Digital Payment Systems

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Digital Payment Systems
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Learning Objectives

• Most common payment systems
• General types of payment systems
• Need for e-commerce payment systems
• Digital wallets
• Types of e-commerce payment systems
• Credit cards
• Digital cash
• Online stored value system
• Digital accumulating balance payment system
• Electronic billing presentment and payment
  systems

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Most Common Payment Systems, Based on Number or
Transactions
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Most Common Payment Systems, Based on Dollar
Amount
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General Types of Payment Systems

• Cash
• Checking Transfer
• Funds transferred directly via a signed draft or
  check from a consumers checking account to a
  merchant or other individual
• Credit card
• Processing centers or clearing houses handle
  verification of accounts and balances
• Stored value payments systems
• accounts created by depositing funds into an
  account and from which funds are paid out or
  withdrawn as needed
• Accumulating balance payment systems
• accounts that accumulate expenditures and to
  which consumers make periodic payments

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e-Commerce Payment Systems

• Credit card
• Digital cash
• generate a private form of currency that can be
  spent at e-commerce sites
• Online store value systems
• 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
• accumulate small charges and bill the consumer
  periodically.
• These systems are especially suited for
  processing micropayments for digital accounts

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How an Online Credit Card Transaction Works
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Limitations of Online Credit Card Payment Systems

• Security
• Neither the merchant not the consumer can be
  fully authenticated
• Merchant Risk
• Consumers can repudiate charges
• Cost
• Roughly 3.5 of purchase plus transaction fee
• Social Equity
• Young adults do not have credit cards
• Almost 100 million adult Americans cannot afford
  cards or are considered poor risks

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B2C Digital Payment Systems

• Digital Wallets
• Digital Cash
• Online Stored Value Systems
• Smart Card Stored Value Systems
• Digital Accumulating Balance Payment Systems
• Digital Credit Card Payment Systems
• Digital Checking Payment Systems

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Digital Wallets

• Authenticates the consumer through the use of
  digital certificates or other encryption methods,
  
• stores and transfers value, and
• secures the payment process from the consumer to
  the merchant
• Fill out order forms

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Promised Functionality of Digital Wallets
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Types of Digital Wallets
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Types of Digital Wallets

• Client-based digital wallets
• software applications that consumers install on
  their computer, and that offer consumer
  convenience by automatically filling out forms at
  online stores
• Server-based digital wallets
• software-based authentication and payment
  services and products sold to financial
  institutions that market the systems to merchants
  either directly or as a part of their financial
  service package

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eWallet

• Developed by Launchpad Technologies
• Free wallet software that stores credit card and
  personal information on users computer, not on a
  central server information is dragged into
  payment form from eWallet
• Information is encrypted and password protected
• Works with Netscape and Internet Explorer

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Microsoft Wallets

• Comes pre-installed in Internet Explorer 4.0, but
  not in Netscape
• All information is encrypted and password
  protected
• Microsoft Wallet Merchant directory shows
  merchants setup to accept Microsoft Wallet

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Microsoft Wallet
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How Microsofts Passport Wallet Works
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W3C Proposed Standard for Electronic Wallets

• World Wide Web Consortium (W3C) is attempting to
  create an extensible and interoperable method of
  embedding micropayment information on a web page
• Extensible systems allow improvement of the
  system without eliminating previous work

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W3C Proposed Standard for Electronic Wallets

• Merchants to accept several payment options to
  insure the widest possible Internet audience
• Merchants must embed in their Web page payment
  information specific to each payment system
• This redundancy spurred W3C to develop common
  standards for Web page markup for all payment
  systems
• Must move quickly to prevent current methods from
  becoming entrenched

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Digital Cash

• Also called e-cash
• Digital forms of value storage or value exchange
  that have limited convertibility into other forms
  of value and require intermediaries to convert

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Examples of Digital Cash
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Digicash How First Generation Digital Cash Worked
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Online stored value systems

• permit consumers to make instant, online payments
  to merchants and other individuals based on value
  stored in an online account
• Smart cards as store value systems are based on
  credit-card-sized plastic cards that have
  embedded chips that store personal information

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Online Stored Value Systems
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How Ecount.com Works A Stored Value System
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Digital Accumulating Balance Payment Systems

• Allow users to make micropayments and purchases
  on the Web, accumulating a debit balance for
  which they are billed at the end of the month

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Digital Accumulating Balance Payment Systems
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Digital Credit Card Payment Systems

• Seek to extend the functionality of existing
  credit cards for use as online shopping payment
  tools

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How a Digital Credit Card Payment System Works
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Digital Checking Payment Systems

• Seek to extend the functionality of existing
  checking accounts for use as online shopping
  payment tools

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How Digital Checking Works Echeck
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Smart Cards

• Available for over 10 years
• So far not successful in U.S., but popular in
  Europe, Australia, and Japan
• Unsuccessful in U.S. partly because few card
  readers available
• Smart cards gradually reappearing in U.S. their
  success depends on
• Critical mass of smart cards that support
  applications
• Compatibility between smart cards, card-reader
  devices, and applications

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Mondex Smart Card

• Holds and dispenses electronic cash
• Developed by MasterCard International
• Requires specific card reader for the merchants
  and/or customers to use card over Internet
• Supports micro-payments as small as 3 cents and
  works both online and off-line at stores or over
  the telephone

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Mondex Smart Card

• Disadvantages
• Card carries real cash in electronic form,
  creating the possibility of theft
• No deferred payment as with credit cards. Cash is
  dispensed immediately

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Mondex Smart Card Processing
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B2B Payment Systems

• More complex than B2C systems
• Must link into exist ERP and EDI systems
• Two main types
• Systems that replace traditional banks
• Existing banking systems extending to the B2B
  marketplace

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Key Features of B2B Payment Systems
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Electronic Billing Presentation and Payment

• New forms of online payment systems for monthly
  bills
• Allow consumers to view bills electronically and
  pay them through electronic funds transfers from
  bank or credit card accounts

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Electronic Billing Presentation and Payment
Growth of EBPP Market
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Electronic Billing Presentation and Payment Types
of EBPP Systems