Unit- II

Consumer Oriented Electronic E-Commerce

The convergence of money, commerce, computing and networks form the global consumer
market place. Consumer applications such as online stores and electronic shopping malls are
increasing rapidly but access is still complicated and basic issues need to be resolved.
Some fundamental business issues must be addressed before consumer- oriented e-commerce
can become widespread, including:
i. Establishment of standard business processes for buying and selling products and
services in electronic markets
ii. Development of widespread and easy to use implementations of mercantile
protocols for order taking, online payment, and service delivery similar to those
found in retail/ credit card based transactions
iii. Development of transport and privacy methods that will allow parties that have no
reason to trust one another to carry on secure commercial exchanges
In other words, to make consumer oriented e-commerce more effective, we need a better
understanding of the components of the business process from the initial search and
discovery of the product/ services via online catalogs to the management of the order to
delivery cycle, including the all-important payment/ settlement component.
Consumer-Oriented Applications:
The wide range of applications envisioned for the consumer marketplace can be broadly
classified into: (i) Entertainment. (ii) Financial Services and Information. (iii) Essential
Services. (iv) Education and Training. The operational rule of evolution for consumer
oriented e-commerce is simple: whenever the physical transfer of information is replaced
with digital transmission, usage is more convenient or faster.
Types of applications that illustrate the operational rule of evolution in different areas:
Personal Finance and Home Banking Management
(i) Basic Services
(ii) Intermediate Services
(iii)Advanced services
Home Shopping
(i) Television-Based Shopping
(ii)Catalog-Based Shopping
Home Entertainment
(i) Size of the Home Entertainment Market
(ii)Impact of the Home Entertainment on Traditional Industries
Micro transactions of Information
Personal Finance and Home Banking Management:
The newest technologies are direct deposit of payroll, on-line bill payment and telephone
transfers. The technology for paying bills, whether by computer or telephone, is infinitely
more sophisticated than anything on the market a few years ago. In 1980s were the days of
“stone age” technology because of technology choices for accessing services were limited.
For home banking, greater demands on consumers and expanding need for information, its
services are often categorized as basic, intermediate and advanced.
(i) Basic services
These are related to personal finance
The evolution of ATM machines from live tellers and now to home banking
The ATM network has with banks and their associations being the routers and the ATM
machines being the heterogeneous computers on the network.
This interoperable network of ATMs has created an interface between customer and bank that
changed the competitive dynamics of the industry.
Increased ATM usage and decrease in teller transactions
The future of home banking lies with PC’s

Intermediate Services
The problem with home banking in 1980 is, it is expensive service that requires a PC, a
modem and special software. As the equipment becomes less expensive and as bank offers
broader services, home banking develops into a comprehensive package that could even
include as insurance entertainment.
Consider the computerized on-line bill-payment system. It never forgets to record a payment
and keeps track of user account number, name, amount and the date and we used to instruct
with payment instructions.

Cheque-Clearing process
(iii)Advanced Services
The goal of advanced series is to offer their on-line customers a complete portfolio of life,
home, and auto insurance along with mutual funds, pension plans, home financing, and other
financial products. The services range from on-line shopping to real-time financial
information from anywhere in the world. In short, home banking allows consumers to avoid
long lines and gives flexibility

Home Shopping:
It is already in wide use. This enables a customer to do online shopping
(i) Television-Based Shopping:
It is launched in 1977 by the Home Shopping Network (HSN). It provides a variety of goods
ranging from collectibles, clothing, small electronics, house wares, jewelry, and computers.
When HSN started in Florida in 1977, it mainly sold factory overruns and discontinued items.
It works as; the customer uses her remote control at shop different channels with the touch of
a button. At this time, cable shopping channels are not truly interactive
(ii) Catalog-Based Shopping
 In this the customer identifies the various catalogs that fit certain parameters
such as safety, price, and quality
 The on-line catalog business consists of brochures, CD-ROM catalogs, and
on-line interactive catalogs
 Currently, we are using the electronic brochures
2. Home Entertainment:
 It is another application for e-commerce
 Customer can watch movie, play games, on-screen catalogs, such as TV guide.
 In Home entertainment area, customer is the control over programming
 Entertainment services play a major role in e-commerce.
 This prediction is underscored by the changing trends in consumer behavior.

