LECTURE 1

E-Commerce Payment System

Agenda
• Electronic Payments
• E-Commerce Transaction
• EXAMPLES OF ELECTRONIC PAYMENT SYSTEMS FOR E-
COMMERCE
• Examples of online payment systems
Introduction
• Collecting revenue from sales of goods and services is a major activity
when running a business
• Challenge in e-commerce
• For businesses to reliably and efficiently collect revenue from customers
online
• Reliably and trustworthy way for customers to pay for goods and
services online
Money
Customer Goods & Services
Merchant
Preferences of Stakeholders
• There are three stakeholders in most payment systems
• Consumer
• Merchant
• Financial institutions
• Each has a different preferences of characteristics of payment system
• Customers
• Prefer low-cost, low risk, refutable, convenient, reliable payment mechanism
• Merchant
• Prefer low-cost, low risk, irrefutable, secure and reliable payment mechanism
• Financial institution
• Prefer secure payment systems that transfer risks and costs to consumers and
merchants, while maximising transaction fees payable to themselves
E-Commerce
Transaction
Types of Payment Systems
• Emergence of e-commerce has created new financial needs cannot be fulfilled by
traditional payment system
• Example
• Auctions between customers require a peer-to-peer payment method via e-
mail
• Some types of online products require micropayments where price of
merchandise is very small (RM 1.99 for a ring tone, and RM 4.99 monthly
subscription fee to get daily information of commodity prices)
Electronic Payments
• E-Commerce or Electronics Commerce sites use electronic payment
where electronic payment refers to paperless monetary transactions.
• Electronic payment has revolutionized the business processing by
reducing paper work, transaction costs, labour cost.
• Being user friendly and less time consuming than manual processing,
helps business organization to expand its market reach / expansion.
• Some of the modes of electronic payments are following.
Electronic payment systems
•Electronic payment systems may be more convenient for
international online business due to differences in credit card
customer protection laws in different countries.
Types of Payment Systems
• Payment for online purchases
• Credit cards most popular in U.S.
• Checks and cash-on-delivery popular in Europe
• Bank transfers, cash-on-delivery popular in Japan
• New forms of payment systems
• Digital cash
• Online stored value systems
• Digital accumulating balance payment systems
• Digital credit accounts
• Digital checking
Types of Electronic Payment Systems
• Digital cash
• Systems that generate a private form of currency that can be spent at e-commerce sites
• Online stored value systems
• Systems that rely on prepayments, debit cards, or checking accounts to create value in an
account that can be used for e-commerce shopping
• Digital accumulating balance payment systems
• Systems that accumulate small charges and bill the consumer periodically (suitable for
micropayments)
• Digital credit accounts
• Systems that extend the online functionality of existing credit card payment systems
• Digital checking
• Systems that create digital checks for e-commerce remittances and extend the functionality of
existing bank checking systems
EXAMPLES OF ELECTRONIC PAYMENT SYSTEMS FOR E-
COMMERCE
Digital wallets
• Digital wallets make paying for purchases over the Web more efficient by
eliminating the need for shoppers to enter their address and credit card
information repeat- edly each time they buy something. The digital wallet
securely stores credit card and owner identification information and enters
the shopper’s name, credit card number, and shipping information
automatically when invoked to complete a purchase. Google Checkout is
an example.
Digital Wallets
• Concept of digital wallet relevant to many of the new digital payment systems
• Seeks to emulate the functionality of traditional wallet
• Most important functions:
• Authenticate consumer through use of digital certificates or other encryption methods
• Store and transfer value
• Secure payment process from consumer to
• merchant
• Two major categories:
• Client-based digital wallets – Gator.com, MasterCard Wallet
• Server-based digital wallets – MSN Wallet
Type of Digital Wallets
Micropayment
• Micropayment systems have been developed for purchases of less than
$10, such as downloads of individual articles or music clips, which would
be too small for conventional credit card payments.
