The Impact of Internet Payment Systems upon the Retail Sector - Coursework Example

The Impact Of Internet Payment Systems Upon The Retail Sector First Last of Impact of Internet Payment Systems upon a Retail Sector: In Building Customer Relationships Online I. Executive Summary This report aims to identify the influence of Internet payment systems upon the grocery retail industry specifically Tesco and Walmart. This report includes a literature review about online marketing and Internet payment systems. The author recommends that online businesses should continuously strengthen their online security systems to increase consumer trust; and they should devise a strategic online customer relationship management to gain customer loyalty. II. Introduction Together with the surge of the Information Age came the integration of electronic payments in e-commerce. Whether businessmen, entrepreneurs alike were carried away with the commercial turbulence brought about by the Internet or merely took it as the high time to expand commercial enterprises, Internet or online payment schemes made online business transactions cost-effective and convenient to both buyer and seller. Yet despite the convenience they pose, they still lack foundations when it comes to security and consumer trust. Internet payment fraud is an ongoing bane where the online merchant becomes ultimately liable. This report aims to stress the roles and impacts of Internet payment systems in the retail sector specifically Tesco.com and Wal-mart.com, two of the largest supermarket chains worldwide in building customer relationship. III. Literature Review A. Clicks to Mortar: Influence of the Internet on Marketing Several firms have exploited the Internet to widen consumer base. These organizations are referred to as “click and mortar” since they are also operating high street corporations (Charlesworth, Esen, & Gay 2007). A lot of industries have engaged in e-commerce -- from financial services sector, fashion and apparel retailing, to supermarket chains. Nonetheless, online successes were often attributed to those which pioneered in the new market, hence obtaining the first mover advantage. Dholakia et al. described how the Information Age was componential to the rise of modern capitalism (Dholakia et al. 2002). What follows are brief descriptions of two of the major impacts of the Internet upon markets and marketing. Consumer-level Impacts. 1.) Consumers take time in understanding the electronic process during cybertransactions just to benefit from it. Dholakia et al. put it as the ”informationalization of the consumer stage.” Through this, marketers will easily acquire market intelligence about the dynamic consumer behavior so that they can strategically respond to it; 2.) Consumers can explore with ease about product information from one site to another competing site. Brand loyalty, identity, and mobility are not easy to achieve over the Internet unless strategic e-marketing is deployed; and 3.) The exploration experience in a virtual marketplace is different from that in a physical marketplace. To achieve this, online merchants will have to adopt the same “experiential frames” that physical marketplaces exude. Supply-side Impacts. 1.) Market structures are conforming to the changing needs and desires of consumers and the environment, hence the existence of varied market prices for similar commodities; 2.) Institutional agreements during cybertransactions are still developing. and carry more risks than physical transactions bear. B. Online Payment Mechanisms Sumanjeeb describes the integration of electronic modes of payment into perfecting virtual transaction. Because not all transactions online can be completed through traditional or conventional modes of payment, online systems were invented. Not only did the new invention ease online business transactions, it also added value to financial systems (Sumanjeeb 2009). To establish online financial transactions, the merchant/seller/retailer must have a gateway provider, a merchant’s account and transaction processing center (Pugh 2002). Crede and Sumanjeeb identified four of the most common Internet payment systems employed today (“Internet Payment” n.d.). Credit Card Payment Based System. Aside from being the most convenient mode of payment online for the past decade, using credit cards also pose the most minimal risk of fraud because of the presence of an established intermediary (credit card company or issuing bank). However, because cards and holders are not physically present at the point of sale (card-not-present (CNP) transactions), setting up a merchant’s account might be a stringent activity. Still due to the unquestionably high demand for online transactions, credit card companies such as Visa, Microsoft and MasterCard decided to extend their services online (Crede 1995). There has been an increased use of credit cards in the US. This indicates that online confidence is still increasing despite the risks and costs (Urban, Amyx, & Lorenzon 2009). With this payment system, the seller or merchant will typically need the number and expiration date of the credit card and a mailing address of the purchaser. Digital Cash/Online Electronic Cash Payment. Digital cash allows a buyer to purchase goods by sending a certain serial number issued by banks (“Digital Cash” n.d.). Like physical money, digital cash is circulated though virtually. People