Micro transactions of information:

 One change in traditional business forced by the on-line information business is the creation
of a new transaction category called small-fee transactions for micro services
 The customer by giving some information away for free and provide information bundles that
cover the transaction overhead.
 The growth of small-money transfers could foster a boom in other complementary
information services
 The complexity is also increased in micro services when an activity named, re-verification is
entered.
 It means checking on the validity of the transaction after it has been approved

Desirable Characteristics of an Electronic marketplace

 Critical mass of Buyers and sellers: To get critical mass, use electronic mechanisms
 Opportunity for independent evaluations : Users not only buy and sell products, they
compare notes on who has the best products and whose prices are outrageous
 Negotiation and bargaining: Buyers and sellers need to able to haggle over conditions of
mutual satisfaction, money, terms & conditions, delivery dates & evaluation criteria
 New products and services: Electronic marketplace is only support full information about
new services
 Seamless interface: The trading is having pieces work together so that information can flow
seamlessly
 Resource for dissatisfied buyers: It provide for resolving disagreements by returning the
product.

Mercantile Process models

 Mercantile processes define interaction models between consumers and merchants for on-line
commerce
 Mercantile Models from the Consumer's Perspective
(i) Pre purchase preparation: The pre purchase preparation phase include search and
discovery for a set of products to meet customer requirements
a. The consumer information search process.
b. The Organizational search process.
c. Consumer search experiences.
d. Information brokers & brokerages.
(ii) Purchase consummation: The purchase consummation phase includes mercantile
protocols
a. Mercantile process using digital cash.
b. Mercantile transaction using credit cards.
c. Costs of electronic purchasing.
(iii) Post purchase interaction: The post purchase interaction phase includes customer
service & support
 Figure: Steps taken by a customer in product/service purchasing

(i) Pre purchase Preparation

 The purchase is done by the buyers, so consumers can be categorized into 3 types
 Impulsive buyers, who purchase products quickly
 Patient buyers, purchase products after making some comparisons
 Analytical buyers, who do substantial research before making decision to purchase products.

Marketing researches have several types of purchasing:

 Specifically planned purchases

 Generally planned purchases
 Reminder purchase
 Entirely unplanned purchases

The consumer information search process

Information search is defined as the degree of care, perception & effort directed toward
obtaining data or information related to the decision problem.

The Organizational search process

Organizational search can be viewed as a process through which an organization adapts to
such changes in its external environment as new suppliers, products, & services.

Consumer Search Experiences

The distinction between carrying out a shopping activity “to achieve a goal” (utilitarian) as
opposed to doing it because “u like it”.

Information Brokers and Brokerages

To facilitate better consumer and organizational search, intermediaries called information
brokers or brokerages. Information brokerages are needed for 3 reasons: Comparison
shopping, reduced search costs, and integration
 (ii) Purchase Consummation

 Buyer contacts vendor to purchase

 Vendor states price
 Buyer and Vendor may or may not engage in negotiation
 If satisfied, buyer asks the payment to the vendor
 Vendor contacts billing service
 Billing service decrypts authorization and checks buyers account balance
 Billing service gives to the vendor to deliver product
 Vendor delivers the goods to buyer
 On receiving the goods, the buyer signs and delivers receipt
 At the end of the billing cycle, buyer receives a list of transactions

Mercantile process using Digital Cash

 Buyer obtains e-cash from issuing bank

 Buyer contacts seller to purchase product
 Seller states price
 Buyer sends e-cash to seller
 Seller contacts his bank or billing service to verify the validity of the cash
 Bank gives okay signal
 Seller delivers the product to buyer
 Seller then tells bank to mark the e-cash as “used” currency

Mercantile Transactions Using Credit Cards

Two major components compromise credit card transactions in this process: electronic
authorization and settlement

In retail transaction, a third-party processor (TPP) captures information at the point of sale,
transmits the information to the credit card issuer for authorization, communicates a response
to the merchant and electronically stores the information for settlement and reporting.

