Pre-paid Visa smooths online transactions
Fri, Nov 23 2007

By Jonathan Oxer, IVT Technical Director

One of the speed bumps in the uptake of e-commerce has always been the actual payment process - exchanging money for goods with minimum fuss and bother. The dominant online transaction method is credit card payments but credit cards are a mixed blessing for both vendors and customers.

On one hand we wouldn't have business-to-consumer e-commerce at all if it weren't for credit cards. For all their flaws, they are still the best general-purpose mechanism we have to transfer money from a consumer to a vendor with a reasonable degree of assurance for both parties.

On the other hand, credit cards have some serious problems that have made many consumers and vendors wary of using or accepting them for online transactions. The problems mainly lie in that phrase "reasonable degree of assurance".

For all the marketing effort expended by banks to convince us that they're vigilantly watching over our funds and preventing fraudulent use of our credit card details, the entire credit card system is still based on trust. When a consumer enters their credit card details into an e-commerce website, they're trusting that the site operator:

* Is really who they claim to be.
* Is a valid business who really will ship the goods as promised.
* Won't store or disclose the card details to third parties.
* Has implemented adequate security to keep the details confidential.

When a vendor sets up an e-commerce website to sell product online, they're trusting that consumers:

* Are really who they claim to be.
* Are using a credit card they are authorised to use.
* Won't renege on the transaction and have it reversed by the bank after receiving the goods.

Because most of the trust difficulties rest with the consumer the system is deliberately stacked in their favour. For example, a consumer who makes a purchase on an e-commerce website can receive the goods then state to their bank that they never authorised the transaction - the bank doesn't bother doing any form of checking or adjudication, it simply reverses the transaction immediately and takes the funds back from the vendor who then has to fight to prove the transaction was valid to get their money. Pretty scary from a vendor's point of view, and I'm sure most business operators are very glad more people don't know about it. If a significant number of consumers started routinely contesting every charge on their credit cards and forcing all vendors to justify every transaction the whole system would fall in a screaming heap and the credit card system we rely on today would cease to be viable.

All this is background to two very interesting announcements recently, both of which aim to make the process of online and offline transactions easier and safer.

The first was the availability of pre-paid Visa cards in Australia. Obtaining a Visa card has traditionally required that the cardholder open a bank account and satisfy various criteria, which in turn means proving their identity to the bank. Traditional Visa cards also typically provide credit which is charged at a very high rate of interest, posing a trap for many consumers who spend beyond what they can repay. And for those reasons traditional Visa cards are very difficult or impossible to obtain for children or those in financial difficulty - which is of course generally a good thing.

However, Visa is also one of the only practical ways to pay for many services now, particularly online, and having a Visa card which does not provide access to credit and is not tied to a bank account would be extremely useful for many people. Even people who have a traditional Visa account could benefit from using pre-paid Visa cards for online transactions or when travelling overseas when there is the potential for theft or fraud.

We've had Bopo pre-paid Visa cards for a while now in Australia. A Bopo pre-paid Visa is almost identical to a traditional Visa except that it restricts consumers to spending only what they have available in their bank account - perfect for limiting the dangers associated with online transactions. However, you still need to open an account to deposit funds for use with the card and if your card details are stolen your account could be cleaned out.

A possible solution is "VCard", a virtual Visa card just released in Australia but available in Ireland since 2005 and the UK since 2006. Buying a VCard is just like buying a gift certificate or mobile phone credit: you walk into a shop and buy a VCard with a nominated value up to AU$1000. You don't actually get a physical card - hence the "virtual" in the name! - just a printout with the Visa card numbers, expiry, and balance. You can then enter those details when buying online just like a normal credit card except that it's only valid up to the purchased value. A VCard isn't rechargable so once you've spent the money on it you just throw it away and buy another one - every VCard has a unique Visa number, so even if someone steals the details they'll never get access to more than the funds remaining.

Bopo have also now released a "Visa Gift Card" product which operates in almost the same way except that you don't just get a paper printout, you get an actual physical Visa card that can be used both online and offline in regular EFTPOS machines. The idea is that rather than buy a store-specific gift certificate, you can buy what is effectively a non-rechargable Visa card preloaded with up to $750 that can be used anywhere a normal Visa is accepted (including online) just like a VCard.

The second announcement was PayPal's release of Mobile Checkout, a system designed to allow transactions to be conducted directly from a phone handset. Mobile Checkout doesn't require the consumer to have a Visa card at all and opens the way for transactions such as purchasing a movie ticket directly on your phone. Imagine if you could go to the movies without queueing up at all: just pick the appropriate movie and session time on your phone, authorise the transaction, and then walk straight in to the cinema after your ticket has been verified off the screen.

It will be very interesting to see how successful VCard and the various Bopo products are in Australia, particularly leading up to the holiday season. Pre-paid Visa in particular may well be the final piece of the puzzle that makes online purchases possible (and safe) for many consumers.