Payment Systems for Electronic Commerce

1
Chapter 12

• Payment Systems for Electronic Commerce

2
Learning Objectives

• In this chapter, you will learn about
• The ways that companies operating online collect
  payments from customers
• Credit and debit card processing for electronic
  commerce transactions
• The history and future for electronic cash
• The implementation of electronic cash systems
• How electronic wallets work
• The use of stored-value cards in electronic
  commerce
• Protocols used to protect credit card transactions

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, three 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.
• Several companies, such as eCash Technologies,
  sell software that enables Web merchants to a
  offer a variety of payment systems.

7
Electronic Payment Systems
8
Debit Cards, Credit Cards and Charge Cards

• A credit card, such as a Visa or a MasterCard,
  has a preset spending limit based on the users
  credit limit.
• A charge card, such as one from American Express,
  carries no preset spending limit.
• A debit card removes the amount of the charge
  from the cardholders account and transfers it to
  the sellers bank.
• The collective term payment card refers to
  credit cards, debit cards, and charge cards.

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 (cont.)

• Electronic cash should have two important
  characteristics in common with real currency
• It must be possible to spend electronic cash only
  once.
• Electronic cash ought to be anonymous.
• The most important characteristic of cash is
  convenience.
• If electronic cash requires special hardware or
  software, it will not be convenient for people to
  use.

14
Electronic Cash (cont.)
15
Holding Electronic Cash Online and Offline Cash

• Two approaches to holding cash online storage
  and offline storage.
• Online cash storage means that an online bank is
  involved in all transfers of electronic cash.
• Offline cash storage is the virtual equivalent of
  money you keep in your wallet. However, it must
  prevent double or fraudulent spending.

16
Advantages of Electronic Cash

• 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.

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

• To establish electronic cash, a consumer goes in
  person to open an account with a bank.
• The consumer uses a digital certificate to access
  the bank through the Internet to make a
  purchase.
• Consumers can spend their electronic cash at
  sites that accept electronic cash for payment.
• The electronic cash must be protected from both
  theft and alteration.

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 Wallets

• An electronic wallet serves a function similar to
  a physical wallet it
• 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.

22
Electronic Wallets (cont.)

• 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

23
Electronic Wallets (cont.)

• 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.

24
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.

25
Microsoft .NET Passport
26
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.

27
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.

28
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.

29
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.

30
Smart Card
31
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.

32
Mondex Smart Card
33
Secure Electronic Transaction (SET) Protocol

• SET is a secure protocol jointly designed by
  MasterCard and Visa with the backing of
  Microsoft, Netscape, IBM, GTE, SAIC, and other
  companies.
• The purpose of SET is to provide security for
  card payments as they traverse the Internet
  between merchant sites and processing banks.

34
Chapter 13

• Planning for Electronic Business

35
Learning Objectives

• In this chapter, you will learn about
• Identifying the value of electronic commerce
  initiatives
• Aligning implementation plans with strategies
• Deciding which electronic commerce project
  elements to outsource

36
Learning Objectives (cont.)

• Selecting Web hosting services
• Using incubators and fast venturing techniques to
  launch Internet business initiatives
• Using project and portfolio management techniques
  to plan and control electronic commerce
  activities
• Staffing electronic commerce activities

37
Planning the Electronic Commerce Project

• A successful business plan for an electronic
  commerce initiative should include activities
  that will
• Identify the initiatives specific objectives
• Link those objectives to business strategies
• Manage the implementation of those business
  strategies
• Oversee the continuing operations of the
  initiative after it is launched

38
Identifying Objectives

• Common objectives include
• Increasing sales in existing markets
• Opening new markets
• Serving existing customers better
• Identifying new vendors
• Coordinating more efficiently with existing
  vendors
• Recruiting employees more effectively
• Resource decisions should consider the expected
  benefits and costs of meeting the objectives.

39
Linking Objectives to Business Strategies

• Businesses can use downstream strategies, which
  are tactics that improve the value that the
  business provides to its customers.
• Businesses can pursue upstream strategies that
  focus on reducing costs or generating value by
  working with suppliers or inbound logistics.

40
Linking Objectives to Business Strategies

• The Web is an attractive sales channel.
• The Web can be used to complement business
  strategies and improve competitive positions.
• Electronic commerce opportunities can inspire
  businesses to undertake many activities.

41
Linking Objectives to Business Strategies

• More companies are taking a closer look at the
  benefits and costs of their electronic commerce
  projects.
• A good business plan will set specific objectives
  for the benefits to be achieved and costs to be
  incurred.
• Companies use pilot Web sites to test an
  electronic commerce idea, and then release a
  production version when it works well.

