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04-2 E-commerce Payment Systems slides

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  • 1. Chapter 4 Payment SystemsCopyright © 2012 Pearson Education 1
  • 2. Learning Objectivesn Describe the features of traditional payment systemsn Understand the major e-commerce payment mechanismsn Describe the features and functionality of electronic billing presentment and payment systemsCopyright © 2012 Pearson Education Slide 4-76 Types of Payment Systemsn Cashn Checking Transfern Credit Cardn Stored Valuen Accumulating BalanceCopyright © 2012 Pearson Education Slide 4-78 2
  • 3. Cashn Legal tender defined by a national authority to represent valuen Most common form of payment in terms of number of transactionsn Instantly convertible into other forms of value without intermediationn Portable, requires no authenticationn “Free” (no transaction fee), anonymous, low cognitive demandsn Limitations: easily stolen, limited to smaller transaction, does not provide any float (period of time between purchase and actual payment), purchases tend to be final and irreversible unless otherwise agreed by the sellerCopyright © 2012 Pearson Education Slide 4-79 Checking Transfern Funds transferred directly via signed draft/check from a consumer’s checking account to merchant/ other individualn Most common form of payment in terms of amount spentn Second most common payment form in the United States in terms of number of transactionsn Can be used for small and large transactionsn Some float (can take up to 10 days for out-of-state checks to clear)n Not anonymous, requires third-party intervention (banks)n Introduces security risks for merchants (forgeries – so authentication is required – bounced checks, stopped payments),Copyright © 2012 Pearson Education Slide 4-80 3
  • 4. Credit Cardn Account that extends credit to consumers, permits consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one timen Credit card associations: v Nonprofit associations (Visa, MasterCard) that set standards for issuing banks, e.g., CitiBankn Issuing banks: v Issue cards and process transactionsn Processing centers (clearinghouses): v Handle verification of accounts and balancesCopyright © 2012 Pearson Education Slide 4-81 Credit Cardn Are widely accepted as a form of paymentn Reduce risk of theft related with carrying cashn Increase consumer conveniencen Offer consumers considerable “float”n Merchants benefit from increased consumer spending, but pay a hefty transaction fee of 3-5% to the issuing banksn Consumers are liable to $50 for unauthorized transactions occurring before card issuer is notifiedn Consumers can refute or repudiate purchases under certain circumstancesn Limit risk for consumers while raising it for merchants and banksCopyright © 2012 Pearson Education Slide 4-82 4
  • 5. Stored Valuen Accounts created by depositing funds into an account, from which funds are paid out or withdrawn as needed v Examples: Debit cards, gift certificates, prepaid cards, smart cards v Debit cards: Immediately debit a checking or other demand-deposit accountn Peer-to-peer (P2P) payment systems v Variation on stored value systems v e.g. PayPal requires an account with stored value, either a checking account or a credit cardCopyright © 2012 Pearson Education Slide 4-84 Accumulating Balancen Accounts that accumulate expenditures and to which consumers make period payments v Examples: Utility, phone, American Express accounts v Accumulate balances over a specified period and are paid in full at the end of the periodn Evaluating payment systems: v Different stakeholders (consumers, merchants, financial intermediaries, government regulators) have different priorities in payment system dimensions (cost, convenience, refutability, risk, anonymity, etc.)Copyright © 2012 Pearson Education Slide 4-85 5
  • 6. Payment System Stakeholders’ Priorities n Consumers v Low-risk, low-cost, refutable, convenience, reliability n Merchants v Low-risk, low-cost, irrefutable, secure, reliable n Financial intermediaries v Secure, low-risk, maximizing profit n Government regulators v Security, trust, protecting participants and enforcing reportingCopyright © 2012 Pearson Education Slide 4-86Copyright © 2012 Pearson Education Slide 4-87 6
  • 7. Online Payment Methods in Other Parts of the Worldn Europe: mostly bank debit cards and some credit cardsn China: paid by check or cash and pick up at local storen Japan: postal and bank transfers and CODs, using local convenience stores as pickup and payment point; also use accumulated balance accounts with telco for purchases made from home PCsCopyright © 2012 Pearson Education Slide 4-88 Online Credit Card Transactionsn Processed in much the same way that in-store purchases aren Major difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions)n Thus are major reasons that charges can be disputed later by consumersn Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bankCopyright © 2012 Pearson Education Slide 4-89 7
