Learning Objectives Describe cross-border EC and the issues that arise in EC payments and fulfillment. Describe the major changes in retail and their impacts.

Electronic Commerce Payment Systems and Order Fulfillment
Chapter 11 Electronic Commerce Payment Systems and Order Fulfillment

Learning Objectives Describe cross-border EC and the issues that arise in EC payments and fulfillment. Describe the major changes in retail and their impacts on EC payments. Discuss the different payment cards used online and processing methods. Discuss the different categories and potential uses of smart cards. Describe the issues with and solutions to online micropayments. Understand PayPal and 3rd party payment gateways.

Learning Objectives Understand the major types and methods of mobile payments. Describe the differences and key characteristics of digital and virtual currencies. Define EC order fulfillment and describe the EC order fulfillment process. Describe the major problems of EC order fulfillment. Describe various solutions to EC order fulfillment problems.

CROSS-BORDER EC – PARTNERING WITH TMALL GLOBAL
The Problem EC can transcend borders, opening product lines and services to a growing international market It may take a substantial sword to open it When a buyer makes an online purchase from a merchant or seller in another country it's called international e-commerce Cross-border e-commerce*

in virtually every region of the world the USA and China are by far the most popular online cross-border purchase destinations The only exception is in Western Europe where cross-border purchases tend to be made within the region By 2020, the volume of cross-border transactions is projected to have a compound growth rate of close to 30% between now and then, so that cross-border transactions will reach around 1 trillion

At that time, close to 1 out of every 2 of the estimated 2 billion shoppers will make cross-border purchases For merchants, sellers, banks, and payment providers these estimates paint a picture of massive opportunity What's needed to take advantage of the opportunity?

The Solution Those merchants involved in cross-border sales treat international customers as if they were domestic (“think local”) They offer multiple languages, multiple currencies, and multiple payment systems Alibaba Group has made a concerted effort to encourage cross-border online B2C imports. They launched a new cross-border EC website called Tmall Global It's a platform that enables foreign companies to sell to Chinese consumers without having a physical presence in China

Costco decided to offer some of their products to the burgeoning B2C market in China Their basic strategy is to offer lower priced, high quality, nationally branded and Costco private label Given the low price strategy, the profits come from selling focused inventory with high sales volumes and rapid turnover coupled with "operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities" They also come from membership fees

Their anemic EC sales are also a consequence of their expressed strategy EC sales don't generate memberships, nor do they encourage much foot traffic along with in store impulse buying Costco decided in 2014 enter the market by setting up shop on Alibaba's Tmall Global site without capital investments in Chinese real estate

Tmall has a number of key features supporting cross-border EC, but two of the more important are Alipay and Tmall's bonded warehouses and logistics-partner network Alipay is Alibaba's payment platform The platform automatically handles currency conversion so that Chinese buyers pay in Yuan and retailers are paid in their home currency once a buyer has received their goods The other key feature revolves around a set of bonded warehouses located in 5 major cities where merchants can pre-ship products in large quantities in duty-free zones

In exchange for these types of key services, which aren't free, retailers must meet certain criteria Have a retail or trading license Prove they own the brands or have rights to distribute them Provide their Tmall site in Chinese Have products manufactured outside inspected and approved by Tmall Provide customer service including Chinese language service support Support customer returns and provide a return location in hina. Provide shipping direct to the consumer in China

The Results Costco’s Tmall Global site sells around 200 items from its food, healthcare and private-label Kirkland Signature product offerings They also used their base in Taiwan to help support operations and rely on Tmall's inventory storage and 20 day delivery to limit operating expenses

Benefits of the operation: Enables them to test the market without having to invest in real estate Allows them to experiment with the market to determine those products that will sell Alleviates the need for a local business license to establish an online store Limitations of the operation: Restricts them from advertising on Tmall Mainland and Taobow Charges merchants a deposit fee, an annual fee, a sales commission fee, and an Alipay fee of 1% of the product price and logistics fees Eliminates membership fees There's no assurance that Costco will succeed in the Chinese online B2C market

LESSONS LEARNED FROM THE CASE
In the merchant's point of view, online life is anything but simple Regardless of whether a merchant is running a domestic or international operation, there are a large number of complex issues that need to be addressed in making a business successful A major difference between the two types of operations is that when a merchant tries to expand hers or his online business by going international the problems are exacerbated -- almost like running separate, local businesses in the different countries

LESSONS LEARNED FROM THE CASE
Merchants have some of the key issues that revolve around: Handling electronic currencies and payments Managing and fulfilling orders once payment has been made Ensuring that the linkage between the financial side and the logistical side appears seamless to customers

