Key Success Factors of Smartcard-based Electronic Payment: An Empirical Analysis

Key Success Factors of Smartcard-based Electronic Payment: An Empirical Analysis Ziqi Liao Department of Finance & Decision Sciences Hong Kong Baptist University e-mail: victor@hkbu.edu.hk Wing-Keung Wong Department of Economics National University of Singapore e-mail: ecswwk@nus.edu.sg Abstract A smartcard-based electronic payment system namely Octopus has effectively enabled several public transport service providers such as subways, buses and ferries to share a common platform for fare collection and settlement in Hong Kong. It has also been used to facilitate micro-payments in selected service sectors. The Octopus smartcard provides customers with a great convenience when traveling with public transport and paying limited amount for goods and services. A user-oriented study suggests that that perceived ease of use, convenience of use, automated add-value service, security, reliability and merchant support have positive effects on the perceived usefulness of the Octopus card. Keywords: Smartcard, electronic payment, usefulness, reliability, services Introduction A smartcard-based electronic payment system namely Octopus has been extensively used to facilitate fare payments for public transportation and micro-payments in selected service sectors in Hong Kong. Its system architecture based on the Sun[tm] platform consists of the central clearing house system, service provider central computers, local data processors, processing devices, card readers/writers and individual Octopus smart cards. The Octopus was initially designed to enable several service providers in public transportation to share an integrated platform for fare collection and settlement and enable passengers to pay for subways, buses and ferries with a single computerized smartcard. The payment process can be instantly completed when the card is placed on a card reader/writer - an electronic device with an optical sensor. Because the system can be customized in light of particular business environments, it has been recently extended to support electronic payments in selected retail sectors involving relatively limited transactions. Today, customers can use the Octopus card at fast food stores, coffee shops, and convenience stores and other services. However, there are numerous factors associated with the practical applications of a smartcard for electronic payment. Individual service providers might not adopt a new payment system until it had received a considerable acceptance by customers. Therefore, it is necessary to critically evaluate whether an innovative technology is useful, reliable and extendable. As far as this is concerned, this paper aims to assess the sustainability of the Octopus system from a user perspective by measuring major factors in adoption of the Octopus smartcard. It begins with theoretical background, followed by hypotheses. It also illustrates the research methods together with a regression model for evaluating the impacts of different variables on the perceived usefulness. Subsequently, it presents the empirical results and discusses the most critical factors in relation to the use of the Octopus card. 2065

Hypotheses Technology Acceptance Model (TAM) (Davis 1989) has been extensively used to evaluate the acceptance of computer-based information systems. Being a useful tool to study the usage of new technologies, TAM has also been extended to evaluate the acceptance of different IT applications. A number of empirical studies have proved that TAM is capable of explaining user behavior across a broad range of end-user systems (Karahanna and Straub 1999). It has also been found that TAM consistently explains a substantial proportion of the variance in usage intention and behavior and compares favorably with alternative models such as the Theory of Reasoned Action (TRA) and the Theory of Planned Behavior (TPB) (Venkatesh and Davis 2000). The basic constructs of TAM include perceived usefulness and perceived ease of use. However, apart from these two dimensions, user acceptance may be affected by other factors. Hence, it is necessary to cope with specific requirements when using the TAM to evaluate a particular application (Igbaria, Guimaraes and Davis 1995). The perceived usefulness refers to whether a user believes that the use of a system would be functional and beneficial (Davis 1989). A system with a high degree of perceived usefulness is likely to be used frequently, even though attributes vary depending on individual characteristics associated with the system (Igbaria, Guimaraes and Davis 1995). The use of the Octopus card by individual customers could be explored on the basis of the generic approach of TAM, because it might fall into behavioral patterns that individuals are comfortable with. In particular, the perceived usefulness of the card might be influenced by a number of factors described below. A smartcard should be relatively compact so that a customer can easily carry it around. Similar to the size of a credit card, it would be desirable if an Octopus card has a compact design together with a pleasurable outlook. Hence, compact design might be one of the key features associated with the usefulness of the Octopus card. Hypothesis 1 Compact design will have a positive effect on perceived usefulness. It would be an advantage if a system enables a convenience of use in different commercial environments (Torkzadeh and Dhillon 2002). The Octopus network has been recently customized to facilitate e-payment in various environments in addition to public transportation. A number of merchants have installed Octopus devices for e-payment in different retail sectors. For instance, instead of using coins, a customer can use the card to buy a soft drink from a vending machine. Payment can be immediately completed when a card is placed on top of an Octopus device installed at the vending machine. Similarly, the card can be used for paying a parking fee. It seems that the card can enable one to conveniently settle small amount of transactions. Therefore, we would examine the following hypotheses. Hypothesis 2 Perceived convenience of use for different purposes will have a positive effect on perceived usefulness. Hypothesis 3 The ability to replace other payments will have a positive effect on perceived usefulness. The stored value of an Octopus card can be reloaded via the add-value services. When the remaining value of the card bellows a particular value, one can easily use cash top up the card value at customer service centers and ticketing offices of public transport service providers, 7-Eleven convenience stores and some retail outlets. In addition, one can add value onto a card 2066

