Electronic Commerce

1. Electronic Commerce Session 7: Processing Payments On-line and the Fulfilment Phase

2. Session Objectives • The objectives of this session are: • To analyse the properties of cash, cheques and credit cards • To describe the requirements for Internet-based payment System Models • To discuss the following electronic payment systems: • Payment cards • Paypal • And E-Wallets • To discuss the order fulfilment phase

3. Payment Systems • After creating a Web site that allows a customer to choose an item for purchase, a payment must be made before the item is shipped http://www.amig.com/cservice/images/payment.jpg

4. Payment Systems Cont’d • When we walk into a “real world” store we basically have three ways to pay for an item. These are: • Cash (most common form of payment) • Cheques • Payment card (i.e. debit cards, credit cards, smart cards or automated teller machine (ATM) cards) • These account for more than 85% of consumer transactions worldwide

5. Payment Systems Cont’d • Cash has some important properties: • It is convenient since it is easy to use, to carry and easy to handle in small quantities • It is widely accepted • It provides anonymity • It does not have associated processing fees • It has no audit trail (maintains privacy)

6. Payment Systems Cont’d • There are several problems associated with the use of cash, however which include: • It is easy to lose • It is difficult to trace (e.g. when used in criminal activities) • It introduces a security risk when being transported • It is time-consuming to count, organise and manage

7. Payment Systems Cont’d • A Cheque, on the other hand is “… a written order by an account holder to his banker to pay a specified sum of money to the bearer or named recipient.”3 • The process of clearing a cheque takes three days in the UK 3 and is completed as follows:

8. Payment Systems Cont’d • Day 1: Any cheque collected during the first day will be processed by the collecting bank that evening • This information is passed electronically through the Inter Bank Data Exchange (a secure network) to the paying bank clearing centre. • Day 2: Cheques are delivered to an Exchange centre • Day 3: Cheques are reviewed by the paying bank and a decision is made whether to pay or return them • Clearly one of the problems associated with cheques is the clearing time

9. Payment Systems Cont’d • A payment system which is increasing in popularity in the US is electronic transfer • There are two tests that should be considered when transferring money. These are: • The ACID Test • The ICES Test

10. Payment Systems Cont’d The Acid Test • The ACID test has four properties: • Atomicity: The complete transaction must occur (e.g. a payment of $50 means that the intended recipient(s) will receive the $50) • Consistency: All parties in the transaction must agree to the exchange • Isolation: The given transaction must be independent of all other transactions • Durability: The exchange must be reversible

11. Payment Systems Cont’d The ICES Test • The ICES test also has four properties: • Interoperability: Money from a given system must be able to move back and forth between other systems (e.g. moving money from system X to cash) • Conservation: Does the money hold its value over time (temporal consistency); how easy is it to store and access (temporal durability) • Economy: Transaction processing should be cheap • Scalability: How many users can be handled at the same time?

12. Payment Systems Cont’d

13. Payment Systems Cont’d • Cash satisfies all the ACID and ICES properties except conservation since it is not easy to store and access large amounts (temporal durability) • Cheques are: • not isolated since during the clearing of a cheque someone can withdraw money from the account, or even stop the cheque. • not interoperable (since it is difficult for them to move between different systems) • Not economical since processing them is expensive

14. Payment Systems Cont’d • Credit cards are: • Not isolated since another transaction might be processed before a given transaction although the actual date/time of the transaction was afterwards • Not interoperable (since it is difficult for them to move between different systems) • Not atomic since although the seller is guaranteed payment the credit card issuer may lose out if the card is stolen or used fraudulently • Not economic since credit card processing is expensive especially for transactions of small value

15. Payment Systems Cont’d Electronic Payments • An e-commerce payment environment requires a more complex design which includes: • Payment security • Transaction privacy • System integrity • Customer authentication • The purchaser’s promise to pay • Primarily, these are security issues which will be covered in Session 10, “Securing a Web site”

