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ONLINE PAYMENT HISTORY & ITS FUTURE

Yaser I. Tawash, Computer Information Science

Chestnut Hill College

Online Payment

In the last 30 years, online payments, also known as electronic fund transfer, have evolved rapidly. At the beginning of the internet revolution, customers used to send checks by mail and wait for weeks to get their products. Later, with the development of the computer technologies, the electronic payment got faster and safer. Prior 1974, most of the banks and financial institutions used to take much time to transfer money from one account to another in the same institution. They even took longer time transferring money from their bank to another. (Federal Trade Commission, 2012) After the development of the internet, the electronic fund transfer, which is based on transferring money from on bank to another, have become the base of online payment. In other words, online banking is basically the online payment but in a different form.

More than 40 years ago, The Electronic Fund Transfer (EFT) Network was developed, which is now called Automatic Clearing House(ACH). This network, with the development of more advanced technologies, has revolutionized the Online Payment. The ACH network have developed solutions for Accounts Receivable Conversion (ARC), Point of Purchase (POP), Back Office Conversion (BOC), International ACH Transaction (AT), and more, which most of them are controlled on the Automated Teller Machines. (Jacques, 20XX)

The automated teller machines (ATMs), which were invented in 1969, are electronic stations that let customers withdraw cash, deposit money, and transfer funds to other accounts. Using those functions was simply done in minutes by using an ATM magnetic card. This technology was introduced after the invention of the Automated Clearing House System, followed by International Bank Account Numbers (IBANs). all those technologies are online and connected; Nowadays, Online payment have matured and a lot of online payment services providers (PSPs) have focused on the development of online payment methods.

The Online Payment in E-Commerce Market. As the e-commerce started to gain consumer trust, the main point of online payment, which is to secure the transaction and make the payment faster, has been successfully following the right path. All that was because the Online Payment Services Providers were focusing on enabling secure payment and gaining consumer trust. Secure Socket Layer (SSL) protocol, which was introduced by Netscape in 1994, and PayPal, which acted as a third party that uses B2C solution, have helped shrinking the trust gab between consumers and merchants. (Wessberg, C. Rustner, O. Roman, P. 2014)

Even though most consumers were comfortably using their debit and credit cards in online payments, some merchants considered it as not a convenient way to complete an online transaction. Therefore, alternative payment services started to standout. Those payment services providers have integrated a new and smoother way for online payment transaction while focusing on the security and consumer trust. An alternative payment is simply any payment type that is not directly transferring money by using credit or debit card. Direct debits, bank transfer, cash on deliver, mWallets, and eWallets are considered an alternative payment. (Wessberg, C. Rustner, O. Roman, P. 2014)

The Development of Online Payments. In Helsinki, Finland in 1997, the first mobile transaction was completed by Coca-Cola vending machine which accepted payments as SMS messages. In 1998, x.com, which was founded by Elon Musk, was the start of what is called today as PayPal. After years of many great online payment innovations, with security of online transactions in mind, the online payment splits into four different layers as follow:

Data Layer: The data layer, usually is the e-commerce website, that uses different type of payment type to collect users’ information.

Payment Type Layer: The type of payment that users choose during the check process such as VISA Card and PayPal.

Processing layer: The processing layer consist of two parts, the payment gateway and payment processor. A payment gateway is the same as the Point of Sale (POS), which sends the transaction information to payment processor that has connection to considerable number of banks and wait for the approval.

Network Layer: The credit card network, network layer, is a term for all the card associations, such as American Express, Master Card, and VISA Card. Some card issuers act as the issuing bank while some card issuers route the transaction to the issuing bank while an acquiring bank processes credit or debit card payments on behalf of the merchant, exchanges funds with issuing banks, and pays the merchant for its daily payment-card activity's net balance, the total amount paid to the merchant after deducting a fee on each transaction made. The issuing bank offers card association branded payment cards directly to consumers. (Wessberg, C. Rustner, O. Roman, P. 2014)

For example, when using a debit or credit card online, or POS devices, the payment process goes to five different associations; a merchant, a payment gateway and processor, an acquiring bank, credit card network, and an issuing bank. For example, when a customer pays for a product with his credit card, the payment goes through the merchant website, or POS, provided by the payment gateway API. Then, the payment gateway sends the transaction data file to the payment processor. The payment processor sends the transaction to the credit or debit card network. Next, the card network sends an authentication to the issuing bank. In seconds, the issuing bank perform fraud and credit check, and approves or denies the transaction. (Wessberg, C. Rustner, O. Roman, P. 2014)

The Technical and Financial Growth of Online Payments. The pioneers of online payment such as, PayPal and Stripe, a payment platform that enables merchants to accept payments in websites and in mobile apps, are growing at a strong rate, while offline payment systems such as POS providers and banks are still trying to stand back-up. What consumer are finding as far as payment solution is a divided picture of hidden innovation and segment center. Be that as it may, a trend of both online and offline payment approach through location based such as Bluetooth Low Energy (BLE), Near Field Communication (NFC), mobile wallets (mWallet), and beacon technology. Mobica, a UK-based and a main supplier of software engineering, testing, and consultancy administrations, for instance, has amid the most recent year and a half observed an immense increase sought after the advancement of NFC and Bluetooth LE guide innovation based items from different market members that are anxious to cross over any barrier amongst online and offline business. (Wessberg, C. Rustner, O. Roman, P. 2014)

Since the beginning of online payments, credit cards have been the most secure and faster solution for consumers around the world. Nowadays, the overall online payment market (excluding location based payments) is assessed to create from $1.7 trillion in 2012 to $4.1 trillion in 2017, representing a compound annual growth rate (CAGR) of 19%. While direct card payment will remain a basic strategy for executing on the web, alternative payments are forecast to account close to 60% of the total online transaction value in 2017, up from $734 billion in 2012 to $2.4 trillion in 2017, regarded as a CAGR of 26%. (Wessberg, C. Rustner, O. Roman, P. 2014)

References

CPSS – Red Book (2012) Payment, clearing and settlement systems in Saudi Arabia. Banking of International Settlement. Retrieved from https://www.bis.org/cpmi/publ/d105_sa.pdf

Wessberg, C. Rustner, O. Roman, P. (2014) The Future of Online and Mobile Payments. International technology Research.

Jacques, E. AAP. (20XX) Understanding SEC Codes: From ARC to XCK, The Clearing House. Retrieved from https://goo.gl/kOAtQA