42
Measuring Benefit Objectives

• Many companies create Web sites to build their
  brands or enhance existing marketing programs.
• These companies can set goals in terms of
  increased brand awareness, as measured by market
  research surveys.
• Companies that sell goods or services on their
  sites can measure sales volumes in units or
  dollars.

43
Measuring Benefit Objectives

• Companies can use a variety of similar
  measurements to assess the benefits of other
  electronic commerce initiatives.
• Supply chain managers can measure supply cost
  reductions, quality improvements, etc.

44
Measuring Benefit Objectives
45
Measuring Cost Objectives

• Many changes in the cost of hardware are
  downward.
• The increasing sophistication of software
  provides an ever-increasing demand for newer
  hardware.
• The project budget must include the cost of
  hiring, training, and personnel.

46
Measuring Cost Objectives

• Based on data collected in separate recent
  surveys, International Data Corporation and the
  GartnerGroup both estimated that the cost for a
  large company to build and implement an adequate
  entry-level electronic commerce site was about 1
  million.
• About 79 of that cost was labor related
• 10 was the cost of software
• 11 was the cost of hardware

47
Measuring Cost Objectives

• Recent estimates of the cost to build small Web
  sites have continued to increase as more
  companies establish themselves on the Web.
• Expensive features, such as shopping carts and
  search engines, have become standard on even the
  most basic sites.
• Analysts have estimated the minimum dollar amount
  needed to open an entry level electronic commerce
  Web site at 150,000.

48
Measuring Cost Objectives
49
Measuring Cost Objectives

• The McKinsey study estimated costs for two types
  of magazine sites a full portal site that would
  serve as a destination in itself and a more
  limited magazine companion site.
• The full portal site cost estimate was 2.4
  million to build and 4.3 million per year to
  maintain, with a staff of 35 people.
• The companion site cost estimate was 150,000 to
  build and 270,000 per year to maintain, with a
  staff of two people.

50
Measuring Cost Objectives

• Kmarts Web store, Blue-Light.com, cost more than
  140 million to create.
• The site is certainly well designed and highly
  functional, but the typical visitor would never
  guess how much this site cost.

51
Measuring Cost Objectives
52
Comparing Benefits to Costs

• If the benefits exceed the cost of a project by a
  comfortable margin, the company invests in the
  project.
• Companies should evaluate each element of their
  electronic commerce strategies using this
  cost/benefit approach.
• Managers often use return on investment (ROI) to
  evaluate any capital investment.

53
Comparing Benefits to Costs
54
Comparing Benefits to Costs

• Although most companies evaluate the anticipated
  value of electronic commerce initiatives in some
  way before approving them, many companies see
  these projects as absolute necessities.
• These companies fear being left behind as
  competitors stake their claims in the online
  market space.
• The value of early positioning in a new market is
  so great that many companies are willing to
  invest large amounts of money with few near-term
  profit prospects.

55
Comparing Benefits to Costs

• Newspaper Web sites are a good example of this
  desire to establish a foothold in the online
  market space.
• Profitable electronic commerce initiatives in the
  newspaper business, such as Gannets USA Today
  and The Wall Street Journals WSJ.com sites, are
  few.

56
Strategies for Web Site Development

• The evolution of Web site functions
• From the static brochures of the early days of
  electronic commerce
• To transaction processing tools
• To todays automated homes for business processes
  of all kinds

57
Strategies for Web Site Development
58
Strategies for Web Site Development

• The transformation of Web site functions occurred
  rapidly, taking only a year or two in most
  companies.
• Few businesses have caught up with the changes in
  terms of how they develop Web sites.
• The purposes and scope of Web sites have
  increased greatly, but few businesses today
  manage them as the dynamic business applications
  they have become.

59
Strategies for Web Site Development

• Many large and medium-sized companies have found
  it extremely difficult to develop new information
  systems and Web sites that work with their
  existing systems to create new markets or
  reconfigure their supply chains.

60
Internal Development vs. Outsourcing

• The key to success is finding the right balance
  between outside and inside support for the
  project.
• Hiring another company to provide the outside
  support for the project is called outsourcing.

61
The Internal Team

• The first step in determining which parts of a
  project to outsource is to create an internal
  team that is responsible for the project.
• Business knowledge and creativity are much more
  important than technical expertise in
  establishing successful electronic commerce.

62
The Internal Team (cont.)

• Measuring the achievement of an internal team is
  very important.
• Customer satisfaction, number of sales leads
  generated, and reductions in order-processing
  time are examples of metrics that can provide a
  sense of the teams level of accomplishment.

63
Early Outsourcing

• In many electronic commerce projects, the company
  outsources the initial site design and
  development to launch the project quickly.
• The outsourcing team then trains the companys
  employees in the new technology before handing
  the operation of the site over to them .
• This approach is called early outsourcing.