The benefits of electronic processing include the reduction in credit losses, lower merchant
transaction costs, & faster consumer checkout & merchant-to-bank settlement
 A step-by-step account of retail transaction follows:

 Step1: A customer presents a credit card for payment at a retail location

 Step2: The point-of-sale software directs the transaction information to the local network
 Step3: System verifies the source of the transaction and routes it.
 Step4: In this, transaction count and financial totals are confirmed between the terminal and
the network
 Step5: In this, the system gathers all completed batches and processes the data in preparation
for settlement

A merchant client takes one of two forms:

 Merchants are charged a flat fee per transaction for authorization and data capture services
 The other form of billing allows merchants to pay a ”bundled” price for authorization, data
capture, & settlement

Cost of Electronic Purchasing:

Cash seems to be preferable to electronic payments, such as on-line debit, credit, and
electronic check authorization. Consumers appear to spend more when using cards then when
spending cash

(iii)Post purchase Interaction

Returns and claims are an important part of the purchasing process. Other complex customer
service challenges arise in customized retailing are:
Inventory issues: To serve the customer properly, a company should inform a customer right
away and if the item is in stock, a company must able to assign that piece to customer

Database access and compatibility issues: Customers should get kind of services by easy
issues like calling an 800 number

Customer service issues: To clear the doubts of customer about product

Mercantile Models from the Merchant's Perspective

 To better understanding, it is necessary to examine the order management cycle (OMC).

 The OMC includes eight distinct activities.
 The actual details of OMC vary from industry to industry and also for individual products
and services
 OMC has generic steps
(i) Order planning & Order generation.
(ii) Cost estimation & pricing.
(iii)Order receipt & entry.
(iv) Order selection & prioritization.
(v) Order Scheduling
(vi) Order fulfillment & delivery.
(vii) Order billing & account/payment management.
(viii)Post sales service.
 Figure: Order management cycle in E- Commerce

Order planning & order Generation

 Order planning leads to order generation.

 Orders are generated in a number of ways in the e-commerce environment.
 The sales force broadcasts ads (direct marketing), sends personalized e-mail to customers
(cold calls), or creates a WWW page

Cost Estimation & pricing

 Pricing is the bridge between customer needs & company capabilities.

 Pricing at the individual order level depends on understanding the value to the customer that
is generated by each order, evaluating the cost of filling each order; & instituting a system
that enables the company to price each order based on its value & cost

Order Receipt & Entry

 After an acceptable price Quote, the customer enters the order receipt & entry phase of OMC.
 This was under the purview of departments variously titled customer service, order entry, the
inside sales desk, or customer liaison.

Order Selection & Prioritization

 Customer service representatives are also often responsible for choosing which orders to
accept and which to decline.
 Not, all customers’ orders are created equal; some are better for the business.
 Order Scheduling

 In this phase, the prioritized orders get slotted into an actual production or operational
sequence.
 This task is difficult because the different functional departments- sales, marketing, customer
service, operations, or production- may have conflicting goals, compensation systems, &
organizational imperatives:
Production people seek to minimize equipment changeovers while marketing & customer
service reps argue for special service for special customers.

Order Fulfillment & Delivery

 In this actual provision of the product or service is made.

 It involves multiple functions and locations.

Order Billing & Account/Payment Management

 After the order has been fulfilled & delivered, billing is given by finance staff.
 The billing function is designed to serve the needs and interests of the company, not the
customer.

Post sales Service

 This phase plays an increasingly important role in all elements of a company’s profit
equation: customer, price, & cost.
 It can include such elements as physical installation of a product, repair & maintenance,
customer training, equipment upgrading & disposal.

