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Jasur Hasanov Qafqaz_university_computer_engineering_informative_research_on_electronic_payment_systems_and_methods

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The bachelor thesis is about electron payment systems by means of payment cards, payment networks, their technologies, security levels, prices, advantages and disadvantages. Starting from the simple …

The bachelor thesis is about electron payment systems by means of payment cards, payment networks, their technologies, security levels, prices, advantages and disadvantages. Starting from the simple concepts such as types of payment cards, to the complex subjects like payment systems technologies, security of transactions and etc are discussed and explained though the thesis.
The thesis includes enough clear information about credit, debit, and other types of payment cards; MasterCard, Visa, PayPal and etc payment networks. These concepts are explained enough well by dividing into small parts. All the concepts considered in subtitles like background of the concept, current situation and technology of concept, pros and cons of concept, and working principles of concept.
As a result all the information about electronic payment systems considered in case of Azerbaijan. Especially, payment cards such as credit, debit, charge and others explained in deep level for well understanding of readers. All these cards compared to each other for the case of Azerbaijan. For making comparison more efficient different categories of payment cards are included in comparison process.


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  • 1. Electronic Payment Systems Jasur Hasanov 2013
  • 2. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Abstract The bachelor thesis is about electron payment systems by means of payment cards, payment networks, their technologies, security levels, prices, advantages and disadvantages. Starting from the simple concepts such as types of payment cards, to the complex subjects like payment systems technologies, security of transactions and etc are discussed and explained though the thesis. The thesis includes enough clear information about credit, debit, and other types of payment cards; MasterCard, Visa, PayPal and etc payment networks. These concepts are explained enough well by dividing into small parts. All the concepts considered in subtitles like background of the concept, current situation and technology of concept, pros and cons of concept, and working principles of concept. As a result all the information about electronic payment systems considered in case of Azerbaijan. Especially, payment cards such as credit, debit, charge and others explained in deep level for well understanding of readers. All these cards compared to each other for the case of Azerbaijan. For making comparison more efficient different categories of payment cards are included in comparison process. 27 June 2013 1
  • 3. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Table of Abbreviations, Figures, or Tables Table of abbreviations EPs EFTs ATMs EPSs PIN ATM AFC SAM PSAM POS Electronic Payments Electronic Fund Transfers Automatic Teller Machines Electronic Payment Systems Personal Identification Number Automatic Teller Machine Automated Fare Collection Security Access Module Payment Security Access Module Point of Sale Table of Figures Figure 1. Credit card transaction processing [12] Figure 2. Debit, Credit and Charge cards Figure 3. Authorization Process [42] Figure 4. Settlement Process [42] Figure 5. Authorization and Settlement Processes are done by PayPal Processing service [42 Figure 6. MasterCard’s and the merchants roles in this transaction process [34] Figure 7. Visa Transaction procedure [36] Figure 8. NFC payment ecosystem, mobile payment using e-wallet [47] Figure 9. Consumers’ awareness and usage of digital wallet services in the United States [48] Figure 10. PayPal Usage Statistics within the top 10k, 100k, and 1 million websites [49] 27 June 2013 2
  • 4. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Table of Tables Table 1. Statistical data of MilliKart by quarter years for 2010 and 2011 [24] Table 2. Statistical data of MilliKart for 2009 and 2010 years [25] Table 3. Comparison of Payment cards for Azerbaijan 27 June 2013 3
  • 5. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Table of Contents Abstract Table of Contents Table of Abbreviations, Figures, or Tables 1. Introduction 1.1. General Overview 1.2. Problems of the System 1.3. Objectives of the Thesis 2. Types and Forms of Electronic Money 2.1. What is Electronic Money 2.2. Types of Electronic Money 2.3. Payment Cards 2.3.1. Debit cards 2.3.1.1. Background of Debit cards 2.3.1.2. Types of Debit card systems 2.3.1.3. Debit cards in market 2.3.1.4. Pros and cons of Debit cards 2.3.2. Credit cards 2.3.2.1. Background of Credit cards 2.3.2.2. Credit card transaction processes 2.3.2.3. Debit cards and Credit cards 2.3.3. Charge cards 2.3.3.1. Why use a Charge card? 2.3.3.2. Differences of a charge and a credit cards 2.3.4. Gift cards 2.3.4.1. Background of Gift cards 2.3.4.2. Types of Gift cards 2.3.5. Local payment cards 2.3.5.1. MilliKart LLC 2.3.5.2. World card 2.3.5.3. BolKart 2.3.5.4. Albali card 2.4. Payment Networks 2.4.1. MasterCard 2.4.1.1. Background of MasterCard 2.4.1.2. How MasterCard works? 27 June 2013 4
  • 6. Author: Jasur Hasanov 3. 4. 5. 6. ELECTRONIC PAYMENT SYSTEMS 2.4.2. Visa 2.4.2.1. Background of Visa 2.4.2.2. How Visa works? 2.4.3. Comparison of MasterCard and Visa 2.4.4. PayPal 2.4.4.1. Background of PayPal 2.4.4.2. How does PayPal system work? 2.4.4.3. How does PayPal make profit? 2.4.4.4. Security of PayPal 2.4.4.5. PayPal supported and unsupported countries 2.4.5. E-Wallet 2.4.5.1. What is an e-wallet? 2.4.5.2. Technology of an e-wallet 2.4.6. Statistics of PayPal and MasterCard, Visa e-wallets Author‘s opinion 3.1. Payment cards for Azerbaijan 3.2. PayPal for Azerbaijan Conclusion References Declaration of Academic Integrity 27 June 2013 5
  • 7. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 1. Introduction 1.1 General Overview Nowadays there has been significant interest in the development of electronic money. Electronic money has the power to get over from cash as the first meaning of making small amount of payments and could do such payments easier and cheaper for both customers and business people [1]. Money has long history starting from its beginning until current situation, as a result of commercial and non- commercial causes. The development of money can be divided into four main categories: 1. Objects-as-money - category that includes the first method (trade by barter) and the second method (trade with valuable objects); 2. Currency-as-money - category that includes the third method (coins) and fourth method (paper notes); 3. Claims-as-money - category that includes the fifth method (deposit accounts), sixth method (‗plastic money‘) and seventh methods (EPs and EFTs); 4. Electronic-impulses-as-money - category that covers the eighth method (smart cards) and ninth method (digital coins). The rest of money development was mostly related to the increase in world trade and commerce [2]. As an important part of developing technologies electronic payment also is getting smarter and more useful day by day. Payment technologies are getting more useful by changing into new types of devices, software, and introducing different methods of payment. These changes are depending on procedure of technological upgrading in different companies and often they bring some problems for customers and mostly for old generation who are not familiar with innovations in technology fields.. In all around the world there are problems which are caused by being unfamiliar with new technologies and their new facilities. Such kinds of issues are mostly happening in the least developed and developing countries such of Azerbaijan. Development requires changes in every field of the industry including electronic payment. Especially, in information age that velocity of processing, and security are more and more important than most of all other issues. There are plenty different methods of electronic payment at the moment, and all of these methods have their own advantages and disadvantages for users by the meaning of being cheaper, quicker, secure, or other important characteristics. 27 June 2013 6
