Payment Systems for Electronic Commerce

1
Chapter 12

• Payment Systems for Electronic Commerce

2
Learning Objectives

• In this chapter, you will learn about
• The basic functions of payments systems that are
  used in electronic commerce
  
• The history and future of electronic cash
• How electronic wallets work
• The use of stored-value cards in electronic
  commerce

3
Electronic Payment Systems

• Electronic commerce involves the exchange of some
  form of money for goods and services.
  
• Implementation of electronic payment systems is
  in its infancy and still evolving.
  
• Electronic payments are far cheaper than the
  traditional method of mailing out paper invoices
  and then processing payments received.

4
Electronic Payment Systems

• Estimates of the cost of billing one person vary
  between 1 and 1.50.
  
• Sending bills and receiving payments over the
  Internet promises to drop the transaction cost to
  an average of 50 cents per bill.
  
• Today, four basic ways to pay for purchases
  dominate business-to-consumer commerce.

5
Electronic Payment Systems
6
Electronic Payment Systems

• Electronic cash distribution and payment can be
  handled by wallets, smart cards, or proprietary,
  limited-use scrip.
  
• Scrip is digital cash minted by a company instead
  of by a government.
  
• Companies like Payment Online sell packages of
  payment processing services to Web merchants that
  accept several types of payments.

7
Electronic Payment Systems
8
Payment Cards

• Payment cards are all types of plastic cards that
  consumers use to make purchases
  
• Credit cards
• such as a Visa or a MasterCard, has a preset
  spending limit based on the users credit limit.
  
• Debit cards
• removes the amount of the charge from the
  cardholders account and transfers it to the
  sellers bank.
  
• Charge cards
• such as one from American Express, carries no
  preset spending limit.

9
Advantages and Disadvantages of Payment Cards

• Advantages
• Payment cards provide fraud protection.
• They have worldwide acceptance.
• They are good for online transactions.
• Disadvantages
• Payment card service companies charge merchants
  per-transaction fees and monthly processing fees.

10
Payment Acceptance and Processing

• Open and closed loop systems will accept and
  process payment cards.
  
• A merchant bank or acquiring bank is a bank that
  does business with merchants who want to accept
  payment cards.
  
• Software packaged with your electronic commerce
  software can handle payment card processing
  automatically.

11
Payment Acceptance and Processing
12
Electronic Cash

• Electronic cash is a general term that describes
  the attempts of several companies to create a
  value storage and exchange system that operates
  online in much the same way that
  government-issued currency operates in the
  physical world.
• Concerns about electronic payment methods
  include
  
• Privacy
• Security
• Independence
• Portability
• Convenience

13
Electronic Cash Issues

• Primary advantage is with purchase of items less
  than 5
  
• Credit card transaction fees make small purchases
  unprofitable
  
• Facilitates Micropayments eg for items costing
  less than 1
  
• Must be anonymous, just like regular currency
• Safeguards must be in place to prevent
  counterfeiting
  
• Must be independent and freely transferable
  regardless of nationality or storage mechanism
  

14
Electronic Cash
15
Electronic Cash Storage

• Two methods
• On-line
• Individual does not have possession personally of
  electronic cash
  
• Trusted third party, e.g. e-banking, bank holds
  customers cash accounts
  
• Off-line
• Customer holds cash on smart card or electronic
  wallet
  
• Fraud and double spending require tamper-proof
  encryption

16
Electronic Cash

• Advantages
• Electronic cash transactions are more efficient
  and less costly than other methods.
  
• The distance that an electronic transaction must
  travel does not affect cost.
  
• The fixed cost of hardware to handle electronic
  cash is nearly zero.
  
• Electronic cash does not require that one party
  have any special authorization.
  
• Disadvantages
• Electronic cash provides no audit trail.
• Because true electronic cash is not traceable,
  money laundering is a problem.
  
• Electronic cash is susceptible to forgery.
• So far, electronic cash is a commercial flop.