Electronic payment systems

• Electronic payment systems are proliferating in banking, retail, health care, on-line markets,
and even government—in fact, anywhere money needs to change hands.
• Organizations are motivated by the need to deliver products and services more cost
effectively and to provide a higher quality of service to customers.
• The emerging electronic payment technology labeled electronic funds transfer (EFT).
• EFT is defined as ―any transfer of funds initiated through an electronic terminal,
telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a
financial institution
EFT can be segmented into three broad categories:
• Banking and financial payments
– Large-scale or wholesale payments (e.g., bank-to-bank transfer)
– Small-scale or retail payments (e.g., automated teller machines)
– Home banking (e.g., bill payment)
• Retailing payments
– Credit Cards (e.g., VISA or MasterCard)
– Private label credit/debit cards
– Charge Cards
• On-line electronic commerce payments –
1. Token-based payment systems
• Electronic cash
• Electronic cheques
• Smart cards or debit cards
2. Credit card-based payments systems
• Encrypted Credit Cards
• Third-party authorization numbers
Token-Based Electronic Payment Systems
Electronic tokens are three types:
1. Cash or Real-time • Transactions are settled with exchange of electronic currency.
• Ex: on-line currency exchange is electronic cash (e-cash).
2. Debit or Prepaid • Users pay in advance for the privilege of getting information.
• Ex: prepaid payment mechanisms are stored in smart cards and electronic purses that store
electronic money.
3. Credit or Postpaid • The server authenticates the customers and verifies with the bank
that funds are adequate before purchase.
• Ex: postpaid mechanisms are credit/debit cards and electronic cheques.
• There are many ways that exist for implementing an e-cash system, all must incorporate a
few common features.
• Specifically, e-cash must have the following four properties:
Properties of Electronic Cash:
1. Monetary value
2. Interoperability
3. Retrievability
4. Security
Electronic Cash in Action
• Electronic Cash is based on cryptographic systems called ―digital signatures‖.
• This method involves a pair of numeric keys: one for locking (encoding) and the other for
unlocking (decoding). (Through public key and private key).
Purchasing E-cash from Currency Servers
The purchase of e-cash from an on-line currency server (or bank) involves two steps:
• Establishment of an account and
• Maintaining enough money in the account to bank the purchase
Some customers might prefer to purchase e-cash with paper currency, either to maintain
anonymity or because they don‘t have a bank account.
Using the Digital Currency
• Once the tokens are purchased, the e-cash software on the customer‘s PC stores digital
money undersigned by a bank.
• The users can spend the digital money at any shop accepting e-cash, without having to open
an account there or having to transmit credit card numbers.
• As soon as the customer wants to make a payment, the software collects the necessary
amount from the stored tokens.
Electronic Cheques
• It is another form of electronic tokens.
• In the given model shown in fig, buyers must register with third-party account server before
they are able to write electronic checks.
• The account server acts as a billing service.
The advantages are:
1. They work in the same way as traditional checks.
2. These are suited for clearing micropayments
3. They create float & availability of float is an important for commerce
4. Financial risk is assumed by the accounting server & may result in easier acceptance
 Payment transaction sequence in an electronic cheque system

Smart Cards & Electronic Payment Systems

• Smart cards have been in existence since the early 1980s and hold promise for secure
transactions using existing infrastructure.
• Smart cards are credit and debit cards and other card products enhanced with
microprocessors capable of holding more information than the traditional magnetic stripe.
• The smart card technology is widely used in countries such as France, Germany, Japan, and
Singapore to pay for public phone calls, transportation, and shopper loyalty programs.
Smart cards are basically two types:
– Relationship-Based Smart Credit Cards
– Electronic Purses, which replace money, are also known as debit cards and electronic
money.
Relationship-Based Smart Credit Cards
-- It is an enhancement of existing cards services &/ or the addition of new services that a
financial institution delivers to its customers via a chip-based card or other device
– These services include access to multiple financial accounts, value-added marketing
programs, or other information card holders may want to store on their card
– It includes access to multiple accounts, such as debit, credit, cash access, bill payment &
multiple access options at multiple locations
Electronic Purses
• To replace cash and place a financial instrument are racing to introduce ―electronic
purses‖, wallet-sized smart cards embedded with programmable microchips that store sums of
money for people to use instead of cash for everything
• The electronic purse works in the following manner:
1. After purse is loaded with money at an ATM, it can be used to pay for candy in a vending
machine with a card reader.
2. It verifies card is authentic & it has enough money, the value is deducted from balance on
the card & added to an e-cash & remaining balance is displayed by the vending machine.
Credit Card-Based Electronic Payment Systems
To avoid the complexity associated with digital cash and electronic cheques, consumers and vendors
are also looking at credit card payments on the internet as one possible time-tested alternative. There
is nothing new in the basic process. If consumers want to purchase a product or service, they simply
send their credit card details to the service provider involved and the credit card organization will
handle this payment like any other.
We can break credit card payment on online networks into two basic categories:
1. Payments using encrypted credit card details:
It would make sense to encrypt your credit card details before sending them out, but even then
there are certain factors to consider. One would be the cost of a credit card transaction itself. Such
cost would prohibit low value payments by adding costs to the transactions.
2. Payments using third party verification:
One solution to security and verification problems is the introduction of a third party: a company
that collects and approves payments from one client to another. Another a certain period of time,
one credit card transaction for the total accumulated amount is completed.
Encryption and Credit cards:
Encryption is incorporate when credit card information is entered into a browser or other electronic
commerce device and sent securely over the network from buyer to seller as an encrypted message. To
make a credit card transaction truly secure, the following sequence of steps must occur before actual
goods, services, or funds flow:
1. A customer presents his or her credit card information securely to the merchant.
2. The merchant validates the customer’s identity as the owner of the credit card account.
3. The merchant relays the credit card charge information and signature to its bank or online credit
card processors.
4. The bank or processing party relays the information to the customer’s bank for authorization
approval.
5. The customer’s bank returns the credit card data, charge authentication, and authorization to
the merchant.
 Processing payments using encrypted credit cards

