OPENING CASE: PAY-PER-PAGE: ALTERNATIVES TO

E-MICROPAYMENTS

THE PROBLEM

The e-book market is booming while the brick-and-mortar book market is rapidly declining. In 2013, Amazon.com released the 6th genera-tion Kindle reader - the "Kindle Paperwhite" (also known as 'Paperwhite 2'). Kindle books can also be read on virtually any PC or tablet device. Barnes & Noble has a Kindle competitor called the Nook. The result is that some categories of books in digital format sell better than their hard-cover and paperback counterparts.

For the most part, e-books are sold as "digital replicas" of their print counterparts. This approach may be fine for works of fiction, true crime, and so forth. Most fiction readers are primarily interested in purchasing the entire book, not individual pages or chapters. This may not be the case for nonfiction readers. Many nonfiction readers do not need, nor do they want, a complete book. For example: A reader is traveling to Rome, Italy on his or her next vacation and only wants a couple of chapters from Fodor's holiday travel guide to Italy, not the whole guide.

A software programmer faces a perplexing problem and discovers a solution in a particular chapter of a well-known programming book. The book sells for $80, but the programmer needs only five pages from the six hundered-page edition.

A professor would like to assign his students one chapter from a concourse textbook with-out violating copyright laws or requiring the students to spend a small fortune purchasing the entire book.

Selling books online - either hard copies or electronic - is straightforward. Selling pages, chapters, or any other sections of a book or journal online for under $5 is another story. There are two barriers, neither of which is technical. The first barrier is that publishers are hesitant to cannibalize their profits by selling parts of a book rather than the book as a whole. This was the same viewpoint the music industry held before iTunes and Amazon.com began selling individual songs in addition to complete CDs.

The second barrier is that merchants incur transaction costs that are too high when they allow customers to use credit or debit cards to make purchases for less than $5. In the online world, the vast majority of consumers use credit cards to make purchases. The financial institutions issuing credit cards charge merchants a fixed percentage and a fixed fee for each credit card purchase. Merchants who accept credit cards typically must pay a minimum transaction fee that ranges from 25 to 35, plus 2% to 3% of the purchase price. The same is true for debit cards, even though the fee is lower. These fees are reasonable for card purchases over $10-$12, but can be cost-prohibitive for smaller transactions.

The same problem occurs when a customer tries to make a credit or debit card purchase in each of the following situations:

Buying a song on iTunes for $1.29, or an application from the App store for $1.99.

Purchasing a copy of an archived newspaper article from a leading newspaper or news jounal (such as Forbes or BusinessWeek) for $1.50.

Selecting an online game and buying 30 minutes of playing time for $3.00 or buying an accessory or weapon while playing the game.

Purchasing a couple of digital images from an online clip art store for 80 each.

In 2005, Amazon.com tried to remedy this problem. Amazon announced a plan called "Amazon Pages" that would allow readers to pur-chase sections of books online. The plan was supplemented by the release of the Kindle e-book reader and the opening of the Kindle Store. Similarly, in February 2008, Random House began testing the idea of selling individual chap-ters online for $2.99. In 2011, the first, and only, title offered was Chip and Dan Heath's Made to Stick (which was given away free in 2013).

THE SOLUTION

Small online payments, usually $10-12 each ($10 per PayPal), are called micropayments. In the offline world, these small purchases are usually made with cash because credit card companies charge merchants exorbitant fees to make the transactions profitable. Because cash cannot be used in the online world, there have been sev-eral efforts aimed at producing digital surrogates. As far back as 2000, a number of companies offered micropayment solutions designed to circumvent the fees associated with credit and debit cards. For the most part, the history of these com-panies is one of unfulfilled promises and outright failure. Digi cash, First Virtual, Cyber coin, Millicent, and Internet Dollar are some of the micropayment companies that went bankrupt during the dot-com crash. Bit pass is an example of a company that failed in 2007. A number of factors played a role in their demise, including the fact that early users of the Internet thought that digital content should be free.

While some digital currencies have been a resounding failure, there are a series of micropayment models that do not depend solely or directly on credit or debit cards and have enjoyed some success.

THE RESULTS

In 2012, Apple announced that consumers had downloaded over 20 billion songs and 10 billion applications from the iTunes Store. The vast majority of these songs and applications cost less than $2.00 each. Consumers downloaded over $150 million worth of 46 different applications on a sin-gle day in December 2011. Clearly, Apple has been able to overcome the micropayment problem, using the "aggregation" payment model (described later in this chapter). In particular, any consumer who wants to purchase items from iTunes or the App store creates an account that is associated with a credit or debit card. When she or he makes a pur-chase, the purchase amount is added to the prior totals until the new total exceeds a value that makes it cost-effective for Apple to submit the payment to the credit or debit card issuer. Naturally, other vendors and particularly Amazon.com could follow Apple's lead and use the same sort of system to sell book pages, chapters, and articles on demand, assuming the publishers are willing to collaborate. Credit and debit card companies are well aware of the difficulties associated with using cards for online micropayments; therefore, they have lowered their fees in an effort to entice online (and offline) vendors to permit credit and debit card micropayments. Even with the new fee structure, purchases of less than $10 are still cost-prohibitive for the average merchant. PayPal also has enhanced their payment system to handle micropayments (described in Section "Nontechnical Methods: from Phishing to Spam and Fraud" in Chapter 10).

