A LOOK AT HOW ONLINE BILL PAYMENT

CHANGES THE eCOMMERCE LANDSCAPE

A MODASolutions™ White Paper

MODASolutions September 2007

2207 Concord Pike, #510
Wilmington, DE 19803-2908
866-365-6632
www.MODASolutions.com
www.eBillme.com
Table of Contents
1. Executive Summary ..................................................................... 3
84 million: The number of consumers available to drive new sales ................................... 3
More payment options equal more sales ........................................................................... 3
Online banking unlocks access to new consumer groups ................................................. 3

2. Consumer Behavior and Online Payments................................ 4

Security and trust................................................................................................................ 4
Control and cash management .......................................................................................... 4
Credit limitations ................................................................................................................. 5
Lack of credit cards ............................................................................................................ 5

3. The Merchant Perspective ........................................................... 6

Reducing costs ................................................................................................................... 6
The high cost of fraud......................................................................................................... 6
Increased sales .................................................................................................................. 7
Additional factors ................................................................................................................ 7

4. The Power of Online Banking...................................................... 8

Impressive growth and high potential................................................................................. 8
Profile of online banking customers ................................................................................... 8
Small businesses................................................................................................................ 9
Online bill payment: top-selling application ........................................................................ 9

5. Online Banking Increases Online Sales ................................... 10

Value to consumers.......................................................................................................... 10
Value to merchants........................................................................................................... 10
Value to banks .................................................................................................................. 10

6. About eBillme™.......................................................................... 11
Payment process.............................................................................................................. 11
eBillme processing platform ............................................................................................. 12

7. Conclusion .................................................................................. 13
About MODASolutions................................................................... 14
1. Executive Summary
This white paper explores the buying behavior of online consumers and the impact of this
behavior on merchant profitability. This document also explains how online banking can help
merchants decrease transaction processing costs, capture new customers, and manage
transaction risk more effectively.

84 million: The number of consumers available to drive

new sales
Estimates show 84 million customers already bank online. However, 80 million consumers
who use the Internet 1 do not buy online. The primary reasons include a perceived lack of
security, an unwillingness to disclose personal information, and the absence of acceptable
payment methods. Regardless of merchants’ best efforts to close sales online, many consumers
abandon their shopping carts at the payment page. At first glance, the abundance of abandoned
online shopping carts represents millions of dollars in lost sales; in reality, it ushers in a major
business opportunity for merchants who are ready and willing to provide alternative payment
options that appeal to millions of potential buyers.

More payment options equal more sales

When consumers buy products face-to-face, they have a choice of multiple payment options
including credit cards, debit cards, cash, and checks. These options are a result of the need to
meet customers’ diverse requirements. However, in the online world the same options do not
exist for consumers. Credit cards dominate online payments and are generally the only payment
method accepted by most merchants. In order to experience continued sales growth, merchants
need to expand their payment options to address varied consumer preferences. Effective and
user-friendly alternative payment options are a much-needed addition to the world of online
shopping.

The addition of new payment options results in fewer dropouts at checkout 2 and more completed
sales. The right payment options generate incremental sales without increasing fraud, charge-
backs, or overhead costs.

Several alternative payment options address these issues. One of the newest options, developed
in response to the growing use of online banking, enables consumers to pay for Internet
purchases directly and securely from their online banking accounts. Today, MODASolutions is the
only company that offers this solution. Using eBillme™, shoppers have the option of paying for
web-based purchases through the convenience, comfort and trust of their own banks.

Online banking unlocks access to new consumer groups

Banks have spent billions of dollars building secure and reliable online banking systems that
include services such as bill payment. 84 million customers already bank online—a number
forecasted to reach 110 million by 2010. Expanding this existing infrastructure to support online
purchases represents a major opportunity for merchants, as online banking becomes one of the
most significant payment alternatives to credit cards.

1
Gartner and Jupiter Research, Online Bill Viewing and Payment Forecast, 2003-2008
2
CyberSource. The Insider’s Guide to eCommerce Payment, 2004

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2. Consumer Behavior and Online Payments
Industry sources cite four main reasons why consumers are reluctant to purchases goods and
services online. These include:

• Concerns about security and trust;

• Preference for cash-like debit payment options;
• Limited credit; and
• Lack of credit cards—particularly in the case of youth and young adults.

Security and trust

The need to provide sensitive information to a website in
order to conduct payment creates a significant barrier to
purchasing.

