Dr. Stefan Heng InternationalInternational Telecommunications Society, Berlin, September 6, 2004 E-PAYMENT SYSTEMS: CHANCE ONLY IN THE MEDIUM TERM

Page 2 - E-Payment Solutions, S. Heng, , h E-payment systems: Chance only in the medium term 1 Initial situation: Symbiosis developing in online commerce 2 Demands on payment systems 3 Comparison of current payment systems 4 Conclusion

Page 3 - E-Payment Solutions, S. Heng, , h Symbiosis developing in online trade (I) E-business: Hype and reality  During internet hype: forecasts of exorbitant e-business growth rates. Actually far more moderate growth. B2C in Germany: currently only 2% of retail turnover.  Thanks to enhanced technologies (3G, 4G) mobile telephony will emerge as important business area. 2001: worldwide turnover of EUR 600 m spent on mobile content. 2005: worldwide turnover of EUR 11 bn.

Page 4 - E-Payment Solutions, S. Heng, , h Symbiosis developing in online trade (II) Great hope on payment systems  E-commerce pioneers tended to see product range, marketing, and logistics as problem areas. Challenges of payment transactions in e-commerce underestimated at first.  Currently great hopes on payment systems. Cooperation of content providers and payment providers needed.

Page 5 - E-Payment Solutions, S. Heng, , h Symbiosis developing in online trade (III) Demand for paid content in the US  Acceptance of electronic payment systems rises with sales of digitized content.  … If (and only if) content providers offer real value- added.content Glimmer of hope 51% of internet users prepared to pay for content. Especially for … -database access, -adult multimedia.

Page 6 - E-Payment Solutions, S. Heng, , h Symbiosis developing in online trade (IV) Cashless payment systems  35 m online purchases in Europe.  Payment methods with origin in offline business dominant. Only … Payment methods Proton (Belgium), Minicash (Luxembourg), and Chipknip (Netherlands) … relevant as yet.

Page 7 - E-Payment Solutions, S. Heng, , h Symbiosis developing in online trade (V) Credit card versus GeldKarte Current situation  18 transactions per credit card.credit card  0.5 transaction per GeldKarte. GeldKarte becoming more attractive because of … … new fee structure tailored to micro payments, … increased user friendliness, … new legislation, andnew legislation … technological progress.

Page 8 - E-Payment Solutions, S. Heng, , h E-payment systems: Chance only in the medium term 1 Initial situation: Symbiosis developing in online trade 2 Demands on payment systems 3 Comparison of current payment systems 4 Conclusion

Page 9 - E-Payment Solutions, S. Heng, , h Demands on payment systems (I) Different players with different needs General  (Perceived) security.security  Consistency.  Totality. Special demands of customerscustomers  Ease of use.  Portability.  Anonymity.  Widespread use among merchants. Special demands of merchants  Indisputability.  Low transaction costs.  Widespread use among customers.

Page 10 - E-Payment Solutions, S. Heng, , h Demands on payment systems (II) E-payment systems as network goods  Attractiveness rises faster than the number of users.  Exceeding critical mass as a prerequisite for long-term potential. Merchants hesitant about investing in a system that only a few customers are interested in. Few customers opt for a system used by only a limited number of merchants.

Page 11 - E-Payment Solutions, S. Heng, , h E-payment systems: Chance only in the medium term 1 Initial situation: Symbiosis developing in online trade 3 Demands on payment systems 4 Comparison of current payment systems 5 Conclusion

Page 12 - E-Payment Solutions, S. Heng, , h Comparison of current payment systems (I) Credit Card  In use all around the world.  Especially suitable for macro payments.  Consumers fear misuse of card data in the anonymity of the internet. Risk of fraud more on merchants and credit-card companies. Add-ons like “Verified by Visa” make credit-card use even safer. Origin in offline business - Adaptation of traditional system Cost to the merchant:3- 5% of sales Accepting outlets in Germany:400,000 Users in Germany:21 m

Page 13 - E-Payment Solutions, S. Heng, , h Comparison of current payment systems (II) GeldKarte  Usually in combination with debit card. Stores encoded value units on its chip.  Guaranteed anonymity.  No automatic credit reloading function as yet. Advantage: Limited amount to lose.  Limited use in e-business so far.  User needs card-reading device. Origin in offline business - Adaptation of traditional system Cost to the merchant:0.3% of sales Accepting outlets in Germany:100,000 (7 online) Users in Germany:62 m

Page 14 - E-Payment Solutions, S. Heng, , h Comparison of current payment systems (III) Firstgate click&buy  Aggregated micro-payments are debited from bank account.  Payment made by entering user name and password.  Guaranteed anonymity. Internet-based micro-payment system Cost to the merchant:10- 35% of sales Accepting outlets in Germany:2,500 Users in Germany:2 m

Page 15 - E-Payment Solutions, S. Heng, , h Comparison of current payment systems (IV) Infin-MicroPayment  Operates through fixed-rate telephone service lines.  Collects payment via telephone bill.  Seller appreciates payment guarantee provided by the system operator.  Guaranteed anonymity.  Additional telephone charges on top.  Only for micro-payments: Law puts limit on payments through service lines. Micro-payment system charging by phone bill Cost to the merchant:15- 35% of sales Accepting outlets in Germany:< 50 Users in Germany: n.a.

