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Mark Grossman

Many Options Available for Online Commerce

29 January 1999

Whether you've had a website for some time now or this is your first foray onto the Net, your goal is to sell goods or services online - and collect payment. This affects everyone in both conducting transactions with consumers and in dealing with the electronic commerce with other online or traditional businesses. This column will discuss the various digital alternatives that you have for the all-important issue of how you get paid.

Online payment systems are essentially digital substitutes for traditional cash and coins. Today, the major Internet payment systems are credit cards, debit systems, and digital cash based systems.

Credit Card Payment Systems

Credit cards are the most common form of payment on the Internet. In part, this is because your buyers are already using credit cards for telephone and mail order sales. As the seller, you pay a small percentage of the sales price, called the "discount rate," to the credit card company for this service.

Be aware that the same laws that govern credit card transactions in the "physical" world generally apply to Internet transactions. For example, a buyer might dispute a credit card charge and claim that someone used their card without authorization. Your bank could then issue a "charge-back" against your account. If this happens, you may never be paid.

A problem with credit cards on the Net is that you're unable to physically check the card, read the magnetic stripe and verify the signature. In addition, although telephone and mail order sales have been around for decades, some credit card companies fear the security risks of selling online. This causes them to be reluctant to issue accounts to sellers. This often translates into a higher discount rate for online sellers. Rates will vary, and they are usually highest for online businesses related to online gaming or adult entertainment.

One thing that you might consider, which will lower your discount rate, is the Secure Electronic Transaction ("SET") protocol. The buyer uses special software to send credit card information to you. The information is encrypted, so it's scrambled and can only be read by the credit card company.

By using SET, you transmit the credit card information for processing and payment, but never have direct access to it. This makes the buyer's credit card information more secure. Many credit card companies favor this procedure, and you will probably pay a slightly lower discount rate for the card processing service. (More information about SET is available at

Debit-Based Payment Systems

Debit-based systems are a less frequently used alternative to credit cards for online payment. They are the digital equivalents of debit cards and checks, which are tied to bank accounts, and "stored value" cards such as pre-paid calling cards. Typically, you and your buyer need to have the proper software, and you may need to open an account with a particular processing service company. The buyer will use software to send encrypted information to you, and you then present the information to the service provider or bank for payment.

These systems can be very effective for small purchases, such as music, articles and games. Their advantage is that you usually have less risk of payment disputes and may face lower transaction fees than credit card transactions. Also, in systems such as CyberCoin, the buyer's payment is designated specifically for you, and it can only be used once. (More information about CyberCash and CyberCoin is available at

Digital Currency

The least used form of online payment is digital currency. In some ways, it's the most futuristic system for true "net-commerce". Imagine using electronic tokens that represent cash.

Unlike credit and debit-based transactions, which require that a payment processor or bank clear every transaction, with digital cash you usually collect a token and then turn it into the bank for payment without a pre-approval process. Also, digital currency can be exchanged more freely in the marketplace. One example of digital currency is eCash which was developed by Digicash. (More information about Digicash is at

Digital currency is great for "micro-transactions" which involve small value purchases in volume and on demand (such as charging to access specific web pages, stock quotes, travel suggestions, sports updates and traffic reports). It makes for a fast and inexpensive transaction. It may be the only way to sell bits of information for pocket-change.

Debt Collection -Alternatives and Traditional

If you prefer not to accept online payments, you can always use traditional payment terms and debt collection methods -- such as selling cash on delivery ("COD") or on open account with payment due upon receipt. Remember that the real world still exists.

Still, if you're selling a software program or selling access to information on your website, you might use the Net to help distribute trial programs online or permit use of your website for a limited time. You can then have the right to use your software or to access your site automatically turn off at the end of the trial period, unless the buyer pays you for more access.

In a faceless Internet transaction, insuring payment is a seller's continuing concern while insuring the on-time delivery of quality goods is the buyer's worry. To help with these concerns, a few companies offer "digital letters of credit." These companies essentially act as neutral third parties to help confirm payment in exchange for delivery.

If you choose to sell on open account, and your online transaction goes bad, remember that many of the same laws that apply to mail order and store sales will apply to your Internet transaction. For example, you will need to consider federal and state debt collection laws. This is especially true when you deal with consumers. You ignore these laws at your own peril. The penalties for violations can be substantial.

If you're forced to sue, you'll need to consider whether you can sue in your state or whether you'll have to go to your buyer's home state. You can often tip the legal balance in your favor by having Terms and Conditions of Website Use on your website. These Terms and Conditions can create a contract between you and your buyer that's favorable to you. If you're doing business online and you haven't had your lawyer write Terms and Conditions, which you've posted on your website, you're an accident waiting to happen.

Turnkey Solutions

If all of these options seem a bit intimidating, you might want to consider companies that are offering complete turnkey storefront solutions. Some such providers now offer a packaged electronic commerce solution which includes web hosting, order processing, and delivery. This system relies on Cybercash to provide the processing of credit card and check payments in a single electronic cash register.

Don't be afraid of the new frontier of online sales. Embrace it while recognizing and coping with some of its unique legal and logistical challenges. If your company is selling online, you need to make sure that you get paid and you have a variety of ways for that to happen. Make sure that you get expert help along the way; different solutions may apply to different types of transactions.

Portions of this article were written with the assistance of Brian Nelson.

Many Options Available for Online Commerce is republished from
Mark Grossman
Mark Grossman