Networked businesses with a focus on the United States take in money in at least 13 distinct ways that you need to know:
- Cash and checks
- Credit card
- Bank transfer
- Western Union
- Digital wallets
- Movenbank "cardless bank"
Different businesses need different methods; every one of these options has its own advantages. The mix of benefits and drawbacks is changing rapidly, though.
To understand properly the alternatives and comparisons, web developers and project managers need to start with three basic facts.
The first fundamental fact is that payment systems are in the middle of upheaval. Fifteen years ago, the United States still had blue postal service mailboxes on every street corner and pay telephones at every gas station; now, they're effectively gone. Children don't remember a time before e-mail and cellular handsets. Five years from now, billions of dollars in routine daily transactions are almost certain to be conducted through a system that is at best an experiment today. Make the best IT systems you can for this year, but don't be surprised if you have to re-work them again very soon.
The exact nature of that re-work is far harder to anticipate. The second fundamental fact about payment systems is that explaining them in isolated, comparative terms is impossible. Think back to the relatively simple times of, "Cash, check, or charge?" For the purpose of a point-of-sale (POS) transaction, these three payment methods are rough substitutes; many physical businesses accept all three on equal terms, within fairly broad limits. The consumer settles accounts with certain restrictions; it's expensive to convert from credit card to either cash or checking account, lags to "clear" a payment vary depending on several factors, and so on. Credit cards essentially require of both consumer and merchant an underlying checking account. Subordinate products, including pre-paid debit cards. are in turn built on and circumvent these restrictions.
This is not the kind of technology choice we practice in IT, where we draw a chart comparing, say, DB2, Oracle, and SQL Server, or Android vs. iPhone vs. Blackberry, choose the best one, and leave the losers behind. If you offer Isis or Dwolla to your end-users, you still need to understand the basics about merchant accounts, checks, and cash, because Isis and Dwolla are built on and assume more "primitive" payment systems underlying them—sometimes in different ways for the buyer and seller. Eventually, clear winners will emerge, and it will become far simpler to adopt "best practices" for implementation of dominant payment systems. During this transition period, though, there'll be a lot to learn about what it takes to make payment as free of pain for your customers as possible.
Finally, the third fundamental fact about payment systems is that they all have costs and insecurities. You need to educate yourself about their "fault modes." If a first goal of any e-commerce implementation is to make normal payment painless for customers, the second one is to have good control over what happens when things go wrong. Credit cards have the reputation for high transaction costs; much of this out-of-pocket cost is tied up in the value that credit cards provide well-established, predictable processes for handling fraud, error, theft, and other loss.
These fundamentals provide the indispensable context to appreciate the specific characteristics of each payment system. Starting with...
Cash and checks
Cash and checks remain largely confined to physical transactions, and therefore are in decline. Cash, in particular, is at risk for elimination from modern economies.
From the perspective of individual retailers, moreover, cash and checks are confined to POS registers, or their equivalents in mail-order fulfillment. Cash and checks in the US are involved in only relatively primitive services or workflows, including "check verification" and "check guarantee." Chex Systems, for example, is a "heavy" service for detection of bogus checks, while AccuBanker sells products for detection of counterfeit currency.
There's no prospect that either cash or checks will tie in to real-time authorization or authentication; therefore cash and checks are significant for e-commerce only to the extent that they underlie more thoroughly digitized systems like the ones below.
Credit cards powered e-commerce's launch. Years of experience in catalogue sales, including over-the-telephone transactions, prepared credit cards to be the incumbent method-of-choice when the Web took off as a commercial ecosystem in the late 1990s.
Credit cards remain the single dominant payment method for e-commerce in 2012. Many of the other systems described here interact with or even rely on credit cards at some point in their workflow. Payment by check or Dwolla, for instance, is likely to involve a credit card at some stage in the processing. For this outline, the main focus is on what a small- to medium-business needs to know to incorporate an electronic shopping cart or e-commerce checkout in its Web site.
The proper name for the credit-card system should probably be "merchant account," that is, a business bank account authorized to receive payments by credit cards, debit cards, and potentially such specialty payment cards as gift cards.
Programming interfaces for merchant accounts are well understood; Magento is an example of an e-commerce software product that can be retrofitted into existing PHP-based Web sites relatively smoothly.