  • 8. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 1.2 Problems of the System As mentioned above in development of electronic payment systems while new innovations are coming to the payment technology problems are appearing at the same time. The main reason of the problems is that clients don‘t have enough clear information about innovations in electronic payment systems, instruction of using new technology, and different types of electronic payment systems depending on payment tariffs. Unfamiliarity of clients with new technology is one of the main problems of electronic payment systems in the least developed and developing countries. In such situations it is not desired for clients to make electronic payments, especially over internet. For making electronic payments, especially over internet has significant importance for transaction velocity, but may cause huge security problems if client is unfamiliar with a payment device or method over internet or directly to the payment machine. Depending on payments tariff prices there are different types of electronic payment systems. The second problem of the clients in developing countries is making choice among payments methods. For example, sometimes they cannot easily make a decision to get credit card, debit card, charge card or another one. The reason for that situation is users again are not enough familiar with all payment methods, their functionalities, pros and cons, processing differences, requirements, and tariff prices of transactions and etc. 1.3 Objectives of the Thesis Explaining to people more information about all the pros and cons of different electronic payment methods, their processing technologies, tariffs prices, quickness, reliability of systems, security, and all other aspects comparing electronic payment systems and methods to each other possible will be one of the main solutions of the unfamiliarity problem of the clients. The paper will contribute users by researching on electronic payment technologies, and analyzing all the methods of payment and their mechanisms including credit, debit, charge and other cards, PayPal and some others most used payment systems. Also, current and future situations of electronic payment transactions will be discussed with its solid outlines. During the analyses all the methods of electronic payment will be explained by mostly categories, types, similar and different sides of payment methods one from another, transactions processes, security, tariff prices and etc. By using these categories electronic payment technologies will be compared to each other and all clients who read the paper will understand most useful information about electronic payment systems and be able to make their choice of payment method easily. Understanding of differences among 27 June 2013 7
  • 9. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS all the payment systems is the main solution for replacing unfamiliarity with clear view of electronic payment. 27 June 2013 8
  • 10. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2. Types and Forms of Electronic Money 2.1 What is Electronic Money? As electronic money is getting to higher priority in world economy, there are different meaningful definitions of electronic money. Different people and different companies have defined and categorized emoney types in different ways [2].The European Central Bank gives a good concise definition of electronic money: ―electronic money is broadly defined as an electronic store of monetary value on a technical device that may be widely used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument‖. It should be known that "technical device" is not necessarily same with physical device. For example, such as smart cards, are actually physical, and it also has internet based systems. The main element is that electronic payments‘ using it is needed to be accepted by entities other than the issuer. For that reason, pre-paid phone cards, for example, cannot be considered as electronic money [3]. 2.2 Types of electronic money According to used technologies, transaction procedure, and their own characteristics there are different types of e-money: 1. Identified e-money - identified e-money is holding the information about the person who has withdrew money from the bank. Also, it is somehow similar to credit cards. It is possible for the bank to track identified e-money as it changes from someone to another through the economy. 2. Anonymous E-money - anonymous e-money is the same as real notes and cash. Once someone withdrew the money from his/her account it can be given to someone else easily without leaving a transaction trail. 3. Online e-money – for using and making transaction of such type of money from one account to another account it is needed to interact with a bank (via modem or network). 4. Offline e-money - offline means it is possible to make a transaction without connecting to directly a bank. Offline anonymous e-money (true digital cash) is the most complex form of e-money [4]. 27 June 2013 9
  • 11. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.3 Payments Cards A payment card is a type card that accepted by a merchant or business body and provides cardholder to make a payment in a purchase procedure or in online payments. Generally, a payment card is physically directed to an account or accounts of the owner and these accounts are possibly deposit, loan or credit accounts. There are different types of plastic card in electronic payment. Physically and condition of agreements in payments, they have few differences from each other. Nowadays, credit, debit, charge, gift and some others are mostly used types of payment cards during electronic payments and purchases. 2.3.1 Debit Card Debit card is a type of electronic payment methods issued by bank that allows clients to pay for services or goods in the business or merchants places without going to bank. Also, clients can withdraw their money from ATMs. Debit card, as a form of electronic payment, also there is no need for checks as the client pays on internet services or directly from users‘ account to the merchants‘ account [6]. Sometimes, the primary account number of debit cards is also used exclusively for payments over internet and without having a physical card. 2.3.1.1 Background of Debit card Debit cards have an interesting history. Credit cards drew the development cycle for debit cards. People mostly used to make transactions via credit cards. It also helped for development of the infrastructure for debit cards to be practical as a method of payment. The first debit card suggested to business executives in 1978 by Seattle's First National Bank. Firstly it was like a check signature or guarantee card, with which would be guaranteed by the bank that the amount of money would be paid. That type of cards was only issued to people who had a long and good standing with the bank, somehow like today credit history and rating. Such type of debit cards was holding the symbol of the Visa or MasterCard on them. 27 June 2013 10
  • 12. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS The first nationwide debit system was created in 1984 by Landmark, using ATMs and other transaction networks that allowed debit cards to be used nationwide. As technology developed the debit cards changed to a new system. That system allowed to clients to debit their money directly from a checking account. After that system debit card became useful to more and more merchants [5]. There is an interesting fact that debit card had 28.8 million accounts in 2006 and is expected to reach 34.4 million accounts by 2016 [6]. 2.3.1.2 Types of debit card systems There are three main types of processing debit card transactions: 1. Online debit 2. Offline debit 3. Electronic Purse Card System. Only one debit card may have the three types of functions, so that it will allow using in a number of different needs. - What is Online Debit Card Payment Processing Transactions? One of the newer and cheaper ways for making payment using debit cards at the POS is an "online debit transaction." In such kind of payment the debit card must be swiped through the machine and a PIN Pad must be installed on the machine. Despite of signing the check for the payment the client will be asked to enter his or her PIN code into the PIN Pad. The machine will send the encrypted code to the bank for verification. After verification the merchant will be paid for the transaction in the same way and moment that they could be paid on a credit card payment. - What is Offline Debit Card Payment Processing Transactions? The mostly used way to make payment with debit cards is through an "off-line debit card payment processing transaction." In such kind of payment the merchant recognize a debit card 27 June 2013 11
  • 13. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS same way as they could accept a normal credit card. The card is swiped through the machine and the client signs the check. As far as the merchant is concerned an off-line debit card is processed in the same way a credit card payment process. The only important thing for merchants to notice is that VISA or MasterCard logo must be on the debit card. Debit card will not be approved without the Visa or MasterCard logo and is not possible to process off-line [7]. - What is Electronic Purse Card System? Payments for public transportation such as metro or bus is done by AFC system. AFC system is designed mostly for micro-payment operations and it uses a pre-paid contactless smart card. Contactless smart cards are processing similar applications as contact smart cards are using to execute. The only change is making the application to be convenient for working without need for contact between a card and a reader to make payment transactions. The amount of payment for such kind of cards is written beforehand for control applications. Depending on what kind of payment clients want to make, e.g. bus, business place, taxi meter, and parking POSs, road toll terminal, etc. there are Security Access Module (SAM) in the various forms of payment machines for secured verification of cards, generation of payment signs, and authentication of debit signatures. Main Feature:  The main feature for the system is security level. Because the system is using a Payment SAM (PSAM) for security to verify the card and debit signature, generate payment signature, etc. [8] 2.3.1.3 Debit card in Market There were 430 million Visa debit, credit and commercial cards in Europe in 2011. Those cards were used to make payment for purchases and cash withdrawals with the amount of €1.6 trillion in the duration of 12 months ending March 2011. 12.5% of these transactions are done at point of sale in Europe with a Visa card. Approximately, about 70% of that is done using Visa debit cards. [9] 27 June 2013 12