According to Forrester Research, almost 30% of

American consumers who browse online do not
purchase online.

Forrester Research reveals that the main obstacle to

online buying is safety concerns related to entering
credit card information on the web; 62% of respondents
cited this as a deterrent.

Consumers are reluctant to use payment options that

require them to provide personal information such as
bank account information, social security numbers, or
credit card numbers.

Of the consumers who currently shop online, 50% are concerned about the security of their
personal information.

Control and cash management

To avoid the ‘debt’ trap, many consumers are looking for cash-like
payments that allow them to maintain control of their finances and
pay merchants immediately and directly from available funds. This is
driving the use of debit options both on and offline.

Most consumers make face-to-face purchases using available funds

such as cash, checks and debit (US Federal Reserve 3 ). Credit cards
only account for 23% of purchases in the US, but credit cards
dominate online purchases. However, this is expected to change as
alternative payment options become available to consumers.

3
The 2004 Federal Reserve Payments Study.

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Credit limitations
Among those Americans with credit cards, close to 45% are within 5% of their credit limit 4 . An
Acxiom study 5 reveals that three main groups comprise most of this segment.

1. Parents with low incomes: Tend to be between 30 and 40 years old and living in urban
areas. Like many lower income groups, this segment purchases many items from higher-end
stores and typically spends more than income dictates.

2. Youth and young adults: Single consumers with no children and very limited income.
Included in this group are college students with little credit and persons with very active
lifestyles. For example, shopping patterns include heavy purchases of consumer electronics,
clothing and sporting goods.

3. Starter families: Young married couples with children. Consumers in this group likely have
white-collar jobs and allocate a good portion of spending on their children. This segment,
which also focuses on building a financial foundation for their families, is often already
overwhelmed with credit card debt.

Lack of credit cards

At least 50 million adults in the US 6 do not possess credit cards. For these potential online buyers
non-credit card payment options fulfill a need that has not previously been addressed.

Youth and young adults between the

ages of 12 to 21 are active consumers
and the bulk of this segment does not
hold credit cards. Offline, these
consumers primarily use cash and
checks; online, they have limited
options.

This segment has disposable income

and can influence their parents’
purchase decisions. The Youth Pulse
project shows that this age group
spends $22 billion online per year 7 .
Another $20 billion is spent offline after
consumers conduct web research.

The absence of credit cards and other

suitable payment options is problematic
for young people who want to shop
online. A typical workaround is to borrow
a parent’s credit card for purchases.
Understandably, not all parents are comfortable with this type of request. In general, youth are
not as aware of the risks and limitations of credit cards which can result in purchases being
declined or returned by parents.

Many young consumers do not have credit cards, but do have bank accounts. Merchants that
provide online payment options other than credit cards can tap into a significant sales opportunity.

4
Pelorus Group Report Stored Value: 21st Century Currency 06/03
5
Acxiom Interactive - http://www.acxiom.com
6
Source: CardWeb.com
7
http://info.virtuinc.com/newsletter/1003_whats_hot.html

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3. The Merchant Perspective
Merchants that provide online payment options in addition to credit card options have the
potential to reduce costs and increase sales.

Reducing costs
Transaction fees for online payments represent one of a merchant’s biggest expenses. On
average, processing credit card transactions cost merchants 4% to 10% of total revenue on a
fully loaded basis. In addition to initial set up fees, merchants have several charges tied to each
transaction, including:

Processing fees:
• The discount rate: The percentage charged on the dollar amount of a sale or a
returned transaction.
• The transaction fee: Assessed for each transaction authorization, such as a sale or
a return, submitted by a merchant. This fee also applies to transactions where cards
are declined.

Security and fraud-related fees:

• The address verification service fee (AVS): A fraud-prevention measure that
provides merchants with an additional fraud-detection tool to determine the validity of
a sale. AVS matches a customer’s shipping information with the cardholder's billing
address. When AVS is used, there is a per-transaction fee for the service.
• Chargeback and retrieval fee: Increases cost and creates significant administration
issues. Merchants often do not clearly examine the chargeback rules and policies
associated with the payment options they are considering. According to Cyota, a
provider of security and anti-fraud solutions, the average cost of processing a
chargeback is approximately $50 in customer service time, phone calls, and paper
processing 8 .

The costs associated with fraud are by far one of the largest and least understood costs to
merchants.

