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ECT 250: Survey of e-commerce technology E-commerce payment systems Most common payment systems (number of transactions) Most common payment systems (dollar amount) Types of payment systems Cash is legal tender defined by a national authority to represent value

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types of payment systems
Types of payment systems
  • Cash is legal tender defined by a national authority to represent value
  • Float is the period of time between a purchase and the actual payment
  • Checking transfers are funds transferred directly via a signed draft or check from a consumer’s checking account to a merchant or other individual
types of payment systems5
Types of payment systems
  • Credit card: an account that extends credit to consumers, permits consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time
  • Credit card associations (VISA) are nonprofit organizations that set standards for issuing banks. They act as financial intermediaries minimizing the risk for transacting partners.
  • Issuing banks issue the cards and process transactions
  • Processing centers or clearing houses handle verification of accounts and balances
types of payment systems6
Types of payment systems
  • Stored value payments systems: are accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed
  • Debit cardsimmediately debit a checking or other demand deposit account
  • Accumulating balance payment systems are accounts that accumulate expenditures and to which consumers make periodic payments
current payment systems
Current payment systems

Online payment is heavily influenced by the country’s financial infrastructure.

  • In the US: 95% of online payment is done using cc
  • Outside the US, only 50% is done by cc
  • In Europe: consumers rely more on debit cards and checks
  • In Japan: consumers rely on bank transfers, cash on delivery (to local convenience stores) and accumulated balance accounts with the phone company
limitations of cc transactions
Limitations of CC transactions
  • Security: neither the merchant not the consumer can be fully authenticated
  • Merchant Risk: consumers can repudiate charges even after the item has been shipped
  • Cost: 3.5% of purchase plus transaction/set-up fee
  • Social Equity
    • Young adults do not have credit cards
    • Almost 100 million adult Americans cannot afford cards or are considered poor risks
s ecure e lectronic t ransaction protocol
Secure Electronic Transaction Protocol
  • SET is an open standard for e-commerce developed by MasterCard and Visa as a way to facilitate improved security for CC transactions
  • Uses a digital certificate to verify a sender’s identity
  • Transaction details are passed along to the bank, minimizing repudiation issues
need for new payment systems
Need for new payment systems

Non traditional online transactions have resulted in a need for new payment systems

  • Peer to peer payment systems: online auctions between individuals
  • Micropayments: purchasing a single music track, downloading a news article, or the chapter of a book
b2c digital payment systems
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
digital wallets
Digital wallets
  • Emulates the functionality of a traditional wallet
  • Authenticates the consumer through the use of digital certificates or other encryption methods
  • Stores and transfers value
  • Secures the payment process from the consumer to the merchant
potential benefits
Consumer

Faster order entry

Reduced risk of fraud or theft

Merchant

Lower transaction costs

Expanded marketing/branding

Some consumer retention

Potential benefits
  • Who will supply the DW?
  • Who owns the wallet and its information?
  • Where will the DW reside?
  • What standard should be used?
client based dw

GatorMasterCard Wallet

Client-based DW
  • Are software applications that consumers install on their computer
  • Offer consumer convenience by automatically filling out forms at online stores
  • Merchant installs software to receive the data
  • Good idea if:
    • Sell millions of them
    • Become the single viable solution to shop online
server based dw

Microsoft Passport

Novell DigitalMe

Server-based DW
  • Are 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
  • Charge the merchant a set-up fee plus monthly minimum fees, and transaction fees
obstacles
Obstacles
  • Consumers resist downloads
  • Consumers distrust server-based digital wallet because of privacy concerns
  • No standard for digital wallets exists
  • Many companies have failed trying to break into this line of business (Digicash)
digital cash or e cash
Digital cash (or e-cash)
  • Not really cash, instead a form of value storage or value exchange that have limited convertibility into other forms of value and require intermediaries to convert
  • Early attempts were difficult to use.
      • Failures: Digicash, First Virtual
      • Limited success: Millicent
  • Online auctions inspired P2P systems that have proven more successfulPayPal, Yahoo PayDirect, MoneyZap
online stored value ps
Online stored value PS
  • Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account
  • Some require the download of a digital wallet Monetta, eCharge
  • Others allow user to sign up and transfer money from an existing CC account into an online stored value account Ecount, Rocketcash, VisaBuxx
smart cards
Smart Cards
  • Are stored value systems based on credit-card-sized plastic cards that have embedded chips that store personal information
  • Could hold 100 times more data than CC
      • Multiple CC numbers
      • Health insurance information
      • Personal identification information
      • Bank account data
other digital payment systems
Other digital payment systems
  • Digital accumulating balance: allow users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the monthqPass, iPIN, Millicent
  • Digital credit cards: seek to extend the functionality of existing credit cards for use as online shopping payment tools. Improve authentication, and privacy, reduce fraudeCharge, Billpoint
digital checking

eChecksAchexBillpoint

Digital checking
  • Seek to extend the functionality of existing checking accounts for use as online shopping payment tools
  • Check-processing currently costs $0.75-$3 per check
  • Simple systems: used to pay individuals
  • Complex systems: used by the Treasury to transfer billions of dollars electronically
e lectronic b illing p resentment and p ayment systems ebpp
Electronic Billing Presentment and Payment systems (EBPP)
  • Allow consumers to view monthly bills electronically and pay them through electronic funds transfers from bank or credit card accounts
    • Life-cycle cost of a bill: $3-$7
    • Overall cost of billing 4-8% of GDP
    • 90% of EBPP use is B2C, real potential is in B2B
  • Grew from 3 mil in 1999 to 15 mil in 2002
types of ebpp
Types of EBPP
  • Biller-direct: sign up with the company directly, but infrastructure is usually supplied by another company. Verison, Billserv, Princeton econ
  • Consolidators: collect bills for the consumerCheckFree, Paytrust
  • Portals: similar to consolidators but also offer other financial management servicesYahoo, AOL, Excite, Cyberbills.com, PayMyBills.com
b2b payment systems
B2B payment systems
  • More complex than B2C systems
  • Must link into existing ERP and EDI systems
  • Two main types
    • Systems that replace traditional banks
    • Existing banking systems extending to the B2B marketplace
some conclusions
Some conclusions
  • There is still a large potential for development and improvement of online payment systems
  • One of the big obstacles to new technologies is the lack of standards
  • Especially when it comes to money there is a resistance to adoption of new systems both on the consumer and the merchant side