DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY COMMITTEE FOR INFORMATION, COMPUTER AND COMMUNICATIONS POLICY
DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY
COMMITTEE FOR INFORMATION, COMPUTER AND COMMUNICATIONS POLICY
FOREWORD
In June 2005 this report was presented to the Working Party on the Information Economy as part of its work on factors affecting the development of e-business and digital delivery. It was recommended to be made public by the Committee for Information, Computer and Communications Policy in October 2005.
The report was prepared by Caroline Paunov (consultant) and Graham Vickery of the OECD Secretariat. The series of reports on the development of e-business and e-commerce and the restructuring of global value chains is co-ordinated by Graham Vickery. It is published under the responsibility of the Secretary-General of the OECD.
TABLE OF CONTENTS
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SUMMARY
This report analyses the recent development of online payment systems for e-commerce, covering different payment mechanisms, the extent to which these different systems are used and the implications of industry characteristics and network effects. It discusses drivers and impediments to the uptake of payment systems and identifies some policy issues for further examination. With the development of the Internet in the 1990s there were high expectations for its widespread commercial use and for rapid growth in e-commerce. Early predictions were over-optimistic, and attention shifted to identifying various barriers to the widespread development of e-commerce. Specifically for business-to-consumer (B2C) transactions the development and use of online payment systems were identified as important concerns. Nonetheless B2C e-commerce is currently growing at around 25% per year and growth has been much higher in some segments (e.g. travel). International transactions have become more important, and much of the initially predicted growth has been attained if not surpassed. This report analyses the development of online payments systems from the viewpoint of their contribution to the development of online transactions, and identifies current issues and future challenges.
By far the major international online payment means are credit cards, which are also dominant in many national transaction markets. Some estimates put their use at over 90% of all e-commerce transactions. In some countries debit cards and payments via online banking are widely used alternatives to credit cards. There is also a large diversity of other payment means such as mediating services, mobile payment systems and electronic currency which may be appropriate for different transactions. However, with the exception of the mediating service PayPal, the majority of alternative online payment means have not yet gained the necessary wide user base of both merchants and consumers. For micropayments, which are of increasing importance for digital content industries, one-off payments are not yet widely developed as alternatives and complements to subscription payment models or cumulative systems.
The introduction of new payment systems faces significant barriers given infrastructure market characteristics, with high initial investment costs and positive network externalities favouring established incumbents with a wide user base. These characteristics strengthen the market position of traditional payment system providers – credit card institutions and banks – and associated lock-in to established and/or well-known systems and standards.
Earlier perceived transaction security problems using credit cards and online banking have been addressed by providers. Payment mechanisms such as MasterCard SecureCode and Verified by Visa have been developed and implemented and banking systems’ security addressed. Other systems (notably mediating services and mobile telephony systems) have the potential to address specific markets, such as person-to-person transactions and micropayments. The development of mobile payments may also allow greater payment convenience. Micropayments are increasingly important with the rapid growth of digital content markets, although total transaction values are low in comparison with the volume of transactions. Cost-effective international payment systems for very small payments are still to be developed.
A set of emerging issues and barriers to the uptake of online payment systems is briefly listed, covering standards and co-ordination challenges, network and competition issues, and improving statistical information.
INTRODUCTION
With the initial widespread uptake of the Internet, there were high expectations of its potential for commercial use and especially for e-commerce. As these predictions were too optimistic in the short run, commercial and policy focus turned to barriers to e-commerce development. Household surveys in OECD countries emphasised a range of barriers to business-to-consumer (B2C) transactions, among them consumer resistance to paying on line figured prominently. A number of issues around online payment systems were often used as one of several key factors to explain slower than predicted e- commerce growth. According to these arguments, the lack of appropriate online payment mechanisms, consumer confidence in electronic payments and/or issues with the perceived security of payment mechanisms partly explained the weak uptake of online shopping. In other words, payment-related difficulties were seen as one key explanation together with other factors such as products not being appropriate, sellers being unknown, delivery being uncertain, and consumers not being interested.
However there has been solid growth in B2C transactions (OECD, 2004a, 2004b), and many of the high expectations formed during the technology bubble are progressively coming true (The Economist, 2004a). An increasing range of products including various types of digital content is becoming available online, new platforms such as mobile devices are increasingly used for purchasing (OECD, 2004e), and whole new applications and markets are developing. However a number of questions still arise. Have online payment systems adjusted to challenges such as the trade-offs between costs versus convenience, ease of use and transaction security, and contributed to the growth of e-commerce? How are they adapting to the new forms of e-commerce? In 2002, consumer concern about safety of using payment cards was identified as key barrier to online purchases (OECD, 2002a). Is this still the case or is customer .terror of launching their financial details into cyberspace. (The Economist, 2000) still prevalent?
This report analyses the development of online payments and evidence on their use across OECD countries (see also Paunov and Vickery, 2004). It reviews characteristics of online payment means, and discusses the structure of this industry. The report identifies impediments to growth and emerging issues related to further developments and structure of online payments.
The main role of a payment system is to provide a way of transferring value between different parties in the economy. As such, it determines partly economic transaction costs. Its design will be optimal if organised to allow quick and effective value transfers while imposing a minimum of additional costs and risks. High costs of the payment process may seriously affect economic activity in that transactions are rendered too expensive and, as a consequence, reduced. Conversely, lower costs through efficient payment systems could have a positive impact on economic growth.
The use of any payment system involves direct and indirect costs. Direct costs are the fees charged by financial payment service providers. Indirect costs include those related to the complexity of transaction processes, speed of transactions, risk and uncertainty, and opportunity costs for the buyers and sellers involved. The modalities of the payment system also affect the cost structure as they determine the financial loss to both parties in case either one of them defaults on the terms of the contract.
For the reasons described above, online payment services involve a complex set of practical and analytical challenges. These include the technological capabilities of service providers, commercial relationships, issues of regulation and law (buyer and seller protection), security considerations including identification issues, such as authentication and verification, and co-ordination among a variety of parties with different and sometimes competing interests.