The high cost of fraud

Preventing fraud is of paramount importance to
merchants. As shown in the figure, direct fraud
loss (i.e. losses due to charge-backs and
unreturned goods) rose 37 percent in 2004. $2.6
billion of this loss is attributed largely to credit
card fraud 9 . This clearly signals the need for
online payment options that incorporate proper
customer authentication for each transaction.

8
The Road to Online Payment Security. Cyota. January 31, 2002
9 th
CyberSource. 6 Annual Online Fraud Report. 2005 Edition

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Even more alarming than the actually fraud is the bleak outlook expressed by merchants.
Merchants believe that credit card payment fraud will continue and become an increasingly
serious problem in the future. Nearly half of the merchants surveyed by CyberSource are
spending 0.5% of their online revenue managing payment fraud. Order screening is becoming
tighter as merchants struggle to find ways to keep fraudsters away.

Although direct fraud loss represents 1% of orders, costs associated with risk management
procedures, tighter screening, and manual order review are significant. Tighter detection tools
lead to a rejection of up to 4% of orders, some of which are valid. Manual reviews of transactions,
established to prevent fraud, are both labor and cost intensive. Up to 23% of orders are manually
reviewed—an overwhelming task for large-volume sites.

Merchants are anxious to find alternative payment options that provide access to more
consumers while reducing total costs, particularly those costs related to fraud, risk management
and exception processing.

Increased sales
Online sales continue to grow and merchants must find new and innovative ways to expand their
consumer base. Consumers who are unwilling or unable to use a credit card give merchants new
opportunities to increase incremental sales.

A 2004 study commissioned by CyberSource 10 shows the

impact of additional payment options on merchants. The
study, which polled 147 leading online retailers, found that
those who have multiple payment options convert more
browsers into buyers.

Another factor in increasing sales is generating repeat

orders and instilling customer loyalty. Repeat orders stem
from customer satisfaction with the purchasing experience.
This experience not only relates to the product and
competitive pricing, but also the degree to which the
consumer’s expectations are met. Alternative payment
options help to meet or exceed customer expectations.

Additional factors
Limited number of new users: To be deemed successful, alternative payment options must
ultimately yield a large incremental user base. Many alternative payment systems ultimately fail
because they rely heavily on credit cards and do not bring new buyers to merchants.

Refunds: Many payment options require the merchant to settle returns offline—an expensive and
labor-intensive process.

Building consumer relationships: Merchants want to establish a consumer relationship that

generates loyalty and repeat business. Some alternative payment options limit the ability of the
merchant to develop these relationships.

10 ∗
CyberSource. The Insider’s Guide to eCommerce Payment. 2004

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4. The Power of Online Banking
Consumers need secure and trusted solutions that align with their existing behavior and provide a
choice of payment options. Merchants seek access to a larger consumer segment to increase
sales, and they desire lower transaction costs and reduced fraud exposure. Online banking, a
large and rapidly growing application, addresses both consumer and merchant needs.

Impressive growth and high potential

Since the early 1990s, banks have been developing a
robust online banking system that currently attracts 84
million Americans. Virtually every bank, credit union
and financial institution offers online banking—
including services that enable consumers to check
account balances, to pay bills, and to transfer funds.
As shown in the graph, online banking has seen
double-digit adoption during the past five years.
Today, banks continue to expand and optimize online
banking services to drive greater adoption.

Profile of online banking customers

Customers view online banking as an important tool that facilitates easier management and
control of finances. Customers trust that online banking provides significant protection from
unauthorized use of their personal information. In addition to control and security, consumer
adoption is also influenced by:

• Ease of use: Customers appreciate that the service is easy to use and intuitive. They do
not need to establish another account elsewhere to make a payment.
• Anytime availability: Online bill payment is available 24 hours a day.
• Anywhere access: Wherever they happen to be (at work, at home, or on the road)
consumers have access to their checking accounts to pay bills and check balances. They
also have access to multiple media for payments such as websites, interactive voice
response (IVR) or payments at a physical branch.

Online banking customers are authenticated by

their banking branch prior to setup for electronic
payments. In addition to this rigorous
authentication process, banks spend billions of
dollars making and keeping their sites secure.

Online banking customers represent people

from all lifestyles, backgrounds, age groups and
income levels. The chart shows the distribution
of online banking users among different
consumer groups.