  • 14. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS There can appear a question as what is the secret of that success by Visa to become the dominant payment network for credit and debit cards. The answer is so clear, competition. Competition usually forces prices lower. However for electronic payment networks such as Visa and MasterCard, competition is more about to make agreement with banks or issuing companies. Because as much as clients make transactions and consumers pay to banks then banks or issuing companies must pay to payment networks. Visa and MasterCard set the fees that merchants must pay the clients‘ bank. Higher fees mean much profit for banks, and also for payment networks [10]. 2.3.1.4 Pros and cons of debit cards The main advantages of debit card are convenience and security. Besides the convenience of being able to access and control account funds at anytime it also removes the complicated check writing as payment like showing ID and associated fees. Debit cards are also considered to be a safer form among all payments. Because it is required to enter code to access the account funds, while checks can be easily stolen [11]. A disadvantage of debit cards is the buying limit for protection provided to clients by law. Debit card transactions and cash transactions are so similar to each other. The money changes hands quickly, and it's difficult to get it back. If clients want to give back broken or unsatisfactory goods which purchased with a debit card, many merchants will only give clients cash or store credit [12]. 2.3.2 Credit Card One of the most used payment cards issued by banks is credit card. Credit card allow to clients, cardholders to pay for goods, purchases from their credit card accounts. The maximum amount of payment is determined in advance when clients apply to bank for credit card. Credit cards are produced for charge interest and they are mostly used for short-term financing. Charge interest generally starts one month after a purchase is made and borrowing limits of clients are preset by credit card producer bank or company according to the clients‘ credit rating. There are two main types of credit cards: Pre-paid credit cards, Normal credit cards. 27 June 2013 13
  • 15. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS People mostly prefer pre-paid credit cards because by this way they border the building up a debt because clients can only spend what they put on the card. Such kind of card is ideal for children, teenagers or students because by that way they cannot borrow money and build up a debt on their credit cards [13]. 2.3.2.1 Background of Credit card The idea of lending money using a card starts from the 1800s. Hotels and department stores suggested to their most valued clients identification cards which initially were paper made. These cards were mostly accepted at that one location as owners or producer places; however, sometimes these cards could be accepted in the competitors ‗places. In the late 1950s the BankAmericard introduced by Bank of America, which was the first credit card in bank sector. The card replaced with new created version in the mid 1970s, and it was named as VISA. As a result of competition rivals of Bank of America later created payment network that came to be known as MasterCard. In 2009, U.S. President Barack Obama signed a new bill into law to curb the most controversial credit card practices, including interest rate hikes, penalties and marketing to college students [14]. 2.3.2.2 Credit card transaction processes There are five main nodes in the credit card transaction: 1. The customer 2. Merchant 3. The bank that has the merchant‘s account 4. The credit card network 5. The issuing bank. Have a look at the chart in the figure 1 in order to understand transaction process of credit card. 27 June 2013 14
  • 16. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Figure 1. Credit card transaction process When client wants to make payment for purchases using his/her credit card, firstly, the merchant checks whether the amount of payment client is paying could be approved and the credit limit that client is allowed to borrow hasn‘t been exceeded. Merchant checks that by sliding the credit card through an electronic device that is connected across a network to the issuing bank. Once the issuing bank confirmed that the credit limit of the client hasn‘t exceeded, a pair of checks is printed for client to sign. One of the copies is kept by the merchant and the second one is given to client. The signed check is then deposited by the merchants with their bank that has the merchant‘s account and the issuing bank of credit cardholder the specified amount in their accounts. The payment is then transferred electronically from the merchant‘s bank to the credit card network like Visa or MasterCard. The network credits the amount of payment in the bank and goes on the transaction further by charging the issuing bank or financial business body which has issued the credit card. After purchase is done a bill for the amount of payment is then sent by the issuers to their card holding clients. If the complete amount of borrowed money is paid by the cardholder in the 27 June 2013 15
  • 17. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS defined time, the issuing bank doesn‘t charge an interest or any other finance charges from the client. That is the obvious procedure and serial steps of any credit card transactions [15]. 2.3.2.3 Debit Cards and Credit Cards Credit cards and debit cards are two leaders of electronic payment systems. They have significant roles in trade and commerce in all the sectors of industry. The common benefit of convenience that is provided by the both systems in all around the world is the most noticeable side of both these payment methods. In the information age credit cards as well as debit cards have become as efficient alternatives of cash and check payment. However, sometimes people ask the question: ‗Which of the two is better?‘ - Working of Debit cards and Credit cards Talking about credit cards, credit is involved in this payment system just as the name suggests. The client swipes the card to make payment for the goods he/she wants to purchase from the point of sales. The merchant receives amount of payment from the credit card issuing company by the credit networks. The client has time period to pay borrowed amount of money back to issuing bank or company. If cardholder paid money before the pre-set time the issuing company doesn‘t charge an interest the client. So, that is how the credit card system works in all around the world. Coming to debit cards, there is no given credit in that type of payment card to talk about. The payment process using a debit card system is enough similar to the procedure in which it is done for the credit cards payment system. The clients have to swipe their debit cards at the POS in order to make payment for the goods they want to purchase and then the required amount is sent to the merchant‘s account from the cardholders account. The main difference of debit cards compared to credit cards is the amount of money in clients account. Because the money in clients account is not borrowed from issuing bank but, completely belongs to the card holder; the issuing company is not paying any money on behalf of the card holder in debit cards system. That is the payment procedure of debit card and its difference from credit cards system. 27 June 2013 16
  • 18. Author: Jasur Hasanov - ELECTRONIC PAYMENT SYSTEMS Comparing the two The one the most valuable benefits of using credit cards is the time period that is provided to cardholder by issuing bank or company to pay back the borrowed amount of money. But on the other hand, if client could not pay back the amount of money until defined time then he/she gets charge of interest by issuing bank as an additional payment on borrowed money. However, if client is using debit cards there is no possibility for the charge of interest by issuing company because the money that cardholder is having in his/her account totally belongs to the cardholder. There is no credit given to clients so there is no charge of interest. But, as long as there is no credit given to cardholder that mean client only may spend the amount that he/she is having in his/her account currently. Whereas, different from debit cards, a credit card holder is provided with a credit limit pre-set by issuing bank according to the clients credit rating. The second main difference between credit and debit cards is the cash advances system. A client who is using credit card has cash advances against the credit card. However, in such type of transaction, as soon as the client borrows cash the interest on the amount of borrowed money as an advance begins immediately. On the other hand, clients can use debit card as an ATM cards in most cases. Debit card holders can take money from ATMs without any interest. Also, it is possible to loan money from one debit card account to another debit card account for some time period. After the defined time to pay loans back, client who loaned money from another account is charged for interest according the pre-decided rates. Anyone can apply for a debit card, even in case of bad credit rating. That is one of the main advantages of debit card. The credit rating and credit score of the applicant don‘t even considered when he/she applies for debit card. However, when clients apply for credit card the issuing bank or company checks all the information about clients, such as credit history, credit rating and score. If all the conditions are matched with issuing banks requirements then credit card is approved to the clients. Also, there is possibility of happening one case related with credit rating when client cannot pay back borrowed money even after the grace period. Such kind of issues has negative effects on the credit history and rating of the clients which can prove to be a problem to get loans or credits in the future. As there is no credit in debit cards, the impact of credit rating on debit card is likely to be zero. One of the similar benefits that can belong to both, credit cards as well as debit cards is the gifts and rewards. There is such kind of credit cards named as reward credit cards. Such types of credit cards provide the clients the opportunity to get reward points on goods they purchased. 27 June 2013 17
