Chapter 12

1. Chapter 12 Electronic Commerce Payment Systems

2. Learning Objectives 1. Describe cross-border EC and the issues that arise in EC payments. 2. Describe the major changes in retail and their impacts on EC payments. 3. Discuss the different payment cards used online and processing methods. 4. Discuss the different categories and potential uses of smart cards. 5. Describe the issues with and solutions to online micropayments. 6. Understand PayPal and 3rd party payment gateways. 7. Understand the major types and methods of mobile payments. 8. Describe the differences and key characteristics of digital and virtual currencies.

3. CHANGING RETAIL LANDSCAPE • Omni-Channel Retail • Overall, worldwide retail sales are growing, but EC retail sales are growing faster • There is no doubt that the number of retail stores and retail square footage are on the decline • So is the foot traffic within most stores • A lot of this decline is a function of online shopping, but this doesn’t mean that stores completely dying • It does mean that the shopping experiences we know today are morphing into something different, so that strictly keeping score of in-store versus online dollars may be moot

4. CHANGING RETAIL LANDSCAPE • Cash versus Non-Cash Transactions • Both offline and online non-cash payments are on the rise • In absolute terms this doesn’t mean that cash payments are declining and ultimately dying • In fact they are actually increasing but at a slower rate than non-cash payments • Cash accounts for 85% of global consumer transactions, although this percentage varies widely by country

5. CHANGING RETAIL LANDSCAPE • There is a substantial push by a number of governments to eliminate cash transactions as much as possible • This pattern between cash and non-cash consumer transactions mirrors the pattern between offline and online retail sales • Globally, cards (credit and debit) are the most frequently used, followed by digital payment systems

6. CHANGING RETAIL LANDSCAPE • Move to Mobile • Not surprisingly, the rapid adoption of smartphones is also highlighted by the number of global shipments of new smartphones versus the combined shipments of other computer-based devices including tablets, 2-in-1 hybrid tablets, portable PCs, and desktop PCs • Not surprisingly, the rapid adoption of smartphones is also highlighted by the number of global shipments of new smartphones versus the combined shipments of other computer-based devices including tablets, 2-in-1 hybrid tablets, portable PCs, and desktop PCs • Older consumers still use PCs

7. Figure 12.1 Percent of total country online EC spend by device Source: Constructed from data in Keith, M. “Global E-Commerce Sales, Trends, and Statistics.” September 2, 2015. remarkety.com/global-ecommerce-sales-trends-and-statistics-2015 (accessed December 2016).

8. CHANGING RETAIL LANDSCAPE • Implications for EC Payments • Those merchants with both a physical and digital presence, tended to run their online business as a simple, albeit separate, extension of their offline world • Innovations aimed at supplementing, modifying, or replacing some aspect of electronic payments number in the thousands • “Hidden digital payments” to describe this overall collection of activities and divided the payments into four main types including: • Closedloop cards and mobile apps • Digital wallets • Mobile money • Virtual currencies

9. USING PAYMENT CARDS ONLINE • Payment cards* • Credit cards • Charge cards • Debit cards • Credit Card Reading • Stationary card readers • Portable card readers • Mobile readers

10. USING PAYMENT CARDS ONLINE • Processing Cards Online • Authorization* • Settlement* • There are a number of parties involved in both processes including: • Customer • Merchant • Issuing bank • Merchant acquiring bank • Credit card (association) network • Payment service provider

11. USING PAYMENT CARDS ONLINE • Although the entire authorization process involves a number of parties, it usually takes a few seconds • While cards are obviously convenient for both the consumer and the merchant, they cost the merchant money • Discount rate* • Interchange rate* • The EC merchant may: • Own the payment software • Use a point-of-sale (POS) system operated by a card acquirer • Use a POS system operated by a payment service provider. Merchants can rely on payment service providers (PSPs)

12. $100 Payment Service/Gateway Provider 9 1 Customer (Card Holder) Batch 2 10 11 Merchant Merchant Bank Acct. 8 Credit Card Billing Stmt. 17 3 12 14 16 Credit Card Network (Merchant) Acquirer Bank 5 7 (Card) Issuing Bank 15 13 6 Figure 12.2 Credit card payment procedure (Drawn by D. King) 4 Authorization Cycle Settlement Cycle

13. USING PAYMENT CARDS ONLINE • Fraudulent Card Transactions • Costs associated with combating fraudulent transactions • These include the costs of tools and systems to review orders, the costs of manually reviewing orders, and the revenue that is lost from erroneously rejecting valid orders • The key tools used in combating fraud are: • Card verification number (CVN)* • Address Verification System (AVS)* • Customer order history • Negative lists • Postal address validation service

14. SMART CARDS • Smart Card* • Smart cards are used for a wide variety of purposes including: • Telecom • Financial • Government and healthcare • Device manufactures • Other

15. SMART CARDS • Types of Smart Cards • Contact card * • Contactless (proximity) card* • Smart card reader* • Hybrid cards and combi cards combine the properties of contact and proximity cards into one card

16. SMART CARDS • Stored-Value Cards* • Stored-value cards come in two varieties: • Closed-loop (single purpose) • Open loop (multiple purposes) • Applications of Smart Cards • Retail Purchases • Transit Fares

17. Figure 12.3 Singapore electronic road pricing system (Source: Photo taken by J. K. Lee March 2013.)

18. EC MICROPAYMENTS • Micropayments (e-micropayments)* • From the viewpoint of many vendors, credit or debit cards are too expensive for processing small payments • There are five basic micropayment models that have enjoyed some amount of success • Aggregation • Direct payment • Stored-value • Subscriptions • À la carte

