A Look at How Online Bill Payment Changes the eCommerce Landscape

8/14/2019 A Look at How Online Bill Payment Changes the eCommerce Landscape

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A LOOK AT HOW ONLINE BILL PAYMENTCHANGES THE eCOMMERCE LANDSCAPE

A MODASolutions White Paper

MODASolutions2207 Concord Pike, #510Wilmington, DE 19803-2908866-365-6632www.MODASolutions.com www.eBillme.com

September 2007
http://www.modasolutions.com/http://www.ebillme.com/http://www.ebillme.com/http://www.modasolutions.com/


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Table of Contents

1. Executive Summary ..................................................................... 3 84 million: The number of consumers available to drive new sales................................... 3

More payment options equal more sales ........................................................................... 3 Online banking unlocks access to new consumer groups ................................................. 3

2. Consumer Behavior and Online Payments................................ 4 Security and trust................................................................................................................ 4 Control and cash management .......................................................................................... 4 Credit limitations ................................................................................................................. 5 Lack of credit cards ............................................................................................................ 5

3. The Merchant Perspective........................................................... 6 Reducing costs ................................................................................................................... 6 The high cost of fraud......................................................................................................... 6 Increased sales .................................................................................................................. 7 Additional factors ................................................................................................................ 7

4. The Power of Online Banking...................................................... 8 Impressive growth and high potential ................................................................................. 8 Profile of online banking customers ................................................................................... 8 Small businesses................................................................................................................ 9 Online bill payment: top-selling application ........................................................................ 9

5. Online Banking Increases Online Sales................................... 10 Value to consumers.......................................................................................................... 10 Value to merchants........................................................................................................... 10 Value to banks.................................................................................................................. 10

6. About eBillme.......................................................................... 11 Payment process.............................................................................................................. 11 eBillme processing platform ............................................................................................. 12

7. Conclusion.................................................................................. 13

About MODASolutions................................................................... 14


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1. Executive SummaryThis white paper explores the buying behavior of online consumers and the impact of thisbehavior on merchant profitability. This document also explains how online banking can helpmerchants decrease transaction processing costs, capture new customers, and managetransaction risk more effectively.

84 million: The number of consumers available to drive new sales Estimates show 84 m illion customers already bank online . However, 80 million consumerswho use the Internet 1 do not buy online. The primary reasons include a perceived lack ofsecurity, an unwillingness to disclose personal information, and the absence of acceptablepayment methods. Regardless of merchants best efforts to close sales online, many consumersabandon their shopping carts at the payment page. At first glance, the abundance of abandonedonline shopping carts represents millions of dollars in lost sales; in reality, it ushers in a majorbusiness opportunity for merchants who are ready and willing to provide alternative paymentoptions that appeal to millions of potential buyers.

More payment options equal more sales When consumers buy products face-to-face, they have a choice of multiple payment optionsincluding credit cards, debit cards, cash, and checks. These options are a result of the need tomeet customers diverse requirements. However, in the online world the same options do notexist for consumers. Credit cards dominate online payments and are generally the only paymentmethod accepted by most merchants. In order to experience continued sales growth, merchantsneed to expand their payment options to address varied consumer preferences. Effective anduser-friendly alternative payment options are a much-needed addition to the world of onlineshopping.

The addition of new payment options results in fewer dropouts at checkout 2 and more completedsales. The right payment options generate incremental sales without increasing fraud, charge-

backs, or overhead costs.Several alternative payment options address these issues . One of the newest options, developedin response to the growing use of online banking, enables consumers to pay for Internetpurchases directly and securely from their online banking accounts. Today, MODASolutions is theonly company that offers this solution. Using eBillme, shoppers have the option of paying forweb-based purchases through the convenience, comfort and trust of their own banks.

Online banking unlocks access to new consumer groups Banks have spent billions of dollars building secure and reliable online banking systems thatinclude services such as bill payment. 84 million customers already bank onlinea numberforecasted to reach 110 million by 2010. Expanding this existing infrastructure to support onlinepurchases represents a major opportunity for merchants, as online banking becomes one of themost significant payment alternatives to credit cards.