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Small businesses
An often overlooked segment that accounts for a significant portion of online spending and
banking is that of small business. Small businesses comprise over 95% of businesses in the
United States and account for about one-fifth of total revenues. 11 79% of small businesses
purchase online and 64% bank online. Those small businesses that did not shop online cited
concerns with convenience and security as the main deterrents.

Small businesses are looking for online purchasing and payment solutions that offer payment
integration, and methods that allow decision makers to track the end-to-end process. Solutions
that address security concerns are a must.

Online bill payment: top-selling application

The use of online bill payment by banking customers is accelerating. Based on Jupiter research
data, MODASolutions estimates that 48 million North Americans now pay bills online—a number
forecasted to reach 92 million by 2009.

According to Jupiter, online bill payment will

continue to generate double-digit growth for banks
for the following reasons 12 :

• Heavy promotion by the major banks

• Incentives offered to consumers
• Proliferation of broadband access
• Security and convenience

11
Estimate assumes SBs are defined as any business earning less than $10 million in annual revenue.
12
ComScore - http://www.comscore.com/press/release.asp?press=467

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5. Online Banking Increases Online Sales
Traditionally, the online bill payment infrastructure has been used for household bills, such as
phone, electricity, and utilities. Funds are transferred from the consumer’s bank account to the
biller’s account using the trusted infrastructure of financial institutions.

What would happen if the advantages of this infrastructure were extended to the merchant? The
merchant would effectively become a biller that invoices consumers for products and services.
The impact to the payment landscape would be significant—presenting a win-win situation for
every party in the value chain.

Value to consumers
Consumers get a simple, secure and a familiar way to pay. They pay from available funds without
concern for ID theft or the need to disclosure banking or personal information.

Value to merchants
Lowers cost: The cost structure of online pill payment is lower than the cost of credit card fees,
especially when considering the reduction in fraud and associated costs.

Reduces charge-backs: Online bill payment is similar to cash or debit transactions. The
customer logs in to their online banking portal and pays their invoice. The fact that the funds are
pushed eliminates ‘surprise charge-backs’. The ability for claim denial of a purchase is virtually
eliminated. The merchant gains willing and authentic buyers.

Reduces fraud: Using online bill payment reduces the risk management burden.

Access to more consumers: By offering online bill payment options, merchants can capture
consumers whose needs are not currently addressed by existing payment methods. 84 million
consumers use the Internet but do not shop online because they will not or cannot provide a
credit card.

Establishes direct relationships: Online bill payment establishes a direct, persistent, and
recurring relationship with the buyer.

Eliminates manual processing: Online bill payment reduces checks, money orders and call
center talk time.

Value to banks
Extending online bill payment to the merchant’s website drives consumers to the bill payment
websites of specific financial institutions, where banks can up-sell additional products and
services such as loans, mortgages, etc. Financial institutions see this as an opportunity to support
their strategic and ongoing push to promote online bill payment. Banks benefit from increased bill
payers, billers and number of transactions.

Using the existing online bill payment tools for merchant payments is complementary to the
strategic direction of financial institutions in their ongoing efforts to promote online bill payment.
Furthermore, this approach represents the industry’s first payment method that bridges
consumers, merchants and banks simultaneously.

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6. About eBillme™
Leveraging the impressive growth of online banking and online bill payment and its infrastructure
is a critical step in gaining consumer confidence in online shopping. The ability to take advantage
of the online bill payment infrastructure stems from the reliability, robustness, scalability and,
most importantly, the critical mass of consumers who use it.

eBillme bridges consumers, merchants and online banking. It enables consumers to shop on the
web or through call centers, and pay conveniently through their trusted banking portals. To
consumers, the functionality is familiar, since there is no need to worry about transfer of funds
and no need to change or apply for a new account.

Payment process
eBillme takes a simple two-step approach:

• the consumer places an order with eBillme

• they use their own online banking website to pay for the order.

1. Shop
At the merchant’s checkout or call center, eBillme appears along with other payment options. The
consumer selects eBillme as the payment option.

2. Pay for order through online banking

Upon selecting eBillme as the payment method, the consumer is prompted with an order
confirmation page, which provides details on how to pay for the order through online banking. In
addition, order confirmation is sent via email, as an eBill. The order confirmation instructs the
consumer to log in to their online banking system, and add eBillme to their payee list (only on first
time eBillme orders). The consumer pays the eBill in the same effortless manner they pay other
bills.

