PAYMENT SYSTEMS FOR E-BUSINESS
Online Payment Basics
*E-commerce
– It is the exchange of money for goods or services
– Its important function is to handle Internet payments
– Business-to-Business (B2B) payment transactions
*Business-to-Consumer (B2C) payment transactions
– Evolving and competing for dominance
– Customer convenience, saves companies money
Four basic means to purchase items in B2C (traditional and electronic)
1. Cash
2. Checks
3. Credit Cards
4. Debit Cards
*Scrip
– Digital cash minted by a company
– Cannot be exchanged for cash
– Exchanged for goods or services by company issuing scrip
– Like a gift certificate: good at more than one store
* Merchant should offer customers payment options which are safe, convenient, & widely accepted
Payment Cards
*Payment Cards– General term describing all types of plastic cards consumers (businesses) use to make purchases.
*Categories of Payment Cards:
1. Credit Cards (Visa, MasterCard)
– Spending limit based on user’s credit history
– Charge purchases against credit line
– Accepted worldwide, 30-day dispute period
2. Debit Cards
– Removes sales amount from cardholder’s bank account
– Transfers sales amount to seller’s bank account
– Issued by cardholder’s bank
– Carries major credit card issuer name
3. Charge Cards (American Express)
– No spending limit
– Entire balance due at end of billing period
– No line of credit or interest charges
– Examples: department store, oil company cards
Advantages of Payment Cards
• Advantage for merchants:
– Fraud protection (built-in security)
– Charge paid through issuer of payment card
• Advantage for U.S. consumers:
– Liability of fraudulent card use: $50
– Card issuer frequently waives $50 charge if card stolen
– Good for merchants and consumers
– Worldwide acceptance
– Currency conversion handled by card issuer
Disadvantages of Payment Cards
• Disadvantage for merchants:
– Per-transaction fees, monthly processing fees
– Cost of doing business
– Goods and services prices are slightly higher
– As opposed to environment free of payments cards
– (For payment) Merchant must first set up merchant account
• Disadvantage for consumers:
– Annual fee
Payment Acceptance & Processing
*EMV standard
– Single standard handling payment card transactions
– Visa, MasterCard, MasterCard International
*United States online stores, mail order stores must ship merchandise within 30 days of charging payment
*Violation penalties are significant
*Most do not charge payment card accounts until merchandise shipped
*General steps in payment card transactions:
1. Merchant receives payment card information
2. Merchant authenticates payment
3. Merchant ensures funds are available and puts hold on credit line or funds to cover charge
4. Settlement occurs (few days after purchase); funds travel between banks and are placed into merchant’s account
Electronic Cash
*Electronic Cash (e-cash, digital cash)
– Describes any value storage and exchange system created by private (nongovernmental)
entity
– Does not use paper documents or coins
– Can serve as substitute for government issued physical currency
– Readily exchanged for physical cash on demand
Problems of Electronic Cash:
– No standard among all electronic cash issuers
– Not universally accepted
Micropayments & Small Payments
*Micropayments
– Internet payments for items
– Costing few cents to a dollar
Micropayments Barriers:
– Not implemented very well on the Web yet
– Human psychology
a. People prefer to buy small value items in fixed price chunks
*Small Payments
– All payments of less than $10
– Companies that have developed micropayment systems
a. (All have failed) Millicent, DigiCash, Yaga, BitPass
b. No company has gained broad acceptance of its system despite industry observers seeing such a need
c. No company devoted solely to offering micropayment services
Holding Electronic Cash: Online & Offline Cash
*Online Cash Storage
– Consumer has no personal possession of electronic cash
– Trusted third party (online bank) involved in all transfers, holds consumers’ cash accounts
*Online System Payment
– Merchants contact consumer’s bank
– Helps prevent fraud (confirm valid cash)
– Resembles process of checking with consumer’s bank to ensure valid credit card
and matching name
*Offline Cash Storage
– Virtual equivalent of money kept in wallet
– Customer holds it; no third party involved in transaction
– Protection against fraud concern (Hardware or software safeguards needed)
*Double-Spending
– Spending electronic cash twice
– Too late to prevent fraudulent act by time same electronic currency clears bank for second time
– Prevent double-spending: use encryption techniques
Advantages & Disadvantages of Electronic Cash
*Traditional brick-and-mortar billing methods
– Costly
– Generate invoices, stuff envelopes, buy and affix postage to envelopes, send invoices to customers
*Accounts payable department
– Keeps track of incoming payments, posts accounts in database, ensures current customer data
*Online stores have the same payment collection inefficiencies.
*Online customers use credit cards to pay for purchases.