1 Gartner and Jupiter Research, Online Bill Viewing and Payment Forecast, 2003-20082 CyberSource. The Insiders Guide to eCommerce Payment, 2004

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2. Consumer Behavior and Online PaymentsIndustry sources cite four main reasons why consumers are reluctant to purchases goods andservices online. These include:

Concerns about security and trust; Preference for cash-like debit payment options; Limited credit; and Lack of credit cardsparticularly in the ca se of youth and young adults.

Security and trust The need to provide sensitive information to a website inorder to conduct payment creates a significant barrier topurchasing.

According to Forrester Research , almost 30% ofAmerican consumers who browse online do notpurchase online.

Forrester Research reveals that the main obstacle toonline buying is safety concerns related to enteringcredit card information on the web; 62% of respondentscited this as a deterrent.

Consumers are reluctant to use payment options thatrequire them to provide personal information such asbank account information, social security numbers, orcredit card numbers.

Of the consumers who currently shop online, 50% are concerned about the security of theirpersonal information.

Control and cash management To avoid the debt trap, many consumers are looking for cash-likepayments that allow them to maintain control of their finances andpay merchants immediately and directly from available funds. This isdriving the use of debit options both on and offline.

Most consumers make face-to-face purchases using available fundssuch as cash, checks and debit (US Federal Reserve 3). Credit cardsonly account for 23% of purchases in the US, but credit cardsdominate online purchases. However, this is expected to change asalternative payment options become available to consumers.

3 The 2004 Federal Reserve Payments Study.

4
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Credit limitations Among those Americans with credit cards, close to 45% are within 5% of their credit limit 4 . AnAcxiom study 5 reveals that three main groups comprise most of this segment.

1. Parents w ith low incomes: Tend to be between 30 and 40 years old and living in urbanareas. Like many lower income groups, this segment purchases many items from higher-endstores and typically spends more than income dictates.

2. Youth and young adults : Single consumers with no children and very limited income.Included in this group are college students with little credit and persons with very activelifestyles. For example, shopping patterns include heavy purchases of consumer electronics,clothing and sporting goods.

3. Starter families : Young married couples with children. Consumers in this group likely havewhite-collar jobs and allocate a good portion of spending on their children. This segment,which also focuses on building a financial foundation for their families, is often alreadyoverwhelmed with credit card debt.

Lack of credit cards At least 50 million adults in the US 6 do not possess credit cards. For these potential online buyersnon-credit card payment options fulfill a need that has not previously been addressed.

Youth and young adults between theages of 12 to 21 are acti ve consumersand the bulk of this segment does nothold credit cards. Offline, theseconsumers primarily use cash andchecks; online, they have limitedoptions.

This segment has disposable incomeand can influen ce their parentspurchase decisions. The Youth Pulseproject shows that this age groupspends $22 billion online per year 7 .Another $20 billion is spent offline afterconsumers conduct web research.

The absence of credit cards and othersuitable payment options is problematicfor young people who want to shoponline. A typical workaround is to borrowa parents credit card for purchases.Understandably, not all parents are comfortable with this type of request. In general, youth arenot as aware of the risks and limitations of credit cards which can result in purchases beingdeclined or returned by parents.

Many young consumers do not have credit cards, but do have bank accounts. Merchants thatprovide online payment options other than credit cards can tap into a significant sales opportunity.

4 Pelorus Group Report Stored Value: 21st Century Currency 06/035 Acxiom Interactive - http://www.acxiom.com6 Source: CardWeb.com7 http://info.virtuinc.com/newsletter/1003_whats_hot.html

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Even more alarming than the actually fraud is the bleak outlook expressed by merchants.Merchants believe that credit card payment fraud will continue and become an increasinglyserious problem in the future. Nearly half of the merchants surveyed by CyberSource arespending 0.5% of their online revenue managing payment fraud. Order screening is becomingtighter as merchants struggle to find ways to keep fraudsters away.

