An agenda for research about the value of payment systems for transactions in electronic commerce

Journal of Information Technology Theory and Application, 2003 by Peffers, Ken, Ma, Will

ABSTRACT

The growth of electronic commerce (EC) may be impeded because payment systems (PS) designed for offline commerce have been adapted for online use, but without all of the information contained in physical meetings among transaction parties. Resulting problems add costs to transactions and affect profitability for EC transactions. New PS have been developed and are in various stages of implementation and rollout, but none have been widely adopted by users. Here we identify eleven generic PS features and nine of transaction characteristics, the interaction of which is expected to affect the cost of completing online transactions. We use a review of literature, as well as focused group and individual interviews, to develop 35 propositions for how interactions between PS features and transaction characteristics affect transaction costs. Finally, we propose a research agenda to determine the importance of each proposition, the functional form of its impact on cost, and to design effective sets of PS for online transactions.

INTRODUCTION

Electronic commerce (EC) is expected to continue to grow in volume and importance (Sraeel, 2002), however, there have been suggestions, e.g., (Apicella, 2000), that its adoption by suppliers and customers, consumers and businesses alike, has been hampered by a variety of concerns about how best to pay for goods and services over the Internet. Participants in the automobile manufacturing industries, for example, are holding back on investments in online payment systems (Kisiel, 2002). Observers, like Burns (2000), worry, EC growth may be hindered unless new payment systems (PS) are successfully adopted soon.

In ordinary commerce, both business to consumer and business to business, five major PS, with variations, are used to facilitate almost all transactions, globally: cash, checks, giros, credit cards, and electronic funds transfers (O'Mahony et al., 1997). The specific implementations of these systems matured in an offline commercial world, but these methods have been adapted, ad hoc, to the online commercial world in which we have found ourselves over the course of just a half-decade or so.

In the process of adapting these PS for online use, the transactions, ironically, have suffered from lost information. For example, credit cards and their variants (debit cards and charge cards) were designed to be presented in person by the buyer to the seller. Information contained in physical possession of the card, in the magnetic stripe, and in the specimen signature is not conveniently and reliably transmitted to the seller online. Notwithstanding the missing information, credit cards have become the only widely accepted means of payment for purchases in business-to-consumer (B2C) EC. They work, but only at the cost of substantial problems for buyers, sellers and intermediaries.

The adaptation of PS that were developed offline to an online commercial world results in or exacerbates several problems for the transaction parties, including vendor fraud, customer fraud and repudiation, third party fraud, excessive costs, and lost transactions. Recently EC transactions represented 1% of all credit card transactions, but 47% of disputes (Beyer, 1999). Other PS also suffer from limitations when transferred from an offline to an online commercial environment. These problems appear to be serious, representing at least part of the reason why profitability has been elusive for B2C vendors (Keen, 2000; Peffers, 2001).

In business-to-business transactions, because of higher transaction values and greater sensitivity to costs, most transactions that have been initiated online have, nonetheless been paid offline (Bowen, 2000), for example, by paper invoice and check. This suggests that, for such transactions, some of the hoped for benefits of supply chain integration from EC are not being realized, placing the hoped for dramatic takeoff for B2B EC at risk.

The financial services industry has developed a number of innovative new payment systems, each designed to address one or more of the limitations of current systems. Although the new systems are generally technically effective, none has yet garnered enough support among users to become commercially viable (Vartanian, 2000). Success of these new systems has been hampered by new costs that they impose on transactions parties and by network externality barriers.

Will flawed PS be an impediment in the development of EC? Early examples of successful EC businesses focused on high-margin, well-specified transactions, such as those in information goods and high value commodities, e.g., software and computer parts. As EC moves forward to include transactions with lower margins and higher transaction expenses, the cost of ineffective PS might be enough of a burden to make some products unprofitable. Consequently, understanding the needs for PS for EC is a serious issue.

It is also a very big issue, one that cannot be addressed seriously in a single paper. Therefore, instead of trying to address these issues directly in this paper, we identify the characteristics of payment systems for EC, identify relevant characteristics of online transactions, develop a broad research framework, develop a series of propositions for how we expect payment systems and transaction characteristics to interact, and propose an agenda for future research.