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Payment Systems for Electronic Commerce


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Title: Payment Systems for Electronic Commerce

Chapter 12
  • Payment Systems for Electronic Commerce

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

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.

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.

Electronic Payment Systems
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.

Electronic Payment Systems
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.

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.

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

Payment Acceptance and Processing
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
  • Privacy
  • Security
  • Independence
  • Portability
  • Convenience

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

Electronic Cash
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
  • Fraud and double spending require tamper-proof

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.

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.

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

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

Providing Security for Electronic Cash
Electronic Cash Systems
  • Compaq Computers electronic cash technology
    allows users to use its NetCoin electronic
  • 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.

IBM and Micropayments
  • 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.

  • 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.

  • 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.

  • 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.

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//

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

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.

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
  • Passport consists of four integrated services
    Passport single sign-in service, Passport Wallet
    Service, Kids Passport service, and public

Microsoft .NET Passport
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

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

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

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.

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

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
  • Compatibility between smart cards, card-reader
    devices, and applications

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.

Smart Card
Octopus Smart Card Hong Kong Public transport
Octopus Smart Card
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

Octopus Smart Card Auto Reloading
Octopus Smart Card- A Downside
  • School children in HK are checked in and out of
    school using their Octopus cards

Octopus as Fashion Accessory
Here comes the Oyster
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.

Mondex Smart Card
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

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

Schlumberger Sema Smart Cards
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.
  • Press release Jan 23rd 2002

  • 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
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