Page 16 - E-Payment Solutions, S. Heng, , h Comparison of current payment systems (V) Moxmo  Mobile phone-based method  Transmission of payment separate from ordering process to guarantee anonymity. Butseparate … high security levels guaranteed by digital signature not reached.digital signature Mobile phone-based payment method Cost to the merchant:3% of sales Accepting outlets in Germany:10 Users in Germany:1 m

Page 17 - E-Payment Solutions, S. Heng, , h E-payment systems: Chance only in the medium term 1 Initial situation: Symbiosis developing in online trade 2 Demands on payment systems 3 Comparison of current payment systems 4 Conclusion

Page 18 - E-Payment Solutions, S. Heng, , h Credit Card: Origin in offline business - Adaptation of traditional system. GeldKarte: Origin in offline business - Adaptation of traditional system. Firstgate click&buy: Micro-payments on the basis of the internet. Infin-MicroPayment: Micro-payments charged on the basis of phone bills. Moxmo: On the basis of mobile phone. Conclusion (I) Exemplifying payment systems: Overview

Page 19 - E-Payment Solutions, S. Heng, , h Conclusion (II) Prospects for innovative payment systems  Online business needs … secure, user-friendly, and low-priced … innovative payment solutions.  Demands of consumers and merchants on payment solutions diverge widely.  Support from high-profile partners crucial to wider dissemination. Content providers, suppliers of telecom infrastructure and banks have an obligation to act.

Page 20 - E-Payment Solutions, S. Heng, , h Conclusion (III) Established systems have the advantage In the medium term innovative payment systems  … have chance in niche markets (where margins are insufficient for big market players). Some opportunities in the area of micro-payments. Legal and technical factors limit the long-term potential of e- payment systems. In the longer term the vast majority of innovative payment systems  … will be pushed aside by upgraded traditional solutions.

Dr. Stefan Heng International Telecommunications Society, Berlin, September 6, Visit our home page to download “E-payments: modern complement to traditional payment systems”, E-Conomics No. 44

Page 22 - E-Payment Solutions, S. Heng, , h E-payment systems: Chance only in the medium term Appendix I: Content

Page 23 - E-Payment Solutions, S. Heng, , h Payment transaction system

Page 24 - E-Payment Solutions, S. Heng, , h Sales of paid content in Germany  Sales of paid content rise.  Tenfold increase between 2002 and  But starting from a low level.low level

Page 25 - E-Payment Solutions, S. Heng, , h Debit dates of various payment methodspayment methods

Page 26 - E-Payment Solutions, S. Heng, , h Payment instruments: OverviewOverview

Page 27 - E-Payment Solutions, S. Heng, , h Consumers' preferred internet payment methods, Germany, 2003  Customers prefer payment methods that they already know from traditional business.traditional business

Page 28 - E-Payment Solutions, S. Heng, , h Core criteria of preferred payment methods  User-friendly, …  widely available, and …  low-priced innovative payment solutions must be established very soon.soon

Page 29 - E-Payment Solutions, S. Heng, , h (Perceived) security a crucial factor  ( Perceived) security derived from the level of security provided by technology and its marketing. ( Perceived) security  Systems need answers on issues of … Authorization:Only legitimate users have access to the system. Authentication:Partners to the transaction really are who they claim to be. Privacy:Only participants are allowed to observe transaction. Integrity:Protecting the information from being manipulated dealing with theft of carrier medium upon which value units have been stored. Totality: Dealing with accidental data corruption (technical defect).

Page 30 - E-Payment Solutions, S. Heng, , h Credit versus debit card, 2000  Systems already successful in offline business have excellent prospects. Internationally established credit card. Especially in Germany the widely used debit card.card

Page 31 - E-Payment Solutions, S. Heng, , h Germany’s Signature Law  Response to demands of e-business. The Signature Law … … equates digital signature with handwritten signature. Digital signature stored on smart card, used with the aid of card-reading device. Specific security mechanisms protect the identities of both partners to a contract.  Signature alliances (banks, businesses, government bodies) drive forward this project, which is crucial to electronic commerce. electronic commerce

Page 32 - E-Payment Solutions, S. Heng, , h Principle of M-payment systems  Buyer gives phone number (or dummy number) to seller  Seller forwards the instruction to payment system provider  Payment system provider calls buyer, verifies information… and collects amount through direct debit direct debit

Page 33 - E-Payment Solutions, S. Heng, , h E-payment systems: Chance only in the medium term Appendix II: DB Research

Page 34 - E-Payment Solutions, S. Heng, , h Deutsche Bank ResearchDeutsche Bank Research: Vision and mandate  Think tank of Deutsche Bank Group  Contribution to Deutsche Bank’s brand equity  Centre for independent assessment of risks and opportunities  In-house research for Board of Managing Directors Group Executive Committee  Bridge to politics via representatives  Bridge to academiaacademia

Page 35 - E-Payment Solutions, S. Heng, , h Selective publications of Deutsche Bank Research  EU Monitor European integration  Current Issues Demography China Energy: the world without oil Global growth centres Banks 2015  Sector reports  Research Notes  E-Conomics E-Conomics Publications available for free! Visit our homepage:

Page 36 - E-Payment Solutions, S. Heng, , h DB Research: Organisation Identification and analysis of macroeconomic trends of relevance to Deutsche Bank Analysis of growth, interest rates and exchange rates Country and sovereign risk analysis and stress testing of developed and emerging markets Country, event and event risk ratings Industry risk modelling and stress testing Internet-driven structural change in financial services, e.g. e-banking, e-brokerage, ECNs, mobile banking Trends in e- and m-commerce Technology and structural change in bank markets A new regulatory framework for the internet society? New economy in Europe Economic policy (regulation, taxes etc.) Old-age provision and pension funds Issues affecting small and medium-sized enterprises European integration (EU enlargement, EMU, institutional issues etc.) Medium-term sector trends Analysis of cross-sector technologies Real-estate market research Economic and European Policy Issues Sector Research Banking, Financial Markets, Regulation Supervision and regulation European capital market integration Structure of banking systems Management Norbert Walter eResearch Macro Trends Risk Analysis

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