who use digital cash retain their identities unlike in credit card or smart card based systems. Issuing banks will authenticate the notes where digital signatures is the key. The issuing bank remains to bear the responsibility of verifying the validity of the digital serial number to the seller. Electronic Wallet/ Smart Card Based Electronic Payment. Electronic wallets and e-cash are the widely used methods of payment online (Boone & Kurtz 2010). Apparently, it is the electronic version of a physical wallet. Electronic wallets contain electronic cash and credit card information so that the customer does not have to provide such information in every online transaction. Electronic wallets in a form of smart cards have the essentially the same use as have credit cards; only that the former have larger memory capacities. Smart cards are often used during small transactions where the parties involved should have a smart card reading device and a software that enables the card reader. Electronic Cheques/ E-checks Based System. An electronic check applies the same basic principle with a conventional paper check (Bidgoli 2002). Electronic checks can be very useful for retailers who don’t have credit card merchant accounts. By using electronic checks as payment systems, the merchant will have to have a certain software to initiate the transaction. The purchaser, on the other hand, will have to provide a similar information present in a regular check. C. Security and Consumer Confidence What remains to be a challenge to entrepreneurs is the lack of security posed by Internet payment systems and as a consequence, the lack of consumer trust. Factors like the Internet-related fraud and scam, availability of credit card systems, or secured encryption methods account for the lack of consumer confidence online (Dholakia et al. 2002). Recent statistics reported that in North America alone, there has been an increasing number of reported cases of Internet-related fraud since 2000 (“Internet Fraud” n.d.). In 2008, online fraud was highest for the past decade where most of the complaints comprise confidence fraud (auction-related, non-delivery of merchandise and payment), and credit/debit card related fraud. Meanwhile, in the United Kingdom, 68 percent of retailers who responded to a 2009 survey expressed that Internet payment fraud is the reason they are reluctant to engage in online retailing (“68% Of Online” 2009). Both consumers and sellers experience the impact of fraudulent transaction cases over the Internet. D. Building Consumer Relationship Online The fact that electronic commerce is not a physical trade is exactly the reason online retailers must go the extra mile to build consumer trust online. Centeno discussed “hard” (usage of passwords, user Ids, virtual and pseudo card numbers, and etc.) and “soft” (cybercrime laws, awareness, and etc.) measures to avert online payment frauds with emphasis on the “soft” measures (Centeno 2002). Online shopping sites use Secure Sockets Layer (SSL) encryption technology to stabilized online security. Specifically, the method involves authenticating the information divulged by the other party. Verisign has been the biggest SSL technology provider. Urban et. al discussed the “Trust Architecture” putting emphasis on online confidence. They described that consumers will base future transactions with the merchant’s according to the previous transaction experience. How the site is authoritative (terms and conditions on privacy and security) and structured (web site usability and design) would likewise importantly affect buying behavior. More importantly, the corporate reputation and brand awareness will add value to the site (Alex n.d.). IV. Common Internet Payment Systems PayPal. PayPal is a system especially designed to strengthen the security during Net transactions. Payments are completed through e-mail accounts wherein the parties involved during the transaction will only have to divulge any credit card or checking account information to PayPal.com, hence preventing fraud. PayPal is responsible for transferring the specific amount from one party to the other. PayPal is applicable to all types of segments (B2B, B2C, C2C). Mondex. Mondex is a smart card product which is viable for any market group. Mondex works best for small transactions. PayCash. Paycash is another system which is viable for those who don’t have credit cards or computers and instead make use of the electronic currency. While some payment systems don’t conform to all local and national policies, PayCash was designed to conform to international laws (Peha & Khamitov 2004). TradEnable. TradEnable is an online escrow service and typical in online auctions. Similar to PayPal, TradEnable uses the e-mail to mediate in the transaction. Only that TradEnable permits any payment mechanism. E-Charge Phone. This system is a simple option involving a transfer or appending of bill purchases to phone bills. This is a convenient option for anyone with or without a credit card. V. The Case for Tesco Tesco PLC is a UK-based supermarket chain offering a vast range of products to customers such as food, apparel and even financial services. It has approximately 3,000 stores operating in 12 countries worldwide. In the mid 1990s, Tesco PLC developed online shopping through Tesco Direct. Around 2000, it pioneered in online food retailing with Tesco.com (Berez n.d.). It is now