  • 19. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS After these points came to some amount using these points clients can get different types of gifts such as air tickets, hotel staying, jewelers and etc. Such types of gifts are also available for some debit cards. The card holders can earn points according to the purchases they do and redeem these points later. Sometimes, even some amount of cash can be given to both card holders as a gift. - Which is better – credit card or debit card? As it is mentioned before there are some advantages as well as disadvantages of both credit cards and debit cards. Sometimes a credit card can be better option for some people compared to debit cards. However, some people might not qualify for a credit card because of the credit history and in such cases the debit card is the only suitable choice as plastic transactions. It is difficult to say which of these two plastic cards is better than other one. Actually, to apply for a credit card or a debit card depends on the requirements of the clients and the financial situations that the person is facing. Both of these cards are useful at their own situation of using, places and one of them cannot be determined as better than the other one [16]. 2.3.3 Charge Card Cards that have no interest charge but require the clients to pay their balances completely before the deadline exceed. Usually clients pay month-to-month. Charge card is so similar to credit card; the main advantage offered by a charge card is that it has enough higher, often unlimited, spending limits. However, there is another difference of charge card that it puts so large amount of penalties for any unpaid balances. The second main difference of charge card is that it doesn‘t allow clients to carry their debt from one month to the next month, in order it is possible with credit card. Leader companies of charge cards are known as American Express and Diner's Club [17]. 27 June 2013 18
  • 20. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.3.3.1 Why use a charge card? Charge cards doesn‘t allow to clients to get into expensive debt. Because clients have to pay back the full balance by the pre-defined date. Charge cards also have rewards as credit and debit cards are having. These rewards come when clients pay an annual fee. For example, American Express gives to their charge card holder clients‘ free access to the Membership Rewards program [18]. The main differences and characteristics of Debit card, Credit card and Charge card can be seen in the figure 2 [19]. Payment Cards Credit Card Debit Card Charge Card • Spending limit based on the user’s credit history • User can pay the entire credit card balance / pay minimum amount each billing period • Credit card issuers charge interest on any unpaid balance • Remove the amount of the sale from the cardholder’s bank account and transfers it to the seller’s bank account • Issued by the cardholder’s bank and usually carry the name of a major credit card issuer like Visa / MasterCard • Offered by companies like American Express • No spending limit • The entire amount charged to the card is due at the end of billing period • No lines of credit and no interest charges Figure 2. Debit, Credit and Charge cards 27 June 2013 19
  • 21. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.3.3.2 Differences of a charge and a credit cards Sometimes people are confusing the terms "charge cards" and "credit cards", but these cards have huge different features from each other. A charge card requires clients to pay full amount of borrowed money at the end of every month. There is no interest charge for that type of cards. If the full amount of spent money is not paid until the determined date, high penalties may ensue for clients, depending on the card agreement. Credit cards have spending limit and allow clients to carry a balance (revolving debt from one month to the next), because banks charge interest for that. That is the main difference between credit and charge cards [20]. 2.3.4 Gift cards A gift card is produced as equivalent to cash that is issued by banks or private companies. These cards are highly popular and used as an alternative to a non-monetary gift. 1. In 2006 gift cards rank as the second-most given gift by consumers in the United States 2. The most-wanted gift by women 3. The third-most wanted by males. Gift cards are similar to a credit card or display a specific theme on a plastic card the size of a credit card. The card has a specific identification number or code, but usually there is no written individual name on cards, so it can be used by anybody. Gift cards are supported by an online electronic system for authorization. Sometimes for few gift cards it is allowed to reload and use multiple times. Gift cards may have a barcode or magnetic strip on them, which can be read by an electronic credit card machine. Mostly, gift cards have no value when they are produced, until the time that consumer wants to define the amount to put into these cards. 27 June 2013 20
  • 22. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.3.4.1 Background of Gift cards Individual Awards team of Maritz Travel Company faced with a successful idea of paper gift products offered by Maritz in early 1992 while they were working on planning and developing rewards products. Later the product was named as ―Exclusively Yours Cheques (EY Cheques)‖, which had been very successful idea of its time period for years. That gift card was one of the first gift checks in that time which was redeemable at more than one merchant. It was allowed to use for travel, retail shopping, merchandise and more. The EY Cheques gift cards became so successful and made a profit from $20 million a year to well over $130 million in six months. The operational team of the gift card received huge boxes of used EY Cheques to be processed again from hotels, and different travel agencies. Nowadays amount of gift cards are sold is more than $100 billion a year [21]. 2.3.4.2 Types of Gift cards - Mobile and virtual gift cards One type of the gift cards is Mobile gift card. They are delivered to clients‘ mobiles phones via SMS messages or phone applications. When client wants to use their gift it is needed to carry only their cell phones to the gift supporter companies place. Benefits of mobile gifts card is connecting them to a particular phone number and convenience of distribution through email. Another type of the gift cards is Virtual gift cards. Virtual gift cards are distributed via e-mail to their clients. The main advantage is that they cannot be lost. Also it is not needed for the consumer to drive to the bricks and define a location to purchase a gift card. 27 June 2013 21
  • 23. Author: Jasur Hasanov 2.3.5 ELECTRONIC PAYMENT SYSTEMS Local payment cards 2.3.5.1 MilliKart LLC MilliKart has started as a card processing and producing center in Azerbaijan. Currently, MilliKart is specialized on producing of payment cards and their processing services, electronic payment security, supporting of ATMs, POS terminals and other equipment, and 24/7 service to [22]. The idea of MilliKart started on August 02, 2003. The Processing Center established on January 03, 2005 as a new department of National Bank of Azerbaijan. MilliKart LLC was founded on July 14, 2006 by 18 banks with charter investment of 4000000 manats. Currently, there are 13 banks served by MilliKart LLC in Azerbaijan, and there are 170 000 cards issued by these banks. Also, more than 300 ATMs and 3000 POS-terminals lunched by these 13 banks [23]. MilliKart is getting wider day by day. There are huge differences in statistics of development in MilliKart. The improvement is clearly seen from the statistical data of MilliKart LLC given in table 1, and table 2 below. Table 1. Statistical data of MilliKart by quarter years for 2010 and 2011 [24] 27 June 2013 22
  • 24. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Table 2. Statistical data of MilliKart for 2009 and 2010 years [25] Sometimes, depending on social requirements and conditions MilliKart produces different types of plastic cards, such as they produced Baku Card for Eurovision Song Contest 2012. Baku Card mainly produced for tourists and guests coming from abroad as well as citizens of the Azerbaijan Republic. A prepaid card Maestro Baku Card was the project of MilliKart LLC, Ministry of Culture and Tourism of Azerbaijan Republic and MasterCard. Baku Card was quite efficient for making payments. It was provided to card holders:  safe and easy payment in local currency  better exchange rates compared to cash or checks  10% discounts at the ―Park Bulvar‖ as well as large number of retail outlets and service centers in Baku city  ability to pay on the territory of Azerbaijan republic and abroad  ability to access funds 7/24 through any ATM  easy account reloading Baku Card was introduced together with colorful guidebook of Baku city and city map [26]. 27 June 2013 23