Although direct fraud loss represents 1% of orders, costs associated with risk managementprocedures, tighter screening, and manual order review are significant. Tighter detection toolslead to a rejection of up to 4% of orders, some of which are valid. Manual reviews of transactions,established to prevent fraud, are both labor and cost intensive. Up to 23% of orders are manuallyreviewedan overwhelming task for large-volume sites.

Merchants are anxious to find alternative payment options that provide access to moreconsumers while reducing total costs, particularly those costs related to fraud, risk managementand exception processing.

Increased sales Online sales continue to grow and merchants must find new and innovative ways to expand theirconsumer base. Consumers who are unwilling or unable to use a credit card give merchants new

opportunities to increase incremental sales.

A 2004 study commissioned by CyberSource 10 shows theimpact of additional payment options on merchants. Thestudy, which polled 147 leading online retailers, found thatthose who have multiple payment options convert morebrowsers into buyers.

Another factor in increasing sales is generating repeatorders and instilling customer l oyalty. Repeat orders stemfrom customer satisfaction with the purchasing experience.This experience not only relates to the product andcompetitive pricing, but also the degree to which the

consumers expectations are met. Alternative paymentoptions help to meet or exceed customer expectations.

Additional factors Limited number of new users: To be deemed successful, alternative payment options mustultimately yield a large incremental user base. Many alternative payment systems ultimately failbecause they rely heavily on credit cards and do not bring new buyers to merchants.

Refunds: Many payment options require the merchant to settle returns offlinean expensive andlabor-intensive process.

Building consumer relationships: Merchants want to establish a consumer relationship thatgenerates loyalty and repeat business. Some alternative payment options limit the ability of themerchant to develop these relationships.

10 CyberSource. The Insiders Guide to eCommerce Payment. 2004

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4. The Power of Online BankingConsumers need secure and trusted solutions that align with their existing behavior and provide achoice of payment options. Merchants seek access to a larger consumer segment to increasesales, and they desire lower transaction costs and reduced fraud exposure. Online banking, a

large and rapidly growing application, addresses both consumer and merchant needs.

Impressive growth and high potential Since the early 1990s, banks have been developing arobust online banking system that currently attracts 84million Americans. Virtually every bank, credit unionand financial institution offers online bankingincluding services that enable consumers to checkaccount balances, to pay bills, and to transfer funds.As shown in the graph, online banking has seendouble-digit adoption during the past five years.Today, banks continue to expand and optimize onlinebanking services to drive greater adoption.

Profile of online banking customers Customers view online banking as an important tool that facilitates easier management andcontrol of finances. Customers trust that online banking provides significant protection fromunauthorized use of their personal information. In addition to control and security, consumeradoption is also influenced by:

Ease of use: Customers appreciate that the service is easy to use and intuitive. They donot need to establish another account elsewhere to make a payment.

Anytime availability : Online bill payment is available 24 hours a day. Anywhere access : Wherever they happen to be (at work, at home, or on the road)

consumers have access to their checking accounts to pay bills and check balances. They

also have access to multiple media for payments such as websites, interactive voiceresponse (IVR) or payments at a physical branch.

Online banking customers are authenticated bytheir banking branch prior to setup for electronicpayments. In addition to this rigorousauthentication process, banks spend billions ofdollars making and keeping their sites secure.

Online banking customers represent peoplefrom all lifestyles, backgrounds, age groups andincome levels. The chart shows the distributionof online banking users among differentconsumer groups.

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Small businesses An often overlooked segment that accounts for a significant portion of online spending andbanking is that of small business. Small businesses comprise ov er 95% of businesses in theUnited States and account for about one-fifth of total revenues. 11 79% of small businessespurchase online and 64% bank online. Those small businesses that did not shop online citedconcerns with convenience and security as the main deterrents.

Small businesses are looking for online purchasing and payment solutions that offer paymentintegration, and methods that allow decision makers to track the end-to-end process. Solutionsthat address security concerns are a must.

Online bill payment: top-selling application The use of online bill payment by banking customers is accelerating. Based on Jupiter researchdata, MODASolutions estimates that 48 million North Americans now pay bills onlinea numberforecasted to reach 92 million by 2009.

