Introduction

E-Commerce has been a major thrust behind the proliferation of the Internet, particularly the WWW. This has led to the integration of traditional
payment methods into Internet-related technologies, particularly to be used over the WWW.

In this article, we discuss the significance of credit card-based electronic payment system, how they can benefit businesses and consumers, what are
the limitations of their use, and means of establishing them.

By E-Commerce we will mean E-Commerce on the WWW, and by dollars ($s) in any statistical figures we will mean US$, unless stated otherwise.

A Classification Of Credit Cards-Based Payment

We can classify credit card payment on online networks into following categories:

Payment using plain credit card information. The easiest method of payment is the exchange of (unencrypted) credit cards over a public network such as telephone lines or the Internet. The low level of security inherent in the design of the Internet makes this method problematic. Authentication is also a problem as the merchant is usually responsible to ensure that the person using the credit card is its owner.

Payment using encrypted credit card information. Encrypting credit card information is a solution to the problems inherent in 1. However, one concern here is the cost of the transaction itself, which could prohibit low-value payments (micropayments).

Payment using third-party verification. One solution to security and verification problems in the introduction of a third-party, such as First Virtual, which is a company that collects and approves payments from one client to another. After a certain period of time for processing, one credit card transaction for the total accumulated amount is completed.

The Network Is The Market

The use of Internet is exploding, and recent surveys indicate that over 100 million people around the world will be using the Internet by the year
2000. Business on the Internet, in form of E-Commerce, is not immune to this growth. Online sales are expected to rise to over $6.5 billion by the
turn of the century as seen in the following statistics:

Why A Merchant Must Take Credit Cards

There are various benefits of accepting credit cards, both from the business's perpective and from the consumer's perspective, and we evaluate each of
these.

The Business Perspective

A "Cashless" Society

The use of credit cards has become so convenient and commonplace that a business which does not accept credit cards is the exception rather than the
rule. Following statistics reflect numbers of credit cards issued and the sales volume based on them in the USA and worldwide:

Sources: Visa Systems Panel Study, June 1996, Visa Quarterly Statistics, June
1996, Visa Business Research and Reporting January 1996

The number of credit cards issued, for example, in the USA, is rapidly approaching 500 million, and 50% of all purchases over $50 are done via a credit
card. Although only 34% of Internet users have currently purchased products/services over the Internet, 12% say they would do so in the future and a
resounding 80% say that their preferred payment method in buying products/services over the Internet was the credit card.

Such a large group of people with the power of using a credit card simply cannot be ignored.

Improvement In Sales

In general, if you are selling to the public, you will have higher average sales and more customers if you accept credit cards than if you don't.
Statistics show that new credit card merchants almost immediately increase their sales 30% - 40%.

You may have any of the following type of businesses where (1) product or service includes what people want or need on short notice (2) items are sold
exclusively over the telephone, or on the Internet. Using credit cards is specifically important to these type of businesses and your sales will be
substantially higher if you accept them. For example, any mail order business can expect 85% - 90% of their total sales to be from customers using
credit cards alone.

There are products or services where people can sample offerings first or buy just a small amount. Businesses who offer credit cards receive more full
orders because people feel (1) it is more secure paying by credit cards so they feel they have less to lose, and (2) they don't think paying by credit
cards is the same as paying by cash or cheque, so they tend to spend more.

Impulse Sales : Turn Browsers Into Buyers

We all buy on impulse. Letting people use major credit cards is the easiest, fastest, and best way to do this. When you get prospects who have
contacted you after looking through your ad, you can convert them to a consumer by accepting credit cards. You also manage to get the impulse sale of
someone looking at an order form attached to your brochure.

Increased Profits

Profits are the bottom line for every business. Almost any type of business will benefit from taking credit cards, particularly selling a product or
service to small businesses or individuals. Your profits can increase an average of 30% - 80% according to accepted industry standards. Studies show
that companies which accept credit cards enjoy up to 40% more sales than those that do not accept credit cards. Higher sales mean higher profits. Since
you are spending the same amount of money to get these customers, accepting credit cards will increase your bottom line.