17
Disadvantages of Electronic Cash

• Electronic cash provides no audit trail.
• Because true electronic cash is not traceable,
  money laundering is a problem.
  
• Electronic cash is susceptible to forgery.
• So far, electronic cash is a commercial flop.

18
How Electronic Cash Works

• Customer opens account with bank in person and
  establishes identity
  
• Thereafter, digital certificate serves as proof
  of identity
  
• Once identified, bank issues e-currency and
  deducts amount from customers account (minus
  service fee)
  
• Customer spends e-cash with merchant who
  validates it to prevent forgery or fraud
  
• Merchant presents e-cash to issuing bank for
  deposit once goods or services are received

19
Providing Security for Electronic Cash

• To prevent double spending, the main security
  feature is the threat of prosecution.
  
• A complicated two-part lock provides anonymous
  security that also signals when someone is
  attempting to double spend cash.
  
• One way to trace electronic cash is to attach a
  serial number to each electronic cash
  transaction.

20
Providing Security for Electronic Cash
21
Electronic Cash Systems

• Compaq Computers electronic cash technology
  allows users to use its NetCoin electronic
  cash.
  
• KCOM offers its own NetCoin electronic cash
  system and offers electronic cash through its
  NetCoin Center.
  
• No standards were ever developed for the entire
  electronic cash system.

22
IBM and Micropayments
23
CheckFree

• CheckFree provides online payment processing
  services to both large corporations and
  individual Internet users.
  
• CheckFree permits users to pay all their bills
  with online electronic checks.
  
• CheckFree provides part of the technology that
  the Web portal Yahoo! uses to provide its Yahoo!
  Bill Pay service.

24
CheckFree
25
Clickshare

• Clickshare is an electronic cash system aimed at
  magazine and newspaper publishers.
  
• Users with an ISP that supports Clickshare are
  automatically registered with Clickshare.
  
• Clickshare tracks users with the standard HTTP
  Web protocol.

26
InternetCash

• InternetCash provides electronic currency that is
  very similar to traditional cash.
  
• Customers must first purchase an InternetCash
  card from stores, such as Circle K.
  
• Customers then go online and activate their cards
  by entering a 20-digit code and creating a PIN.
  
• After their card is activated, customers can pay
  for purchases using the InternetCash card at any
  site that accepts it.

27
PayPal

• PayPal.com is a free service that earns a profit
  on the float, which is money that is deposited in
  PayPal accounts.
  
• The free payment clearing service that PayPal
  provides to individuals is called a peer-to-peer
  payment system.
  
• PayPal allows customers to send money instantly
  and securely to anyone with an e-mail address,
  including an online merchant.

28
Electronic Wallets

• An electronic wallet serves a function similar to
  a physical wallet
  
• holds credit cards, electronic cash, owner
  identification, and owner contact information
  
• provides owner contact information at an
  electronic commerce sites checkout counter
  
• Some electronic wallets contain an address book.
• (http//www.computing.co.uk/Features/1134792)

29
Electronic Wallets

• Electronic wallets make shopping more
  efficient.
  
• Electronic wallets fall into two categories based
  on where they are stored
  
• Server-side electronic wallet
• Client-side electronic wallet

30
Electronic Wallets

• Electronic wallets store shipping and billing
  information, including a consumers first and
  last names, street address, city, state, country,
  and zip or postal code.
• Electronic wallets automatically enter required
  information into checkout forms.

31
Microsoft .NET Passport

• Microsoft Passport Wallet comes preinstalled in
  Internet Explorer 4.0 and higher versions.
  
• All the personal data you enter into your
  Microsoft Passport, including your name, address,
  and credit card information, are encrypted and
  password-protected.
• Passport consists of four integrated services
  Passport single sign-in service, Passport Wallet
  Service, Kids Passport service, and public
  profiles.