through Add-Value machines installed in different stations and terminals. Hypothesis 4 Add-value services will have a positive effect on perceived usefulness. In case of electronic transactions, perceived security is the extent to which one believes that a system is secure for transmitting sensitive information (Salisbury, Pearson, Pearson and Miller 2001). Previous studies indicate that security is a critical factor to electronic transactions. One with a greater level of perceived security should have an impact on one s attitude towards a service (Dutta and McCrohan 2002). Particularly, individual customers might perceive a risk when involving private data and expect a stringent security procedure (Stewart and Segars 2002). One can also add value onto the personalized card by authorizing the issuer to debit a particular amount of money from a designated credit card account or a bank account. Hence, customers might be concerned about the personalization of the card and its add-value service. Hypothesis 5 Securing personalized data will have a positive effective on perceived usefulness. Being fundamental to service quality, reliability is defined as the ability to perform service dependably and accurately (Parasuraman, Zeithaml and Berry 1988). Usually, users would have greater confidence in a system if it could be reliably operated (Liao and Cheung 2002). Similar to other technology-based services, the use of a smartcard for e-payment should have a considerable risk because it involves financial transactions. In case of the Octopus system, it is desirable that no error occurs when the fund is deducted from the card. It is also desirable that the Octopus system operates smoothly without delay or disruption during a payment process. Therefore, we would explore whether the perceived reliability affects the perceived usefulness of the Octopus. Hypothesis 6 Reliability will have a positive effect on perceived usefulness. From the supplier point of view, extra benefits associated with the use of the card may help promote the use of Octopus card. It is not uncommon that the public transport service providers often offer a little discount on fare if the Octopus card is used. Many merchants in the service sectors also provide customers with limited incentives if they would use the Octopus card for e-payments. It is suspected that the provision of additional incentives can effectively encourage customers to use the Octopus in a more frequent manner. Hypothesis 7 Additional incentives will have a positive effect on perceived usefulness. Perceived ease of use refers to the degree to which a user believes that the use of a system requires little effort (Davis 1989). It has been empirically proved that perceived ease of use is a major consideration in terms of the acceptance of a new system. For instance, Cooper (1997) finds that ease of adoption as an important characteristic for adoption of innovative service from customer perspective. Daniel (1999) also suggests that the perceived ease of use as one of the factors for customer acceptance in a study of electronic business. Being an antecedent to perceived usefulness, perceived ease of use might be indirectly related to the usage of a system through its effect on perceived usefulness. System usage is affected by perception of usefulness, which is, in turn, affected by perceived ease of use (Karahanna and Straub 1999). In case of the smartcard, it might directly influence the perceived usefulness of the Octopus. Hence, we would examine the following hypothesis. 2067