Accumulated balance digital payment systems
• Accumulated balance digital payment systems enable users to make
micropayments and purchases on the Web, accumulating a debit balance
that they must pay periodically on their credit card or telephone bills.
Examples are Valista’s PaymentsPlus used by AOL, Vodafone, and NTT
DoCoMo, and Clickshare, which is widely used by the online newspaper
and publishing industry.
Accumulated balance
• Accounts that accumulate expenditures and to which consumers make
period payments
• Examples: utility, phone, American Express accounts
• Allows users to make micropayments and purchases on the Web,
accumulating a debit balance for which they are billed at the end of the
month
• Examples: Qpass and iPin
Digital Accumulating Balance Payment Systems
Online stored value payment systems
• Online stored value payment systems enable consumers to make instant
online payments to merchants and other individuals based on value stored
in an online digital account. Some online stored value payment systems
such as Valista are merchant platforms. Others are focused on peer-to-
peer payments, such as PayPal. PayPal is owned by eBay and makes it
possible for people to send money to vendors or individuals who are not
set up to accept credit card payments.
Online Stored Value Systems
Digital checking systems
• Digital checking systems such as PayByCheck extend the functionality of
existing checking accounts so they can be used for online shopping
payments. Digital checks are processed much faster than traditional paper-
based checking.
• Extend the functionality of existing checking accounts for use as online
shopping payment tools
• Examples: eCheck, Achex (MoneyZap)
Digital Checking: eCheck
Digital Checking Payment Systems
Electronic billing presentment and payment systems
• Electronic billing presentment and payment systems are used for
paying routine monthly bills. They enable users to view their bills electroni-
cally and pay them through electronic fund transfers from bank or credit
card accounts. These services notify purchasers about bills that are due,
present the bills, and process the payments. Some of these services, such
as CheckFree, consolidate subscribers’ bills from various sources so that
they can all be paid at one time.
Examples of online payment systems
• Virtual PIN
• DigiCash (or E-cash)
• CyberCash/CyberCoin
• SET (Secure Electronic Transactions)
• PayPal
• Smart cards
Examples of Digital Cash
Online Credit Card Use
Digital Credit Card Payment Systems
PayPal
• PayPal is an electronic payment system which can transfer money between
its accounts. In order to use PayPal, one has to obtain a PayPal account,
which is associated either with the customer's credit card or with their regular
bank account.
• To avoid fraud, PayPal sends an e-mail message to both the initiator and the
recipient of the transaction.
• PayPal is used to settle online auctions, such as eBay auctions. The ease of
use and the fact that no credit card is required to use it makes PayPal
increasingly popular.
PayPal
Credit Card
•Represents 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 time
•Credit card associations – Nonprofit associations (Visa,
MasterCard) that set standards for issuing banks
•Issuing banks – Issue cards and process transactions
•Processing centers (clearinghouses) – Handle verification of
accounts and balances
How an online credit transaction works
Limitations of Online Credit Card Payment Systems
• Security – neither merchant nor consumer can be fully authenticated
• Cost – for merchants, around 3.5% of purchase price plus transaction fee
of 20-30 cents per transaction
• Social 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)
Stored Value
• Accounts created by depositing funds into an account and from which
funds are paid out or withdrawn as needed
• Examples: Debit cards, gift certificates, prepaid cards, smart cards
• Debit cards: Immediately debit a checking or other demand-deposit
account
• Peer-to-peer payment systems such as PayPal a variation
• An example of an online stored value system
• Aimed at teenagers
• Funds can be deposited in a RocketCash account, which functions like a
credit card and allows teens to buy products online
The SET (Secure Electronic Transaction) Protocol
• Authenticates cardholder and merchant identity through use of digital
certificates
• An open standard developed by MasterCard and Visa
• Transaction process similar to standard online credit card transaction, with
more identity verification
• Thus 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 Work
END.