*Online auction customers use conventional payment methods (checks, money orders)
*Electronic cash system
– Less popular than other payment methods
– Provides unique advantages and disadvantages
• Advantages of electronic cash transactions:
– More efficient (less costly)
– Efficiency fosters more business (lower prices)
– Occurs on existing infrastructure (Internet)
– Internet spans globe
– Distance transaction travels does not affect cost
– Does not require one party to obtain authorization
• Disadvantages of electronic cash transactions:
– No audit trail
– Money laundering
– Susceptible to forgery
– Other potentially damaging digital economic factors
– Expansion of money supply when banks loan electronic cash on consumer and merchant traditional bank accounts
– Electronic cash has not yet become a global success
– Will require wide acceptance and solution to problem of multiple electronic cash standards
How Electronic Cash Works
• Consumer opens account with electronic cash issuer
– Presents proof of identity
• Consumer withdraws electronic cash using issuer’s Web site
– Presents proof of identity
– Digital certificate issued by certification authority
– Combination of credit card number and verifiable bank account
• After consumer identity is verified, electronic cash amount is issued
– Amount deducted from consumer’s account
– Issuer may charge small processing fee
• Consumer stores electronic cash (in electronic wallet, on his or her computer, or on stored-value card)
• Consumer can authorize issuer to make third-party payments from electronic cash account
Electronic Cash Systems
*Electronic cash is more successful in Europe and Japan
*Consumers prefer to use cash (does not work well for online transactions)
*Electronic cash fills important need
*Not successful in the United States
*Consumers have payment cards and checking accounts
*KDD Communications (KCOM)
– Internet subsidiary: Japan’s largest phone company
– Offers electronic cash through NetCoin Center
Reasons for failure of United States’ electronic cash systems:
– Electronic cash systems implementation
– Number of competing technologies
– No interoperable software
*PayPal
– Payment processing services to businesses, individuals
– Earns profit from float
– Money deposited, not used immediately
– Charges transaction fee
– Businesses using service to collect payments
– Eliminates writing and mailing checks or payment cards
– Send money instantly and securely to anyone with an e-mail address
– Convenient for auction bidders to pay for purchases
– Convenient for auction sellers
– Eliminates risks posed by other online payment types
– Transactions clear instantly
– Redemption
– Merchants and consumers first register for PayPal account
– Add money by authorizing checking accounts transfer, using credit card
– Merchants need PayPal accounts to accept PayPal payments
*Peer-to-peer (P2P) payment system
– Free payment clearing service for individuals
– Payments from one type of entity to another of the same type
Electronic Wallets
Concerns of consumers when shopping online:
– Entering detailed shipping and payment information for each online purchase
– Filling out forms
Solution:
– Electronic commerce sites allows customer to store name, address, credit card information on the site
Problem:
– Consumers must enter information at each site
*Electronic wallet (e-wallet)
– Holds credit card numbers, electronic cash, owner identification, owner contact information
– Provides information at electronic commerce site checkout counter
– Benefit: consumer enters information once (more efficient shopping)
*Server-side electronic wallet
– Stores customer’s information on remote server of merchant or wallet publisher
– No download time or installation on user’s computer
– Main weaknesses: Security breach can reveal thousands of users’personal information (credit card numbers), & Servers must employ strong security measures to minimize possibility of unauthorized disclosure
*Client-side electronic wallet
– Stores information on consumer’s computer
– Disadvantages:
a. Must download wallet software onto every computer
b. Not portable
– Advantages:
a. Sensitive information stored on user’s computer
b. Sensitive information safer on client machine
c. Attackers must launch many attacks on user computers (more difficult to identify)
d. Prevents easily identifiable wallet vendor’s servers from attack
Characteristics of useful wallets:
– Wallet accessibility
• Populate data fields in any merchant’s forms for any site consumer visits
– Electronic wallet manufacturer and merchants from many sites must coordinate efforts
• Wallet recognizes consumer information going into each field of given merchant’s forms
*Electronic wallets
– Store shipping and billing information (consumer’s first and last names, street address, city, state, country, postal code)
– Hold credit card names, numbers
– Offers consumer choice of credit cards at online checkout
– Hold electronic cash from various providers
Electronic wallet used by business companies:
– Example: MasterCard
– Most abandoned efforts
• Current major browsers include feature to remember names, addresses, other commonly requested information
• Browsers provides one-click Web form field completion
Two e-wallet arena survivors:
1. Microsoft Windows Live ID
2. Yahoo! Wallet
*Yahoo! Wallet
– Server-side electronic wallet offered by Yahoo!
– Completes order forms automatically (identifying information, credit card payment information)
– Stores information
– Accepted by thousands of Yahoo! Store merchants, Yahoo! Travel, & Yahoo! Services
• Yahoo! Advantages:
– Number of services and shops accommodate own wallet
– Large number of merchants accept wallet
• Privacy concern
– Company issuing wallet has access to great deal of information about individual using wallet
*Stored-Value Cards
– Microchip smart card or magnetic strip plastic card
– Records currency balance
Microchip versus magnetic strip:
*Microchip
– Microchip stores more information
– Tiny microchip computer processor
– Performs calculations and storage operations on card
– Different microchip card reader needed
– Examples: prepaid phone, copy, subway, bus cards
– “Stored-value card” and “smart card” used interchangeably
*Magnetic Strip Cards
– Holds rechargeable value
– Passive magnetic strip cards cannot send or receive information, & increment or decrement cash value stored
– Processing done on device into which card inserted
– Magnetic strip cards and smart cards store electronic cash
– Has processing capability
Smart Cards
– Stored-value card
– Plastic card with embedded microchip
*Credit, debit, charge cards store limited information on magnetic strip
– Store information about 100 times more than magnetic strip plastic card
– Hold private user data (financial facts, encryption keys, account information, credit card numbers, health insurance information, medical records)
– Safer than conventional credit cards
– Popular in Europe, parts of Asia
– Public telephone calls, cable television programs
*Smart Card Alliance
– Advances smart card benefits
– Promotes widespread acceptance of multiple application smart card technology
– Promotes compatibility among smart cards, card reader devices, applications
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