Credit cards are more-or-less globally available and usable. They dwarf other methods: Total US credit-card transactions topped $2 trillion in 2012 for the first time, for instance.
Deep experience, unparalleled market coverage and economies of scale, excellent consumer acceptance, swift confirmation, and well-known programming best practices are formidable benefits credit cards boast. Why, then, would any organization ever choose a system other than a merchant account?
Because they are a poor fit. For all credit cards' advantages, they simply don't work out in many situations. Direct transaction costs of credit cards typically range between 2% and 6%. Merchant accounts are only effectively authorized for businesses of a certain scale, and acceptance of payment involves exposure to risks of fraud and delay. Small or ill-situated businesses can't easily bear these burdens. Private sellers—friends settling accounts after a meal, homeowners hosting garage sales, hobbyists beginning to sell their crafts—are locked out.
Any organization which accepts credit cards needs to learn PCI (payment card industry) standards.
In Europe, it's popular to transfer payments directly into and out of business and personal bank accounts. For a variety of reasons, these transfers (both ACH—Automated Clearing House—and wire transfers, along with a few rarer forms of electronic funds transfer, or EFT) will remain limited in the United States to direct deposit of payroll, automatic payment of utility bills, and a few other niches. There's no need for most U.S. e-commerce sites to accommodate bank transfers.
For a merchant, PayPal is more convenient than credit cards in several regards. There is essentially only a single "port" to manage. With PayPal, a vendor has fewer requirements to track whether a payment is by credit card vs. debit card, which credit card, maintain the security of customer information, and prevent fraud. PayPal takes on most of these chores.
PayPal is a wholly-owned subsidiary of eBay; its 2011 revenues were $4.4 billion. PayPal provides centralized documentation for its application programming interfaces (APIs) and working sample code; most major shopping carts and e-commerce platforms build in support for PayPal. PayPal provides a capable native application for iPhone that facilitates payment from those handsets. It also "gateways" to other modes through such facilities as its eChecks.
PayPal fees average about 3% of transactions, even for small vendors, and even for small amounts.
In principle, PayPal is global; for many, it's a good vehicle for payment across national boundaries. PayPal goes to considerable lengths to "localize" its face and practices for the convenience of users wherever they are. While PayPal has been firm and even ideologically combative about not being a "bank" in the United States, in Europe it operates explicitly as a specific bank chartered in Luxembourg. PayPal has a small but visible number of opponents upset by its cancellation policies, co-operation with government authorities, and fitful transparency.
Western Union has operated since 1855 as an electronic communications company. Since 1987 it has concentrated on consumer-oriented money transfer services. It operates around the world, and has close ties to telephone companies and especially mobile network operators (MNOs) in many different countries. The main significance of Western Union for e-commerce is that physically-mailed Western Union money orders represent a relatively low-cost payment method from some countries to the United States. Western Union experiments with real-time payment electronic payment, including Speedpay, have been small and of interest only in specialized cases.
Dwolla pays on-line and through mobile means. It operates exclusively in the United States. Dwolla's fees are very low: $0.25 or less in most circumstances, even for large payments.
Dwolla has options for clearing both through the Automated Clearing House (essentially the same system as used for checks on U.S. banks), and an instantaneous FiSync alternative. Dwolla aggressively promotes its low cost, in comparison to PayPal and credit cards, and its sophistication in digital and especially mobile transactions. While Dwolla doesn't consistently publicize its financials, it appears to have over 100,000 accounts as of this writing, with the number growing extremely rapidly. The company "hopes to have a couple million users” ... in the next few years. Monthly processing currently surpasses $50 million.
Dwolla has convenient programming interfaces; simple examples in Python, for instance, demonstrate how straightforward it is to access a user's balance, transactions, account details, and so on. Dwolla has a one-click OAuth-based service.
Dwolla also offers Proxi for face-to-face transactions; Proxi does not depend on near-field communications (NFC), and thus is available for far more encounters at a time when NFC has only begun to enter the market. While NFC is exploding, it's very young; by 2014 one in five consumers worldwide is likely to have access.