19. PAYPAL AND OTHER 3RD PARTY PAYMENT GATEWAYS • While credit and debit cards dominate e-commerce payments, one alternative that has succeeded is PayPal (and its clones) • eBay sellers and buyers opened up PayPal accounts that were secured by a bank or credit card account • At the completion of an auction, the payment transactions were conducted via the seller’s and buyer’s PayPal accounts • In this way, the bank or credit card accounts remained confidential

20. PAYPAL AND OTHER 3RD PARTY PAYMENT GATEWAYS • While PayPal provides a number of services, at their core they are a full-service 3rd party payment gateway • Basically, they eliminate the need for a merchant to deal with the intricacies and complexities of authorization and settlement in online payment • The also eliminate the need for merchants to handle card information and for customers to provide their financial information with every transaction.

21. PAYPAL AND OTHER 3RD PARTY PAYMENT GATEWAYS • Amazon, the leading online retailer, has started to make forays into this 3rd party payment arena with their Amazon Payments system • Globally, PayPal is also the market leading gateway

22. MOBILE PAYMENTS • Types of Mobile Payments • Mobile payment* • From the standpoint of the various parties, any successful mobile system needs to overcome the following sorts of issues: • For Buyer: Security (fraud protection), privacy, ease of use, choice of mobile device • For Seller: Security (getting paid on time), low cost of operations, adoption by sufficient number of users, improved speed of transactions • For Network Operator: Availability of open standards, cost of operation, inter-operability, and flexibility and roaming • For Financial Institutions: Fraud protection and reduction, security (authentication, integrity, non-repudiation

23. MOBILE PAYMENTS • Four types of mobile payments: • Consumer • Merchant • Person-to-Person (P2P) • Institutional

24. MOBILE PAYMENTS • Mobile Consumer Payments – Wallets, Clouds, and Loops • Mobile digital wallet* • Device-Based Digital Wallets • Example: Wearable Wallets from MasterCard and Coin • Cloud-Based Digital Wallets • Closed-Loop Systems • Example: Starbucks Closed-Loop Wallet

25. MOBILE PAYMENTS • Mobile Point of Sale • Example: Square (squareup.com) • Person-to-Person (P2P) Payments

26. Mobile Payment Service Provider 3. Create a password 2. Confirm Phone Number Telco Server 4. Send password to mobile phone Online Site 5. Input password and purchase Wireless Telco 1. Request Purchase; Input mobile number 1. Include in phone bill Customer Figure 12.4 Process of mobile payment service (Drawn by D. King & J. K. Lee)

27. Mobile Payment Service Provider 3. Create a password 2. Confirm Phone Number Telco Server 4. Send password to mobile phone Online Site 5. Input password and purchase Wireless Telco 1. Request Purchase; Input mobile number 1. Include in phone bill Customer Figure 12.4 Process of mobile payment service (Drawn by D. King & J. K. Lee)

28. DIGITAL AND VIRTUAL CURRENCIES • Types of Digital Currencies • Fiat currency* • Electronic money* • Virtual currency* • Digital currency* • Convertible virtual currency* • Non-convertible virtual currency* • Size of the Virtual Currency Market

29. DIGITAL AND VIRTUAL CURRENCIES • Bitcoin and Other Cryptocurrencies • Bitcoin Background • Bitcoinit was the first to come up with a decentralized system that offered a useable solution to what is known as the double-spend problem • Like the dollar or any other currency, a bitcoin is a unit of account that possesses a number of the key characteristics • Durable • Divisible • Countable • Transportable • Fungible • Verifiable

30. DIGITAL AND VIRTUAL CURRENCIES • How Does Bitcoin Work? • Public ledger: Essentially, it is a digital file tracking every Bitcoin transaction – time, date, participants, amount, and transfer of ownership of bitcoins – that has ever occurred since the first bitcoin was issued • Blockchain* • Unlike a company ledger, the Bitcoinblockchain is public, this means that anyone can view it • While Bitcoin is a payment system for exchanging value, at its technical base it is a messaging system built on its peer-to-peer (Internet) network

31. DIGITAL AND VIRTUAL CURRENCIES • Bitcoin private key* • Bitcoin address* • When someone wants to execute a transaction, he or she uses his or her private key to digitally sign a message that includes: • Input • Amount • Output

32. DIGITAL AND VIRTUAL CURRENCIES • Advantages and Disadvantages of Bitcoin • Some of the more frequently cited advantages include: • Anonymity • Simplifies Financial Transactions • Merchant Friendly • Support Cross-Border Commerce • Free from Government Manipulation • Some of the more frequently cited disadvantages include: • Not yet widely accepted • Fluctuating valuation • Transactions are irreversible • Private keys can be lost

33. DIGITAL AND VIRTUAL CURRENCIES • Bitcoin Competitors and the Future of Math-Based Currencies • Ethereum • Ripple • Litecoin

34. Figure 12.6 Bitcoin Web Wallet (Drawn by D. King)

35. MANAGERIAL ISSUES • How will you address the omni-channel imperative? • What payment methods should you support? • What micropayment strategy should your e-marketplace support? • Which mobile systems could influence your business? • Should we outsource our payment gateway service? • Should we accept virtual currencies as a form of payment? • How secure are e-payments?

36. SUMMARY • Cross-Border EC • Changing retail landscape • Using payment cards online • Smart cards • EC micropayments • PayPal and 3rd party payment gateways • Mobile payments • Digital and virtual currencies.