CHANGING RETAIL LANDSCAPE
Omni-Channel Retail Overall, worldwide retail sales are growing, but EC retail sales are growing faster There is no doubt that the number of retail stores and retail square footage are on the decline So is the foot traffic within most stores A lot of this decline is a function of online shopping, but this doesn’t mean that stores completely dying It does mean that the shopping experiences we know today are morphing into something different, so that strictly keeping score of in-store versus online dollars may be moot

Cash versus Non-Cash Transactions Both offline and online non-cash payments are on the rise In absolute terms this doesn’t mean that cash payments are declining and ultimately dying In fact they are actually increasing but at a slower rate than non-cash payments Cash accounts for 85% of global consumer transactions, although this percentage varies widely by country

There is a substantial push by a number of governments to eliminate cash transactions as much as possible This pattern between cash and non-cash consumer transactions mirrors the pattern between offline and online retail sales Globally, cards (credit and debit) are the most frequently used, followed by digital payment systems

Move to Mobile Not surprisingly, the rapid adoption of smartphones is also highlighted by the number of global shipments of new smartphones versus the combined shipments of other computer-based devices including tablets, 2-in-1 hybrid tablets, portable PCs, and desktop PCs Older consumers still use PCs

Figure 11.1 Percent of Total Country Online EC Spend by Device
Source: Constructed from data in Keith, M. “Global E-Commerce Sales, Trends, and Statistics.” September 2, remarkety.com/global-ecommerce-sales-trends-and-statistics-2015 (accessed June 2016).

Implications for EC Payments Those merchants with both a physical and digital presence, tended to run their online business as a simple, albeit separate, extension of their offline world Innovations aimed at supplementing, modifying, or replacing some aspect of electronic payments number in the thousands “Hidden digital payments” to describe this overall collection of activities and divided the payments into four main types including: Closedloop cards and mobile apps Digital wallets Mobile money Virtual currencies

Critical Mass Critical mass depends on a number of key factors such as those listed below: Independence Interoperability and portability Anonymity Divisibility Ease of use Transaction fees International support Regulations

USING PAYMENT CARDS ONLINE
Credit cards Charge cards Debit cards Credit Card Reading Stationary card readers Portable card readers Mobile readers

Processing Cards Online Authorization* Settlement* There are a number of parties involved in both processes including: Customer Merchant Issuing bank Merchant acquiring bank Credit card (association) network Payment service provider

Figure 11.2 Credit Card Payment Procedure
Drawn by Dave King

Although the entire authorization process involves a number of parties, it usually takes a few seconds While cards are obviously convenient for both the consumer and the merchant, they cost the merchant money Discount rate* Interchange rate* The EC merchant may: Own the payment software Use a point-of-sale (POS) system operated by a card acquirer Use a POS system operated by a payment service provider. Merchants can rely on payment service providers (PSPs)

Fraudulent Card Transactions Costs associated with combating fraudulent transactions These include the costs of tools and systems to review orders, the costs of manually reviewing orders, and the revenue that is lost from erroneously rejecting valid orders The key tools used in combating fraud are: Card verification number (CVN)* Address Verification System (AVS)* Customer order history Negative lists Postal address validation service

SMART CARDS Smart Card*
Smart cards are used for a wide variety of purposes including: Telecom Financial Government and healthcare Device manufactures Other

SMART CARDS Types of Smart Cards Contact card *
Contactless (proximity) card* Smart card reader* Hybrid cards and combi cards combine the properties of contact and proximity cards into one card

SMART CARDS Stored-Value Cards* Applications of Smart Cards
Stored-value cards come in two varieties: Closed-loop (single purpose) Open loop (multiple purposes) Applications of Smart Cards Retail Purchases Transit Fares

Figure 11.3 Singapore Electronic Road Pricing System
(Source: Photo taken by J. K. Lee March 2013)

EC MICROPAYMENTS Micropayments (e-micropayments)*
From the viewpoint of many vendors, credit or debit cards are too expensive for processing small payments There are five basic micropayment models that have enjoyed some amount of success Aggregation Direct payment Stored-value Subscriptions À la carte

PAYPAL AND OTHER 3RD PARTY PAYMENT GATEWAYS
While credit and debit cards dominate e-commerce payments, one alternative that has succeeded is PayPal (and its clones) eBay sellers and buyers opened up PayPal accounts that were secured by a bank or credit card account At the completion of an auction, the payment transactions were conducted via the seller’s and buyer’s PayPal accounts In this way, the bank or credit card accounts remained confidential

While PayPal provides a number of services, at their core they are a full-service 3rd party payment gateway Basically, they eliminate the need for a merchant to deal with the intricacies and complexities of authorization and settlement in online payment The also eliminate the need for merchants to handle card information and for customers to provide their financial information with every transaction.

