cybercrook's software program. And yes, fraud is far more likely to occur online than in a store, but it's still rare--1.14% of all transactions."
Credit Card Fraud
Nevertheless, there's no doubt that credit card fraud has raised problems for adult webmasters--because they are the ones who usually have to pay for it, both in the direct loss and also in the form of bank charge-back and other fees.
In the article mentioned above, Heun also provides an overview of recent activity by banks and card companies in developing systems to reduce online fraud-notably Verified by Visa, Discover's Deskshop, and a MasterCard program. These schemes center on verifying card numbers before transactions are processed.
They do not seem to offer any silver bullet solution. Heun says, "Retailers and banks are taking a cautious approach to the programs, and cost is a big reason. To get Verified by Visa up and running, using outside consultants, merchants will spend $10,000 to $20,000 and take three weeks, plus any software-license fees a vendor would charge." The cost to banks depends on the number of cardholders it has, but would range up to $200,000, plus annual maintenance fees.
However, the additional security could still be cost-effective for webmasters. Especially-since the card companies and banks will also benefit-if they were given a break and fees were lowered a bit. But this is not in the cards: "In fact, as early as next year, companies that process credit-card transactions could raise their rates for retailers selling goods more likely to be stolen for resale, or for those that do a poor job of preventing fraud and have a high charge-back rate," says Jeff King, director of risk-product management at security vendor CyberSource.
Alternative Payment Methods
There are lots of alternatives to credit cards for online transactions, including debit cards, digital cash, electronic checks, stored-value cards, e-wallets, smart cards, telephone billing, wire transfers, and even offline payment by check or cash, cashier's check, or money order. A good collection of links and pointers to existing payment schemes that were designed for, or are in use on, the Internet is available at "Payment Mechanisms Designed for the Internet" (LINK)
A rather unscientific sampling of adult sites shows that credit cards are the only form of payment accepted by virtually all types of adult sites, with alternatives used to a lesser degree and in characteristic ways. Sex toy and lingerie shops, as well as the movie places, for example, definitely prefer credit cards but cash, check, or wire transfers are common options. For the biggest tickets (such as a $6K Real Doll) merchants get a bit more careful, and terms may be check or money order only (although Abco will also accept credit cards for their $1,300+ Sybian and Venus machines).
Membership sites tend to accept credit card, online check, or sometimes phone billing. Check or money order through the mail is also available fairly frequently. AVS sites basically prefer credit card or online checks, although Validate does take a Mastercard check/ATM card. Webcams mainly ask for credit cards but some do online checks or phone billing, and a few accept PayPal (AmandaCAM LINK and
Watching Whitney LINK are examples). But online casinos and sportsbooks usually provide wide flexibility in banking-they'll take almost anything. While credit cards are the front-runners, online checks, wire transfers, PayPal, and various other instruments are very common options.
It's clear that the use of particular payment schemes, by different types of adult sites, is affected by the type of product or service offered, by tradition and business culture, as well as the value and frequency of the transactions. But the credit cards still seem to win. Of all the candidates to seize plastic's crown, I think that two debit rather than credit solutions--PayPal and ATM cards-currently show a lot of promise.
PayPal and Friends
Very popular among eBay users, PayPal has 13 million users and processes almost 200,000 transactions per day. PayPal validates members' credit card and/or bank information, along with their e-mail address. Transactions are conducted by e-mail (including wireless devices). To send money, users go to the Paypal site, enter the required information, and the amount to be sent. It's received in the payee's account instantly, and billed to the users account (tied electronically to their credit card, debit card, or checking account). The payee can ship immediately, and never sees the user's credit card or bank account number.
A number of adult sites already accept PayPal payments. However, it appears to have got off on the wrong foot with the adult indusrty. Adam Eisner recounts the story in "Adult Web Hosting Guru Takes PayPal to Court" (Web Host Industry Review 3/2002 LINK).
Lew Payne Publishing (LPPI) first approached PayPal in November 2000 with an idea for a recurring billing solution. Payne is well known in the industry for building and hosting high-traffic adult sites, such as his Persian Kitty . He says "After signing a Mutual Non-Disclosure Agreement, we provided PayPal with LPPI's proprietary software specifications for a flexible recurring billing system and associated API. In exchange, LPPI was to receive exclusive distributorship into the adult marketplace, and a share of revenues generated." Good deal.
Over the course of 2001, Payne says LPPI met with PayPal and provided them with written technical specifications that detailed how to build a recurring billing system under the protection of a Non-Disclosure Agreement. However, "PayPal then put it into operation, introducing it to merchants through its site without permission from LPPI, in violation of its NDA and applicable copyright law... PayPal then proceeded to do the same with LPPI's password management system." As a result, Payne filed a lawsuit last Fall.
Nevertheless, according to the Washington Post, after a problematic 2000, during 2001 PayPal's revenue increased to $64.4 million and, according to some analysts, the company is well on the path to profitability. PayPal (NASDAQ:PYPL) was trading at $19 at the end of March.
The LPPI fiasco notwithstanding, PayPal has a reasonable shot at gaining some currency on the adult Web. It became popular quickly and now enjoys a broad base of generally happy users (even though some of them felt moved to complain with www.paypalwarning.com). It worked in the eBay and person-to-person case and should be a promising option here. Already, most online casinos and sportsbooks offer it, and more often than competing debit systems such as FirePay (LINK) and PrePaidATM (LINK), which are in use by the virtual gambling dens.
ATM Cards
Which brings us to plain old ATM cards. If they worked just as easily on the Web as they do in an Interac machine that would be an alternative payment method to look out for. And it looks like that dream is rapidly approaching reality.
NACHA is the leading organization in developing electronic solutions to improve the payments system, representing over 12,000 financial institutions and 600 organizations. Last year, a NACHA pilot study (LINK) successfully demonstrated that consumer ATM or debit cards can be used on the Internet with transaction authentication and security that are comparable to point-of-sale purchases. The pilot-which worked perfectly and withstood attempts to compromise security and commit fraud--processed 598 transactions in which digital signatures substituted for personal identification numbers. The digital signatures make these transactions secure because they're transmitted through an EFT network and validated by the issuing bank. Because the process is comparable to PIN-based debits at point-of-sale, Internet merchants are provided with "card present" equivalent transactions.
"The issue of security has to be satisfied for consumers. According to a survey recently commissioned by STAR, that's one reason that two-thirds of online sales are cancelled before consumers reach the checkout," says Ronald Congemi, president of the STAR network. "And, even those who do shop online limit their purchases because of security concerns. That is the reason we are very enthusiastic about our support of the successful digital signature technology. The flexibility and security of this authentication method make it a highly attractive solution for financial institutions, retailers, and consumers alike."
What's Ahead?
Credit cards gained their current preferred status on the Web as a transfer from the bricks-and-mortar world-even with the drawbacks, there's a vast installed base of users, plastic is traditionally familiar to both customers and merchants, the instrument has a number of advantages and pretty good security. All these transfer very nicely to the Web. However, in the bricks-and-mortar world, lots of people now like their debit cards even better than their credit cards. And the debit approach has some significant advantages for both customer and merchant, including more security and lower cost. If any alternative payment method is going to give credit cards a run for the money, it will likely be a debit system such as PayPal or an ATM card issued by a financial institution. If you had to bet on it, you know that the sportsbook probably takes PayPal already, which should be a clue.
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