Digital Payment Systems

1. Digital Payment Systems

2. Learning Objectives • Most common payment systems • General types of payment systems • Need for e-commerce payment systems • Digital wallets • Types of e-commerce payment systems • Credit cards • Digital cash • Online stored value system • Digital accumulating balance payment system • Electronic billing presentment and payment systems

3. Most Common Payment Systems, Based on Number or Transactions

4. Most Common Payment Systems, Based on Dollar Amount

5. General Types of Payment Systems • Cash • Checking Transfer • Funds transferred directly via a signed draft or check from a consumer’s checking account to a merchant or other individual • Credit card • Processing centers or clearing houses handle verification of accounts and balances • Stored value payments systems • accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed • Accumulating balance payment systems • accounts that accumulate expenditures and to which consumers make periodic payments

6. e-Commerce Payment Systems • Credit card • Digital cash • generate a private form of currency that can be spent at e-commerce sites • Online store value systems • rely on prepayments, debit cards, or checking accounts to create value in an account that can be used for e-commerce shopping • Digital accumulating balance payment systems • accumulate small charges and bill the consumer periodically. • These systems are especially suited for processing micropayments for digital accounts

7. How an Online Credit Card Transaction Works

8. Limitations of Online Credit Card Payment Systems • Security • Neither the merchant not the consumer can be fully authenticated • Merchant Risk • Consumers can repudiate charges • Cost • Roughly 3.5% of purchase plus transaction fee • Social Equity • Young adults do not have credit cards • Almost 100 million adult Americans cannot afford cards or are considered poor risks

9. B2C Digital Payment Systems • Digital Wallets • Digital Cash • Online Stored Value Systems • Smart Card Stored Value Systems • Digital Accumulating Balance Payment Systems • Digital Credit Card Payment Systems • Digital Checking Payment Systems

10. Digital Wallets • Authenticates the consumer through the use of digital certificates or other encryption methods, • stores and transfers value, and • secures the payment process from the consumer to the merchant • Fill out order forms

11. Promised Functionality of Digital Wallets

12. Types of Digital Wallets

13. Types of Digital Wallets • Client-based digital wallets • software applications that consumers install on their computer, and that offer consumer convenience by automatically filling out forms at online stores • Server-based digital wallets • software-based authentication and payment services and products sold to financial institutions that market the systems to merchants either directly or as a part of their financial service package

14. eWallet • Developed by Launchpad Technologies • Free wallet software that stores credit card and personal information on users’ computer, not on a central server; information is dragged into payment form from eWallet • Information is encrypted and password protected • Works with Netscape and Internet Explorer

15. Microsoft Wallets • Comes pre-installed in Internet Explorer 4.0, but not in Netscape • All information is encrypted and password protected • Microsoft Wallet Merchant directory shows merchants setup to accept Microsoft Wallet

16. Microsoft Wallet

17. How Microsoft’s Passport Wallet Works

18. W3C Proposed Standard for Electronic Wallets • World Wide Web Consortium (W3C) is attempting to create an extensible and interoperable method of embedding micropayment information on a web page • Extensible systems allow improvement of the system without eliminating previous work

19. W3C Proposed Standard for Electronic Wallets • Merchants to accept several payment options to insure the widest possible Internet audience • Merchants must embed in their Web page payment information specific to each payment system • This redundancy spurred W3C to develop common standards for Web page markup for all payment systems • Must move quickly to prevent current methods from becoming entrenched

20. Digital Cash • Also called e-cash • Digital forms of value storage or value exchange that have limited convertibility into other forms of value and require intermediaries to convert

21. Examples of Digital Cash

22. Digicash: How First Generation Digital Cash Worked

23. Online stored value systems • permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account • Smart cards as store value systems are based on credit-card-sized plastic cards that have embedded chips that store personal information

24. Online Stored Value Systems

25. How Ecount.com Works: A Stored Value System

26. Digital Accumulating Balance Payment Systems • Allow users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the month

27. Digital Accumulating Balance Payment Systems

28. Digital Credit Card Payment Systems • Seek to extend the functionality of existing credit cards for use as online shopping payment tools

29. How a Digital Credit Card Payment System Works

30. Digital Checking Payment Systems • Seek to extend the functionality of existing checking accounts for use as online shopping payment tools

31. How Digital Checking Works: Echeck

32. 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.; their success depends on: • Critical mass of smart cards that support applications • Compatibility between smart cards, card-reader devices, and applications

33. Mondex Smart Card • Holds and dispenses electronic cash • Developed by MasterCard International • Requires specific card reader for the merchants and/or customers to use card over Internet • Supports micro-payments as small as 3 cents and works both online and off-line at stores or over the telephone

34. 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

35. Mondex Smart Card Processing

36. B2B Payment Systems • More complex than B2C systems • Must link into exist ERP and EDI systems • Two main types • Systems that replace traditional banks • Existing banking systems extending to the B2B marketplace

37. Key Features of B2B Payment Systems

38. Electronic Billing Presentation and Payment • New forms of online payment systems for monthly bills • Allow consumers to view bills electronically and pay them through electronic funds transfers from bank or credit card accounts

39. Electronic Billing Presentation and PaymentGrowth of EBPP Market

40. Electronic Billing Presentation and PaymentTypes of EBPP Systems