10 March 2017
E-commerce: Electronic Payment
While the rise of e-commerce platforms has cut out many traditional middlemen, it has created new intermediaries and service suppliers that provide essential functions, such as online payment for facilitating web-based transactions. On the other hand, mobile payment has become increasingly popular for settling not only online, but also offline day-to-day transactions. As far as electronic payment is concerned, opportunities for Hong Kong companies lie mainly with further innovations in electronic-payment solutions and by offering payment-aggregation services to bridge countries around the world with China, which has a different set of preferred payment gateways.
Electronic Payment Ecosystem
Consumers around the world increasingly shop via e-commerce channels and pay online. However, the online payment ecosystem is a big unknown as people seldom look beyond the web front-end to consider the back-office operations. But it is essential for merchants to have a general understanding of the system in order to make an informed choice of payment gateways and other payment solution providers. The figure below demonstrates the basic online payment ecosystem.
To be able to accept card payments from online customers, online merchants need to establish a merchant account with a merchant (acquiring) bank. In all cases, to acquire a merchant account, merchants must make an arrangement with a payment processor (acquirer) to charge a customer’s credit/debit card. Payment processors are the financial institutions that work in the background to provide all the payment-processing services used by an online merchant. A variety of payment processors are available, varying in terms of monthly fees, transaction costs, and other services. It is vital for anyone who runs an online business to choose the right payment processor.
Another pivotal player in the online-payment circle is the payment gateway – an e-commerce application service provider that allows software to accept online payments. A gateway is something that connects to a merchant account and converts billing information into something that can be processed electronically. In real-world terms, the gateway is the equivalent to the card swipe machine at a physical store.
The payment gateway could be provided by a bank, but can also be provided by a third-party financial-service provider. Among the hundreds of third-party payment gateways around the world, Visa, Mastercard, AliPay, WeChat Pay and PayPal are among the most prominent.
Common Electronic Payment Solutions
In response to online payment needs, a number of electronic payment solutions emerged, providing consumers with more convenience and security when making online purchases.
Electronic Wallets (E-wallets)
These are internet-based applications built by e-wallet providers on top of traditional payment options such as card payments and bank transfers. Consumers pre-register an account, which stores payment details based on their preferred funding source. These e-wallet providers act as a trusted intermediary – both by consumers and merchants – for storing payment information and facilitating ease of checkout between buyers and sellers. Leaders in this area are internet giants such as PayPal, Google Wallet and Checkout by Amazon.
Mobile payments are extensions of e-wallets, with mobile-specific features and services, and have become increasingly popular in line with the proliferation of mobile devices. Due to their input and interface simplicity, e-wallets provide convenience for mobile checkouts. PayPal and Google Wallet offer mobile versions in the form of apps for mobile-optimised e-commerce sites. These payment options allow consumers to manage their e-wallets on the go and make payments with their mobile devices at traditional brick-and-mortar stores. Coming full circle, these mobile payments enable secure cashless transactions in the offline domain.
However, the adoption of mobile-payment services in Hong Kong has lagged behind other markets, notably the Chinese mainland. Banks and other financial institutions, however, are looking forward to changes in Hong Kong consumers’ payment behaviour following the aggressive launch of Apple Pay and other payment innovations. Products developed by wireless-network operators such as Hong Kong Telecommunications and SmartTone Telecommunications have also joined the mobile-payment battlefield. The Hong Kong market may finally be ripe for more advanced mobile-payment products.
An escrow payment is a financial arrangement where a third party (escrow payment provider) holds and regulates payment of the funds required for two parties involved in a given transaction. It helps to make transactions safer by keeping the payment in a secure escrow account, and only releasing funds after the receipt of goods or services is deemed satisfactory. Escrow payment providers act as trusted intermediaries, reducing the risk of fraud for merchants and providing assurance for consumers.
Escrow payments are particularly useful in the case of online transactions as both the buyer and seller are subject to risks of fraud. When the payment is kept by the escrow payment provider, the online transaction can be safely carried out without risk of losing money or merchandise due to fraud. In China, AliPay provides escrow payment for transactions on Alibaba’s platforms. In the rest of the world, the most popular provider of escrow payment is PayPal, which secures transactions on eBay.
Bridging China and the Rest of the World
There are hundreds of payment gateways and acquiring banks. The process of setting up relationships with multiple payment gateways and local banks can result in additional costs and delay in time-to-market, particularly for merchants targeting both China and the rest of world. In China, the leading payment gateways are Alipay, WeChat Pay and UnionPay, while credit cards, debit cards and/or PayPal are the preferred payment methods in the rest of world.
In most cases, using a payment service provider (payment aggregator) can help online merchants, especially those whose transaction volumes are low, to save money and time. Global payment services providers such as Stripe or PayPal Pro act as an aggregating intermediary with established relationships with acquiring banks and various payment gateways. While an aggregator is connected to multiple gateways, it can also offer their own payment methods.
By one single connection between e-commerce sites and the payment aggregator, online merchants can gain immediate access to multiple payment options and reduce the number of integration points. Moreover, through a partnership with a payment aggregator, merchants can get a better rate from payment gateways, merchant support for technology and the most important thing – the best payment experience for consumers. This will help lower their business costs and simplify the operations for their global expansion. Merchants can then focus on their core business activities, such as product development, channel development and marketing.
In Hong Kong, when the Octopus Card system was introduced in 2005, it was probably the world's leading smartcard payment system. However, the development of Hong Kong’s electronic payment system and other innovations seems to have fallen short of public expectations in the past decade due to the “first mover disadvantage”, as many claim. However, the payment-service providers in Hong Kong have actually found their competitive advantage.
As a financial hub with well-established rules and regulations in compliance with the rest of the world, as well as similarities in language and culture to many Asian countries, Hong Kong has an unrivalled position as a provider of payment-aggregation services to bridge China and other countries, as overseas merchants normally find it challenging to set up the infrastructure to accept online payment from mainland consumers.
mPay is one of the payment-service providers in Hong Kong that provides aggregation services. By collaborations with Visa and Mastercard (through acquiring banks), UnionPay, Alipay, WeChat Pay, Octopus Online and PPS, mPay enables any online merchants, who have registered a company in Hong Kong, to accept transactions from consumers in Hong Kong, the Chinese mainland and other countries. With mPay’s one-stop secure online payment service – which supports multi-delivery channels and multi-currencies – e-commerce websites or mobile apps worldwide can open for business without the hassle of dealing with multiple financial institutions and various payment methods in different markets. To overseas merchants, registering a company in Hong Kong is much easier than setting up the infrastructure to accept online payment from mainland consumers.
China Smartpay, another payment aggregator in Hong Kong that possesses a nationwide prepaid card licence and internet payment licence from China, enables Hong Kong merchants to conduct cross-border RMB exchange for their online transactions on the mainland. To complete an online transaction, a mainland online shopper can choose any payment gateways to settle the payment. After the transaction is verified, the payment will be transferred to China Smartpay’s mainland account and then to the merchants’ account in Hong Kong (via China Smartpay’s account in Hong Kong). Without leaving their offices, the online merchants in Hong Kong can receive the payment from the mainland buyers in their preferred currency.