04-2 E-commerce Payment Systems slides

Chapter 4
Payment Systems

Copyright © 2012 Pearson Education

1

Learning Objectives
n Describe the features of traditional
payment systems
n Understand the major e-commerce
payment mechanisms
n Describe the features and functionality
of electronic billing presentment and
payment systems

Copyright © 2012 Pearson Education Slide 4-76

Types of Payment Systems
n Cash

n Checking Transfer

n Credit Card

n Stored Value

n Accumulating Balance


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Cash
n Legal tender defined by a national authority to
represent value
n Most common form of payment in terms of
number of transactions
n Instantly convertible into other forms of value
without intermediation
n Portable, requires no authentication
n “Free” (no transaction fee), anonymous, low
cognitive demands
n Limitations: easily stolen, limited to smaller
transaction, does not provide any float (period of
time between purchase and actual payment),
purchases tend to be final and irreversible unless
otherwise agreed by the seller

Checking Transfer
n Funds transferred directly via signed draft/check from a
consumer’s checking account to merchant/ other individual
n Most common form of payment in terms of amount spent
n Second most common payment form in the United States in
terms of number of transactions
n Can be used for small and large transactions
n Some float (can take up to 10 days for out-of-state checks to
clear)
n Not anonymous, requires third-party intervention (banks)
n Introduces security risks for merchants (forgeries – so
authentication is required – bounced checks, stopped
payments),

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Credit Card
n Account that extends credit to consumers,
permits consumers to purchase items while
deferring payment, and allows consumers to
make payments to multiple vendors at one
time
n Credit card associations:
v Nonprofit associations (Visa, MasterCard) that set
standards for issuing banks, e.g., CitiBank
n Issuing banks:
v Issue cards and process transactions
n Processing centers (clearinghouses):
v Handle verification of accounts and balances


Credit Card
n Are widely accepted as a form of payment
n Reduce risk of theft related with carrying cash
n Increase consumer convenience
n Offer consumers considerable “float”
n Merchants benefit from increased consumer
spending, but pay a hefty transaction fee of 3-5% to
the issuing banks
n Consumers are liable to $50 for unauthorized
transactions occurring before card issuer is notified
n Consumers can refute or repudiate purchases under
certain circumstances
n Limit risk for consumers while raising it for
merchants and banks

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Stored Value
n Accounts created by depositing funds into an
account, from which funds are paid out or
withdrawn as needed
v Examples: Debit cards, gift certificates, prepaid cards,
smart cards
v Debit cards: Immediately debit a checking or other
demand-deposit account
n Peer-to-peer (P2P) payment systems
v Variation on stored value systems
v e.g. PayPal requires an account with stored value,
either a checking account or a credit card


Accumulating Balance
n Accounts that accumulate expenditures and
to which consumers make period payments
v Examples: Utility, phone, American Express
accounts
v Accumulate balances over a specified period and
are paid in full at the end of the period
n Evaluating payment systems:
v Different stakeholders (consumers, merchants,
financial intermediaries, government regulators)
have different priorities in payment system
dimensions (cost, convenience, refutability, risk,
anonymity, etc.)

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Payment System Stakeholders’ Priorities
n Consumers
v Low-risk, low-cost, refutable, convenience, reliability

n Merchants
v Low-risk, low-cost, irrefutable, secure, reliable

n Financial intermediaries
v Secure, low-risk, maximizing profit

n Government regulators
v Security, trust, protecting participants and enforcing
reporting


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Online Payment Methods in Other Parts of the World

n Europe: mostly bank debit cards and some
credit cards
n China: paid by check or cash and pick up at
local store
n Japan: postal and bank transfers and CODs,
using local convenience stores as pickup
and payment point; also use accumulated
balance accounts with telco for purchases
made from home PCs

Online Credit Card Transactions
n Processed in much the same way that in-store
purchases are
n Major difference is that online merchants do
not see or take impression of card, and no
signature is available (CNP transactions)
n Thus are major reasons that charges can be
disputed later by consumers
n Participants include consumer, merchant,
clearinghouse, merchant bank (acquiring bank)
and consumer’s card issuing bank


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How an Online Credit Transaction Works