enjoying the first mover advantage -- having approximately one million users and £6m sales per week by 2008 in UK alone (Quader 2008). Tesco’s online shopping store generated £1.9bn in fiscal year 2009 (“Annual Reports” n.d.). Tesco’s brand awareness is relatively high worldwide even before it established an online market because of its cheap but quality products. Such a fact have contributed to its online success. Conjunction to Effect Payment System. Tesco is in agreement with the Royal Bank of Scotland, enabling Tesco’s customers to use their savings accounts (with Visa credit card) and/or debit card payments and permit them to withdraw from ATMs (“Payment Systems in United” n.d.). Systems of Online Payment. Tesco’s mode of payment online are credit/debit cards or direct debit particularly, Visa, Mastercard, Delta, and Switch/Solo. Last year, it ceased accepting check payments to hasten checkout services and to minimize check-related fraud. Tesco Clubcard. Tesco’s 15 year-old Clubcard marketing strategy revolutionized customer loyalty not just on their high street stores but also online. This reward system makes customers stay committed to shopping at Tesco in the hope of getting a certain reward that corresponds to the vouchers earned. Internet-related Fraud Issues. A credit card scam had tarnished Tesco’s online business in 2007. It was considered an inside job wherein card details were discovered stolen (“Annual Reports” n.d.). Online Customer Base. Tesco.com had a 25% increase of active customers from fiscal year 2007 to 2008. This indicates that the Internet payment fraud didn’t have much destructive impact upon the online retailer. VI. The Case for Walmart Like Tesco PLC establishing a reputation in the UK, Walmart established an online market in 2000 -- Walmart.com. They offer the same cheap but high-quality products online. With over $405 billion generated sales at the start of the year, Walmart is now the largest retailer around the world. It operates at least 4,000 stores in 15 countries worldwide (“Walmart” 2010). However the online success of Tesco is incongruous to Walmart’s online effort. Online revenues generated by Walmart.com accounts to an estimated $1.74 billion -- making it No. 13 in the web sales ranking by 2002 (Talley 2010). Amazon is one of Walmart’s biggest competitor online in the US market but it only generates below 10 percent of Amazon’s sales (Anderson 2009). Systems of Online Payment. Walmart.com accepts credit cards (American Express, Discover, MasterCard, Visa, Walmart Credit); ATM/Debit/Check Cards (Walmart MoneyCard, or cards with MasterCard and Visa logos); Walmart Gift Cards and eGift Cards; Bill Me Later; and PayPal. Internet Fraud Issues. Walmart became a subject of check scams early this year. Fraud Protection.Walmart.com associates with Retail Decisions, an expert in fraud detection and prevention. VII. Discussion While online successes are not central to Internet payment strategies, payment systems still contribute a large slice of consumer confidence online. The efficiency and security of the payment method don’t only benefit the consumer but also the seller. The fact that credit cards permit the customer to purchase in large sums is very advantageous to supermarket chains such as Tesco and Walmart because they offer varieties of non-food and food products. Besides, Visa and MasterCard have created strong reputations on credit card solutions. The case for Tesco is totally different from Wal-mart as both have different consumer bases in different market locations. Plus, both company’s efforts to avert Internet-related fraud are on the surface. Having said so however does not conclude that even a strong corporate high-street reputation leverages an online brand equity. Such is the case for Walmart. The Tesco Advantage. Tesco maintains strict policies with its payment methods. The extension of the Tesco Clubcard to the online business was a sly move to maintain customer loyalty. While credit cards remain to be one of the most expensive option for payment, Tesco’s streamlining effort (scrapping check payments) had contributed to an effective online retail management. The Walmart Challenge. Offering a vast range of paying for online purchases may imply that such strategy is an effort to expand online consumer base. Walmart may be undoubtably successful in the high-street but the opposite goes online. As there are still other unidentified factors (i.e. consumers preferences ), it is early to say that its online payment methods hinder its commercial success online. (The free shipping strategy may have contributed to its slow online growth.) Like the Tesco Clubcard, the eGift cards have the potential to increase traffic on its online store by garnering customer loyalty. Aside from that PayPal.com is still credited to be one of the widely used payment systems online since in the first place, it is made to be efficient and secured for Net transactions. The Bill Me Later strategy may also be a smart move to increase website traffic but the mediating bank may experience the consequences. VIII. Recommendation and Conclusion Unless online payment systems become completely developed, online commerce will fail to achieve its full potential. Indeed, online security and trust are indispensable factors to retain a healthy relationship between business and consumers. 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