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Beginner's Guide to
Ecommerce
by:
June Campbell of NightCats.com
Whether you call
it Internet commerce, or ecom, or ecommerce,
or immerce, it basically means the same
thing. These terms mean buying or selling
something electronically, and the time has never
been better to jump in. If you have something
you'd like to sell on the Net, new technologies
have opened up an array of ecom options --
there's one to suit every need and requirement.
Most importantly, ecom is safe. Experts
tell us that online transactions are every bit as
safe as face to face transactions-- although
neither can be guaranteed to be 100% risk free.
You're just as likely to be mugged on your way to
the Bank Machine as you are to run into security
problems with Internet commerce!
But ecommerce
can be a confusing subject and many of us need a
little help sorting it all out. If some of the
jargon is confusing you, read on and I’ll
explain some of the basic concepts. This document
contains three categories of information:
- Definition
of Terms
- Facts About
Accepting Credit Cards Online
- Ecommerce
Solutions Compared
Definitions
- Commerce
Service Providers (CSP)
- CSPs are
business or web sites that provide
ecommerce solutions.
- Digital
or Electronic Cash or E-cash or Ecash or
Digital Money
- These terms
are also used interchangeably, and they
refer to any of the various methods that
allow a person to purchase goods or
services by transmitting a number from
one computer to another. The numbers are
issued by a bank and represent sums of
real money. Digital cash is anonymous and
reusable. Unlike credit card
transactions, the merchant does not know
the identity of the shopper.
Yahoo’s
Listing of Companies Providing Digital
Cash
Cybercash and Digicash are two well
known methods.
- Electronic
Checks or Cheques
- Customers
pay for merchandise by writing an
electronic check that is transmitted
electronically by email, fax or phone.
The "cheque" is a message that
contains all of the information that is
found on an ordinary cheque, but it is
signed digitally, or indorsed. The
digital signature is encoded by
encrypting with the customer’s
secret key. Upon receipt, the merchant or
"payee" may further indorse by
encoding with a private key. When the
cheque is processed, the resulting
message is encoded with the bank’s
secret key, thus providing proof of
payment.
Various companies are
selling Electronic Check software and
services.
- Electronic
Wallet
- Electronic
Wallets store your credit card numbers on
your hard drive in an encrypted form. You
then make purchases at Web sites that
support that particular type of
electronic wallet . By clicking on a Pay
Button, customers initiate a credit card
payment via a secure transaction enabled
by the electronic wallet company’s
server.
- Electronic
Commerce or Ecom or Emmerce or EC
- These terms
are used interchangeably, and they all
mean the same thing — the paperless
exchange of routine business information
using Electronic Data Interchange (EDI) ,
email, electronic bulletin boards, fax
transmissions and Electronic Funds
Transfer. It refers to Internet shopping,
online stock and bond transactions, the
downloading and selling of "soft
merchandise" (software, documents,
graphics, music, etc.), and business to
business transactions.
- Extranet
- An extranet
is an extension of a corporate intranet.
It connects the internal network of one
company with the intranets of its
customers and suppliers. This makes it
possible to create e-commerce
applications that link all aspects of a
business relationship, from ordering to
payment.
- Disintermediation
- Disintermediation
is the process of bypassing retail
channels or mail order houses and selling
directly to the customer.
- Hard
Goods vs Soft Goods
- Hard Goods
are items that exist in the real world,
as opposed to soft goods, which exist
virtually or electronically. For
instance, an Internet merchant selling a
book that is shipped to the customer in a
print version is selling hard goods; a
merchant offering a book for download in
electronic format is selling soft goods.
- High
Risk Processors
- High risk
processors (or brokers) are financial
institutions or companies that that issue
merchant status accounts to high risk
businesses. They offset their risks by
charging higher transaction fees and
higher rates than traditional banks do.
However, the initial outlay of cash that
you will be required to put up is usually
much less than the large deposits
required by traditional banking
institutions. Some brokers may offer
other added features such as shopping
cart software, web site templates, forms
or secure lines for ordering.
- Immerce
- Immerce is
the new term being used for commerce that
is transacted totally over the Internet.
- Merchant
Account
- A Merchant
Account is a relationship between a
business (i.e. a merchant) and a merchant
bank which allows the retailer or
merchant to accept credit card payments
from customers. Many banks or financial
institutions, especially in Canada, have
stiff requirements and regulations
regarding the issuing of a merchant
account. Many small or home based
businesses report that they have great
(sometimes insurmountable) difficulties
acquiring Merchant Status. If Merchant
Status is obtained, the merchant then
rents or buys special software that is
used to process the transaction. In some
cases, depending on the bank and
depending on the type of business that
you are operating, you will also need to
purchase or rent a piece of hardware
known as a processing terminal.
