E-commerce Payment        Systems          Instructor: Wei DingCopyright © 2004 Pearson Education, Inc.   Slide 6-1PayPal:...
PayPal: The Money’s in the E-mail               One of e-commerce’s major success stories:                   Went public i...
Why PayPal has grown so fast?               The more people who accept and use PayPal, the               greater the benef...
Types of Payment Systems               Cash               Checking Transfer               Credit Card               Stored...
Cash               Legal tender defined by a national authority to               represent value               Most common...
Credit Card               Represents an account that extends credit to               consumers, permitting consumers to pu...
Accumulating Balance               Accounts that accumulate expenditures and               to which consumers make period ...
Online Merchants’ Actual andPreferred Online PaymentsCopyright © 2004 Pearson Education, Inc.                 Slide 6-15 H...
How an Online Credit TransactionWorksCopyright © 2004 Pearson Education, Inc.                                Slide 6-17An ...
Limitations of Online Credit Card Payment Systems               Security – neither merchant nor consumer               can...
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Payment systems 2 1

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Payment systems 2 1

  1. 1. E-commerce Payment Systems Instructor: Wei DingCopyright © 2004 Pearson Education, Inc. Slide 6-1PayPal: The Money’s in the E-mail The first “peer-to-peer” payment system, which allows individuals to send money to one another via e-mail. PayPal emphasizes ease of use for both senders and receivers of cash.Copyright © 2004 Pearson Education, Inc. Slide 6-2 1
  2. 2. PayPal: The Money’s in the E-mail One of e-commerce’s major success stories: Went public in 2002; acquired by eBay October 2002 for $1.5 billion An example of a “peer-to-peer” payment system Fills a niche that credit card companies avoided – individuals and small merchants Piggybacks on existing credit card and checking payment systems Weakness: suffers from relatively high levels of fraud Competitors include Western Union (MoneyZap), AOL (AOLQuickcash) and Citibank (C2it)Copyright © 2004 Pearson Education, Inc. Slide 6-3 How PayPal works? 1. Create a PayPal account at the PayPal Web site by filling out a one- page application form and providing credit card or bank account information. Only PayPal is privy to this information, not the receiving party. 2. When using PayPal to pay for a purchase, money is drawn from the credit card or bank account and transmitted to the AutomatedClearingHouse (ACH) Network, a privately operated financial intermediary that tracks and transfers funds between financial institutions. 3. The party who is to receive the payment is notified via e-mail that money is waiting. If the receiving party has a PayPal account, the funds are automatically deposited into the account; If the person does not have a PayPal account, he or she must set one up, and then the money is credited to his or her account. 4. Once the funds are in the PayPal account, the recipient can then transfer them electronically to a checking account, request a paper check, or use PayPal to send the funds to someone else.Copyright © 2004 Pearson Education, Inc. Slide 6-4 2
  3. 3. Why PayPal has grown so fast? The more people who accept and use PayPal, the greater the benefit to the consumer. It works for a company such as eBay, providing purchasers and sellers with a way to short-cut the time-consuming and cumbersome process of mailing checks and money orders and waiting for checks to clear before shipping items. For small merchants selling items on the Web, it is difficult and expensive to obtain the capability to accept credits cards. Moreover, credit companies usually require a physical place of business as a requirement.Copyright © 2004 Pearson Education, Inc. Slide 6-5 PayPal earns money in two ways. Online sellers pay a transaction fee for the service, about the same that a merchant typically pays for a credit card transaction. PayPal earns revenue by collecting the interest earned on consumer funds not yet transferred out of the PayPal system.Copyright © 2004 Pearson Education, Inc. Slide 6-6 3
  4. 4. Types of Payment Systems Cash Checking Transfer Credit Card Stored Value Accumulating BalanceCopyright © 2004 Pearson Education, Inc. Slide 6-7Most Common Payment Systems, Based on NumberOf TransactionsCopyright © 2004 Pearson Education, Inc. Slide 6-8 4
  5. 5. Cash Legal tender defined by a national authority to represent value Most common form of payment in terms of number of transactions Instantly convertible into other forms of value without intermediation of any kind Portable, requires no authentication, and provides instant purchasing power “Free” (no transaction fee), anonymous, low cognitive demands Limitations: easily stolen, limited to smaller transaction, does not provide any float (the period of time between a purchase and actual payment for the purchase).Copyright © 2004 Pearson Education, Inc. Slide 6-9 Checking Transfer Funds transferred directly via a signed draft or check from a consumer’s checking account to a merchant or other individual Most common form of payment in terms of amount spend Can be used for both small and large transactions Some float Not anonymous, require third-party intervention (banks) Introduce security risks for merchants (forgeries, stopped payments), so authentication typically requiredCopyright © 2004 Pearson Education, Inc. Slide 6-10 5
  6. 6. Credit Card Represents an account that extends credit to consumers, permitting consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time Credit card associations – Nonprofit associations (Visa, MasterCard) that set standards for issuing banks Issuing banks – Issue cards and process transactions Processing centers (clearinghouses) – Handle verification of accounts and balancesCopyright © 2004 Pearson Education, Inc. Slide 6-11 Stored Value Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed Examples: Debit cards, gift certificates, prepaid cards, smart cards Debit cards: Immediately debit a checking or other demand-deposit account Peer-to-peer payment systems such as PayPal a variationCopyright © 2004 Pearson Education, Inc. Slide 6-12 6
  7. 7. Accumulating Balance Accounts that accumulate expenditures and to which consumers make period payments Examples: utility, phone, American Express accountsCopyright © 2004 Pearson Education, Inc. Slide 6-13 Current Online Payment Systems Credit cards are dominant form of online payment, accounting for around 80% of online payments in 2002 New forms of electronic payment include: Digital cash Online stored value systems Digital accumulating balance payment systems Digital credit accounts Digital checkingCopyright © 2004 Pearson Education, Inc. Slide 6-14 7
  8. 8. Online Merchants’ Actual andPreferred Online PaymentsCopyright © 2004 Pearson Education, Inc. Slide 6-15 How an Online Credit Card Transaction Works Processed in much the same way that in- store purchases are Major difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions) Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bankCopyright © 2004 Pearson Education, Inc. Slide 6-16 8
  9. 9. How an Online Credit TransactionWorksCopyright © 2004 Pearson Education, Inc. Slide 6-17An online credit card transaction 1. It begins with a purchase (1). 2. A SSL (secure sockets layer) tunnel is used to send credit cared information to the merchant (2). SSL does not authenticate either the merchant or the consumer. The transacting parties have to trust one another. 3. Once the consumer credit card information is received by the merchant, the merchant software contacts a clearing house (3). 4. A clearing house is a financial intermediary that authenticates credit cards and verifies account balance. The clearinghouse contacts the issuing bank to verify the account information (4). 5. Once verified, the issuing bank credits the account of the merchant at the merchant’s bank (usually this occurs at night in a batch process). (5). 6. The debit to the consumer account is transmitted to the consumer in a monthly statement.Copyright © 2004 Pearson Education, Inc. Slide 6-18 9
  10. 10. Limitations of Online Credit Card Payment Systems Security – neither merchant nor consumer can be fully authenticated Cost – for merchants, around 3.5% of purchase price plus transaction fee of 20-30 cents per transaction Social equity – many people do not have access to credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or are considered poor risk)Copyright © 2004 Pearson Education, Inc. Slide 6-19 10

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