CH5

Electronic Payments

1
Learning Objectives
 Explain EDI
 Describe the features of traditional payment systems
 Discuss the current online payment systems
Introduction to EDI
All Organization and administrative association with
large information system faces a situation where typing
and printing of all information arriving or leaving their
domain is no longer feasible. Everyone who works in a
business organization where hundreds and
thousands of standard forms, (e.g. invoices) and
received and responded to, knows how difficult it is to
manage this task. These forms should be entered in the
computer for processing, and response should be
generated and posted to the concerned parties.
Introduction to EDI
Electronic Data Interchange (EDI) is the electronic
exchange of business documents in a standard,
computer process able, and universally accepted
format between-trading partners. EDI is quite different
from sending electronic mail, messages or sharing files
through a network. In EDI, the computer application of
both the sender and the receiver, referred to as Trading
Partners (TPs) have to agree upon the format of the
business document which is sent as a data file over an
electronic messaging service.
Introduction to EDI
The following problems can be reduced by using EDI:-
 Increased time.
 Low accuracy.
 High labor charges.
 Increased uncertainty.
Types of Payment Systems
 Cash
 Checking Transfer
 Credit Card
 Stored Value
 Accumulating Balance
Cash
 Legal tender defined by a national authority to
represent value (5 birr,10 birr,100 dollar).
 Most common form of payment in terms of
number of transactions
 Instantly convertible into other forms of value
without intermediation of any kind
 Portable, requires no authentication, and provides
instant purchasing power
 Limitations: easily stolen, limited to smaller
transaction
Checking Transfer
 Funds transferred directly via a signed draft or
check from a consumer’s checking account to a
merchant or other individual
 Most common form of payment in terms of
amount spend
 Can be used for both small and large transactions.
 Not anonymous, require third-party intervention
(banks)
 Introduce security risks for merchants (forgeries,
stopped payments), so authentication typically
required
Most Common Payment Systems, Based on
Number Of Transactions
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
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
Accumulating Balance
 Accounts that accumulate expenditures and
to which consumers make period payments
 Examples: utility, phone, American Express
accounts
Current Online Payment Systems
 New forms of electronic payment include:
 Digital cash
 Online stored value systems
 Digital accumulating balance payment systems
 Digital credit accounts
 Digital checking
How an Online Credit Card Transaction
Works
 Processed in much the same way that in-store
purchases are
 Major difference is that online merchants do not see
or take impression of card, and no signature is
available
 Participants include consumer, merchant,
clearinghouse, merchant bank (acquiring bank) and
consumer’s card issuing bank
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 who cannot afford cards or are
considered poor risk)
 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
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
Digital Cash
 One of the first forms of alternative payment
systems
 Not really “cash” – rather, are forms of value
storage and value exchange that have limited
convertibility into other forms of value, and
require intermediaries to convert
Digicash: How First Generation Digital
Cash Worked
Online Stored Value Systems
 Permit consumers to make instant, online
payments to merchants and other individuals
based on value stored in an online account
 Rely on value stored in a consumer’s bank,
checking or credit card account
How Ecount.com Works: A
Stored Value System
Digital Accumulating
Balance Payment Systems

 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 Checking Payment Systems

 Extend the functionality of existing

checking accounts for use as online
shopping payment tools
 Examples: eCheck, Achex
(MoneyZap)