Reduced Expenses

There is a certain saving when you don't have to open the envelopes, endorse the cheques, and cover the bad ones. Your cost of accepting credit cards
will actually pay for itself especially when the costs are offset in no time with increased revenue and profit. You'll also be saving a lot by reducing
your paperwork and order-processing time. By accepting credit cards, you can also substantially reduce your accounts receivable costs. This is why many
online services promote paying by credit card; some of them even charge an extra fee if they have to send you a statement.

Security

Cheque Problems

If you are contacted by a prospect, you have a higher chance of getting the sale by asking for his/her credit card number as opposed to a cheque. Many
prospects become suspects because they never actually send in the cheque. When almost any credit card is processed and approved, you can be completely
assured that you will be paid for the sale because if the user doesn't pay the bill, the credit card company takes all the risk.

Pre-Approvals

If you put an order into production or mailed out your product cash-on-delivery (COD), there is always a possibility that you may never receive the
funds. By accepting credit cards, you are assured immediately that you will receive the funds from your customer.

Efficiency

Credit cards are faster than writing cheques and allow items to be immediately shipped when used over the Internet or through mail order. This
is because when the merchant gets an approval, the money is in route to their account; when a cheque is cashed, it takes a few days to a couple of
weeks before the merchant knows that they will receive their money. When they order a product, many people want it to be delivered as soon as possible.
Such customers won't buy from you if it takes you a couple of weeks (as you have to wait for their cheques to clear) to mail out their purchase.

Working Capital

Most credit card processors will now connect you directly to their bank's computer with a processing terminal. This allows them to authorize your
transactions in seconds, and then deposit the funds in your bank account where you have access to it in a couple of days. This means you have sole use
of your customer's money that has been deposited into your bank account to purchase a product. Also, many credit card merchants cannot afford tying up
a lot of cash in inventory since they use the customer's money to purchase the product from their supplier before shipping it out to the customer.

Competition

With the powerful search capabilities of the Internet, it is easy to do comparison shopping in a matter of minutes. If you are not taking credit cards,
people can find out your competitor who is selling the same or a similar product for a similar price and does accept credit cards. If a prospect has
any interest in paying with a credit card, you are losing business to your competitors that do accept credit cards.

The Consumer Perspective

Convenience

Remote purchase using a cheque can be a cumbersome process - write a cheque, fill out an envelope, and mail it in - which can discourage people from
buying your product. If you use an online order form to get your business, it is easier for the customer to use a credit card; that is difficult to do
with a cheque. (There are electronic cheques (e-cheques) but that is a different matter.) Also, many customers want to use a credit card to get all the
attractions their bank may be offering, like free air miles, rebates towards gifts, or other bonuses.

No Benefit Of Doubt

Many customers may not ask if you do accept credit cards because they automatically assume that you do not, unless you display the credit card logos.
If they are among the 30% of customers who only purchase using their credit cards, you have automatically lost their sale.

Credibility

Your prospects will think of you as a creditable and a well established business, when they see you accept major credit cards in your advertisements.
Everyone assumes that only established companies can accept credit cards. The credit card companies do such an excellent job of promoting the use of
credit cards and you benefit by accepting them.

By displaying the Visa and MasterCard logos in your ads or on your WWW pages, you can gain instant credibility with your customers. People
know that if they don't get what they were promised/expected, they can always request a refund on the purchase, or get their money back from their
bank. Your customers can buy from you if they know that they can trust you.

Security

Cheque/Cash Problems

Customers know that credit cards are much safer than cash. (There are methods of electronic cash (e-cash) but that is a different matter.) If
they use a credit card to make a purchase and there is a case of fraud or the product quality is not what they expected, they can dispute the charge
retroactively and have the credit card company act on their behalf. This makes them feel safe even buying from a company they are not absolutely sure
of. Many buyers are also hesitant of sending cheques to companies that are not local to them for a similar reason.