In this scheme each consumer and each vendor generates a public key and a secret key. The public
key is sent to the credit card company and put on its pubic key server. The secret key is encrypted
with a password, and the unencrypted version is erased. To steal a credit card, a thief would have to
get access to both a consumer’s encrypted secret key and password. The credit card company sends
the consumer a credit card number and a credit limit. Nobody can cheat this system. The consumer
can’t claim that he didn’t agree to the transaction, because he signed it. The vendor can’t invent fake
charges, because he doesn’t have access to the consumer’s key. He can’t submit the same charge
twice, because the consumer included the prices time in the message.
Unfortunately, whether existing credit card companies will accept digital signatures as replacements
for real signatures is not clear, so vendors will still have a difficult time when customers dispute
charges made using encrypted credit card numbers over the Internet. When credit card companies do
decide to accept digital signatures, they will need to maintain a public server with all of the public
keys. This method assumes that the credit card company will keep the vendor honest, as is the case in
traditional credit card transactions. Electronic payment processing is not an inexpensive proposition,
however. But neither is fraud. If electronic commerce takes off and small transactions increase
without a fully encrypted system in place, fraud, will become even more expensive.
Third party Processors and Credit Cards
In third party processing, consumers register with a third party on the Internet to verify electronic
micro transactions. Verification mechanisms, can be designed with many of the attributes of
electronic tokens, including anonymity. They differ from electronic token system in that (1) they
depend on existing financial instruments and (2) They require the online involvement of at least one
additional party and, in some cases, multiple parties to ensure extra security.
Online Third Party Processors (OTPPs) have created a six-step process that they believe will be a fast
and efficient way to buy information online:
 1. The consumer acquire an OTPP account number by filling out a registration form.
This will give the OTPP a customer information profile that is backed by a traditional
financial instrument such as a credit card.
2. To purchase an article, software, or other information online, the consumer requests
the item from the merchant by quoting her O TPP account number. The purchase can
take place in one of two ways: The consumer can automatically authorize the
merchant via browser settings to access her OTPP account and bill her, or she can
type in the account information.
3. The merchant contacts the OTPP payment server with the customer’s account
number.
4. The OTPP payment server verifies the customer’s account number for the vendor and
checks for sufficient funds.
5. The OTPP payment server sends an electronic message to the buyer. This message
could be an automatic WWW form that is sent by the OTPP server or could be a
simple e-mail. The buyer responds to the form or e-mail in one of three ways: Yes, I
agree to pay: No, I will not pay: or Fraud, I never asked for this.
6. If the OTPP payment server gets a Yes from the customer, the merchant is informed
and the customer is allowed to download the material immediately.
7. The OTPP will not debit the buyer’s account until it receives confirmation of
purchase completion. Abuse by buyers who receive information or a product and
decline to pay can result in account suspension.
To use this system, both customers and merchants must be registered with the OTPP. An
online environment suitable for microtransactions will require that many of the preceding
steps be automated. WWW browser capable of encryption can serve this purpose. Here the
two key servers are merchant server and payment server. Users first establish an account with
the payment server. Then, using a client browser, a user makes a purchase from a merchant
server by clicking on a payment URL (hyperlinks), which is attached to the product on a
world wide web page. Unknown to the customers, the payment URL encodes the following
details of purchase: price of item, target URL and duration.
 Online payment process using a third party processors