  • 8. How an Online Credit Transaction WorksFigure 4.16, Page 301Copyright © 2012 Pearson Education Slide 4-90 Limitations of Online Credit Card Payment Systemsn Security: v Neither merchant nor consumer can be fully authenticatedn Cost: v For merchants, around 3.5% of purchase price plus transaction fee of 20 – 30 cents per transaction + other setup fees (see next fig.) v Paypal’s fees are even higher 3.5% + 1.5% – 3% v Avoiding this by aggregating purchases made within 24 hrs and charge to credit card account as a total, e.g., Apple’s iTunes Music Store with $0.69 – $1.29 cents/ songn Social equity: v Many people do not have access to credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or who have low incomes)Copyright © 2012 Pearson Education Slide 4-92 8
  • 9. E-commerce Payment Systems (cont.)n Digital wallets v Emulates functionality of wallet by authenticating consumer, storing and transferring value, and securing payment process from consumer to merchant v Early efforts to popularize failed; E.g., MS’s server-side Passport & MSN Wallet terminating in Feb 2005 v Latest effort: Google CheckoutCopyright © 2012 Pearson Education Slide 4-93 Google Checkout Sample ScreenCopyright © 2012 Pearson Education Slide 4-94 9
  • 10. Digital Cash (“e-cash”) n One of the first forms of alternative payment systems n Value storage and exchange using tokens n Not really “cash” v Users deposit money in bank or provide credit card; banks issue digital tokens (unique encrypted number) for denominations of cash, and consumers “spend” these at merchants’ sites; merchants deposit these e-tokens in its bank n Most early examples (DigiCash, First Virtual, and Millicent) have disappeared; protocols and practices too complex n GoldMoney still survive Copyright © 2012 Pearson Education Slide 4-95 Digicash: How First Generation Digital Cash WorkedFigure 6.6, Page 324 Copyright © 2012 Pearson Education Slide 4-96 10
  • 11. Online Stored Value Systemsn Permit consumers to make instant, online payments to merchants and other individualsn Based on value stored in a consumer’s bank, checking, or credit card accountn PayPal most successful system with $91 billion processed in 2010, 98 million usersn Good sides: no personal credit info shared among the users; service can be used by individuals to pay one another even in small amountsn Down sides: high cost and lack consumer protections when fraud occurs or charge is repudiatedCopyright © 2012 Pearson Education Slide 4-98 How PayPal WorksCopyright © 2012 Pearson Education Slide 4-99 11
  • 12. Online Stored Value Systemsn Smart cards: plastic cards with embedded chips storing personal data (e.g., multiple credit card no’s and info about health insurance, transportation, personal ID, bank accounts, and frequent fryer accounts) v Contact : Require physical reader n certain-value retail store gift cards n Mondex – allows users in Europe and Asia to download cash from bank account to the card via Mondex-compatible phone or a card reader connected to a PC, can carry 5 currencies simultaneously and accepted by merchants who have readers installed v Contactless : Use RFID or NFC technology n EZPass – highway toll payment system n Octopus – rechargeable contactless stored value smart card used in Hong Kong to pay public transportation, convenience stores, fast-food restaurants, parking, and POS.Copyright © 2012 Pearson Education Slide 4-100 E-commerce Payment Systems (cont.) n Digital accumulated balance payment: v Users accumulate a debit balance for which they are billed at the end of the month, like a utility or phone bill v PaymentsPlus, BillMeLater n Digital checking: v Extends functionality of existing checking accounts for use online v Based on consumer’s existing checking account v Advantages: do not require consumers to send sensitive info over the Web, cheaper than credit cards for merchants, much faster than paper checks v PayByCheck, EBillMeCopyright © 2012 Pearson Education Slide 4-101 12
  • 13. PayByCheck Sample ScreenCopyright © 2012 Pearson Education Slide 4-102 Mobile Payment Systemsn Use of mobile handsets as payment devices well- established in Europe, Japan, South Korean Japanese mobile payment systems v E-money (stored value charged by credit card or bank accounts) v Mobile debit cards (tied to bank accounts) v Mobile credit cardsn Japan’s NTT DoCoMo launched wireless RFID cell phones and related payment system (FeliCa) in 2004n Not as well established yet in United States v Infrastructure still developing v Apple, Google, RIM developing separate NFC systemsCopyright © 2012 Pearson Education Slide 4-103 13
  • 14. FeliCa System Demo YouTube http://www.youtube.com/watch?v=QGkoFXbC3-4Copyright © 2012 Pearson Education Slide 4-104 Electronic Billing Presentment and Payment (EBPP)n Online payment systems for monthly billsn 30% + of households in 2010 used some EBPP; expected to continue to grown Two competing EBPP business models: v Biller-direct (dominant model): Used by utility, phone, and credit card companies, and individual stores v Consolidator: Third party (financial institution or portal) aggregates consumer’s bills and permits one-stop bill paymentn Both models are supported by EBPP infrastructure providersCopyright © 2012 Pearson Education Slide 4-105 14
  • 15. Copyright © 2012 Pearson Education Slide 4-106Copyright © 2012 Pearson Education Slide 4-107 15