32
Microsoft .NET Passport
33
Yahoo! Wallet

• Functions the same way as other electronic
  wallets, but with certain advantages
  
• Yahoo! hosts several services and shops that can
  accommodate its own wallet
  
• Can be used at more than 10,000 Yahoo! Store
  merchants

34
The W3C Proposed Standard

• The W3C Electronic Commerce Interest Group
  (ECIG) developed a set of standards called the
  the Common Markup for Micropayment
  Per-Fee-Links.
• This standard identifies existing system
  micropayment types of online connections,
  stored-value systems, and combined online-offline
  systems.

35
The ECML Standard

• The consortium of America Online, Compaq, Dell,
  IBM, Microsoft, Visa USA, and MasterCard has
  agreed on a technology called ECML, or electronic
  commerce modeling language.
• The ECML standard will expedite online processing
  for customers by simplifying the form-filling
  procedure.

36
Stored-Value Cards

• A stored-value card can be an elaborate smart
  card or a simple plastic card with a magnetic
  strip that records the currency balance.
  
• A smart card is better suited for Internet
  payment transactions because it has limited
  processing capability.

37
Smart Cards

• Plastic card containing an embedded microchip
• Can contain cash
• Over 100 times more information storage than a
  magnetic-striped plastic card
  
• Information is encrypted, unlike credit cards
  which have account number on its face, making
  credit theft practically impossible

38
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.
  success depends on
  
• Critical mass of smart cards that support
  applications
  
• Compatibility between smart cards, card-reader
  devices, and applications

39
Smart Card

• A smart card is a plastic card with an embedded
  microchip containing information about you.
  
• A smart card can store about 100 times the amount
  of information that a magnetic strip plastic card
  can store.
  
• A smart card contains private user information,
  such as financial facts, private encryption keys,
  account information, credit card numbers, health
  insurance information, etc.

40
Smart Card
41
Octopus Smart Card Hong Kong Public transport
42
Octopus Smart Card
43
Octopus Smart Card - Buses

• Note the special offers
• Note also the limitation of 9 other trips since
  the Octopus memory only remembers the last 10
  trips

44
Octopus Smart Card Auto Reloading
45
Octopus Smart Card- A Downside

• School children in HK are checked in and out of
  school using their Octopus cards

46
Octopus as Fashion Accessory
47
Here comes the Oyster
48
Mondex Smart Card

• Mondex is a smart card that holds and dispenses
  electronic cash.
  
• Mondex requires special equipment, such as a
  card reader, to process.
  
• Containing a microcomputer chip, Mondex cards can
  accept electronic cash directly from a users
  bank account.

49
Mondex Smart Card
50
Mondex Smart Card

• Holds and dispenses electronic cash
• Developed by MasterCard International
• Requires specific card reader for merchant or
  customer to use card over Internet
  
• Supports micropayments as small as 2p and works
  both online and off-line at stores or over the
  telephone

51
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
  
• Trialled in Swindon but not taken up

52
Schlumberger Sema Smart Cards
53
M(obile)-Payments the future?

• Analysts believe that easy mobile payment is
  one of the main prerequisites for the success of
  m-commerce. When the mobile phone can function as
  an electronic wallet for mobile payments,
  including micropayments, application developers
  will find it attractive to introduce new mobile
  communication services to the market. Examples
  include mobile entertainment (downloads of music,
  mobile gambling, etc.), information services
  (sports news, horoscopes, location-based
  services, etc.), and real-world services (paying
  parking fees, buying train or concert tickets,
  etc.). Network operators envision micropayments
  as an attractive business that does not compete
  with banks or credit card companies. For the end
  user, PayCircle will make m-commerce easy and
  secure and thus eliminate the major hurdles to
  widespread adoption and popularity.
• PayCircle.org Press release Jan 23rd 2002

54
Summary

• In this chapter, we looked at
• The basic functions of payments systems that are
  used in electronic commerce
  
• The history and future of electronic cash
• How electronic wallets work
• The use of stored-value cards in electronic
  commerce