  • 25. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.3.5.2 World card World card is designed on a MasterCard payment system by YapiKredi bank. It is considered as one of the top ten most valuable payment cards in the world. Depending on tariff conditions there are four main types of World card produced for clients; WorldCard Gold, WorldCard Platinum, WorldCard Business, and Virtual WorldCard. World card has partnerships with different shops, merchants in countrywide. When customers make purchases from any of World cards partners they can use pre-defined discounts and gift points from the vendors. As soon as points reached to the level of usage clients can use these points during their following payments [27]. World card provides clients with credits starting from 3 months to 12 months pay-back conditions. World virtual card allows customers to make secure online payments and purchases. However, virtual world card identification number is not same as on the card. That specification makes clients account more secure during online payments. If clients want to have virtual World card of their normal World cards at the same time, it is needed to ask when they apply for a World card to the bank [28]. 2.3.5.3 BolKart BolKart is produced by Bank of Baku based on MasterCard system. Currently, there are about 110.000 BolKart cardholders [29]. BolKart provides customer to pay for their bills or purchases online with the secure MasterCard payment system. Also, it has advantage of using in most local vendors. Partners of BolKart allow the clients of BolKart to make purchase and pay in determined time period with credits between 1-12 months [30]. 2.3.5.4 Albali card Albali card is a produced by Unibank, and it provides customers credits for making payments in local partner merchants. Clients can get cash from ATMs using Albali card and the amount should be paid back in three months. Interest charge is 5 % for the cash. Also, Albali card holders are allowed to make purchases and make payment during next one year. Depending on vendors the time period of credit can be 27 June 2013 24
  • 26. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 1,3,6,9, and 12 months [31]. Cardholders can only make online payments in few local internet shops or payment websites using Albali card. 2.4 Payment Networks 2.4.1 MasterCard 2.4.1.1 Background of MasterCard MasterCard answered to the question of ―What we do?‖ as an best description of their mission as following: ―As consumers and businesses continue to seek ever faster, more secure and smarter methods of payment for an increasing array of transactions, MasterCard Worldwide is at the center, providing a sophisticated set of transaction processing and consulting services that enable economic connections, fuel commercial development on a global and local scale and drive business growth for our customers [32].‖ MasterCard started in 1966 a group of business people who established MasterCard as an association. Later on, MasterCard expanded their borders through Mexico, Japan and Europe in 1968, and as it went on they became worldwide payments network. MasterCard continued to grow up and bring new technologies into electronic payments in 1980s. They started Maestro® as first global online debit in the world. Europay International and MasterCard became partners on the project of Maestro debit card as the first issued payment card in the Republic of China. As electronic payment systems become more popular by the ‘90s, MasterCard also went on by upgrading their payment technologies to be convenient, faster and efficient. MasterCard Advisors began to their mission in 2001, as bringing new innovations into consulting services for clients and others in the industry. At the same time they reconstructed their network, to make payments more secure, easier and smart. MasterCard came together with Europay International in 2002. The purpose of these two was to become a huge global corporation in electronic payment networking. In 2010, MasterCard started their labs. These labs are working as incubator for new creative ideas. 27 June 2013 25
  • 27. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Nowadays, MasterCard is growing rapidly by bringing new products and solutions into market. Currently, 85 percent of transactions still are made with cash and checks in the world, there is still large space for payment networks to get in market and grow by serving billions of people [33]. 2.4.1.2 How MasterCard works? A transaction process of MasterCard is a purchase that starts with a customer. The figure 6 below will provide you better explanation of MasterCard‘s and the merchants‘ roles in this transaction process. Figure 6. MasterCard’s and the merchants’ roles in this transaction process [34] 1. Transaction begins - The cardholder purchases goods or services from the merchant. 2. Authentication - The merchant, if effect, sells the transaction to the ―acquirer‖ and is reimbursed the amount of the sales ticket less a ―discount fee‖ 3. Transaction submitted - The acquirer then submits the transaction to the issuing bank for payment via the MasterCard interchange and settlement system. 4. Merchant payment - The issuing bank pays the merchant acquirer, minus its fee through the MasterCard settlement system. 5. Cardholder payment - Finally, the cardholder repays the issuer for the goods or services originally purchased from the merchant. 27 June 2013 26
  • 28. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Card Issuing Bank – The cardholder‘s financial institution, also a licensed member of MasterCard Cardholder – A consumer who is solicited, screened, and approved by the issuer who establishes a line of credit for the customer and issues the bankcard. Merchant – Virtually any company that wants to accept cards for payment and that meets the qualification standards of MasterCard and an ―acquirer‖. Acquirer – A licensed member of MasterCard that screens and accepts merchants into its bankcard program, processes transactions, and completes financial settlement to them. MasterCard Worldwide – Provides services to consumers and merchants [34]. 2.4.2 Visa There are different definitions for Visa payment system. One of the clear definitions is written by Unibul. ―Visa is a system that includes technology, products, services and marketing programs that facilitate the electronic exchange of information and funds among financial institutions, merchants, consumers, businesses, non-profits and governments. Visa defines the rules that enable financial transactions to be completed safely and reliably, including functional and technical specifications [35].‖ 2.4.2.1 Background of Visa Today Visa has about $100 billion marketcap, however no one believed if the idea will go few steps away when Visa was established in 1958. Joseph P. Williams was the person who improved and rised the idea to the advanced system. At that time he was the Vice president for a division at Bank of America known as the Customer Services Research Group. There were over 2 million cards in circulation and more than 20000 vendors were accepting them for payment by 1959. The system of BankAmericard was originally considered to be used only in California. However, Bank of America changed their plans and started to license the system to financial institutions elsewhere in 1965. By 1970 there were more than 100 million cards in circulation across the country as a 27 June 2013 27
  • 29. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS result of the successful decision. Bank of America had also licensed the system to some foreign banks in Canada, United Kingdom, and France by the late 60‘s. The BankAmericard name could not work in a foreign country, for that reason banks issued the cards under their own brand names. Bank of America was the owner and controller of the system in 1970. However, many foreign countries were hesitating to use a card that belongs to Bank of America. So In 1977 BankAmericard, Barclaycard (UK issuer), Carte Bleue (French issuer), Chargex (Canadian issuer) and the others decided to use ―Visa‖ as the new universal name for the credit card. There were more than 21,000 financial institutions using the Visa program by 2006. In 2008, Visa went up with the market valuing the company at more than $50 billion. On the New York Stock Exchange Visa is traded under the symbol ―V‖. Currently, the value of Visa is about twice as large. Visa makes money from the (a) transaction fees on purchases, and (b) the licensing fees that financial institutions have to pay for joining to the network [36]. 2.4.2.2 How Visa works? Visa provides customers with easier payment. There are happening Visa payment transactions in every second of every day in the world. Visa is supported in more than 200 countries. Visa has transaction infrastructure that allows customers to feel relaxed no matter where in the world they are, Visa transactions are secure, reliable and easier. The Visa transaction has four participants:  The merchant is any entity — a vendor — that accepts Visa as payment.  The acquirer is a financial institution that enlists vendors to accept Visa payments and guarantees they get paid for each transaction.  The issuer is a financial institution that provides Visa-branded cards or other Visa-branded payment products to clients and merchants.  The account holder is any client or vendor using a Visa card or other Visa-branded payment product to make purchases [37]. The figure 7 given below will explain clear procedure of Visa transaction. 27 June 2013 28
