Chapter 12 Payment Systems for Electronic Commerce
Learning Objectives • In this chapter, you will learn about: • The basic functions of payments systems that are used in electronic commerce • The history and future of electronic cash • How electronic wallets work • The use of stored-value cards in electronic commerce
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.
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, four basic ways to pay for purchases dominate business-to-consumer commerce.
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. • Companies like Payment Online sell packages of payment processing services to Web merchants that accept several types of payments.
Payment Cards • Payment cards are all types of plastic cards that consumers use to make purchases: • Credit cards • such as a Visa or a MasterCard, has a preset spending limit based on the user’s credit limit. • Debit cards • removes the amount of the charge from the cardholder’s account and transfers it to the seller’s bank. • Charge cards • such as one from American Express, carries no preset spending limit.
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.
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.
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
Electronic Cash Issues • Primary advantage is with purchase of items less than £5 • Credit card transaction fees make small purchases unprofitable • Facilitates Micropayments – eg for items costing less than £1 • Must be anonymous, just like regular currency • Safeguards must be in place to prevent counterfeiting • Must be independent and freely transferable regardless of nationality or storage mechanism
Electronic Cash Storage • Two methods • On-line • Individual does not have possession personally of electronic cash • Trusted third party, e.g. e-banking, bank holds customers’ cash accounts • Off-line • Customer holds cash on smart card or electronic wallet • Fraud and double spending require tamper-proof encryption
Electronic Cash Advantages • 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. Disadvantages • 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.
How Electronic Cash Works • Customer opens account with bank in person and establishes identity • Thereafter, digital certificate serves as proof of identity • Once identified, bank issues e-currency and deducts amount from customer’s account (minus service fee) • Customer spends e-cash with merchant who validates it to prevent forgery or fraud • Merchant presents e-cash to issuing bank for deposit once goods or services are received
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.
Electronic Cash Systems • Compaq Computer’s 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.
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.
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.
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.
PayPal • PayPal.com is a free service that earns a profit on the float, which is money that is deposited in PayPal accounts. • 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.
Electronic Wallets • An electronic wallet serves a function similar to a physical wallet: • holds credit cards, electronic cash, owner identification, and owner contact information • provides owner contact information at an electronic commerce site’s checkout counter • Some electronic wallets contain an address book. • (http://www.computing.co.uk/Features/1134792)
Electronic Wallets • 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
Electronic Wallets • Electronic wallets store shipping and billing information, including a consumer’s first and last names, street address, city, state, country, and zip or postal code. • Electronic wallets automatically enter required information into checkout forms.
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.
Yahoo! Wallet • Functions the same way as other electronic wallets, but with certain advantages: • Yahoo! hosts several services and shops that can accommodate its own wallet • Can be used at more than 10,000 Yahoo! Store merchants
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.
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.
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.
Smart Cards • Plastic card containing an embedded microchip • Can contain cash • Over 100 times more information storage than a magnetic-striped plastic card • Information is encrypted, unlike credit cards which have account number on its face, making credit theft practically impossible
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.; success depends on: • Critical mass of smart cards that support applications • Compatibility between smart cards, card-reader devices, and applications
Octopus Smart Card - Buses Note the special offers Note also the limitation of 9 other trips since the Octopus memory only remembers the last 10 trips
Octopus Smart Card- A Downside School children in HK are checked in and out of school using their Octopus cards
Mondex Smart Card • Holds and dispenses electronic cash • Developed by MasterCard International • Requires specific card reader for merchant or customer to use card over Internet • Supports micropayments as small as 2p and works both online and off-line at stores or over the telephone
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 • Trialled in Swindon but not taken up
M(obile)-Payments – the future? “Analysts believe that easy mobile payment is one of the main prerequisites for the success of m-commerce. When the mobile phone can function as an electronic wallet for mobile payments, including micropayments, application developers will find it attractive to introduce new mobile communication services to the market. Examples include mobile entertainment (downloads of music, mobile gambling, etc.), information services (sports news, horoscopes, location-based services, etc.), and real-world services (paying parking fees, buying train or concert tickets, etc.). Network operators envision micropayments as an attractive business that does not compete with banks or credit card companies. For the end user, PayCircle will make m-commerce easy and secure and thus eliminate the major hurdles to widespread adoption and popularity.” PayCircle.org Press release Jan 23rd 2002
Summary • In this chapter, we looked at: • The basic functions of payments systems that are used in electronic commerce • The history and future of electronic cash • How electronic wallets work • The use of stored-value cards in electronic commerce