16. Payment Systems Cont’d Electronic Payments Cont’d • Electronic payments are financial transactions that do not require paper • Electronic payments are far cheaper than mailing paper checks • Cost of billing a person by mail ranges from US$1 to US$1.50 • Billing a person electronically cost about US$0.50 • Replacing paper bills also saves on trees

17. Payment Systems Cont’d Electronic Payments Cont’d • Four properties (in addition to the ACID and ICES Tests) should also be considered: • Acceptability: Must be widely accepted, by customers and merchants alike • Ease of Integration: Effective Web interface • Customer base: It should be financially viable • Ease of use and access

18. Payment Systems Cont’d Payment Cards Payment cards include: • Credit Cards • Debit Cards • Charge Cards www.paylessbills.com/ credit_cards.htm

19. Payment Systems Cont’d Payment Cards Cont’d • The main categories of payment cards are: • Credit cards (e.g. Visa) • Debit cards • Charge Cards

20. Payment Systems Cont’d Payment Cards Cont’d • If a merchant wants to sell merchandise on the Web they must accept credit cards because: • It is the most widely accepted form of payment • It is the most popular

21. Payment Systems Cont’d Payment Cards Cont’d To be able to accept payments via credit cards: • The seller must open a merchant account • A search can be made online for a list of credit and merchant services (some US banks include Bank of America and National Data Corporation) • With this account the seller can accept and process credit cards • During processing only the card numbers and transactions are known (normally authorisation is provided through a customer signing a payment slip).

22. Payment Systems Cont’d Payment Cards Cont’d To be able to accept payments via credit cards: • A secure and encrypted line is required to accept payments • The most popular solution used is Secure Socket Layer (SSL) which is built into Netscape Navigator and Microsoft’s Internet Explore browser • A shopping cart is also required to allow users to collect their purchase • The shopping cart connects to a payment processing system, calculates costs and taxes and generates a bill

23. Payment Systems Cont’d Payment Cards Cont’d • The processing of credit cards is complicated, however the following diagram highlights the important steps

24. Payment Systems Cont’d Payment Cards Cont’d

25. Payment Systems Cont’d Payment Cards Cont’d • The customer places the order on the merchant’s Web site (shipping and payment information is included) • The customer verifies the order • The encrypted order is sent to the payment server by the merchant • The payment server receives the payment information, takes it behind a firewall, reformats it and forwards to to the merchant bank over a secure, dedicated line

26. Payment Systems Cont’d Payment Cards Cont’d • The merchant bank forwards an authorisation request to the issuing bank for approval or denial and the decision is sent back to the payment server • The approval or denial is communicated back to the merchant and delivered to the customer

27. Payment Systems Cont’d Payment Cards Cont’d Some of the characteristics of credit cards include: • Interest is charged on outstanding balances not paid off within a given time • The merchant’s account is credited immediately • Cardholders are only liable for $50 (by law) if their card is stolen or lost • Cardholders can dispute charges or purchases for the 30-day period after the purchase • The spending limit is based on credit history

28. Payment Systems Cont’d Payment Cards Cont’d • Several charges are associated with credit card processing • Firstly, a set-up fee that might cost a few hundred dollars (US$) • A fee of 2-4% of the value of each transaction processed • Statement fees • And a minimum monthly charge of US$20-$50

29. Payment Systems Cont’d Payment Cards Cont’d • Some of the issues associated with credit cards are: • They leave a complete audit trail • They are insecure • A signature does not get verified which makes it difficult to assure the identity of a person • Merchant accounts are difficulty to get from banks • The banks review financial records and business history • Credit card are not economical for small payments

30. Payment Systems Cont’d Payment Cards Cont’d • The difficult of securing a merchant account may be overcome through the use of third parties who are willing to process credit cards e.g. iBill (http://ibill.com) • iBill charges 15% of the company’s total revenue for a two week period (this charge will not exceed US$10,000)