  • 30. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Figure 7. Visa Transaction procedure [37] Here is how each of the above entities participates in a Visa transaction and steps of procedure explained by Unibul. 1. The cardholder presents the merchant with a card for payment. The card data are read directly from the card by a POS device, key-entered into it by the vendor or provided by the cardholder on the merchant‘s website or over the phone. 2. The merchant transmits the transaction information to the acquirer. 3. The acquirer sends a transaction authorization request to Visa. 4. Visa sends the authorization request on to the issuer or, in certain circumstances. It may perform ―stand-in processing‖ on behalf of the issuer and approve or decline the transaction. 5. The issuer sends back to Visa an authorization response, either approving or rejecting the transaction. 6. Visa sends the authorization response on to the acquirer. 7. The acquirer routes the authorization response to the merchant [35]. 2.4.3 Comparison MasterCard and Visa Visa and MasterCard are leader and competitor companies in the electronic payment networks. Most consumers are thinking that there is no significant difference between MasterCard and Visa. Both of them are accepted in more than 200 countries and it is not easy to find a location that will accept one but not the other. 27 June 2013 29
  • 31. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Actually, Visa and MasterCard do not issue cards directly to clients. They are both just an electronic payment methods. MasterCard and Visa rely on banks in several countries to issue cards which are based on these payment methods. So, the interest charges, rewards, and all other charges are issued by customers‘ banks. Therefore, clients are paying these fees and charges to their banks or institution that issued their cards, but not Visa or MasterCard. By charging the retailer for using their payment systems Visa and MasterCard make their money. There are small differences in what Visa and MasterCard. Differences are in charges on the banks for issues such as foreign currency exchange fees. However, that doesn‘t change anything for both to remain rivals on basic offerings [38]. Main features of both: Usability - Visa was considered more global network than MasterCard when they appeared new in market, however that difference happened for a short time period. Nowadays, they are having almost every facility in a level that they are almost indistinguishable, but there are some properties that customers would want to take into account. Security – ―Verified by Visa‖ scheme of Visa provides customers protection for online shopping. On the other hand, MasterCard produced a new ‗SecureCode‘ scheme for making online purchases more secure almost at the same level with Visa. These schemes are optional to sign up when clients make online payment. However, using these facilities allows purchases to be more secure. Both systems based on setting up a password or secret number which customers will be asked to enter whenever they want to make payment online. Reward Schemes - Both of them have reward schemes with different available offers for their clients. There are few differences between Visa and MasterCard interest charge to credit card providers for foreign currency exchange fees. However, these leader networks are very competitive in charges, too [39]. Payment Brand - MasterCard and Visa are an electronic payment brands with a high level security of their payment networks. They provide connection among financial institutions and also allow vendors to receive payments from different locations. MasterCard and Visa don‘t play a role in setting of fee and rates by the financial institutions. Contactless Payment - MasterCard and Visa have developed a contactless payment cards. These cards allow customers to tap their payment device on a terminal instead of swiping it. The MasterCard 27 June 2013 30
  • 32. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS contactless payment brand is the PayPass, at the same manner Visa has the Visa payWave as a contactless payment brand [40]. 2.4.4 PayPal 2.4.4.1 Background of PayPal PayPal is a leader system among all electronic payment systems by means of being the faster, safer way to pay and get paid online, with facilities of using a mobile device and in store. The service provides clients simpler methods to send money without sharing their financial information. Also, PayPal is quite flexible to pay using clients‘ account balances, bank accounts, credit cards, and etc. PayPal has 128 million active accounts in 193 markets including 25 different currencies around the world. As a result of such wider payment network PayPal has significant role in global commerce by processing more than 7.6 million payments every day. As PayPal provides clients make their payment anytime, anywhere and in any way, the company is supporting mobile commerce and expects to process $20 billion in mobile payments in 2013. PayPal is part of an eBay company and contributed 40 percent of eBay Inc.'s revenues in 2012. PayPal is headquartered in San Jose, Calif. and its international headquarters is located in Singapore. List of 25 currencies which are supported by PayPal: PayPal supports payments in 25 currencies including: U.S. Dollar, Australian Dollar, Canadian Dollar, Hong Kong Dollar, Singapore Dollar, Taiwan New Dollar, New Zealand Dollar, Euro, Swiss Franc, Czech Koruna, Swedish Krona, Danish Krone, Norwegian Krone, Hungarian Forint, Mexican Peso, Philippine Peso, Malaysian Ringgit, Chinese RMB, Israeli New Shekel, Pounds Sterling, Brazilian Real, Polish Zloty, Thai Baht, Turkish Lira and Japanese Yen [41]. 27 June 2013 31
  • 33. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.4.4.2 How does PayPal system work? Understanding the Payment Processing Network PayPal processing network is consisting of two main groups: Individuals and institutions. Individuals are merchant and customer, seller and buyer sides of goods. There are three institutions in PayPal processing network: 1. Customer‘s Issuing Bank – provides customer‘s credit card information and verification 2. Merchant‘s Acquiring Bank – provides internet merchant account 3. Processor – authorizes credit card transactions and settles funds for merchants The PayPal Payment Network provides clients with several processes and services. The main provided processes are authorization and settlement. Authorization is the process of verifying a customer‘s credit card, and settlement is the process of collecting funds from the customer‘s account. The main services which are provided by PayPal payment network are Payment Processing Service and Gateway. Payment Processing Service connects merchants, customers, and banks through secure online transactions and Gateway is the secure pipe between the banks and the processor. For clearly understanding benefits of PayPal payment system it is needed to understand the processes of authorization and settlement. After spending two minutes on given charts which are explaining the authorization and settlement processes it is possible to have a clear and obvious picture of processes in our mind. Look at the figure 3 and figure 4 below. 27 June 2013 32
  • 34. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Figure 3. Authorization Process [42] Figure 4. Settlement Process [42] 27 June 2013 33
  • 35. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS As it is described on the charts there are several steps for making transaction from clients‘ account to merchants‘ account using credit cards. The most noticeable advantage of PayPal payment system is condition of ―all-in-one‖ procedure. PayPal payment system removes most of the steps described in figure 3 and figure 4 and processes these steps within its own system. As a result of that the procedure of transactions in PayPal system Secure, Simple and Fast. These three criteria are the most useful sides of PayPal payment system provided for customer. Graphical description of PayPal payment system is given on the figure 5 below. Figure 5. Authorization and Settlement Processes are done by PayPal Processing service [42] 2.4.4.3 How does PayPal make money? While PayPal makes transactions for its clients it gets profit by charging a percentage of the money it transfers from one account to another. In transfer procedure of PayPal system there is fee for buyers and it is free to send money to someone else. When a buyer sets up a PayPal account, there is no cost to send 27 June 2013 34
