Second-generation e-payments to revolutionize the world of e-commerce

[October 18th 2000]

A new breed of electronic payments has emerged that addresses the constraints of traditional credit cards and will change the future of e-commerce transactions. New technologies and payment processes are offering easier ways to pay for goods and services that are flexible, affordable and secure for both the buyer and seller. Additionally, payment service providers have evolved: offering packaged payment solutions that represent a fundamental shift in the delivery of e-payment methods. In fact, a new report from independent research and consulting company Ovum, finds that second-generation e-payment methods are capable of displacing cards from e-commerce entirely.

"Credit cards are necessary for e-commerce, but not sufficient, " says Duncan Brown, Ovum principal analyst and lead author of Second Generation E-payments: E-business Beyond the Credit Card. "Today's payment cards are suited to only a subset of potential e-commerce participants and there is a pent up demand for new e-payment methods." Limitations to traditional types of payment and the emergence of new technologies are allowing for new ways of charging for goods and services. In addition, a wide range of devices and access channels are coming on stream - moving the domain of e-commerce beyond the desktop and creating the need for alternative means of payment.

Ovum finds that there are five key types of e-payment method, including:

1. Metered payments - e-commerce transactions that appear as itemized entries on a bill, along with, for example, phone calls or units of electricity.

2. Optimized card payments - built-in payment card enhancements such as virtual cards, wallets and smart cards that can offer enhanced security.

3. E-cheques - the migration of the traditional paper method to the on-line environment. Such methods involve funds being paid from the buyer's bank account to the seller's bank account.

4. E-cash - `cash-like' payments designed for high volume, low value transactions, such as micropayments for digital goods.

5. Alternative currencies - non-cash initiatives, such as Beenz, PayPal and RocketCash, which replace traditional currencies.

While these methods and technologies create new ways of conducting electronic transactions, the report finds that payment service providers (PSPs) will emerge to dominate e-payments. "PSPs serve as the payment intermediary between the buyer and seller, and as the central broker of e-payments, are responsible for ensuring the effective transfer of funds," states Brown. "They are about making it easier for sellers to sell and buyers to buy, acting as mediators between the two parties, banks and other payment method providers."

Ovum finds that the key factor driving the PSP model is service, not technology. Second-generation e-payment technologies threaten the current dominance of banks in the payments market. In order to succeed in displacing banks, players in this space will need to differentiate themselves by developing the services that surround the transaction and facilitate the e-payment. A full service offering means that providers will be able to duplicate the trust relationship and recourse that banks have historically provided. Basic services to be offered may include brokerage, optimization, aggregation, internationalization and billing.

The report is also quick to point out that relationships within the market will be strained, especially as banks and telcos go head-to-head. "Telcos have long been hovering on the verge of financial services, and are now empowered to offer e-payments with little effort and cost," confirms Brown. "Banks will need to take history and experience into the new market and embrace the idea of the PSP. If not, they run the risk of complacency, and by not establishing themselves in this emerging market, victims of their own egos." Additionally, network operators, ISPs and even utility companies are well positioned to dominate micropayments, especially as banks have little play in offering these types of payments.

Links
Ovum		http://www.ovum.com