Sources: Based on Analysys Mason (2010), Tsotsis (2011), and en.ecommercewiki.info/ payment/micro_payment (accessed June 2014).

LESSONS LEARNED FROM THE CASE

Almost since the inception of e-commerce, credit and debit cards have ruled the world of e-payments. Virtually all B2C purchases are made using payment cards. As noted in the opening case, many electronic money clones have tried to solve the problem but virtually all failed. The only major company to succeed is PayPal (paypal.com), which is dis-cussed in Section "The Information Security Problem" in Chapter 10. A similar situation exists in B2B where several methods were attempted, but only a few succeeded.

While the majority of B2C e-payments are made with credit and debit cards, there are a number of new situations where other alternatives are making inroads (although they still tend to be linked to cards some-where in the payment chain). One of these is the micropayment scenario discussed in the opening case. Another is in the mobile arena. Smartphones and other mobile devices are being used to make payments both online and offline. Over time, the mobile payments may actually end up on our phone bills, not on our credit card statements. Note that globally there are big differences in the way that e-payments are made. For an overview, see yStats.com (2014).

APPLICATON CASE: 01

EC APPLICATION: CRUTCHFIELD GOES MOBILE

The Problem

Crutchfield Corporation (crutchfield.com) is a successful consumer electronics retailer head-quartered in Virginia. They began in 1974 as a print "magalog" - a cross between a magazine and a catalog (see books.infotoday.com/books/ casinwitcon/sample.pdf). What distinguished their catalog from others was the inclusion of information designed to educate potential buyers. Critchfield sells a wide range of electronic products - televisions, digital cameras, stereo equipment, and the like. It is a multichannel retailer providing sales and service through their mail order catalog, call centers, and their website that includes live chat. Crutchfield has won BizRate's "Circle of Excellence Platinum" award for fourteen consecutive years (twice.com/articletype/news/crutchfield-earns-top-bizrate-honors-again/108515).

Crutchfield recognized the growing importance of mobile technology as new sales and ser-vice channels. Goldman Sachs' March 2014 forecast $626 billion in sales by 2018 would be accounted for by mobile online shopping glob-ally. This number represents about 98% of the total of mobile shopping in 2013 (reported by Severt 2014). Crutchfield concluded that they needed a payment solution that was built specifically for mobile transactions and could run on a variety of mobile devices. In addition, the solution needed to support their Canadian call center and the Web, as well as servicing other international buyers outside the U.S. and Canada and could be implemented quickly.

The Solution

As noted earlier, most e-payments are made with credit and debit cards. This is true for both non-mobile and mobile purchases. However, the num-ber of steps and the total amount of information required to complete a card transaction with a mobile device can be a bit more because of the smaller design and the time delay in mobile responses. For this reason, Crutchfield decided to implement an alternative solution that could sup-port a range of mobile devices. They chose PayPal Mobile Express Checkout.

In October 2010, PayPal introduced their Mobile Express Checkout system (paypal.com/ us/webapps/mpp/mobile-checkout), which is a mobile version of their Express Checkout ser-vice. Before the introduction, they had approximately 5 million members using mobile devices to place orders. It was a cumbersome process requiring a number of steps. They tried to simplify the process with a pay-by-text service, but were unsuccessful. The Express Checkout is a comprehensive, streamlined, and highly secure service that expedites checkouts.

Crutchfield decided to employ Usable net Inc. (usablenet.com), which built Crutchfield's mobile site, to help integrate Mobile Express Checkout with their existing website. Usable net has over 400 clients worldwide, and has been named by Fast Company magazine as one of the top 10 innovative companies in mobile computing. They have lived up to their billing. They took only two weeks to get the system up and running, just in time for the holiday season.

The Results

Crutchfield's ROI from their new mobile system was substantial. First, testing revealed that the Mobile Express system increased conversion by 33.7%. In this case, conversion refers to the num-ber of unique visitors to a site who actually made a purchase. More importantly, testing also revealed that 65% of the PayPal mobile users were new to Crutchfield. Not only did the system result in improved sales, but it also attracted new customers. (The case study is available at

paypalobjects.com/webstatic/mktg/docs/ Crutchfield_case_study.pdf.)

Sources: Based on Severt ( 2014), O'Dell (2010), Hachman (2010), Hamblen ( 2011), and McMillian (2011).

Questions

1.Why was Crutchfield interested in implementing a mobile payment solution?

2.What solution did Crutchfield select?

3.What were the outcomes of the mobile payment implementation?

