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 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
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

23
CheckFree
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
eCoin.Net

• ECoins are electronic tokens issued by
  eCoin.net.
• Consumers can use the tokens to pay for online
  goods.
• The electronic cash is stored in an eCoin wallet
  on the consumers computer.
• The eCoin system uses a three-link chain
  consisting of a consumer, a merchant, and the
  eCoin server.

27
eCoin.Net
28
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.

29
InternetCash
30
PayPal

• PayPal.com is a free service that earns a profit
  on the float, which is money that is deposited in
  PayPal account.
• 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.

31
PayPal
32
Billpoint

• Billpoint is operated as a joint venture between
  eBay and Wells Fargo.
• Billpoint does not currently allow its members to
  maintain cash deposits or to transfer cash
  directly from their checking accounts.
• Billpoint requires all its members to have a
  credit card.
• Billpoint only handles payments for eBay auctions.

33
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.

34
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

35
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.

36
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.

37
Microsoft .NET Passport
38
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.

39
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.

40
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.

41
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.

42
Smart Card
43
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.

44
Mondex Smart Card
45
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.

46
Secure Electronic Transaction (SET) Protocol

• The SET specification uses public key
  cryptography and digital certificates for
  validating both consumers and merchants.
• The SET protocol provides confidentiality, data
  integrity, user and merchant authentication, and
  consumer non-repudiation.