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Chapter 7

Chapter 7. Electronic Payment Systems. Electronic Commerce. Objectives. We will discuss about: Four methods for collecting customer payments Credit and debit card processing SET protocol protections for credit cards How software wallets work

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Chapter 7

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  1. Chapter 7 Electronic Payment Systems Electronic Commerce

  2. Objectives • We will discuss about: • Four methods for collecting customer payments • Credit and debit card processing • SET protocol protections for credit cards • How software wallets work • History and future of electronic cash systems, how they work and are implemented • Smart cards • Which payment systems are most popular and which are likely to gain acceptance

  3. Introduction to Electronic Payment Systems • The largest distinction between a typical Web server and a Web commerce server is the concept of money - handling payments over the Internet. • Electronic payments are far cheaper than the traditional method of billing and payment systems (which includes invoicing/billing, mailing statements, receiving payments, and posting payments). • The methods of payment for business-to-consumer transactions are different than that of the business-to-business transactions.

  4. Introduction to Electronic Payment Systems • There are three methods of payment in a traditional business transaction: • Check, credit card, or cash • There are four methods of payments in an electronic commerce transaction: • Electronic cash, software wallets, smart cards, and credit/debit cards • Scrip is digital cash minted by third-party organizations

  5. Electronic Cash • Credit card-issuing banks make money partly by charging merchants a processing fee for a consumer transaction. • The processing fee range from 1.5 to 3 percent of a sell, in addition to a fee of, say, 20 cents per transaction. • This policy applies to both traditional business and electronic commerce. • These fees make small purchases unprofitable for a merchant. • Sometimes a merchant imposes a minimum credit card purchase amount to consumers (say $20) to make small transaction profitable.

  6. Electronic Cash • Electronic cash (e-cash or digital cash) is used primarily for small purchase of items costing less than, say, $10 • Micropayments • Payments for items costing $1 or less is termed as micropayments. • Paying 25 cents for a reprint of an article from a newspaper is an example.

  7. Electronic Cash Issues • Electronic cash should have two important characteristics: • It must allow spending only once, like traditional cash • Must be anonymous, just like regular currency • Safeguards must be in place to prevent counterfeiting or the cash can not be used more than nonce • Must be independent and freely transferable regardless of nationality or storage mechanism

  8. Beenz Home Page

  9. Electronic Cash Storage • Two methods • On-line • Individual does not have possession of electronic cash • Trusted third party, e.g. online bank, holds customers’ cash accounts • Off-line • Customer holds cash on smart card or software wallet • Fraud and double spending (to two merchants) require tamper-proof encryption

  10. CyberCash -- A Pioneer in Electronic Cash

  11. Advantages and Disadvantages of Electronic Cash • Advantages • More efficient, eventually meaning lower prices • Lower transaction costs • Anybody can use it, unlike credit cards, and does not require special authorization • Disadvantages • Tax trail non-existent, like regular cash • Money laundering • Susceptible to forgery

  12. 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

  13. Electronic Cash Security • Complex cryptographic algorithms prevent double spending • Anonymity is preserved unless double spending is attempted • Serial numbers can allow tracing to prevent money laundering • Does not prevent double spending, since the merchant or consumer could be at fault

  14. Detecting Double Spending

  15. Past and Present E-cash Systems • E-cash not popular in U.S., but successful in Europe and Japan • Reasons for lack of U.S. success not clear • Manner of implementation too complicated • Lack of standards and interoperable software that will run easily on a variety of hardware and software systems

  16. Past and Present E-cash Systems • Checkfree • Allows payment with online electronic checks • Clickshare • Designed for magazine and newspaper publishers • Miscast as a micropayment only system; only one of its features • Purchases are billed to a user’s ISP, who in turn bill the customer

  17. Using Checkfree To Pay A Bill Online

  18. Clickshare’s Home Page

  19. Past and Present E-cash Systems • CyberCash • Combines features from cash and checks • Offers credit card, micropayment, and check payment services • Connects merchants directly with credit card processors to provide authorizations for transactions in real time • No delays in processing prevent insufficient e-cash to pay for the transaction

  20. Past and Present E-cash Systems • CyberCoins Service from CyberCash • Stored in CyberCash wallet, a software storage mechanism located on customer’s computer • Used to make purchases between 25c and $10 • PayNow -- payments made directly from checking accounts

  21. CyberCash’s CashRegister Service

  22. Past and Present E-cash Systems • DigiCash • Allowed customers to purchase goods and services using anonymous electronic cash • Recently entered Chapter 11 reorganization

  23. Past and Present E-cash Systems • Coin.Net • Electronic tokens stored on a customer’s computer is used to make purchases • Works by installing special plug-in to a customer’s web browser • Merchants do not need special software to accept eCoins. • eCoin server prevents double-spending and traces transactions, but consumer is anonymous to merchant