CLOSING CASE: INNOVATIVE CREDIT CARD MICROPAYMENTS FOR THE KOREAN METROPOLITAN UNIFIED FARE SYSTEM

Boram, a banker in Seoul, Korea commutes by MRT and public buses. She uses a credit card that allows her to pay for both MRT and buses, not only in Seoul, but also in other major Korean cit-ies without having to recharge the card. The accumulated monthly charges are automatically paid by the bank. Boram recalls the days when she had to carry two different transportation cards in addition to credit cards.

In the past, Boram used to pay for the subway by using a Seoul MRT Card, which is a stored-value card. The card is issued by the city-owned Seoul MRT Corporation and could be recharged only at MRT stations. To ride a bus, she had to use a Seoul Bus Card that is another stored-value card issued by the private Seoul Bus Transport Association (SBTA). The Seoul Bus Card was introduced in 1996 as the first RF-type bus card in the world. Thus, she had to recharge both cards individually because they could not be used inter- changeably. Other cities have similar governance structures. Therefore, to take the subway in another city, Boram had to buy one-time subway tickets at the subway station.

Credit cards, as described in this chapter, are not cost-effective enough to be used for the micropayment of transportation because the card company could not justify its service fee. Therefore, as described earlier, Boram needed to carry at least one credit card and two transportation cards in her wallet.

Large cities in Asia such as Seoul, Hong Kong, and Singapore have adopted similar types of stored-value transportation cards. As such, credit cards and stored-value cards coexist as two major card services. The two types of card issuers compete to expand their application territory. The transportation card company wants to extend the card's application so users can pay for parking fees, various toll fees, and at restaurants and stores. However, the users have to load the cards for prepayment.

At the same time, for credit cards issuers to expand their application to include payments for transportation, they need to simplify the authorizations process and reduce the service fee for the participating transporters. The question is: which business model will eventually win? In Seoul, it is the credit card issuer that includes payments for transportation.

In order to pay transportation fares quickly, credit card payments for subways and buses must be processed without the full authorization procedure. This risk is tolerable because the frequency and amount of micropayment abuse is low in Korea. Therefore, the transportation ticket gate merely automatically checks whether the card is valid and not on a "blacklist." The gate displays not only the fare, but also the charges incurred during the current month as shown in Figure 11.5. The first credit- based MRT card was adopted by Kookmin Bank in 1998. Today, several issuers support this type of card.

The credit-based transportation card has revolutionized the recharge service process. In the early stage, both MRT cards and bus cards had to be recharged at manned booths. To reduce the expense of the recharge service, unmannedbooths were installed at MRT stations. However, with the credit card, recharge booths can be eliminated altogether and users do not have to spend time recharging their cards. Therefore, both the users and the city transportation authority benefit.

Another benefit of the smart transportation card is that it can restructure the city's transportation system by aligning and coordinating the routes of subways and buses. In the past, bus routes were designed in consideration of the departure and destination points of citizens' trips. This approach intended to make it convenient for citizens to take only one bus to reach their destination. However, too many buses created bottle-necks in busy streets, causing traffic jams. To avoid such congestion, the MRT and main bus companies planned to design the transportation system so that bus branch routes are connected to the subway and to the main bus routes. However, if citizens are required to pay an additional fee for branch routes, they may resist the new structure. Therefore, the transportation fare card should be interconnected.

To solve this problem, the transportation card, credit or stored-value, is designed to memorize the departure time from the MRT station so that the connecting buses do not charge passengers again if the elapsed time is less than 30 minutes. Taking a branch bus is regarded as a transfer for single trip. This means that the owners of transport systems need to agree on about how to allocate the collected fees. Therefore, the city of Seoul adopted the Metropolitan Unified Fare System in 2009.

Due to the national standardization and integration effort, nationwide transportation cards are now unified using smart cards. Credit card companies do not really make enough money through transportation payment services, but this service is essential for them to gain new customers and retain existing ones.

The city also can collect data about commuters so that additional buses can be dispatched depending upon the passenger load by route and time. Note that, at midnight, regular bus services stop. For midnight bus service, the control center analyzes the frequency of mobile phone usage in certain areas to estimate the number of potential commuters and dynamically determine the routes of midnight buses.

Another lesson that can be learned from Korea's experience is the C2C payment system use of credit cards. In C2C auction markets, escrow services that are based on credit cards allow individual buyers to pay eBay Korea directly. The sellers can receive payment through eBay Korea if delivery is confirmed by the buyer. Therefore, there is no need for an e-mail payment system such as PayPal that charges high service fees. The function of a debit card, combined with a credit card, has also virtually replaced the function of electronic checks, so e-checks are no longer needed. In this manner, payments by credit cards in Korea are electronically integrated for e-commerce, physical stores, and micropayments for transportation.

Sources: Case written by Jae K. Lee, Seoul -Korea.

Questions

1.How can credit cards be processed as quickly as stored-value cards at the ticket gate?

2.What is the major benefit of owning a credit-based transportation card for commuters?

3.What is the major benefit of credit-based transportation cards to the city government?

How can the Metropolitan Unified Fare System enable the restructuring of public transportation infrastructure?