Electronic Commerce

Eighth Edition

Chapter 11
Payment Systems For Electronic
Commerce
 Learning Objectives

In this chapter, you will learn about:

• The basic functions of online payment systems
• The use of payment cards in electronic commerce
• The history and future of electronic cash
• How electronic wallets work
• The use of stored-value cards in electronic
commerce

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 Online Payment Basics

• E-commerce
– Exchange money for goods or services
– Important function: handling Internet payments
– B2B payment transactions
• Electronic funds transfers (EFTs)
• B2C payment transactions
– Evolving and competing for dominance
– Customer convenience, saves companies money
• Bill mailed by mail costs $1.00 to $1.50
• Internet billing cost: 50 cents

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 Online Payment Basics (cont’d.)

• Four basic means to purchase items in B2C

(traditional and electronic)
– Cash, checks, credit cards, debit cards
• 90% of all United States consumer payments
• Electronic transfer: small but growing
• Most popular: automated payments
• Credit cards
– Worldwide: 90% of online payments
– United States: 97% of online payments

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Electronic Commerce, Eighth Edition 5
 Online Payment Basics (cont’d.)
• 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
– Current scrip offerings (eScrip)
• Focus: not-for-profit fundraising market
• Merchant should offer customers payment options
– Safe, convenient, widely accepted
– Companies sell payment processing package service

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 Payment Cards
• General term describing all types of plastic cards
consumers (businesses) use to make purchases
– Categories: credit cards, debit cards, charge cards
• Credit card (Visa, MasterCard)
– Spending limit based on user’s credit history
• Charge purchases against credit line
– Options for user billing cycle payments
• Pay off entire credit card balance; pay minimum
amount
• Card issuers charge unpaid balance interest
– Accepted worldwide, 30-day dispute period

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 Payment Cards (cont’d.)

• Credit card (cont’d.)

– Card not present transactions
• Cardholder not present during transaction
• Requires extra security
• Debit card
– 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

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 Payment Cards (cont’d.)

• Charge card (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
• “Payment card”
– Refers to credit cards, debit cards, and charge cards

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 Payment Cards (cont’d.)

• Single-use cards
– Cards with disposable numbers
• Addresses concern of giving online vendors payment
card numbers
– Not used much anymore
• Problem: required consumers to behave differently

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 Advantages and Disadvantages 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

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 Advantages and Disadvantages of
Payment Cards (cont’d.)
• 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

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 Payment Acceptance and Processing

• Internet payment card process easier than physical

store process
• 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
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 Payment Acceptance and Processing
(cont’d.)
• General steps in payment card transactions
– Merchant receives payment card information
– Merchant authenticates payment
– Merchant ensures funds are available and puts hold
on credit line or funds to cover charge
– Settlement occurs (few days after purchase); funds
travel between banks and are placed into merchant’s
account

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 Payment Acceptance and Processing
(cont’d.)
• Open and closed loop systems
– Closed loop systems
• Card issuer pays merchant directly
• Does not use intermediary
• American Express, Discover Card
– Open loop systems (three or more parties)
• Third party (intermediary bank) processes transaction
• Visa, MasterCard: not issued directly to consumers
• Credit card associations: operated by association
member banks
• Customer issuing banks: member banks
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 Payment Acceptance and Processing
(cont’d.)
• Merchant accounts (acquiring bank)
– Bank doing business with sellers (Internet, non-
Internet) wanting to accept payment cards
– Merchant account
• Required for online merchant to process payment cards
– Acceptance by bank of merchant account
• Merchant must provide business information
• Risk of business type assessed
– Bank collects credit card receipts on merchant’s
behalf
• Credits value in merchant’s account
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 Payment Acceptance and Processing
(cont’d.)
• Merchant accounts (cont’d.)
– Chargeback
• Cardholder successfully contests charge
• Merchant bank must retrieve money from merchant
account
• Merchant may have to cover chargeback potential
– Problem facing online businesses
• Level of online transaction fraud
• Fewer than 5 percent of credit card transactions
completed online; accounts for 60 percent of total credit
card dollar amount fraud