Hypothesis 8 Perceived ease of use will have a positive effect on perceived usefulness. There is a doubt that a system can effectively work with limited confidence of users. In the context of an electronic payment system, customers might wish to use the card if service providers with established reputations implement the system to facilitate their services. The implementation of the Octopus system by popular service providers and reputable merchants might encourage customers to use the Octopus card. Therefore, we would explore whether the implementation of the Octopus system by large merchants has an impact on perceived usefulness. Hypothesis 9 The adoption of the Octopus system by reputable service providers will have a positive effect on perceived usefulness. Research Methods Our research methods include questionnaire design, data collection and statistical analysis. Firstly, a questionnaire was designed for collecting data in relation to individual perceptions on the Octopus and its perceived usefulness in different environments such as subways, buses, and fast food shops. It also consisted of questions examining the characteristics that might be possibly related to the use of Octopus card. Individual respondents were requested to rate their perception based on a seven-point Likert-scale ranging from strongly disagree to strongly agree: 1 (strongly disagree), 2 (disagree), 3 (slightly disagree), 4 (neutral), 5 (slightly agree), 6 (agree), and 7 (strongly agree). Question was coded such that a higher value indicates a greater perceived importance. Questionnaires were distributed using a simple random sampling technique which results in 212 responses. After deleting some outliers, there are 202 observations useful for analysis. Several statistical procedures were employed to examine the data collected. In particular, multiple linear regression analysis is conducted to test the hypotheses proposed in the previous section and examine the impacts of various exogenous variables on perceived usefulness of the Octopus card. Diagnostic tests are then applied to check the validity of the regression model. A multiple regression model is used to evaluate the empirical data collected from individual customers (1). The model examines the impact of several exogenous variables on the perceived usefulness, in which the endogenous variable (y 1 ) is the usefulness of the Octopus card perceived by customers based on their experiences, while the exogenous variables (x 1 to x 9 ) are related to individual assessments of various characteristics associated with the Octopus card. y 1 = α 1 + β 1 x 1 + β 2 x 2 + β 3 x 3 + β 4 x 4 + β 5 x 5 + + β 9 x 9 + µ 1 (1) where y 1 is Perceived usefulness, x 1 is Compact design, x 2 is Perceived convenience of use, x 3 is Substitution capacity, x 4 is Add-value service, x 5 is Secure personalized data, x 6 is Reliability, x 7 is Additional incentives, x 8 is Perceived ease of use, x 9 is Merchant support, and µ 1 is the error term. 2068

Results and Discussion The results of multiple regression analysis (Table 1) suggest that such characteristics as compact design, perceived convenience, add-value service, secure personalized data, reliability, perceived ease of use, and merchant support are major exogenous variables significantly contributing to perceived usefulness (F = 21.65, d. f. = 9, 192, p < 0.001, Adjusted R 2 = 48.05%). However, substitution capacity and additional incentives are not significant. The multicollinarity is not serious, because their variance inflation factors are less than 1.5. The exogenous variables altogether explain 48.05% of the variance of the perceived usefulness. Table 1 Results of Multiple Regression Analysis Exogenous Variable Parameter Estimate Variance Inflation (Constant) 0.8227 H1 Compact design 0.0745* 1.3360 H2 Perceived convenience 0.1605** 1.2396 H3 Substitution -0.0335 1.4636 H4 Add-value service 0.1038* 1.4004 H5 Secure personalized data 0.1831** 1.2807 H6 Perceived reliability 0.1341** 1.0896 H7 Additional incentives -0.0177 1.0864 H8 Perceived ease of use 0.1822** 1.7101 H9 Merchant support 0.1011* 1.3864 Note: p < 0.1*, p < 0.05**, p < 0.01*** In the diagnostic check for residuals from the Model, the Durbin Watson test (2.001, not significant at the 0.1 level) implies that there is no lag one autocorrelation on the residuals for the model is not correct. The White test (52.76, not significant at the 0.1 level) indicates that no heteroskedasticity for the model. The Breusch-Godfrey test (2.4861, not significant at the 0.1 level) also indicates no serial correlation and no heteroskedasticity for the model. The diagnostic check suggests the model is appropriate in explaining the endogenous variable: Perceived usefulness. Finally, the results of parameter estimates suggest that compact design (H1), perceived convenience (H2), add-value service (H4), secure personalized data (H5), reliability (H6), perceived ease of use (8) and merchant support (H9) have positive impacts on the perceived usefulness of Octopus card. Therefore, Hypotheses 1, 2, 4, 5, 6, 8 and 9 are strongly supported. The public transportation networks and selected service sectors in Hong Kong has implemented the Octopus system. The Octopus becomes a conventional ticketing system for fare collection and settlement in public transport services including subways, trains, buses, trams and ferries. Many customers have adapted themselves to the use of the Octopus card, because of its convenience, security and reliability. Individual customers can purchase Octopus cards from the customer service centers in all subway and railway stations. In addition, the Octopus card is reusable and rechargeable. One can purchase a regular Octopus card which includes HK$50 deposit and HK$100 credit for paying fare to different individual public transport (Octopus 2003). For instance, when the card is used to access a bus, a particular amount of its stored value is automatically deducted. 2069

