E-commerce Kenneth C. LaudonCarol Guercio Traver

business. technology. society.Third Edition

Chapter 6E-commerce Payment Systems

Types of Payment SystemsCashChecking TransferCredit CardStored ValueAccumulating Balance

Most Common Payment Systems, Based on Number Of Transactions Figure 6.1, Page 309 SOURCE: Based on data from U.S. Census Bureau, 2005.

Most Common Payment Systems, Based on Dollar Amount Figure 6.2, Page 310SOURCE: Based on data from U.S. Census Bureau, 2005.

CashLegal tender defined by a national authority to represent valueMost common form of payment in terms of number of transactionsInstantly convertible into other forms of value without intermediation of any kindPortable, requires no authentication, and provides instant purchasing powerFree (no transaction fee), anonymous, low cognitive demandsLimitations: easily stolen, limited to smaller transaction, does not provide any float

Checking TransferFunds transferred directly via a signed draft or check from a consumers checking account to a merchant or other individualMost common form of payment in terms of amount spentCan be used for both small and large transactionsSome floatNot anonymous, require third-party intervention (banks)Introduce security risks for merchants (forgeries, stopped payments), so authentication typically required

Credit CardRepresents an account that extends credit to consumers, permitting consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one timeCredit card associations: Nonprofit associations (Visa, MasterCard) that set standards for issuing banks Issuing banks: Issue cards and process transactionsProcessing centers (clearinghouses): Handle verification of accounts and balances

Stored ValueAccounts created by depositing funds into an account and from which funds are paid out or withdrawn as neededExamples: Debit cards, gift certificates, prepaid cards, smart cardsDebit cards: Immediately debit a checking or other demand-deposit accountPeer-to-peer payment systems such as PayPal a variation

Accumulating BalanceAccounts that accumulate expenditures and to which consumers make period paymentsExamples: utility, phone, American Express accounts

Dimensions of Payment Systems Table 6.1, Page 312

Current Online Payment SystemsCredit cards are dominant form of online payment, accounting for around 80% of online payments in 2005 New forms of electronic payment include:Digital cashOnline stored value systemsDigital accumulating balance payment systemsDigital credit accountsDigital checking

Various Payment Methods Offered or Planned to be Offered by Online MerchantsFigure 6.3, Page 314SOURCE: Based on data from Cybersource Corporation, 2005.

How an Online Credit Card Transaction WorksProcessed in much the same way that in-store purchases areMajor difference is that online merchants do not see or take impression of card, and no signature is available Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumers card issuing bank

Limitations of Online Credit Card Payment SystemsSecurity: neither merchant nor consumer can be fully authenticatedCost: for merchants, around 3.5% of purchase price plus transaction fee of 20 30 cents per transactionSocial equity: many people do not have access to credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or are considered poor risk)

The SET (Secure Electronic Transaction) ProtocolAuthenticates cardholder and merchant identity through use of digital certificatesAn open standard developed by MasterCard and VisaTransaction process similar to standard online credit card transaction, with more identity verificationThus far, has not caught on much, due to costs involved in integrating SET into existing systems, and lack of interest among consumers

How SET Transactions WorkFigure 6.5, Page 320

E-Commerce Digital Payment SystemsTraditional payment systems were never designed for use in the digital worldAs a result, many new payment options, designed to better meet the needs of merchants and consumers, are being studied:Digital cashOnline stored value payment accountsDigital accumulated balance payment systemsDigital credit card payment systemsDigital checking payment systems

Digital WalletsConcept of digital wallet relevant to many of the new digital payment systemsSeeks to emulate the functionality of traditional walletMost important functions:Authenticate consumer through use of digital certificates or other encryption methodsStore and transfer valueSecure payment process from consumer to merchantMost common types are client-based software applications: Gator eWallet.com, Google Toolbar AutoFill

Digital CashOne of the first forms of alternative payment systemsNot really cash: rather, are forms of value storage and value exchange that have limited convertibility into other forms of value, and require intermediaries to convertMany of early examples have disappeared; concepts survive as part of P2P payment systems

Digicash: How First Generation Digital Cash WorkedFigure 6.6, Page 324

Online Stored Value SystemsPermit consumers to make instant, online payments to merchants and other individuals based on value stored in an online accountRely on value stored in a consumers bank, checking, or credit card accountExamples: PayPal, Ecount

How Ecount.com Works: A Stored Value SystemFigure 6.7, Page 327

Smart Cards as Stored Value SystemsAnother kind of stored value system based on credit-card sized plastic cards that have embedded chips that store personal informationTwo types:ContactContactlessExamples: Mondex, Octopus

Digital Accumulating Balance Payment SystemsAllows users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the monthExamples: Qpass, Valista, Clickshare, Click & Buy, Peppercoin