Amazon, the leading online retailer, has started to make forays into this 3rd party payment arena with their Amazon Payments system Globally, PayPal is also the market leading gateway

MOBILE PAYMENTS Types of Mobile Payments Mobile payment*
From the standpoint of the various parties, any successful mobile system needs to overcome the following sorts of issues: For Buyer: Security (fraud protection), privacy, ease of use, choice of mobile device For Seller: Security (getting paid on time), low cost of operations, adoption by sufficient number of users, improved speed of transactions For Network Operator: Availability of open standards, cost of operation, inter-operability, and flexibility and roaming For Financial Institutions: Fraud protection and reduction, security (authentication, integrity, non-repudiation

Figure 11.5 The Credit-based Transportation Card Displays the Fare and Accumulated Charges for the Current Month at the Ticket Gate (Photos by J. K. Lee)

MOBILE PAYMENTS Four types of mobile payments: Consumer Merchant
Person-to-Person (P2P) Institutional

MOBILE PAYMENTS Mobile Consumer Payments – Wallets, Clouds, and Loops
Mobile digital wallet* Device-Based Digital Wallets Example: Wearable Wallets from MasterCard and Coin Cloud-Based Digital Wallets Closed-Loop Systems Example: Starbucks Closed-Loop Wallet

MOBILE PAYMENTS Mobile Point of Sale Person-to-Person (P2P) Payments
Example: Square (squareup.com) Person-to-Person (P2P) Payments

DIGITAL AND VIRTUAL CURRENCIES
Types of Digital Currencies Fiat currency* Electronic money* Virtual currency* Digital currency* Convertible virtual currency* Non-convertible virtual currency* Size of the Virtual Currency Market

Bitcoin and Other Cryptocurrencies Bitcoin Background Bitcoin it was the first to come up with a decentralized system that offered a useable solution to what is known as the double-spend problem Like the dollar or any other currency, a bitcoin is a unit of account that possesses a number of the key characteristics Durable Divisible Countable Transportable Fungible Verifiable

How Does Bitcoin Work? Public ledger: Essentially, it is a digital file tracking every Bitcoin transaction – time, date, participants, amount, and transfer of ownership of bitcoins – that has ever occurred since the first bitcoin was issued Blockchain* Unlike a company ledger, the Bitcoin blockchain is public, this means that anyone can view it While Bitcoin is a payment system for exchanging value, at its technical base it is a messaging system built on its peer-to-peer (Internet) network

Bitcoin private key* Bitcoin address* When someone wants to execute a transaction, he or she uses his or her private key to digitally sign a message that includes: Input Amount Output

Advantages and Disadvantages of Bitcoin Some of the more frequently cited advantages include: Anonymity Simplifies Financial Transactions Merchant Friendly Support Cross-Border Commerce Free from Government Manipulation Some of the more frequently cited disadvantages include: Not yet widely accepted Fluctuating valuation Transactions are irreversible Private keys can be lost

Figure 11.6 Bitcoin Web Wallet
(Drawn by D. King)

Bitcoin Competitors and the Future of Math-Based Currencies Ethereum Ripple Litecoin

ORDER FULFILLMENT AND LOGISTICS: AN OVERVIEW
Basic Concepts of Order Fulfillment and Logistics Order fulfillment* The EC Order Fulfillment Process Order and pay Payment authorization Check for in-stock availability. Notify if and when available Determine whether inventory should be replenished (and whether additional production is required) Locate warehouse where order can be handled. Transmit order to warehouse Pick and pack order for shipment Dispatch order Receipt of goods Manage returns

Figure 11.7 Order Fulfillment
Merchant Payment Gateway Customer Authorize? 2 Inventory 3 Product Sourcing Available 5 Warehousing 65 Pick, Quality Check, Pack, Ship 7 Shipment, Tracking 4 Replenishment? 9 Returns Handling Order Pay 8 Receipt (Drawn by D. King)

ORDER FULFILLMENT AND LOGISTICS: AN OVERVIEW
The basic operations models are well known to supply chain experts and practitioners and include: Engineer-to-Order (ETO) Make-to-Order (MTO) Make-to-Stock (MTS) Digital Copy (DC) Order Fulfillment and the Supply Chain

PROBLEMS IN ORDER FULFILLMENT ALONG SUPPLY CHAINS
The main challenges that these executives and their companies are facing include: Order Expectations Order Accuracy Multi-Channel Order Management Complex Distribution