31. Payment Systems Cont’d Payment Cards Cont’d • Debit cards • The sale amount is removed from user’s account and transferred to the sellers account • Limited by funds in account plus overdraft (if present) • Charge cards (e.g. American Express) • Has no spending limit • The amount due on the card is due at the end of the billing period • They do not accumulate interest payments

32. Payment Systems Cont’d Payment Cards Cont’d • Some vendors provide single-use-cards which are valid for a single transaction • A unique card number is issued • This helps with card details security

33. Payment Systems Cont’d Payment Cards Cont’d • Some advantages of Payment Cards • In the US card holder’s liability is limited to US$50 when used fraudulently • Accepted worldwide • Currency conversion handled by card issuer • Ease of use, no special hardware required

34. Payment Systems Cont’d Payment Cards Cont’d • Some disadvantages of Payment Cards • Service companies charge merchants per-transaction and monthly processing fees • Price of goods for the consumer might be slightly higher as a result • A limit is placed on the minimum amount allowed to spend (e.g. 5 pounds in the UK)

35. Other Payment Methods • For other payment methods read the following presentations: • PayPal http://scitec.uwichill.edu.bb/cmp/online/comp3210/presentations/DanaBabb.ppt • Metered Payments http://scitec.uwichill.edu.bb/cmp/online/comp3210/presentations/LeeHarvey.ppt • E-Wallets http://scitec.uwichill.edu.bb/cmp/online/comp3210/presentations/ShawnHolder.ppt

36. The Fulfilment Phase2 • After the customer has paid for the product(s) then it is the merchant’s responsibility to deliver it • The customer generally expects that the product(s) will be delivered in a quick and timely fashion

37. The Fulfilment Phase Cont’d • The fulfilment process includes: • Sourcing items from a warehouse • Packing these items • Shipping • Answering questions about the order • This might be done online through order management software where the customer is able to track their order

38. The Fulfilment Phase Cont’d • The fulfilment process includes (cont’d): • Giving the customer a bill or verifying an online payment • Determining whether the customer is satisfied with the delivery

39. The Fulfilment Phase Cont’d • From the customer’s point of view fulfilment is the most critical part of the shopping experience • If the customer is dissatisfied with the fulfilment process, it can really damage the merchant’s reputation • E.g. Toys R Us during Christmas 1999 failed to deliver items; a costly mistake

40. The Fulfilment Phase Cont’d • Recognising the importance of fulfilment, Amazom.com in 1999 spent US$300 million on 3 million square feet of warehouse space

41. The Fulfilment Phase Cont’d • Tax is also a part of the fulfilment phase • Different countries and even different States in the USA have different tax rules • E.g. in New Jersey there is no tax on clothing, while in California there is • In some cases (e.g. in the US), state, city and county tax must be considered

42. The Fulfilment Phase Cont’d • To alleviate the tax calculation burden it is recommended that tax software be used • E.g. include Taxware and Cybersource

43. The Fulfilment Phase Cont’d • One further issue that must be considered is inventory fulfilment • Some of the questions that must be asked are: • Are the required products available? • Are the products offered for sale (on the Web site) linked to the inventory? • Should customers be notified of out-of-stock items?

44. The Fulfilment Phase Cont’d • In conclusion, credit cards are the most widely used method of payment on the Internet • There are some alternatives for niche markets, such as Paypal whose focus is primarily C2C e-commerce and small businesses • It should also be clear that the order fulfilment phase is an extremely important part of the shopping experience • If a merchant fails to deliver, or fails to deliver on time then it can badly damage their reputation

45. References [1] Schneider, Gary, P., “Electronic Commerce: The second wave”, Thomson Course Technology, Fifth Annual Edition, 2004 [2] Awad, Elias, M., “Electronic Commerce: From Vision to Fulfillment”, Second Edition, Prentice Hall, 2004 [3] APACS, “Cheque and Credit Clearing Company”, 2000. Online document available at www.apacs.org.uk/about_apacs/htm_files/chequecred.htm