According to Jupiter, online bill payment will

continue to generate d ouble-digit growth for banksfor the following reasons 12 :

Heavy promotion by the major banks Incentives offered to consumers Proliferation of broadband access Security and convenience

11 Estimate assumes SBs are defined as any business earning less than $10 million in annual revenue. 12 ComScore - http://www.comscore.com/press/release.asp?press=467

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5. Online Banking Increases Online SalesTraditionally, the online bill payment infrastructure has been used for household bills, such asphone, electricity, and utilities. Funds are transferred from the consumers bank account to thebillers account using the trusted infrastructure of financial institutions.

What would happen if the advantages of this infrastructure were extended to the merchant? Themerchant would effectively become a biller that invoices consumers for products and services.The impact to the payment landscape would be significantpresenting a win-win situation forevery party in the value chain.

Value to consumers Consumers get a simple, secure and a familiar way to pay. They pay from available funds withoutconcern for ID theft or the need to disclosure banking or personal information.

Value to merchants Lowers cost: The cost structure of online pill payment is lower than the cost of credit card fees,

especially when considering the reduction in fraud and associated costs.

Reduces charge-backs: Online bill payment is similar to cash or debit transactions. Thecustomer logs in to their online banking portal and pays their invoice. The fact that the funds arepushed eliminates surprise charge-backs. The ability for claim denial of a purchase is virtuallyeliminated. The merchant gains willing and authentic buyers.

Reduces fraud: Using online bill payment reduces the risk management burden.

Acc ess to more consumers: By offering online bill payment options, merchants can captureconsumers whose needs are not currently addressed by existing payment methods. 84 millionconsumers use the Internet but do not shop online because they will not or cannot provide acredit card.

Establishes direct relationships: Online bill payment establishes a direct, persistent, andrecurring relationship with the buyer.

Eliminates manual processing: Online bill payment reduces checks, money orders and callcenter talk time.

Value to banks Extending online bill payment to the merchants website drives consumers to the bill paymentwebsites of specific financial institutions, where banks can up-sell additional products andservices such as loans, mortgages, etc. Financial institutions see this as an opportunity to supporttheir strategic and ongoing push to promote online bill payment. Banks benefit from increased billpayers, billers and number of transactions.

Using the existing online bill payment tools for merchant payments is complementary to thestrategic direction of financial institutions in their ongoing efforts to promote online bill payment.Furthermore, this approach represents the industrys first payment method that bridgesconsumers, merchants and banks simultaneously.

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6. About eBillmeLeveraging the impressive growth of online banking and online bill payment and its infrastructureis a critical step in gaining consumer confidence in online shopping. The ability to take advantageof the online bill payment infrastructure stems from the reliability, robustness, scalability and,

most importantly, the critical mass of consumers who use it.

eBillme bridges consumers, merchants and online banking. It enables consumers to shop on theweb or through call centers, and pay conveniently through their trusted banking portals. Toconsumers, the functionality is familiar, since there is no need to worry about transfer of fundsand no need to change or apply for a new account.

Payment process eBillme takes a simple two-step approach:

the consumer places an order with eBillme they use their own online banking website to pay for the order.

1. ShopAt the merchants checkout or call center, eBillme appears along with other payment options. Theconsumer selects eBillme as the payment option.

2. Pay for order through online bankingUpon selecting eBillme as the payment method, the consumer is prompted with an orderconfirmation page, which provides details on how to pay for the order through online banking. Inaddition, order confirmation is sent via email, as an eBill. The order confirmation instructs the

consumer to log in to their online banking system, and add eBillme to their payee list (only on firsttime eBillme orders). The consumer pays the eBill in the same effortless manner they pay otherbills.

Merchant notification of paymentThe merchant can fulfill the order at the time of purchase (at checkout) or when payment isconfirmed. Typically, payment settlement is transferred from eBillme to the merchants bankaccount in 1 to 3 business days. eBillme will deposit all collected funds into the merchants bankaccount; the payment will appear as an ACH deposit from eBillme payment, clearing throughFifth Third Bank.

