04-2 E-commerce Payment Systems slides

Chapter 4Chapter 4

Payment Systems

Copyright © 2012 Pearson Education

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Learning Objectives

Describe the features of traditional payment systems

Understand the major e-commerce payment mechanisms

Describe the features and functionality of electronic billing presentment and payment systems

Types of Payment Systems

Cash

Checking Transfer

Credit Card

Stored ValueStored Value

Accumulating Balance

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CashLegal tender defined by a national authority to represent valueMost common form of payment in terms of number of transactionsInstantly convertible into other forms of value Instantly convertible into other forms of value without intermediationPortable, requires no authentication“Free” (no transaction fee), anonymous, low cognitive demandsLimitations: easily stolen, limited to smaller transaction, does not provide any float (period of time between purchase and actual payment), purchases tend to be final and irreversible unless otherwise agreed by the seller

Checking TransferFunds transferred directly via signed draft/check from a consumer’s checking account to merchant/ other individual

Most common form of payment in terms of amount spent

Second most common payment form in the United States in terms of number of transactions

Can be used for small and large transactions

Some float (can take up to 10 days for out-of-state checks to Some float (can take up to 10 days for out-of-state checks to clear)

Not anonymous, requires third-party intervention (banks)

Introduces security risks for merchants (forgeries – so authentication is required – bounced checks, stopped payments),

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Credit CardAccount that extends credit to consumers, permits consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one timetimeCredit card associations:

Issuing banks:

Processing centers (clearinghouses):

Credit CardAre widely accepted as a form of paymentReduce risk of theft related with carrying cashIncrease consumer convenienceOffer consumers considerable “float”Merchants benefit from increased consumer spending, but pay a hefty transaction fee of 3-5% to the issuing banksConsumers are liable to $50 for unauthorized Consumers are liable to $50 for unauthorized transactions occurring before card issuer is notifiedConsumers can refute or repudiate purchases under certain circumstancesLimit risk for consumers while raising it for merchants and banks

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Nonprofit associations (Visa, MasterCard) that set standards for issuing banks, e.g., CitiBank

Issue cards and process transactions

Handle verification of accounts and balances

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Stored Value

Accounts created by depositing funds into an account, from which funds are paid out or withdrawn as needed

Peer-to-peer (P2P) payment systems

Accumulating Balance

Accounts that accumulate expenditures and to which consumers make period payments

Evaluating payment systems:Evaluating payment systems:

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Examples: Debit cards, gift certificates, prepaid cards, Examples: Debit cards, gift certificates, prepaid cards, smart cards

Debit cards: Immediately debit a checking or other demand-deposit account

Variation on stored value systems

e.g. PayPal requires an account with stored value, either a checking account or a credit card

Examples: Utility, phone, American Express accounts

Accumulate balances over a specified period and are paid in full at the end of the period

Different stakeholders (consumers, merchants, financial intermediaries, government regulators) have different priorities in payment system dimensions (cost, convenience, refutability, risk, anonymity, etc.)



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Payment System Stakeholders’ Priorities

Consumers

MerchantsMerchants

Financial intermediaries

Government regulators

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Low-risk, low-cost, refutable, convenience, reliability

Low-risk, low-cost, irrefutable, secure, reliable

Secure, low-risk, maximizing profit

Security, trust, protecting participants and enforcing reporting



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Online Payment Methods in Other Parts of the World

Europe: mostly bank debit cards and some credit cardsChina: paid by check or cash and pick up at local storeJapan: postal and bank transfers and CODs, using local convenience stores as pickup and payment point; also use accumulated balance accounts with telco for purchases made from home PCs

Online Credit Card Transactions

Processed in much the same way that in-store purchases areMajor difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions)Thus are major reasons that charges can be disputed later by consumersdisputed later by consumersParticipants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bank

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How an Online Credit Transaction Works

Figure 4.16, Page 301

Limitations of Online Credit Card Payment Systems

Security:

Cost:

Social equity:



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Neither merchant nor consumer can be fully authenticated

For merchants, around 3.5% of purchase price plus transaction fee of 20 – 30 cents per transaction + other setup fees (see next fig.)

