Academic journal article Economic Review (Kansas City, MO)

Clicking with Dollars: How Consumers Can Pay for Purchases from E-Tailers

Academic journal article Economic Review (Kansas City, MO)

Clicking with Dollars: How Consumers Can Pay for Purchases from E-Tailers

Article excerpt

The Internet is often referred to as the world's largest mall. Consumers can shop at stores from around the globe simply by pointing and clicking on their computers. About half of all adults in the United States have made a purchase online. That's at least 75 percent of Americans with web access. These cybershoppers spent $44.8 billion online in 2000--148 percent more than they spent the previous year. Worldwide, online shopping is considerably greater since the United States contributes only about a third of all Internet users. (1) And cybershopping is expected to continue to grow as more households become connected to the Internet and as improvements in mobile telecommunication technology allow wireless Internet access anywhere and anytime.

A byproduct of the dramatic increase in online shopping has been a heightened demand for convenient and secure online payment methods. If consumers had access to a Star Trek-like transporter, paying for goods and services in cyberspace would be easy. The transporter could convert their dollar bills to energy and send them through space to the appropriate e-tailer, where the bills would rematerialize upon arrival. Lacking such a device, consumers are making almost all their online purchases with credit cards. But the dominance of credit cards at the online check-out counter does not mean consumers perceive credit cards as the ideal way to pay on the Internet. Study after study continues to identify concerns about the safety of providing credit-card numbers and personal information online as the biggest barrier to cybershopping. (2) Without further improvements in consumers' online payment options, e-tailing might not realize its full potential.

Many firms have stepped in to meet the demand for payment services by cybershoppers. Some have been established providers of payment services in the bricks-and-mortar world. Most have been technology start-ups, though increasingly these tech firms are forming alliances with more established financial service providers. Regardless of their industry experience, today's payment service providers (PSPs) are generally offering new ways of using the same means of payment that predominate in the physical world. Only a few provide truly new means of payment.

This article surveys and assesses what is new about the options consumers have to make payments at Internet retailers. Section I considers as background the two objects that are available for transferring value to make payments in the physical world--cash and deposits--and describes their use at bricks-and-mortar retail outlets today. Section II first discusses how making payments in cyberspace differs from making payments in the bricks-and-mortar world. It goes on to describe the use of traditional payment methods for cybershopping. Section III focuses on new means of payment designed especially for use online.


As background for considering how consumers can pay for purchases on the Internet, it is useful to understand first what objects in the physical world allow a buyer to transfer monetary value to a seller, and second how payments are made. The distinction between these is significant because monetary value must ultimately be exchanged to make payment, even though it often cannot be exchanged directly by consumers.

How monetary value is exchanged

In most economies today, consumers can transfer monetary value with either cash or deposits. The term "cash" refers to paper currency and metallic coins that are used in exchange. The term "deposits" refers to claims to monetary value (that is, claims to cash) on the books of financial institutions (FIs), such as the funds individuals hold in their accounts with banks. They are merely bookkeeping entries on FIs' balance sheets with no physical representation.

Because deposits take no physical form, buyers cannot pay for purchases by handing them directly to sellers, the way they would cash. …

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