Risk and Electronic Payment Systems:

One essential challenge of e-commerce is risk management. Operation of the payment
systems incurs three major risks: fraud or mistake, privacy issues, and credit risk. Preventing
mistakes might require improvements in the legal framework. Dealing with privacy and fraud
issues requires improvements in the security framework. Curtailing credit risk requires
devising procedures to constrict or moderate credit and reduce float in the market. Risks in
payment systems refer to the possibility of payments being incomplete. The impact can be
measured in terms of damaging value or level of confidence in payment
systems. For example, in case of incorrect or delayed payments, there are costs arising from
transferring funds back, interest charges, replacement costs and other types of charges. In
case of not receiving or receiving partial payments, there will be a principal loss, while in
some cases, which involve high value payments or payment participants at large, this may
cause systemic risks among financial institutions and eventually affect the stability of the
financial system. Such risks generally exist in the payment systems that are not settled on a
real-time basis i.e. net settlement systems, whereby the longer the time difference between
payment and settlement time, the higher the risk exposure it is. Moreover, the risks will also
depend on the volume and value of transactions in the payment system.
Risks from Mistakes and Disputes: Virtually all electronic payment systems need some
ability to keep automatic records, for obvious reasons. From a technical standpoint, this is no
problem for electronic systems. Credit and debit cards have them and even the paper based
cheque creates an automatic record. Once information has been captured electronically, it is
easy and inexpensive to keep.
The need for record keeping for purposes of risk management conflicts with the transaction
anonymity of cash. One can say that anonymity exists today only because cash is a very old
concept, invented long before the computer and networks gave us the ability to track
everything. An anonymous payment systems without automatic record keeping will be
difficult for bankers and governments to accept.
Managing Information Privacy: The electronic payment system must ensure and maintain
privacy. Everytime one purchases goods using a credit card, subscribes to magazine or
accesses a server that information goes into a database somewhere. Furthermore, all these
records can be linked so that they constitute in effect a single report. This file would reflect
what items were bought and where and when. This violates one the unspoken laws of doing
business: that the privacy of customers should be protected as much as possible.
Managing Credit Risk: Credit Risk is a major concern in net settlement systems because of
a bank failure to settle its net position could lead to a chain reaction of bank’s failures. The
digital central bank must develop policies to deal with this possibility. Various alternatives
exist, each with advantages and disadvantages. A digital central bank guarantee on settlement
removes the insolvency test from the system because banks will more readily assume credit
risks from other banks. Without such guarantees the development of clearing and settlement
systems and money markets may be impeded.

Designing Electronic Payment Systems

Despite cost and efficiency gains, many hurdles remain to the spread of electronic payment
systems. These include several factors, many non-technical in nature, that must be addressed
before any new payment method can be successful:
Privacy: A user expects to trust in a secure system; just as the telephone is a safe and private
medium free of wire taps and hackers, electronic communication must merit equal trust.
Security: A secure system verifies the identity of two party transactions through user
authentication and reserves flexibility to restrict information/ services through access control.
Intuitive Interfaces: The payment interface must be as easy to use as a telephone. Generally
speaking, users value convenience more than anything.
Database Integration: With home banking, a customer wants to play with all his accounts.
To date, separate accounts have been stored on separate databases. The challenge before
banks is to tie these databases together and to allow customers access to any of them while
keeping the data up-to-date and error free.
Brokers: A network banker, someone to broker goods and services, settle conflicts, and
facilitate financial transactions electronically, must be in place.
Pricing: One fundamental issue is how to price payment system services. The problem with
subsidies is the potential waste of resources, as money may be invested in systems that will
not be used. Thus investment in systems not only might not be recovered but substantial
ongoing operational subsidies will also be necessary.
Standards: Without standards, the welding of different payment users into different networks
and different systems is impossible. Standards enable interoperatability, giving users the
ability to buy and receive information, regardless of which bank is managing their money.