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 Payment Acceptance and Processing
(cont’d.)
• Processing payment cards online
– Payment processing service providers
• Companies offering payment card processing
– Example: InternetSecure
• Supports Visa and MasterCard payments for Canadian
and U.S. accounts
• Provides risk management and fraud detection
• Handles online merchants transactions
• Uses existing bank-approved payment card processing
infrastructure, secure links, and firewalls

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 Payment Acceptance and Processing
(cont’d.)
• Processing payment cards online (cont’d.)
– First Data
• Provides merchant payment card processing services
with ICVERIFY and WebAuthorize programs
• ICVERIFY: for small retailers using Microsoft Windows
electronic cash registers, point-of-sale terminal systems
• WebAuthorize: for large enterprise-class merchant sites
– ICVERIFY, WebAuthorize connect directly to:
• Network of banks: Automated Clearing House (ACH)
• Credit card authorization companies
• Connect to ACH through highly secure, private leased
telephone lines
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Electronic Commerce, Eighth Edition 21
 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
• Problem
– No standard among all electronic cash issuers
– Not universally accepted

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 Electronic Cash (cont’d.)

• Small purchases not profitable for merchants

– Bank fees greater than profits
• Factors in favor of electronic cash
– Potentially significant market for electronic cash
• Market for Internet small purchases (below $10)
– Most of world’s population does not have credit cards
• Electronic cash: solution to paying for online purchases
• Idea of electronic cash refuses to die
– Despite failures

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 Micropayments and 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
• People prefer to buy small value items in fixed price
chunks
• Example: mobile phone has fixed monthly payment
plans

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 Micropayments and Small Payments
(cont’d.)
• Small payments
– All payments of less than $10
• Companies that have developed micropayment
systems
– Millicent, DigiCash, Yaga, BitPass
• All have failed
– No company has gained broad acceptance of its
system despite industry observers seeing such a
need
– No company devoted solely to offering micropayment
services
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Privacy and Security of Electronic Cash

• Electronic payment methods concerns

– Privacy and security, independence, portability,
convenience
– Privacy and security: most important to consumers
• Transactions vulnerable
• Electronic currency: copied, reused, forged
• Unique security problems of electronic cash
– Possible to spend only once
• Not counterfeit; used in two different transactions
– Anonymous use
• Prevents sellers from collecting information
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 Advantages and Disadvantages of
Electronic Cash
• 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

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 Advantages and Disadvantages of
Electronic Cash (cont’d.)
• 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

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 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

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 Electronic Wallets (cont’d.)
• 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

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 Electronic Wallets (cont’d.)
• Server-side electronic wallet (cont’d.)
– Main weakness
• 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
• Must download wallet software onto every computer
• Not portable

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 Electronic Wallets (cont’d.)

• Client-side electronic wallet (cont’d.)

– Advantage
• Sensitive information stored on user’s computer
– Sensitive information safer on client machine
• Attackers must launch many attacks on user computers
(more difficult to identify)
• Prevents easily identifiable wallet vendor’s servers from
attack

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 Electronic Wallets (cont’d.)

• 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

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 Electronic Wallets (cont’d.)

• 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

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 Electronic Wallets (cont’d.)

• 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
• Microsoft Windows Live ID
• Yahoo! Wallet

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 Stored-Value Cards

• Microchip smart card or magnetic strip plastic card

– Records currency balance
• Microchip versus magnetic strip
– 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
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 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
– Smart card better suited for Internet payment
transactions
• Has processing capability

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 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

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 Smart Cards (cont’d.)

• Safer than conventional credit cards

– Information encrypted on smart card
• Popular in Europe, parts of Asia
– Public telephone calls, cable television programs
– Hong Kong
• Retail counters, restaurant cash registers have smart
card readers
• Octopus is the public transportation smart card: can be
reloaded at transportation locations, 7-Eleven stores

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 Summary
• Online stores payment forms
– Credit, debit, charge cards (payment cards)
• Ubiquitous, convenient, easy to use
– Electronic cash advantages and potential uses
• Making micropayments, stored online or offline
– Convenience of electronic wallets
– Stored-value cards
• Smart cards, magnetic strip cards

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