Subsequently, customers can add value to the card in different service centers if the remaining value falls below a particular level. The stored value of an Octopus card is presently limited at a maximum of HK$1,000 in order to eliminate the potential risk. Alternatively, if the customer has authorized the transfer of a particular amount of fund to the card from a bank account or credit card number, the personalized Octopus card will be automatically loaded HK$250 when its previously stored value falls below zero (Octopus 2003). This provides customers with a great convenience. Because the number of a personalized Octopus card has been linked to an individual bank account on a continuous basis, such an operation requires the participation of financial institutions. Upon the instructions given by the card owner, a predefined value is added automatically to a personalized card when it reaches a particular balance. However, the involvement of financial transactions and personal information demands a guarantee of security and privacy of personalized smartcard. Although the Octopus was initially introduced as an electronic ticketing system for public transportation, it has been gradually adopted by a numbers of merchants for micro e-payments. In particular, customers seem to be willing to use the Octopus card at fast food restaurants, coffee shops and dessert houses. The other retail outlets that customers are likely to use the Octopus card include convenience stores and supermarkets. Our survey indicates that the respondents who are willing to use the Octopus for their purchases in convenience stores and supermarkets respectively, because they believe that it is convenient to pay by the Octopus in these places. For instance, Seven-Eleven dominates the convenience store market, while large groups such as Park nshop and Wellcome basically dominate the supermarkets in Hong Kong. As these merchants with sizable market shares have implemented the Octopus devices in their chain stores. Today, consumers have generally feel confident about the use of the Octopus card for shopping at different retail outlets, purchasing movie tickets and renting tennis courts. Conclusion As an integrated smartcard system, the Octopus effectively enables electronic fare collection and settlement of public transport and electronic micro-payment in selected retail businesses. Because it is an open system used daily, the acceptance by the community is critical to its successful implementation. This study has systematically identified determinants of perceived usefulness on the basis of the empirical feedback of individual customers. The compact design of the card encourages individuals to conveniently carry it around. However, the Octopus is especially useful for the settlement of limited amount of payments, instead of substituting other e-payment instruments such as credit cards. In terms of the practical use of the Octopus, the availability of add-value services would be necessary, because it provides a great convenience for those customers who use the card in a frequent manner. In addition, customers are enabled to automatically top up the stored value of a personalized card through automatic fund transfer from a pre-determined account, because the local banks have effectively collaborated with the system developer for fund transfer. In this connection, it is necessary to secure individual data and to protect individual privacy. Furthermore, the system can accurately settle a payment when the card is placed on top of an Octopus device (card reader/writer). As such, the significantly high reliability should motivate customers to continuously use the card. Recently, a number of service providers would accept Octopus payment by implementing the system and installing Octopus devices in various retail outlets. The adoption of Octopus by relatively large and reputable service providers should encourage individual customers to use the smartcard. 2070

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