On the other hand, if you choose Debit, the payment goes through the Interlink network (which, confusingly, is owned by Visa), and you’re asked to type in your 4-digit PIN number to verify your purchase, and no signature is necessary.

In most cases, a debit card issued by your bank allows you to use both modes: PIN and Signature. It is at the point of sale (the cash register, for example) that you’re prompted to select which mode to use: the Signature mode (by swiping a debit card and selecting, counter-intuitively, “Credit”), or the PIN mode (by swiping a debit card and selecting “Debit”). Merchants prefer you use the PIN number because it costs them less in fees, which is why they make selecting the Signature mode more confusing by marking it as “credit” despite that fact that it’s still a debit card. For the same exact reason (the higher fees), the card’s issuing bank (the customer’s bank) prefers you use the signature method and will often offer you rewards for using it in that fashion.

Online, there’s no way to enter a PIN number, so with cards that are issued by Visa/Mastercard/etc., you can either use a standard credit card, or use a debit card like a credit card, which means that it is used in signature mode (and the merchant gets your “digital signature” on the website by getting all your personal details).

The Boleto Bancário online payment process starts with a customer placing an order on the merchant’s website and chooses to pay by Boleto Bancário. The customers are presented with a form where they fill out their payment details, and they can then opt to either pay immediately through an online banking option or to print out the filled form, bring it to a bank and pay for it with cash. When the payment is made at the customer’s bank, a confirmation of completed payment is sent to the merchant’s payment processor, and the merchant is notified. A couple of days later, the funds are transferred from the payment processor into the merchant’s bank account.

By providing the option to pay for goods and services online with cash, Boleto Bancário has opened the doors of online commerce to consumers without credit cards and those wary of the fraud risks associated with other online payments. This benefits merchants by allowing them to sell to a wider range of customers than were available before. An additional benefit to merchants is that the payment is irreversible by the consumer and chargebacks cannot be issued.

Once a chargeback claim is filed by the consumer and sent to the credit card’s issuing bank (e.g. Bank of America), the issuing bank will send it to the approprate credit card network (e.g. Visa). The credit card network then forwards the chargeback claim to the merchant’s payment processor (the body that processes credit card payments on behalf of the merchant), which withdraws the money from the merchant’s bank account and sends the merchant a notice about the chargeback (typically, by fax). The merchant then has 14 days to dispute the chargeback, otherwise the money is permanently returned to the consumer.

Chargebacks can be caused by technical reasons (e.g. the credit card has insufficient funds), clerical reasons (e.g. duplicate charges caused by mistake) or fraud claims by consumers, where consumers claim to have not made the purchases disputed by the chargeback. Typically fraud is separated into two types: true fraud, where consumers intentionally dispute purchases they’ve made, and “friendly fraud”, where consumers don’t remember making a purchase and file a chargeback claim by mistake.

In case of a chargeback claim, the merchant needs to prove that the consumer did indeed receive the good/service for which the payment is disputed. To do this, the merchant needs to keep track of their interaction with all their customers: phone calls, mail sent and received, store visits and online website activity. For online merchants fraud is harder to fight because of a lack of physical signature on the purchase receipt, so it is usually advisable for them to keep track of every page the consumer visited, as well as other information such as the IP addresses from which they visited the site.

For online purchases, there are several indicators of possible fraud that the merchants should keep tab on:

• Distance between the credit card’s billing address and the geographical location from which the consumer is logging in to the website (this can be inferred from the consumer’s computer’s IP address).
• Purchases done through proxy servers which anonymize web traffic and hide the originating computer’s IP address.
• Purchases done with a free email address provided by email providers who’ve had a high percentage of fraud in the past.

This challenge is combined with the obvious challenge of trying to sell products to their potential customers. All retailers work very hard to make sure that the products are appealing, that the price points are just right for the market segment that they’re targeting, that the product is easily locatable (in a physical store or on an online website) and a myriad of other factors that come into play when trying to sell a product.

Selling is expensive, which is why when trying to sell products to individuals, retailers usually segment those individuals into market segments and try to use the same selling techniques on all the members of that segment in the belief that the right kind of appeal to the right segment would result in sales. Traditionally segments had been created using demographic information: segments had been defined as people from a certain geographic area that share certain properties such as age group, profession, gender, etc. Marketers would assume that people who share demographic characteristics would be likely to be interested in products for the same reasons, and thus the same marketing and selling techniques would be used on them as a group, and delivered through segment-specific channels like magazines, websites and TV shows that this segments tunes in to.

A newer way of defining segments is based on behavior, also known as psychographic segmentation. Where as demographic segmentation assumes that people behave in certain ways because of certain statistics (location, gender, age, income, etc.) and groups them based on it, psychographic segmentation groups people based on their past behavior. For example, people who buy at Whole Foods would likely also be interested in organic food, tea, environmentally-friendly products and electric cars. Psychographic segmentation works on the assumption that people who engage in the same activities and buy the same products would likely have something in common and therefore can be approached in the same way.

Along with demographic and psychographic information, the web 2.0 era and its plethora of social networks, blogs, forums and other online profiles allows up to gain further insight into people’s buying behavior. It turns out that a very good indicator to what people buy is what their friends are buying. This is a stronger indicator than mere demographics – if all my friends have an iPhone, then I may consider buying an iPhone despite not necessarily being in the market segment that Apple is targeting.

With the advent of online social media aggregators, online retailers now have access to their customers’ social graph. A sophisticated online retailer can use this social graph to determine, for each customer, who their friends are and what they bought from the same retailer or other retailers, and provide individually-tailored suggestions to each customer. This is basically friend-based merchandising, and is a very powerful tool: if all your friends are reading the same book, buying the same phone/car, eating the same food, you, as a customer are far more likely to at least try that product. Merchandising based on customers’ social graphs could be a very interesting trend that we may see in use in the upcoming years.

However, social-graph-based selling and merchandising has its limitations:

• Privacy concerns: Facebook tried doing this with their Beacon initiative, and suffered a backlash from their users due to privacy worries. Retailers who will attempt this must be very cautious in the manner in which they present this to their customers.
• Scope limitation: There is currently no automated way to share purchase history between retailers, so while very large retailers might still find the technology useful since at least some of their customers’ friends have also bought from the same retailer, small retailers would probably find that their customers’ friends have probably not visited them yet and thus friend-based merchandising would provide no insights. It is possible that retailers would collaborate to create a huge data repository of what all of their customers bought, but it is likely that this move will cause a big backlash from the public and quite possibly the government.
• Audience limitation: This technology relies on people using such technologies as social networks and blogs, and having their friends also use them and be online shoppers. People who use such technologies are usually younger and web-savvy, and contain very few aging and elderly people. Thus, social-graph merchandising (“friend-based merchandising”) would work mostly for retailers targeting younger audiences. As the US population is growing older, retailers will have to be wise about utilizing this technology to avoid data bias, and to perhaps encourage older shoppers to create their social graph in a 65+-friendly environment.