The elephant in the payment-systems waiting room is one everyone can see in outline. Very soon, the cellular handsets consumers carry will also be "digital wallets" that swiftly, conveniently, yet securely give access to all sorts of accounts, including financial ones. Walk up to a vending machine, or an automobile show-lot, or many outlets in-between, wave your mobile near the appropriate reader, perhaps key in a special code or provide a thumbprint, and you can within seconds pay for anything from a soft drink to a new car. Digital wallets inevitably also will have capabilities for ticketing, couponing, and other promotions.
As compelling as that sketch is, though, the details, aren't yet so clear. Google, Starbucks, and a host of other companies have begun to offer particular forms of digital wallets, with rather complex arrays of advantages, disadvantages, and restrictions. At the same time, major retailers including Wal-mart and Target are rumored to have counterattacks in the works: their own digital wallets. No one has certain knowledge about who'll win this struggle. The important systemic point to remember is that most of the players aren't in this for the transaction fees; those are likely to be "loss leaders" for the foreseeable future. The real target in the digital wallet war is access to all the information and eyeballs the winner gains.
From an implementation standpoint, each of the competing digital wallets currently has a unique merchant-side interface. Integration of Google Wallet, for example, is straightforward but not trivial. While an alert programming team can manage it quickly, testing remains essential.
Geode is a clever "appcessory" for iPhones that consolidates and digitizes credit cards, affinity cards, and so on. The premise is that Geode can be used with any existing merchant account system—retailers just see it as another credit card—while for the consumer it usefully unifies existing accounts to make shopping more convenient.
AT&T, T-Mobile, and Verizon jointly own the Isis Mobile Wallet project. As of this writing, Isis is available only in a few U.S. cities.
Square is a payment system that allows cellular handset owners to receive credit card payment through their mobiles. It's ideal for person-to-person transfers of small or medium amounts. Within the last year, Square's Register POS systems have begun to compete with traditional credit card terminals and registers.
Square is very popular in some coastal cities, and has extremely well-connected backing. Its valuation exceeds a billion dollars, although its precise financials are not public. It claims over a million active retailers, and $4 billion annually in transactions.
One of the amenities Square promotes is a feature where its application "calls ahead" to have a purchase ready. A Square consumer can walk in, pick up a pizza or pair of shoes, and walk out immediately with the payment already made and receipt written.
BOKU, like Square, is headquartered in San Francisco. BOKU provides for direct mobile-based payments: Consumers can buy with their mobiles. While BOKU began with an emphasis on games, it has grown to encompass physical goods. BOKU can be used by consumers who have cellular handsets but do not have traditional bank accounts. BOKU is positioning itself for a new generation of online banking, among other opportunities.
While BOKU appears to be well-capitalized, its financials remain closely-guarded.
Movenbank styles itself the world's first cardless bank. Reminiscent of BOKU, it emphasizes gaming and NFC mechanisms.
Stripe's Web site emphasizes it provides "payments for developers." Stripe makes programming a Web site to receive credit cards as easy as possible. There's no requirement for a merchant account, nor any enforcement of PCI compliance by the consumer-facing application. There's no need for a programming team to wait on banks, credentials, and so on; just drop in a bit of well-documented Stripe code, and begin to accept payment.
African and other emerging systems
This list hardly exhausts the collection of commercial-grade initiatives in payment systems in the U.S.; Green Dot, BankSimple, Mint, Dynamics, Quicken, Currency Cloud, and several other companies all are experimenting with wallets, NFC, cross-border clearing, or other emerging technologies.
More provocative than any of these, at least for the next few years, is the rich stew of mobile-based payment systems emerging in the countries of Africa and other parts of the "underdeveloped" world. Huge expanses of the planet's area lack not only reliable roads, electricity, and safe drinking water, but a well-developed banking infrastructure. Many regions will never have these things.
By now, though, they do have cellular telephones. Many, many people use those mobile handsets for financial transactions. When 2011 closed, Africa had over forty million "mobile money" users; that number is forecast to reach 350 million by 2015. Whatever the outcomes of beta releases of different systems in Austin and Salt Lake City, keep an eye open for the hundreds of millions of potential customers from Abidjan and Santo Domingo and so on who are coming on-line this decade, and who will have different expectations than experience in the US market produces. For enormous numbers of people around the world, "m-commerce" is not a convenient adjunct to a privileged life, but a crucial mechanism in an environment where little else works as it should.