  • 36. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS money to a merchant. The funds are withdrawn from the clients‘ credit card or bank account, or both. PayPal never charge buyers to send money. PayPal commonly charges money receivers (Sellers) a 30 Cent Fee + (1.9% to 2.9%) surcharge. PayPal only charge clients when they receive money. Using a special surcharge formula, PayPal will bill you whenever you receive a payment from a buyer. PayPal Fee Table:  For receiving transfers under $3000 USD: the fee is 2.9% + $0.30 USD.  For receiving transfers $3000.01 to $10,000: the fee is 2.5% + $0.30 USD.  For receiving transfers $10,000.01 to $100,000: the fee is 2.2% + $0.30 USD.  For receiving transfers over $100,000: the fee is 1.9% + $0.30 USD. When customer sends money to someone who is not a registered as seller he/she can opt to pay for the PayPal surcharge himself/herself [43]. 2.4.4.4 Security of PayPal There is no 100% secure system, PayPal has designed many checks and balances into its system to keep errors and fraud to a bare minimum. What does PayPal provides? 1. PayPal is guaranteed against fraud and identity theft. PayPal provides 100% guarantee for clients protection against unauthorized transactions from their account. In every transaction PayPal sends email to the PayPal account holder to confirm transaction. Also, 24/7 access to a PayPal support team of analysts is provided to customers for solutions of any problem they face. 2. eBay purchases can also be insured up to $1000 through PayPal. "PayPal Buyer Protection" service is one of the certifying ways that certain sellers are trustworthy. 3. PayPal's Anti-Fraud Team works 24/7. , the team is able to detect, and often predict, suspicious activity to help eliminate identity theft. Using advanced risk models and technology the anti-fraud team‘s of PayPal is working to make every transaction as safe as possible. 4. Many other PayPal safety measures distinguish the service from its competitors [44]. 27 June 2013 35
  • 37. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.4.4.5 PayPal supported and unsupported countries Whether clients buy an item from somewhere, or sell to another country, PayPal provides clients these facilities having a large network of 193 countries and regions [35]. However, there are few countries which are not supported by PayPal depending on local unsatisfactory situations. These countries are: Afghanistan, Bangladesh, Pakistan, and Montenegro, and the countries on the US economic sanction list which are Burma, Cuba, Iran, Libya, North Korea, Sudan, and Syria. The reason for restriction is mostly related with political instability of countries. 2.4.5 E-Wallet payment and Google E-wallet 2.4.5.1 What is an e-wallet? An e-wallet is one of the quick and secure methods of payment provided by different companies such as Google, Yahoo and etc. The term e-Wallet started as digital wallet. Previously, the digital wallet was used same as a physical wallet. It was as a method of storing different forms of electronic payment information. As digital wallet continued they developed the system into a service that allows internet users with a easy way to store money and make online payment [45]. E-wallets are able to store customers‘ passwords, credit card numbers, email contacts and important data such as social security numbers. An e-wallet provides users to unify and store the information that they need to keep safe. The only thing they need is to remember one password to unlock the encrypted data in e-wallet. Features - An e-wallet is a standalone software application that can easily be downloaded and installed on PC, PDA or Smartphone. It is often allowed to customize the application's data entry options for making more useful users needs. Security – Mostly e-wallet encrypts data using strong methods for the security requirement. For making security of e-wallet some providers use extra password security features such as a limit on wrong password attempts. Once wrong password reached the limit, the user is locked out for a while [46]. 27 June 2013 36
  • 38. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 2.4.5.2 Technology of an e-wallet An e-wallet has a software and information component. Security and encryption for the customers‘ data and for the payment transactions are provided by the software. Digital wallets are installed on the customer side and are so convenient for making payments with most e-commerce Web sites. However, a server-side e-wallet is located on provider company side and they are getting more widely used among all the providers due to the security, efficiency. The information component includes all the data of clients. An e-wallet is consisting of digital wallet devices and digital wallet systems. Currently there are further explorations for Smartphone with NFC digital wallet capabilities. NFC provides needed environment and system for e-wallet payments. Digital wallet systems allow the widespread use of e-wallet payments among several merchants in the form of mobile payments systems and digital wallet applications. The figure 8 gives clear explanation for NFC and mobile payment system using e-wallet. Figure 8. NFC payment ecosystem, mobile payment using e-wallet [47] 27 June 2013 37
  • 39. Author: Jasur Hasanov 2.4.6 ELECTRONIC PAYMENT SYSTEMS Statistics of PayPal and MasterCard, Visa e-wallets The services that allow clients to store their payment information (i.e. credit or debit card) on their PC, Smartphone or tablet and make online or offline purchases without having to re-enter that information is called a ―digital wallet‖. As much as it is written about digital wallets advantages as being the future of electronic payments, unfortunately, few people are using such payment systems and services. Statistics say that only 51 percent of the responding consumers have ever heard about a electronic payment service other than PayPal according to the study of comScore. Additionally, 12 percent of consumers have ever used one of the digital payment services. As being a payment service of eBay PayPal is currently on the top of list in the competition. It is the most known service by customer and also PayPal leads other payments services in usage as a choice of payment by customers. The statistics are clearly seen in the figure 9 given below [48]. Figure 9. Consumers’ awareness and usage of digital wallet services in the United States [48] 27 June 2013 38
  • 40. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS As it is described above PayPal is the most widely known and used payment system among all these services. Google Wallet also is widely known compared the rest of the list, however, usage percentage of Google Wallet is not much enough. MasterCard and Visa services are still so far away from PayPal and even Google Wallet. Also, PayPal is the most widely used payment service for different online serving websites such as business, shopping, technology, vehicles, entertainment and etc. These websites have their own ratings for the accepted amount of electronic payment through PayPal payment service. The statistics of these business types are as below according to the figure 10. Figure 10. PayPal Usage Statistics within the top 10k, 100k, and 1 million websites [49] As it is clearly seen from the chart above top 1 million shopping and business website receive their electronic payments through PayPal service. Also, top 10000 shopping websites are leading others in received amount of payments through PayPal service. 27 June 2013 39
  • 41. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 3. Authors opinion There have been explained different concepts, technologies, methods and some other important information related with electronic payment systems. Mainly, explanations are based on different types of electronic money, forms of electronic money, payment cards, payment networks, and their technologies, advantages and disadvantages. As a result it would be a better ending to consider all the payment methods for Azerbaijan and bring a clear view in local environment by taking all statistical information, technologies of payment systems, their pros and cons into account. As it was mentioned above infrastructure for electronic payment is not high enough in Azerbaijan, by means of technical infrastructure and e-readiness of customers. That part of the paper will help our people to understand all the important issues about electronic payment, benefits and negatives of using online payment systems who are interested in making their payments online. Also, they will easily understand mostly used types payment cards and payment networks and differences among them. As soon as they understand all these concepts it will be so easy for them to make their choices on payment cards and payment networks. As a result that will remove the problem of unfamiliarity with electronic payment systems. 3.1 Payment cards for Azerbaijan Credit, debit and charge cards are the main types of payment cards used in almost all around the world. The best way of understanding differences among these three is comparing them to each other according to conditions of Azerbaijan. There will be considered 6 items as categories of comparison payment cards for Azerbaijan. These items are:       Depending on monthly income Depending on credit history Depending on employment Spending limit Interest charge Supporting by local banks While comparing payment cards they will be evaluated over 5 points. Let‘s have a look at the comparison table and comparing categories of these thee using categories of comparison. 27 June 2013 40
  • 42. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS cards Credit card Debit card Charge card Comparison of payment cards [2] categories Monthly income 4 1 2 Credit history 3 5 3 Employment 2 3 1 Spending limit 3 2 5 Interest charge 1 5 2 Local bank supports 4 4 1 Overall mark 17 20 14 Table 3. Comparison of Payment cards for Azerbaijan According to our categories overall mark for credit card is 17, for debit card is 20 and for charge card is 14. Let‘s consider all the categories one by one for these three types of cards in Azerbaijan. Monthly income Credit card (4points) -- Monthly income is the first and most important condition for customer who wants to apply to a bank for a credit card. According to amount of monthly income clients get their monthly spending limit. As much as customer‘s monthly income is higher he/she gets higher spending limit. Debit card (1 point) – As debit card are working with the method of pre-payment monthly income doesn‘t have an important role for such type of payment cards. However, as much as customers‘ income is higher he/she is able to pay more for their debit card. As a result debit card gets 1 point from that section. Charge card (2 points) – There is no spending limit for charge cards, however at the end of every month cardholder must pay full amount of money he/she spent during month using charge card. Monthly 27 June 2013 41