Security Deposits

A company which requires security deposits for rentals or to put an order into production can substantially increase its sales by accepting credit
cards because customers feel that using their credit cards is a safe way to make security deposits on items.

Limitations Of Credit Cards-Based Payment

Despite of numerous advantages of using credit cards mentioned above, there are certain limitations. One disadvantage to credit cards, from the
consumer's viewpoint, is that their transactions are not anonymous (for example, like cash). Credit card companies do use this to their
advantage by compiling data based on spending habits. Another limitation is the potential bottleneck due to the complexity of verification
phase in a credit card processing. Encryption and transaction speed need to be balanced to avoid long waits at the customer's end. There are also
questions of reliability of the infrastructure under component failures and system overload conditions. The providers of the facility are
aware of these problems and there are ongoing efforts to minimize them.

Getting A Merchant Account

In order to accept credit cards, you must apply for a merchant account. Historically, merchant account status was granted only to a bank's
preferred customers who had been in business longer than two years and had a storefront. Financial statements, copies of tax returns, and, in some
cases, a substantial credit reserve, were required. Due to growing credit card fraud, banks have become more selective, and many business owners have
been denied merchant account status regardless of the quality or term of their existing bank relationship.

Cost

Today, there are many companies that specialize in securing merchant accounts for those who wish to engage in e-commerce. For businesses with
anticipated volumes of less than $30,000 per month, financial statements and/or tax returns are rarely requested. Application fees range from
$75 - $250 and are refundable if the application is declined. Discount rates, or the fee the processing company charges you to process the ticket, vary
from 1.5% - 8%, depending upon the company. You must either buy their processing software, or you may lease/purchase a terminal and a printer.

The company will also charge you a processing fee per transaction, usually $0.20 - $0.30, and a monthly statement fee of around $10. After processing,
funds are normally available within 48 - 72 hours and can be "wired" to your local account or transmitted to you by your preferred method. You should
expect to pay a higher discount rate if your business is mail order, as these are considered high risk. If your personal credit is good, you should
have no problem obtaining a merchant account. If your credit is not so good, there are companies that will work with you at a higher discount rate.

Caveats

If you have an established merchant account for your business, you should be sure that your bank or processing company is notified and approves in a
written agreement of the advertising methods and the products you intend to market before you offer them on the Internet. You should also
beware of any person or company representative who approaches you to process their credit card sales through your merchant account for a set fee or
commission. This is commonly known as credit card laundering and in addition to violating your merchant agreement with the bank or credit card
company, you could be subject to criminal prosecution for fraud and civil liabilities.

Security

While it is possible to take and transmit credit card information on non-secure WWW pages or via e-mail, this is not very safe and most buyers are
hesitant to do this. The current versions of the popular WWW browsers in use today are able to identify access to a secure WWW server (such as one that
supports the Secure Socket Layer (SSL) protocol), switch to a special secure mode and notify the user that any information they transmit from that page
will be securely encrypted. Major credit card companies now accept that transmitting your credit card number from a secure page is safe and fully
support their use.

Conclusion

By setting up a WWW site for your business, you establish your presence on the Internet. By accepting credit cards, you will be a part of the growing
world of e-commerce. By getting a merchant account, you can get your share of the enormous business that is just waiting for your offer.

Acknowledgements

I would like to thank Arthur Resendes for his tremendous help in setting up the WWW site on
E-Commerce on the WWW at Concordia University, Canada. Statistical graphs presented here are
copyrights of respective organizations, and their use is hereby acknowledged.

References

Journal of Computer-Mediated Communications - This issue on e-commerce examines the commercial potential of the WWW, its impact on new and traditional market institutions, and the development of electronic payment systems.