PROBLEMS IN ORDER FULFILLMENT ALONG SUPPLY CHAINS
At the root of many of the problems and challenges are deficient planning and execution practices Some are some of the key causes: Uncertainties in Demand Lack of Information Sharing Inadequate Logistical Infrastructure Third-party logistics suppliers (3PL)* Inefficient Financial Flows

SOLUTIONS TO ORDER FULFILLMENT PROBLEMS ALONG THE SUPPLY CHAIN
Improvements in the Order-Taking Activity One way to excel in order fulfillment is to improve the order-taking activity and its links to fulfillment and logistics

Warehousing and Inventory Management Improvements Warehouse management system (WMS)* Inbound functions Inventory functions Resource management Outbound functions 3PL/divisional support Changing the Structure and Process of the Supply Chain

Figure 11.8 Changes in the Supply Chain
Technology Supplier Consultant Logistics Sub-supplier Support Manufacturer Bank Payment Buyer Delivery Other Services Service Retailer Wholesaler Traditional Linear Supply Chain

Speeding Up Deliveries: From Same Day to a Few Minutes Delivery by Drones Example: Amazon Prime Air Same Day Delivery Partnering Efforts and Outsourcing Logistics Using Robots for Order Fulfillment

Integrated Global Logistics Program Order Fulfillment in Make-to-Order (MTO) and Mass Customization

Handling Returns (Reverse Logistics) Return the item to the place of purchase Separate the logistics of returns from the logistics of delivery Completely outsource returns Allow the customer to physically drop the returned item at a collection station or at a physical store of the same vendor Auction the returned items

Order Fulfillment in B2B Using E-Marketplaces and Exchanges to Ease Order Fulfillment Problems in B2B Order Fulfillment in Services Innovative E-Fulfillment Strategies Merge-in-transit* Supply Chain Planning and Execution Software

MANAGERIAL ISSUES How will you address the omni-channel imperative?
What payment methods should you support? What micropayment strategy should your e-marketplace support? Which mobile systems could influence your business? Should we outsource our payment gateway service?

MANAGERIAL ISSUES Should we accept virtual currencies as a form of payment? How secure are e-payments? If you are an EC vendor, what are the bottlenecks in your order fulfillment process? How should we manage returns?

SUMMARY Cross-Border EC Changing retail landscape
Using payment cards online Smart cards EC micropayments PayPal and 3rd party payment gateways

SUMMARY Mobile payments Digital and virtual currencies
Order fulfillment process Problems in order fulfillment Solutions to order fulfillment problems

SEND MONEY HOME: M-PESA AND THE KENYA EXPERIENCE
The slang term unbanked refers to people who do not use banks or other financial institutions The Problem In developing countries, immigration is "a way of life” This migration results in a massive transfer of money from workers to their families and friends back home These sums not only represent big money from the developing countries perspective, they also represent big money for the Money Transfer Operators like Western Union who handle these transfers

Developing countries also have sizeable "internal" remittances generated by workers who have moved from the rural parts of the country to take jobs in the cities As the last few years have demonstrated, the real answer might be in mobile money and the "un-banking" of the banking system

The Solution Kenya's mobile operators, of which Safaricom Network Company was by far the largest, had managed in a relatively short period of time to get 10 million mobile phones in the hands of the Kenyans (for a 35% penetration rate) The new system was called M-PESA - the "m" stands for Mobile and "pesa" is the Swahili word for money

First, the sender and the receiver had to have mobile phones that supported texting Next, they had to get Safaricom SIM cards They had to register with an M-PESA agent a registered customer first deposits cash to his or her account This is done by giving cash to an M-PESA agent who immediately credits it to the customer's account

He or she can send money at any time by selecting "Send money" from the M-PESA menu and then entering the recipient's phone number At this point, the sender is prompted for his or her M-PESA pin number and then selects "Ok" At this point, the system sends a message to the sender confirming the transfer and the recipient's name In turn the recipient receives a message with the sender’s name and the amount transferred to his or her account

A major key to the success of the system is the M-PESA agent network; "human ATMs” They receive regular training and are frequently monitored They are also restricted from doing business with other mobile operators There are no fees for making deposits nor are there fees for adding airtime to a phone

The Results M-PESA has been a major success The program started in Kenya but now operates in 11 countries M-PESA has become a mobile e-wallet Additional systems have also been integrated to M-PESA to provide other financial services

Learning Objectives Describe cross-border EC and the issues that arise in EC payments and fulfillment. Describe the major changes in retail and their impacts.

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Learning Objectives Describe cross-border EC and the issues that arise in EC payments and fulfillment. Describe the major changes in retail and their impacts.

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