Internet Payments: Do P2P and Surrogate Numbers have Staying Power?
In the early days of the Internet, a number of payment methods such as eCash and eMoney were developed to provide new means of paying for services and products online. Many of these alternative payment methods failed, as they did not perform well against the current dominant payment method, credit cards.
Despite being well-intentioned, these new payments methods are often unable to address the key requirements of consumers, merchants, issuers and processors. But
credit cards are not the best option for Internet payments. The messaging standards and legacy systems that process credit and debit card transactions were, in many
cases, developed several decades ago - well before the Internet had become a daily occurrence for consumers.
These debit and credit card processing systems were set up in an era of expensive bandwidth and limited computer power. They require costly, dedicated single-purpose communication networks, point-of-sale (PoS) devices,
automatic teller machines(ATMs) and magnetically-encoded plastic cards that need a standardized messaging format in
order to function and interoperate.
This legacy has imposed many limitations on Internet-based payments. Traditional payment methods such as credit and
debit cards are not suited to cope with and adapt to new forms of consumer interactivity and authentication. The
Internet requires an open secure payment method that transacts in realtime - the legacy payment methods only
partially transact in real-time.
Also, in many cases there is no finality of payment such that funds can be rescinded if someone intercepts a card number and uses it to make a purchase. Many modifications and workarounds have been employed to extend the current payment infrastructure to cope with the new requirements imposed by the Internet, but these changes have been
slow and have not addressed the underlying problems.
Yet things are changing. There are several new payment methods that may challenge the dominant position of credit
cards. These emerging payment methods are changing the way we pay or send money to each other. Person-to-Person
P2P) and surrogate card numbers have the potential to fill the missing links for Internet payments.
Person-to-Person Payments (P2P)
P2P payments are the new frontier in Internet payments. By replacing cumbersome cash and check payments with electronic money transfers, P2P providers such as Pay Pal and c2it have created a new payment segment that continues to grow rapidly.
P2P is free and easy to use, and allows for multiple payment options, but, as PayPal has found, pure P2P transactions are very small in number and most transaction volumes come from the auction space. Although auctions drive most P2P payments, this payment form rapidly diversifying into various consumer and small business applications such as cross-border money transfers and recurring payments.
In the early adopter phase of P2P, we will see schemes that work and schemes that fail. This is already happening in the US where some large financial institutions have discontinued their P2P services. They have struggled to find a return on
investment (ROI) since consumers baulk at being made to pay for the service.
This is changing because P2P has both B2C and B2B appeal - the ROI from B2C and B2B payments has the potential to
generated more rapidly than from B2Conly applications like eWallets and Mobile Payments.
Promising P2P Segments
One of the most promising P2P segments is international money transfers. A key target market for international P2P
money transfer services is workers from labour-exporting countries around the world who send their earnings to their
families back home. The remittance industry can generally be categorized into formal and informal channels. On top of
the commercial banks, the formal channels also comprise non-bank financial institutions that cater specifically
to the money transfer market, such as Western Union and MoneyGram.
However, it is the informal channels that account for the bulk of remittances, particularly those from low-income migrants.
P2P can bring some of the unrecorded remittance back to the banks which allow the migrating workers to open an account
and offer them the ability to make a P2P transaction from an ATM or a web-based PC.
However, the initial P2P providers face significant fraud risks as their systems are tied to a credit card, which may
impact the long-term viability of these business models. One player, CertaPay in Canada, has taken P2P in a different
direction, by integrating its services with the banks. The service, known as Email Money Transfer, is a transfer sent directly from a consumer's bank account to anyone with an email address and a Canadian financial institution bank
account.
The Internet e-mail carries the notice of the pending transfer and instructions to collect the money, while the banks
provide the ability to move the money securely using reliable payment networks already in place. The banks validate their
customers and manage the settlement process, and CertaPay manages the Email Money Transfer service. CertaPay facilitates the email notifications, maintains the Email Money Transfer records, and provides the option to deposit an Email
Money Transfer using an electronic fund transfer.
Surrogate card numbers
Surrogate card numbers represent a solution which is based on traditional payment networks, utilizing the credit card companies' traditional schemes by issuing surrogate numbers. The consumer uses the surrogate number to
make purchases on the Internet. The surrogate number can be configured by the consumer so that it is used for a
single transaction, only at specific websites, and limited to a specific time, date or amount. If a fraud is committed
against a surrogate number, the fraud is limited to the surrogate number alone.
The surrogate number takes advantages of the legacy payment networks and is deployed by the card issuer. To take advantage of the surrogate number, the consumer needs to be registered for the service with their issuer. The service remains within the bank's Internet banking application; a consumer can set up a surrogate card and make the
source of funding a credit card, debit card or a bank account. We are now starting to see consumers use surrogate
numbers instead of their debit cards in combination with their debit card PIN.
This means that they can carry out a debit card transaction online - by entering a surrogate number, authentication
takes place and the issuer debits the cardholder's account.
This payment method allows for safer purchases online, as the surrogate card number used is controlled by the user.
This is not a pure-play Internet payment, but will be continue to be used until better authentication and payments methods arrive.
Conclusion
To get to the market quickly, banks will in the short term benefit from partnering with established P2P vendors to achieve fast time-to-market. However, banks are
soon likely to develop their own solutions. Banks can also establish the first building block in mPayments by providing prepaid top-up to customers a small-scale move to gain mind-share the mobile payment arena without stretching their budgets.
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