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eBillme leverages the existing bill payment infrastructure, a key component of which isMasterCard Internationals Remote Payment and Presentation Service (RPPS). RPPS provides aremittance and payment-processing network for approximately 95 percent of the industrys billand consumer service providers. As a third-party payment processor, MODASolutions utilizes theRPPS network to handle the transaction processing. RPPS enables merchants to receivepayments from the bank network.

eBillme processing platform eBillmes processing platform includes the following modules:

eBillme Gateway: Mana ges all system functionality and accepts information from bothmerchants and banking institutions. The gateway stores order-processing information and trackstransactions for outstanding payment and bill management. Payment processing handles allpayment receipts, including completed payments, errors, exceptions, refunds and recurringpayments.

Notification Manager: A configurable option that automatically generates and issues eBills,eReceipts and eReturns directly to consumers on behalf the merchant. Merchants can choose tobe copied on the notification. The emails merchants send provide a marketing opportunity and

can embed any number of up-sell and cross-sell messages; for example, Have you seen ourweekly specials?

Quick Start API: MODASolutions front-end APIs integrate eBillme with the merchants existingshopping cart or order-processing system. The merchants application passes information usingan HTML POST. The interface accepts the details and automatically generates eBills (or returnsprocessing results to the merchant application to generate the eBill). Payments are processedseparately upon receipt from the bank. All APIs are platform-independent and support thefollowing scripts: java, php, .net, perl, python, and asps.

Reconciliation API: An interface that enables application-to-application interaction over theInternet, regardless of platform, language, or data formats. The backend API enables transfer ofelectronic transactions between merchant systems and MODASolutions eBillme Gateway.

Merchants use the backend API to transfer payment information to their order-entry, accountingand inventory systems.

Merchant Administration: Provides secure password-protected access to order transaction andpayment reports. Information can be searched and sorted based on a date range, name, andreference number, and then captured for use in other merchant applications.

Refund Manager : Enables eBillme to issue refunds to customers without having access to theirDDA accounts. eBillme issues partial or full refunds electronically, direct to the consumer.

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7. ConclusionOnline merchants have a significant opportunity to tap into an online consumer segment that:

values security, privacy, control and cash management when buying online; and has limited access to credit cards.

Existing payment options have not addressed the needs of this segment. Online banking bringsthe merchant 84 million consumers that value security and who trust their banks when makingpayments. This segment is reachable by enabling an innovative payment option at checkoutcalled eBillme, from MODASolutions. Using eBillme, consumers can safely shop online,enjoying the same payment control that they do when making offline transactions.

eBillme allows merchants to leverage the existing b anking infrastructure by enabling consumersto pay for Internet purchases at any bank, credit union, or bill pay portal that supports onlinebanking. Through online banking, merchants can harness an existing, established consumerbehavior (that of paying bills online) to pay for Internet purchaseswith no risk of fraud orcharge-backs. This fresh approach can have significant, positive impact on a merchants bottom

line.

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About MODASolutions MODASolutions is the leading provider of payment solutions that extend online banking to themerchants checkout. The company is dedicated to increasing merchant sales by leveraging thepower of online banking, while reducing the security risks of shopping online for both consumers

and retailers. The companys flagship product, eBillme, does not require consumers to releaseany financial information when placing orders. Consumers can shop online, by catalog, or throughcall centers, and pay for purchases at their bank, credit union, or bill pay portal, with the securityand convenience of online banking. eBillme gives retailers access to over 84 million Americanusers of online banking.

MODASolutions Corporate Office260 Hearst Way, Suite 510Ottawa ON Canada K2L 3H1

MODASolutions US Office2207 Concord Pike Rd., Unit #510Wilmington, DE 19803-2908

Phone : 613-270-8755Toll Free: 1-866-365-6632Fax: 613-822-8107

Email : [email protected]

Website : www.MODASolutions.com www.eBillme.com

Copyright 2007 MODASolutions. All rights reserved. Information in this document is subject to change without notice.

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A Look at How Online Bill Payment Changes the eCommerce Landscape