Figure 4.16, Page 301

Limitations of Online Credit Card Payment Systems

n Security:
v Neither merchant nor consumer can be fully authenticated
n Cost:
v For merchants, around 3.5% of purchase price plus transaction
fee of 20 – 30 cents per transaction + other setup fees (see next
fig.)
v Paypal’s fees are even higher 3.5% + 1.5% – 3%
v Avoiding this by aggregating purchases made within 24 hrs
and charge to credit card account as a total, e.g., Apple’s iTunes
Music Store with $0.69 – $1.29 cents/ song
n Social equity:
v Many people do not have access to credit cards (young adults,
plus almost 100 million other adult Americans who cannot
afford cards or who have low incomes)

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E-commerce Payment Systems (cont.)
n Digital wallets
v Emulates functionality of wallet by authenticating
consumer, storing and transferring value, and securing
payment process from consumer to merchant
v Early efforts to popularize failed; E.g., MS’s server-side
Passport & MSN Wallet terminating in Feb 2005
v Latest effort: Google Checkout


Google Checkout Sample Screen


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Digital Cash (“e-cash”)
n One of the first forms of alternative payment
systems
n Value storage and exchange using tokens
n Not really “cash”
v Users deposit money in bank or provide credit card; banks
issue digital tokens (unique encrypted number) for
denominations of cash, and consumers “spend” these at
merchants’ sites; merchants deposit these e-tokens in its
bank
n Most early examples (DigiCash, First Virtual, and
Millicent) have disappeared; protocols and
practices too complex
n GoldMoney still survive


Digicash: How First Generation Digital Cash
Worked
Figure 6.6, Page 324


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Online Stored Value Systems
n Permit consumers to make instant, online
payments to merchants and other individuals
n Based on value stored in a consumer’s bank,
checking, or credit card account
n PayPal most successful system with $91 billion
processed in 2010, 98 million users
n Good sides: no personal credit info shared
among the users; service can be used by
individuals to pay one another even in small
amounts
n Down sides: high cost and lack consumer
protections when fraud occurs or charge is
repudiated

How PayPal Works


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Online Stored Value Systems
n Smart cards: plastic cards with embedded chips storing
personal data (e.g., multiple credit card no’s and info
about health insurance, transportation, personal ID,
bank accounts, and frequent fryer accounts)
v Contact : Require physical reader
n certain-value retail store gift cards
n Mondex – allows users in Europe and Asia to download cash
from bank account to the card via Mondex-compatible phone
or a card reader connected to a PC, can carry 5 currencies
simultaneously and accepted by merchants who have readers
installed
v Contactless : Use RFID or NFC technology
n EZPass – highway toll payment system
n Octopus – rechargeable contactless stored value smart card used in
Hong Kong to pay public transportation, convenience stores, fast-food
restaurants, parking, and POS.

E-commerce Payment Systems (cont.)
n Digital accumulated balance payment:
v Users accumulate a debit balance for which they are
billed at the end of the month, like a utility or phone bill
v PaymentsPlus, BillMeLater

n Digital checking:
v Extends functionality of existing checking accounts for
use online
v Based on consumer’s existing checking account
v Advantages: do not require consumers to send sensitive
info over the Web, cheaper than credit cards for
merchants, much faster than paper checks
v PayByCheck, EBillMe

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PayByCheck Sample Screen


Mobile Payment Systems
n Use of mobile handsets as payment devices well-
established in Europe, Japan, South Korea
n Japanese mobile payment systems
v E-money (stored value charged by credit card or bank accounts)
v Mobile debit cards (tied to bank accounts)
v Mobile credit cards
n Japan’s NTT DoCoMo launched wireless RFID cell
phones and related payment system (FeliCa) in 2004
n Not as well established yet in United States
v Infrastructure still developing
v Apple, Google, RIM developing separate NFC systems


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FeliCa System Demo YouTube

http://www.youtube.com/watch?v=QGkoFXbC3-4

Electronic Billing Presentment and
Payment (EBPP)
n Online payment systems for monthly bills
n 30% + of households in 2010 used some EBPP;
expected to continue to grow
n Two competing EBPP business models:
v Biller-direct (dominant model): Used by utility, phone, and
credit card companies, and individual stores
v Consolidator: Third party (financial institution or portal)
aggregates consumer’s bills and permits one-stop bill
payment
n Both models are supported by EBPP
infrastructure providers

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