Digital Credit Card Payment SystemsExtend the functionality of existing credit cards for use as online shopping payment toolsFocus specifically on making use of credit cards safer and more convenient for online merchants and consumersExample: eCharge

How a Digital Credit Card Payment System Works: eChargeFigure 6.8, Page 334

Digital Checking Payment SystemsExtend the functionality of existing checking accounts for use as online shopping payment toolsExamples: PayByCheck, Western Union MoneyZap

Digital Payment Systems and the Wireless WebMobile payment (m-payments) systems not very well established yet in U.S, but with growth in Wi-Fi and 3G cellular phone systems, this is beginning to changeJuniper Research predicts global m-commerce will total at least $88 billion by 2009, majority of transactions will be micro-m-payments

Electronic Billing Presentment and Payment (EBPP)Online payment systems for monthly billsEBPP expected to grow rapidly, to an estimated 40% of all households by 2007 Main business models in EBPP market include:Biller-directConsolidatorAbove are supported by EBPP infrastructure providers

Growth of the EBPP MarketFigure 6.10, Page 340SOURCE: Based on data from eMarketer, Inc., 2004b; Forrester Research, 2005; authors estimates.

Stored Value debit cardsAccumulating Balance utility bill, phone billAbout 43% of payments were made by some form of card (credit, debit, or stored value)Over 50% of the dollars spent in 2005 were paid via a card or electronic transactionHow PayPal works:

First, the consumer creates a PayPal account at the PayPal website. The customer gives credit or debit card info and bank account information.

When the customer buys something on line, money is drawn from his credit card or bank account and transmitted to the Automated Clearing House (ACH) Network (private finanical intermediary)

If merchant has a PayPal account established, funds are deposited electornically into the merchants account. The main stakeholders in payment systems are consumers, merchants, financial intermediaries, and govt. regulators

Customers want low-risk, low-cost, convenient, payment mechnsims

Merchants want low-risk, low-cost, irrefutable (final), secure, and reliabile payment mechanisms

Financial Intermediaries (banks, credit card companies) want secure payment systems that transfer risks and cost to the merchnats or consumers. Also want to maximize transaction fees

Govt regulators want to maintian trust in financial systems SSL protocol provides secure transactions between merchant and customer but it cannot provide authentication (is it really the person that he/she says it is?)

SET protocol is intended to address this weakness by authenticating the cardholder and merchant and therefore making it impossible to refute charges through the use of digital signatures.

Although SET has not really caught on yet, it is currently the most secure way to handle online paymentsFills in blanks

Handout from ScumwareAt this point in time, neither the Federal Reserve Bank of the US nor the government regulators of any other country have created an electronic form of legal tender. If they did, we really would have e-cash. So really not CASH

ARE WE HEADING IN THAT DIRECTION???

E-cash has not been a success because it is so complicated. The early pioneers in e-cash (DigiCash, First Virtual) no longer offer services in this original formSteps:Consumer must establish an account at a bank that is using a DigiCash systemOnce the account is established, the consumer downloads the digital wallet software onto their computer hard driveThen consumer can request a transfer of digital cashOnce the wallet has cash, the consumer can spend that cash at merchnats willing to accept it.The software would deduct the cash from the digital wallet and transfer it to the merchantThe merchant can then transfer it to his bank to confirm that it is available and had not been double spentThe bank then cancels the e-coins and credits the merchants account at the bankWhereas credit cards store a single charge account number in the magnetic strip on the back, smart cards can hold multiple credit card numbers, information about health insurance, transportation, personal identification, bank accounts, frequent flyer accounts etc. This capacity makes them an attractive alternative to carrying dozens of credit and id cards1) Consumer establishes an account with Ecount and funds it with a credit to debit card. Account information is transferred via the Web using SSL2) Once Ecount has verified the account and its balance with the customers card issuing bank, consumer can shop anywhere on the web where Visa is accepted.3) Ecount immediately debits the customers account and transfers the funds to the merchant4) At the end of the month, the consumers card issuing bank sends a statement showing the debit to Ecount A consumer signs up for an eCharge account and passes personal credit card information via a SSL connection2) After approving the consumers application, eCharge downloads a digital wallet to the consumers computer3) Consumers can then make online purchases at participating merchants that accept eCharge by selecting the eCharge optioneCharge then authenticates both the consumer and the merchant by verifying the digital certificateseCharge then verifies the consumers account and balance with the consumers issuing bankeCharge then authorizes the transactionConsumers pay their bills electronically at the end of the monthPayByChecks system is based on the consumers existing checking account. When a consumer wishes to pay by check at a merchant site that offers the service, an online authorization form appears that mimics the appearance of a paper check. The user must type his name and then it is matched against PayByChecks various databases containing information on known bad check writers, real time info about customers current banc account, and delivers cash to merchant.