An Internet
Merchant Account is a special account
that permits the acceptance of credit
cards online. Transactions are processed
online, in real time. While the customer
waits, the system checks the credit card
to be sure that it has not been reported
stolen, has not expired, and is listed to
the same address that the customer has
given. If the card is approved, the
customer and the merchant are both
automatically notified that the sale has
transpired. This type of account is a
stricter banking relationship than one
involving face-to-face transactions. Web
transactions do not gather signatures
from purchasers and therefore there is a
higher risk of fraud.
Merchant
Brokers specialize in obtaining
credit card accounts for online
businesses. Brokers charge a setup fee
and lease or sell the software and
hardware as needed. Expect to pay a
discount rate, which is the percentage
you pay for each transaction processed,
as well as various other charges that
differ among services. If obtaining a
merchant account through a traditional
bank is proving to be a problem, merchant
brokers are a good alternative.
Yahoo’s List
of Credit Card Merchant Services
- Microtransactions
or Micropayments
- Microtransactions
are transactions of tiny amounts – a
few cents or a few dollars, typically
made in order to download or access
graphics, games, and information.
- Phonecash
- Still under
development at the time of this writing,
Phonecash allows customers who prefer not
to use credit cards to buy items on-line
by having the value of the purchase
transferred from their account to another
account within the Internet Banking
System. For details, visit Cybank
- Telephone
Billing Systems
- A very new
approach, telephone transactions allow
the customer to purchase an item or
service, and the amount will be billed to
his or her telephone bill. To date, this
is being used for soft items such as
downloads, time measured services (i.e.
time spent at a Web site) or for making
charitable donations online.
For a sample,
check eCharge
Corporation
Facts
About Accepting Credit Cards Online
Before you can
accept credit cards (either online or offline),
you must have a Merchant Account, which is
a special arrangement with a banking institution.
Small and home businesses often experience
difficulties qualifying for a merchant account,
and Web based businesses run into even more
problems.
The situation is
this: Online transactions don’t take place
at the point of sale (POS). They are considered
to be "non-face-to-face" transactions.
Since there is no way of ascertaining the
customer’s identification, there is no way
to be sure that the customer is the legitimate
card holder. Therefore, financial institutions
are leery about the high potential for fraud.
Moreover, the
major credit card companies offer their card
holders the right to contest charges on their
statements that may be the result of theft, fraud
or error. A contested charge is referred to as a chargeback.
When a chargeback occurs, merchant will end up
paying the charge to the issuing bank, in
addition to a chargeback fee that can be as high
as $30 or more. For example, if you sell a book
for $20 through a credit card transaction, and
the cardholder later contests the sale, you will
end up paying your bank the $20 PLUS a chargeback
fee of $10 to $30 dollars.
Consequently,
many banks require a reserve fee when issuing
merchant status. Typically, face to face sales
have a chargeback rate of 1% of all sales. The
potential for chargebacks is greater when it is
an online sale, so the risk to both bank and
merchant increases.
To minimize
their risks, most banks have stringent
requirements that a business must meet to
establish eligibility for merchant status.
Factors considered include cash reserves, length
of time in business, tax returns, credit history,
debt load, refund policies, volume of business,
cost of item being sold, and other sources of
income.
High Risk
Processors are merchant acquirers that
specialize in high risk business. They offset
their risks by charging you higher transaction
fees and higher rates. In the US, the Electronic
Card Systems Inc. and Card Service International
are two of the better known examples. Merchants
living outside the US will be required to find a
service that works with their own banking
institutions.
Other
Associated Expenses
The chargeback
expense is the first and foremost concern for a
merchant hoping to acquire a merchant account.
Chargebacks can result in serious financial loss
to the would-be merchant. Also, merchants who
encounter too many chargebacks are at risk of
losing their merchant account.
However, there
are other charges and expenses to factor into the
budget as well. Merchants will need to
investigate hidden equipment costs, setup fees,
line charges, bank transactions fees, holdbacks,
and discount rates, etc. These vary considerably
among service providers, so compare, compare,
compare!
Ecommerce
Solutions Compared
There are
dozens, perhaps hundreds of businesses and
organizations eager to assist you sell your
product online. Basically, they fall into four
categories: credit card transactions, digital
cash transactions, electronic fund transfers and
telephone billing systems. No solution is perfect
and each comes with its own set of pros and cons.
The right choice for you depends upon your
specific business requirements.