64
Late Outsourcing

• The company does the initial design, development,
  implementation, and operates the system until it
  becomes stable.
• After the company has gained all the competitive
  advantages provided by the system, the
  maintenance of the electronic commerce system can
  be outsourced.
• This approach is called late outsourcing.

65
Partial Outsourcing

• In partial outsourcing, the company identifies
  specific portions of the project that can be
  completely designed, developed, implemented, and
  operated by another firm that specializes in a
  particular function.
• E-mail systems, electronic payment systems, and
  Web hosting are examples of partial outsourcing
  projects.

66
Partial Outsourcing

• Another common example of partial outsourcing is
  an electronic payment system.
• Web hosting is one of the most common elements of
  electronic commerce initiatives that companies
  outsource using partial outsourcing.

67
Selecting a Hosting Service

• The internal team should be responsible for
  selecting the ISP that will provide the sites
  hosting service.
• For smaller electronic commerce projects, teams
  can consult an ISP directory, such as The
  List.
• For larger Web sites, the team will want to
  obtain the advice of consultants or other firms
  that rate ISPs and CSPs, such as Keynote
  Systems.

68
Selecting a Hosting Service (cont.)

• The factors to evaluate when selecting a hosting
  service include
• Functionality
• Reliability
• Bandwidth and server scalability
• Security
• Backup and disaster recovery
• Cost

69
Selecting a Hosting Service (cont.)

• Determine the functionality offered by a hosting
  service and carefully evaluate whether that
  functionality will be sufficient to meet the
  needs of your Web site.
• Because the companys information on customers,
  products, pricing, and other data will be placed
  in the hands of the service provider, the
  vendors security policies and practices are very
  important.

70
New Methods for Implementing Partial Outsourcing

• New ways of implementing the partial outsourcing
  strategy have evolved for Web businesses.
• Two of the more popular methods are
• Incubators
• Fast venturing

71
Incubators

• An incubator is a company that offers start-up
  companies a physical location with offices,
  accounting and legal assistance, computers, and
  Internet connections at a very low monthly cost.
• Incubators might offer seed money, management
  advice, and marketing assistance.
• In exchange, the incubators receive an ownership
  interest in the company.

72
Incubators

• Some companies have created internal incubators.
• A number of companies have used internal
  incubators in the past to develop technologies
  that the companies planned to use in their main
  business operations.
• Recently companies, such as Matsushita Electrics
  U.S. Panasonic division, have started internal
  incubators to help launch new companies that will
  grow to become important strategic partners.

73
Fast Venturing

• In fast venturing, an existing company that wants
  to launch an electronic commerce initiative joins
  external equity partners and operational partners
  to scale up the project rapidly.
• Equity partners are usually banks or venture
  capitalists.
• Operational partners are firms that have
  experience in moving projects along.

74
Fast Venturing
75
Managing Electronic Commerce Implementations

• The best way to manage any complex business
  software implementation is to use formal project
  management techniques.
• Individual projects can become so large that it
  becomes impossible for managers to maintain
  control without some kind of assistance.

76
Project Management

• Project management is a collection of formal
  techniques for planning and controlling the
  activities undertaken to achieve a specific
  goal.
• The project plan includes criteria for cost,
  schedule, and performance.
• It helps project managers make intelligent
  trade-off decisions regarding these three
  criteria.

77
Project Management (cont.)

• Project managers use specific application
  software called project management software to
  help them manage projects.
• Microsoft Project and Primavera Project Planner
  are tools for managing resources and schedules.

78
Project Management (cont.)

• Project management software can help the team
  manage the tasks assigned to consultants,
  technology partners, and outsourced service
  providers.
• The Project Management Institute is a
  not-for-profit organization devoted to the
  promotion of professional project management
  practices.

79
Project Portfolio Management

• Project portfolio management is a technique in
  which each project is monitored as if it were an
  investment in a financial portfolio.
• In project portfolio management, the CEO assigns
  a ranking for each project based on its
  importance to the strategic goals of the business
  and its level of risk.

80
Staffing the Operation

• Regardless of outsourcing, an internal team must
  determine the staffing needs of the electronic
  commerce initiative.
• The general areas of staffing include
• Business management
• Application specialists
• Customer service staff
• Systems administration
• Network operations staff
• Database administration

81
Staffing the Operation

• Some companies outsource parts of their customer
  relationship management operation to independent
  call centers.
• A call center is a company that handles incoming
  customer telephone calls and e-mails for other
  companies.

82
Post-Implementation Audits

• A post-implementation audit is a formal review of
  a project after it is up and running.
• The post-implementation audit gives managers a
  chance to examine the objectives, performance
  specifications, and cost estimates to schedule
  delivery dates that were established in its
  planning stage and to compare them to what
  actually happened.