Merchant notification of payment

The merchant can fulfill the order at the time of purchase (at checkout) or when payment is
confirmed. Typically, payment settlement is transferred from eBillme to the merchant’s bank
account in 1 to 3 business days. eBillme will deposit all collected funds into the merchant’s bank
account; the payment will appear as an ACH deposit from “eBillme payment”, clearing through
Fifth Third Bank.

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eBillme leverages the existing bill payment infrastructure, a key component of which is
MasterCard International’s Remote Payment and Presentation Service (RPPS). RPPS provides a
remittance and payment-processing network for approximately 95 percent of the industry’s bill
and consumer service providers. As a third-party payment processor, MODASolutions utilizes the
RPPS network to handle the transaction processing. RPPS enables merchants to receive
payments from the bank network.

eBillme processing platform

eBillme’s processing platform includes the following modules:

eBillme Gateway: Manages all system functionality and accepts information from both
merchants and banking institutions. The gateway stores order-processing information and tracks
transactions for outstanding payment and bill management. Payment processing handles all
payment receipts, including completed payments, errors, exceptions, refunds and recurring
payments.

Notification Manager: A configurable option that automatically generates and issues eBills,
eReceipts and eReturns directly to consumers on behalf the merchant. Merchants can choose to
be copied on the notification. The emails merchants send provide a marketing opportunity and
can embed any number of up-sell and cross-sell messages; for example, “Have you seen our
weekly specials?”

Quick Start API: MODASolutions’ front-end APIs integrate eBillme with the merchant’s existing
shopping cart or order-processing system. The merchant’s application passes information using
an HTML POST. The interface accepts the details and automatically generates eBills (or returns
processing results to the merchant application to generate the eBill). Payments are processed
separately upon receipt from the bank. All APIs are platform-independent and support the
following scripts: java, php, .net, perl, python, and asps.

Reconciliation API: An interface that enables application-to-application interaction over the

Internet, regardless of platform, language, or data formats. The backend API enables transfer of
electronic transactions between merchant systems and MODASolutions eBillme Gateway.
Merchants use the backend API to transfer payment information to their order-entry, accounting
and inventory systems.

Merchant Administration: Provides secure password-protected access to order transaction and

payment reports. Information can be searched and sorted based on a date range, name, and
reference number, and then captured for use in other merchant applications.

Refund Manager: Enables eBillme to issue refunds to customers without having access to their
DDA accounts. eBillme issues partial or full refunds electronically, direct to the consumer.

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7. Conclusion
Online merchants have a significant opportunity to tap into an online consumer segment that:

• values security, privacy, control and cash management when buying online; and
• has limited access to credit cards.

Existing payment options have not addressed the needs of this segment. Online banking brings
the merchant 84 million consumers that value security and who trust their banks when making
payments. This segment is reachable by enabling an innovative payment option at checkout
called eBillme™, from MODASolutions. Using eBillme, consumers can safely shop online,
enjoying the same payment control that they do when making offline transactions.

eBillme allows merchants to leverage the existing banking infrastructure by enabling consumers
to pay for Internet purchases at any bank, credit union, or bill pay portal that supports online
banking. Through online banking, merchants can harness an existing, established consumer
behavior (that of paying bills online) to pay for Internet purchases—with no risk of fraud or
charge-backs. This fresh approach can have significant, positive impact on a merchant’s bottom
line.

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About MODASolutions
MODASolutions is the leading provider of payment solutions that extend online banking to the
merchant’s checkout. The company is dedicated to increasing merchant sales by leveraging the
power of online banking, while reducing the security risks of shopping online for both consumers
and retailers. The company’s flagship product, eBillme™, does not require consumers to release
any financial information when placing orders. Consumers can shop online, by catalog, or through
call centers, and pay for purchases at their bank, credit union, or bill pay portal, with the security
and convenience of online banking. eBillme gives retailers access to over 84 million American
users of online banking.

MODASolutions Corporate Office

260 Hearst Way, Suite 510
Ottawa ON Canada K2L 3H1

MODASolutions US Office
2207 Concord Pike Rd., Unit #510
Wilmington, DE 19803-2908

Phone: 613-270-8755
Toll Free: 1-866-365-6632
Fax: 613-822-8107

Email: Sales@MODASolutions.com

Website: www.MODASolutions.com
www.eBillme.com

Copyright ©2007 MODASolutions. All rights reserved. Information in this document is subject to change without notice.

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