Paypal’s fees are even higher 3.5% + 1.5% – 3%

Avoiding this by aggregating purchases made within 24 hrs Avoiding this by aggregating purchases made within 24 hrs and charge to credit card account as a total, e.g., Apple’s iTunes Music Store with $0.69 – $1.29 cents/ song

Many people do not have access to credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or who have low incomes)

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E-commerce Payment Systems (cont.)

Digital wallets

Google Checkout Sample Screen

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Emulates functionality of wallet by authenticating consumer, storing and transferring value, and securing consumer, storing and transferring value, and securing payment process from consumer to merchant

Early efforts to popularize failed; E.g., MS’s server-side Passport & MSN Wallet terminating in Feb 2005

Latest effort: Google Checkout



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Digital Cash (“e-cash”)One of the first forms of alternative payment systemsValue storage and exchange using tokens Not really “cash”Not really “cash”

Most early examples (DigiCash, First Virtual, and Millicent) have disappeared; protocols and practices too complexGoldMoney still survive

Digicash: How First Generation Digital Cash Worked

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Users deposit money in bank or provide credit card; banks issue digital tokens (unique encrypted number) for denominations of cash, and consumers “spend” these at merchants’ sites; merchants deposit these e-tokens in its bank

Figure 6.6, Page 324

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Online Stored Value SystemsPermit consumers to make instant, online payments to merchants and other individualsBased on value stored in a consumer’s bank, checking, or credit card accountPayPal most successful system with $91 billion PayPal most successful system with $91 billion processed in 2010, 98 million usersGood sides: no personal credit info shared among the users; service can be used by individuals to pay one another even in small amountsDown sides: high cost and lack consumer protections when fraud occurs or charge is repudiated

How PayPal Works

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Online Stored Value SystemsSmart cards: plastic cards with embedded chips storing personal data (e.g., multiple credit card no’s and info about health insurance, transportation, personal ID, bank accounts, and frequent fryer accounts)

E-commerce Payment Systems (cont.)

Digital accumulated balance payment:

Digital checking:

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Contact : Require physical readerContact : Require physical readercertain-value retail store gift cardsMondex – allows users in Europe and Asia to download cash from bank account to the card via Mondex-compatible phone or a card reader connected to a PC, can carry 5 currencies simultaneously and accepted by merchants who have readers installed

Contactless : Use RFID or NFC technologyEZPass – highway toll payment system

Octopus – rechargeable contactless stored value smart card used in Hong Kong to pay public transportation, convenience stores, fast-food restaurants, parking, and POS.

Users accumulate a debit balance for which they are billed at the end of the month, like a utility or phone billPaymentsPlus, BillMeLater

Extends functionality of existing checking accounts for use onlineuse onlineBased on consumer’s existing checking accountAdvantages: do not require consumers to send sensitive info over the Web, cheaper than credit cards for merchants, much faster than paper checksPayByCheck, EBillMe



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PayByCheck Sample Screen

Mobile Payment Systems

Use of mobile handsets as payment devices well-established in Europe, Japan, South KoreaJapanese mobile payment systems

Japan’s NTT DoCoMo launched wireless RFID cell Japan’s NTT DoCoMo launched wireless RFID cell phones and related payment system (FeliCa) in 2004Not as well established yet in United States



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E-money (stored value charged by credit card or bank accounts)Mobile debit cards (tied to bank accounts)Mobile credit cards

Infrastructure still developingApple, Google, RIM developing separate NFC systems

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FeliCa System Demo YouTube

Electronic Billing Presentment and Payment (EBPP)

Online payment systems for monthly bills30% + of households in 2010 used some EBPP; expected to continue to growTwo competing EBPP business models:

Both models are supported by EBPP infrastructure providers



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http://www.youtube.com/watch?v=QGkoFXbC3-4

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Biller-direct (dominant model): Used by utility, phone, and Biller-direct (dominant model): Used by utility, phone, and credit card companies, and individual storesConsolidator: Third party (financial institution or portal)aggregates consumer’s bills and permits one-stop bill payment



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04-2 E-commerce Payment Systems slides

Education

commerce payment

credit cards

debit cards

common form

bank accounts

united states

government

online stored