Reading through the recently-published EC Green Paper on card, internet and mobile payments (here), the thing that struck me most was the absence of references to the reasons for payment and consequently the trust that a payment method generates between the customer and merchant. In the internet and mobile environment, where transactions are not face-to-face and there is often no authentication of either party, the payment method has become the guarantee that makes these transactions possible.
In e-Commerce, the customer takes a risk unless buying digital goods that the merchant will send the goods as ordered. Additionally, the merchant takes a risk that they will be paid for the goods that they are sending out – and that the person ordering is actually the owner of the payment credentials. One of the main reason for the success of credit cards as a payment method in e-Commerce is that due to the guarantees that they offer, they create a bond of trust between customer and merchant. This allows a merchants to ‘have’ the funds prior to sending goods, which can’t be repudiated if they have followed the accepted security protocols (typically 3D-Secure or equivalent) and so they are paid even if cardholder was defrauded. Equally, if the cardholder experiences problems they can repudiate the transaction and be covered under the guarantees of the card schemes. In this environment the bond of trust is facilitated by the payment method. But primarily, any fraud on the payment method shouldn’t leave the customer stranded – fraud is inevitable, but having an empty current account can cause considerable problems for the average consumer.
There are lots of other ways that this can be achieved, yet at the moment, cards are the only mainstream payment method to achieve this. Some of the deported credit transfer methods such as PayPal offer customer repudiation, but often seem to fail on the merchant front. There are a number of escrow systems in market, but their complexity can offer deter customers and merchants. And of course, there is cash-on-delivery (CoD), where a trusted third party transforms the remote transaction into a face-to-face, but this is incredibly difficult to manage in an international transaction.
So what would the ideal internet payment system look like? Firstly it needs to be simple for the customer to use – an easy set of credentials to relay to the merchant. It also needs to be highly secure – a tough balancing act with the first criteria! Finally it needs to ensure the guarantees to both parties to ensure that neither loses out in cases of fraud. The system needs to be one step away from the current account, so as to protect the cash of the customer and yet easy to replenish from multiple sources so as not to disenfranchise those without access to card or other banking services. So is this a holy grail or an attainable goal? Is escrow the right way to go? Or perhaps there is space in the market for SCT plus – where an intermediary offers the bi-directional guarantees or a purchase insurance to create the bond of trust? Whatever shape the evolution of internet payments takes, it will only succeed if it considers the environment for e-Commerce transactions and creates that bond of trust needed.