1. Merchant
Internet Accounts.
If you have a
merchant status, you will need to consider the
following factors:
Pros:
- Consumers
are familiar with credit cards
- With credit
card transactions, consumers don’t
have to download and install special
plugins.
- Credit card
sales lends itself to impulse buying.
- You have
the customers' contact information for
follow up sales and marketing purposes.
(This is a pro for the merchant but a con
from the point of view of many customers,
who prefer anonymity.)
Cons:
- Consumers
still have concerns regarding providing
financial information online.
- Not
everyone has a credit card.
- This method
does not lend itself well to the purchase
of down loadable soft goods, such as
software, art, graphics, etc. Vendors
wanting to sell down loadable soft goods
will will need to find a way to ensure
the product is paid for, once downloaded.
- You will
have to deal with chargebacks.
If you
can’t or won’t get a merchant account
through your regular banking institution, you
still have the broker option open to you. Brokers
can often arrange merchant accounts for
businesses who are deemed high risk. Setup fees
and discount fees apply.
2. Electronic
Cash Transactions
Electronic money
is an arrangement whereby the customer pays for
the merchandise using, well, electronic money.
Examples of this are the well known DigiCash,
Cyberbucks, CyberCash, etc. As consumers become
more comfortable providing credit card
information over the Net, these methods are less
utilized.
The Pros
- No credit
card transactions are required.
- No concerns
re chargebacks.
- Lends
itself well to micropayments.
Cons
- Many people
are unfamiliar with the concept and shy
away from unknown entities.
- The process
is perceived as "a hassle" to
some shoppers who prefer to simply give
credit card information.
- Both
merchant and customer must be
participating in the same scheme before
this method of ecom can be used.
- Eliminates
the possibility of impulse buying, unless
both customer and merchant are already in
same scheme.
- May not be
available globally.
Check out Digicash and Cybercash
3. Electronic
Fund Transfers
Funds are
transferred electronically from the customers
bank account to yours. (This is a highly
simplified explanation, and is accurate in the
most general sort of way. However, the bottom
line is that the customer buys, and at some point
the funds are removed from his or her account and
ultimately deposited into yours.)
The best known
method is the issuing of electronic checks
Customers pay
for merchandise by writing an electronic check
that is transmitted by email, fax or phone. The
"check" is a message that contains all
of the information that is found on an ordinary
check, but it is signed digitally, or indorsed.
The digital signature is encoded by encrypting
with the customer’s secret key. Upon
receipt, the merchant or "payee" may
further indorse by encoding with a private key.
When the cheque is processed, the resulting
message is encoded with the bank’s secret
key, thus providing proof of payment.
NetCheck or Cybank are examples.
Pros
- No credit
card worries
- Available
to persons who don’t have credit
cards
Cons
- A very new
technology that some perceive as being
less secure than other forms of
ecommerce.
- Many
customers aren’t set up to issue
electronic cheques; time required to make
the arrangements eliminates impulse
buying.
- May not be
available to international consumers.
4. Telephone
Billing Systems
A very new
approach, telephone transactions allow the
customer to purchase an item or service, and the
amount is billed to his or her telephone bill. To
date, this is being used for the sale of soft
items such as downloads, time measured services
(i.e. time spent at a Web site) or for making
charitable donations online. eCharge Corporation is a pioneer in the use
of this technology.
Pros
- Eliminates
worries about credit cards (for both
consumer and merchant)
- Safeguards
soft merchandise – no possibility of
theft or pirating.
- Available
to customers without credit cards
- Coverage
includes the US and points in Europe.
Canadian coverage is expected soon.
Cons
- Customer is
required to download and install a
plugin.
- Currently
only available for soft merchandise but
can do some limited transactions for hard
goods.
- Not
currently available for Mac users.
- Currently
available for sales using telephone
modems, and will not work for
transactions over cable modems and ISDN
lines.
5. One-Stop
Shops
More recently,
with the huge interest shown in ecommerce, a
multitude of services and products have become
available. It's now a possibility to find a
service that will broker your Internet Merchant
Account, as well as providing web site storage, a
template for designing your site, shopping cart
software, a form generator, a secure line for
safe online ordering, and more. IBM, ICAT and
Vantage are examples of businesses offering these
all-encompassing services. They are excellent
starting points for the entrepreneur who wants to
delve into ecommerce.
-------------------------
Article by: June Campbell is a professional
writer whose work has appeared in several
international print and online publications. Her
business resource web site offers guides for
proposal writing, business plan development,
joint venture contracts and more. (www.nightcats.com)
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