  • 43. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS income is not as much important as it is in credit card system. For that reason, charge card gets 2 pionts from the section. Credit history Credit card (3 points) -- Credit history is also one of the most important issues for customers when they apply for a credit card. If customer has a higher credit rating during previous years he/she possibly can get higher spending limit than previous one. Debit card (5 points) – Whatever customer credit rating is he/she can easily apply and get debit card. Charge card (3 points) – Credit rating also has importance for charge card at the same manner. Employment Credit card (2 points) -- Customer who applies for a credit card he/she needs to be officially employed. Otherwise, there is so small possibility that banks will accept his/her application for credit card. Debit card (3 points) – For debit card there is no huge difference if customer is employed or not. That only may change an amount of money in clients debit card. As a result debit card get 3 point as middle level. Charge card (1 point) – As mentioned above at the end of every month charge card customers have to pay full amount back to bank. If customer doesn‘t have a financial source then unemployment can be big trouble for the client. Spending limit Credit card (3 points) -- As previously mentioned depending on monthly income there is determined spending limit for every client in credit card system. Debit card (2 points) – There is no spending limit for debit card, but the amount of money in customers debit card is pre-paid by the customer himself/herself. That is why spending limit is not depending on card issuer bank. Charge card (5 points) – The most significant and noticeable advantage of charge card is that it has no spending limit during one month. Cardholder is allowed to spend as much as he/she wants to spend. 27 June 2013 42
  • 44. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Interest charge Credit card (1 point) -- Interest charge is a percentage of borrowed money from certain bank using credit card. When customer pays borrowed money back to the bank he/she also makes additional payment as an interest charge. That is one of the negative sides of credit cards. Debit card (5 points) – There is no interest charge for debit card holders. Charge card (2 points) – Actually, there is no interest charge for charge cards, however, if customer could not pay that amount he/she spent to the end of month most probably issuer bank will put huge penalties on the customer. Local bank supports Credit card (4 points) -- Currently credit cards are used in all around world. As much as local banks support and provide credit cards interest charge becomes lower as a result of competitive banks. Debit card (4 points) – Debit card is also widely used and produced in Azerbaijan. Most of local banks support and produce debit cards. Charge card (1 point) – Charge cards are not so popular as much as credit and debit cards. Additionally, it is not easy to find charge card producer banks in Azerbaijan. As a result of the evaluation, it is clearly seen that debit card is more efficient than others in Azerbaijan. However, considering monthly income of population in Azerbaijan, credit cards are also recommended for clients as it is seen from the evaluations. 3.1 PayPal for Azerbaijan As online payment and shopping have new started to develop PayPal payment service is extremely recommended to customers. Because PayPal provides its clients with high level security, and processing velocity, convenience as it is explained above. The only problem for not using PayPal so widely in Azerbaijan is infrastructure. Population in Azerbaijan is integrating into technology more every day. As a result of that there will be required infrastructure for PayPal to be more widely used in Azerbaijan. 27 June 2013 43
  • 45. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 4. Conclusion Electronic payment systems has significant usage with its high level security, convenience, cheap and nowadays free prices of transactions between accounts from miles away. As people are getting more familiar with new payment technologies and their usage methods, and understanding advantages of one method compared to others it will be more efficient and useful to make all the payments over internet even the most smallest payments of bill. By this way it will be a passing procedure from cash usage to electronic payment. Development cycle of electronic payment systems includes new technological innovations. However, it brings few problems at the same time. The reason of these problems is that customers are not aware of payment systems, different payment cards, their facilities, prices, technologies, payment networks and etc. Unfamiliarity of customers with such types of issues is one of the main problems for electronic payment systems. If customer doesn‘t have enough clear information about electronic payment system it is so dangerous for them to make transactions over internet. That type of behaviors may cost customer to lose his/her protected information. As they were all explained people need to get exact information about electronic payment methods, their processing technologies, tariffs prices, security, and all other aspects. The paper considered being helpful for customers by researching on payment cards, their technologies, and analyzing all the methods of payment, payment networks and their mechanisms including credit, debit, and other cards, PayPal, Visa, MasterCard and some others most used payment networks. Also, at the end advantages and disadvantages of some of these systems compared to each other by mostly categories, types, transactions processes, security, tariff prices and etc considering current infrastructure of Azerbaijan, in order to be helpful for customers. 27 June 2013 44
  • 46. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS 5. Reference: 1. Anonymous (2009), Issues in Informing Science and Information Technology, Volume 6, Mohamad Al-Laham, Haroon Al-Tarawneh (eds.), Development of Electronic Money and Its Impact on the Central Bank Role and Monetary Policy, Albalqa Applied University, Karak, Jordan: Page, 339. 2. Lawyer.20m (No Year), Electronic Money and Relevant Legal and Regulatory Issues, [Online], Available: http://lawyer.20m.com/English/articles/e-money.htm [April 20, 2013]. 3. Reynolds Griffith, Stephen F. (No Year), Electronic Money and Monetary Policy, Austin State University: Page, 47. 4. Dolceta, (No year), Different types of e-money, [Online], Available: http://www.dolceta.eu/unitedkingdom/Mod2/Different-types-of-e-money.html [June 24, 2013] 5. M Lambert, Donna Cosmato (2011), The History of Debit Cards, [Online], Available: http://www.brighthub.com/money/personal-finance/articles/42073.aspx [June 24, 2013] 6. EconomyWatch (2010), Debit cards, [Online], Available: http://www.economywatch.com/debitcard/history.html [June 24, 2013] 7. Credit Card Transactions, Inc. (No Year), [Online], Available: http://www.creditcardtrans.com/13 [June 12, 2013] 8. Multi Tech Engineering LTD, (No Year), Automatic Payment, [Online], Available: http://mtecheng.co.za/new01/index.php?option=com_content&view=article&id=80&Itemid=92 [June 12, 2013] 9. Visa, (No Year), [Online], Available: http://www.visaeurope.com/en/newsroom/news/articles/2011/visa_2012_economic_impact.aspx#st hash.L0U5cAuJ.dpuf [June 12, 2013] 10. The New York Times, (2010), The Card Game, Andrew Martin, [Online], Available: http://www.nytimes.com/2010/01/05/your-money/credit-and-debitcards/05visa.html?em=&pagewanted=all&_r=0 [June 12, 2013] 11. Investopedia (No Year), Debit cards, [Online], Available: http://www.investopedia.com/terms/d/debitcard.asp [June 11, 2013] 12. HowStuffWorks, (No Year), How Debit Cards Work, John Barrymore, [Online], Available: http://science.howstuffworks.com/debit-cards1.htm [June 12, 2013] 13. Find Card Now, (No Year), Pre-paid credit cards, [Online], Available: http://www.find-cardsnow.com/types-of-credit-cards/types-of-credit-cards/pre-paid-credit-cards.html [June 12, 2013] 14. Brigitte Yuille (No Year), Credit card, [Online], Available: http://www.investopedia.com/university/credit-cards/credit-cards1.asp [June 24, 2013] 15. Find Card Now, (No Year), How does a credit card work, [Online], Available: http://www.find-cardsnow.com/credit-card-basics/credit-card-basics/how-does-a-credit-card-work.html [June 12, 2013] 27 June 2013 45
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  • 49. Author: Jasur Hasanov ELECTRONIC PAYMENT SYSTEMS Declaration of Academic Integrity I hereby confirm that I prepared this bachelor thesis independently and on my own, by exclusive reliance on the tools and literature indicated therein. The thesis has not been submitted to any other examination board. ____________________ 27 June 2013 June 26, 2013 ________________________ 48

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