  24. eCoin.net Home Page

  25. Past and Present E-cash Systems • MilliCent • Developed by Digital, now part of Compaq • Electronic scrip system • Participating merchant creates and sells own scrip to broker at a discount • Consumers register with broker and buy bulk generic scrip, usually with credit card • Customers buy by converting broker scrip to vendor-specific scrip, i.e. scrip that a particular merchant will accept

  26. Past and Present E-cash Systems • MilliCent cont’d • Customers can purchase items of very low value • Brokers required for two reasons: • Small payments require aggregation to insure profitability • System is easier to use -- customer need only deal with one broker for all their scrip needs

  27. MilliCent Demonstration Page

  28. Electronic Wallets • Stores credit card, electronic cash, owner identification and address • Makes shopping easier and more efficient • Eliminates need to repeatedly enter identifying information into forms to purchase • Works in many different stores to speed checkout • Amazon.com one of the first online merchants to eliminate repeat form-filling for purchases

  29. An Electronic Checkout Counter Form

  30. Electronic Wallets • Agile Wallet • Developed by CyberCash • Allows customers to enter credit card and identifying information once, stored on a central server • Information pops up in supported merchants’ payment pages, allowing one-click payment • Does not support smart cards or CyberCash

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

  32. Electronic Wallets • Microsoft Wallet • 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

  33. Entering Information Into Microsoft Wallet

  34. 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

  35. W3C Proposed Standard for Electronic Wallets • Merchants must 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

  36. W3C Electronic Commerce Interest Group (ECIG) Draft Standard Architecture • Client (consumer’s web browser) initiates micropayment activity • Client browser includes Per Fee Link Handler module and one or more electronic wallets • New HTML tags will carry micropayment information

  37. W3C Proposed Micropayment HTML Tags

  38. The ECML Standard • Electronic Commerce Modeling Language (ECML) proposed standards for electronic wallets • Companies forming the consortium are America Online, IBM, Microsoft, Visa, and MasterCard • Ultimate goal is for all commerce sites to accept ECML • Unclear how this standard will incorporate privacy standards W3C set forth

  39. Smart Cards • It is a plastic card containing an embedded microchip. It • Can store 100 times more information than a credit card • Can contain bank account information to dispense cash • Can also contain information on health insurance, private encryption keys, credit card numbers, and so on.

  40. Smart Cards • Information is encrypted, unlike credit cards which have account number on its face, making credit theft practically impossible • A key like a Personal Identification Number (PIN) is required to unlock the information • To use from a browser, a card reader must be installed with the computer

  41. Smart Cards • It has been available for over 10 years • It was not successful in U.S., but popular in Europe, Australia, and Japan • Unsuccessful in U.S. partly because few card readers are available in stores • 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

  42. Mondex Smart Card • Holds and dispenses electronic cash • Developed by MasterCard International • Requires a “Mondex Card Reader” for merchant or customer to be installed on the computer to use it over the Internet • Supports micropayments as small as 3 cents and works both online and off-line at stores or over the telephone

  43. 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

  44. Mondex Smart Card Processing

  45. Credit and Charge Cards • Credit card (ex.: Visa or MasterCard) • Used for the majority of Internet purchases • Has a preset spending limit • Charge card (ex.: American Express) • No spending limit • Entire amount charged due at end of billing period • A merchants must set up a merchant account to accept payment cards (credit or charge cards)

  46. Payment Acceptanceand Processing • Law prohibits charging payment card until the merchandise is shipped. This works fine with a normal store, but not simply with the Internet shopping • Payment card transaction requires: • Merchant to authenticate payment card • Merchant must check with the card issuer to ensure funds are available and to put hold on funds needed to make current charge. (Processing charges for downloaded software can be requested immediately) • Settlement occurs in a few days when funds travel through banking system into merchant’s account

  47. Open and Closed Loop Systems • Closed loop systems • Banks and other financial institutions serve as brokers between card users and merchants who want to use a particular type of card -- no other institution is involved • American Express and Discover are examples • Open loop systems • Transaction is processed by a third party, such as an acquiring bank, that works as an intermediary between the customer’s credit card issuing bank and the merchant’s bank. • Whenever a transaction is processed by a third party, it is called open loop system • Visa and MasterCard are examples

  48. Setting Up a Merchant Account • Merchant bank (both Internet and non-Internet) • Does business with merchants that want to accept payment cards • Merchant receives an account number where they deposit card sales • Amounts of sales are credited to the merchant’s account on a periodic basis • Acquiring Bank (May be same as the Merchant bank) • Several third-party Internet and Web based credit card processing services are available to handle all details of processing credit cards

  49. Processing Payment Cards Online • Can be done automatically by software packaged with the electronic commerce software • Use a payment processing service company: A merchant can contract a third party to handle all payment card processing • In both cases, a software is used to capture credit card information from the merchant’s form and connect directly to the processing bank network using dial-up or private, leased lines • The processing bank network receives credit information, performs credit card authorization with the issuing bank, and presents transaction for processing • The issuing bank then deposits the money in the merchant’s bank account • The merchant’s web site receives confirmation or rejection of the transaction, which is communicated to the customer

  50. Processing a Payment Card Order

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