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Ch12 06 28 05


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Ch12 06 28 05

  1. 1. Chapter 12 Electronic Payment Systems
  2. 2. Learning Objectives <ul><li>Understand the shifts that are occurring with regards to non-cash and online payments. </li></ul><ul><li>Discuss the players and processes involved in using credit cards online. </li></ul><ul><li>Discuss the different categories and potential uses of smart cards. </li></ul><ul><li>Discuss various online alternatives to credit card payments and identify under what circumstances they are best used. </li></ul>
  3. 3. Learning Objectives <ul><li>Describe the processes and parties involved in e-checking. </li></ul><ul><li>Describe payment methods in B2B EC, including payments for global trade. </li></ul><ul><li>Discuss electronic bill and invoice presentment and payment. </li></ul><ul><li>Understand the sales tax implications of e-payments. </li></ul>
  4. 4. The Payment Revolution <ul><li>Crucial Factors </li></ul><ul><ul><li>Independence </li></ul></ul><ul><ul><li>Interoperability and portability </li></ul></ul><ul><ul><li>Security </li></ul></ul><ul><ul><li>Anonymity </li></ul></ul><ul><ul><li>Divisibility </li></ul></ul><ul><ul><li>Ease of use </li></ul></ul><ul><ul><li>Transaction fees </li></ul></ul><ul><ul><li>Regulations </li></ul></ul>
  5. 5. Using Payments Cards Online <ul><li>payment card </li></ul><ul><li>Electronic card that contains information that can be used for payment purposes </li></ul><ul><li>Three forms of payment cards: </li></ul><ul><ul><li>Credit cards </li></ul></ul><ul><ul><li>Charge cards </li></ul></ul><ul><ul><li>Debit cards </li></ul></ul>
  6. 6. Using Payments Cards Online <ul><li>Processing Credit Cards Online </li></ul><ul><ul><li>authorization </li></ul></ul><ul><ul><li>Determines whether a buyer’s card is active and whether the customer has sufficient funds </li></ul></ul><ul><ul><li>settlement </li></ul></ul><ul><ul><li>Transferring money from the buyer’s to the merchant’s account </li></ul></ul>
  7. 7. Using Payments Cards Online <ul><li>Processing Credit Cards Online </li></ul><ul><ul><li>payment service provider (PSP) </li></ul></ul><ul><ul><li>A third-party service connecting a merchant’s EC systems to the appropriate acquirers. PSPs must be registered with the various card associations they support </li></ul></ul>
  8. 8. Using Payments Cards Online <ul><ul><li>Key participants in processing credit card payments online include the following: </li></ul></ul><ul><ul><ul><li>Acquiring bank </li></ul></ul></ul><ul><ul><ul><li>Credit card association </li></ul></ul></ul><ul><ul><ul><li>Customer </li></ul></ul></ul><ul><ul><ul><li>Issuing bank </li></ul></ul></ul><ul><ul><ul><li>Merchant </li></ul></ul></ul><ul><ul><ul><li>Payment processing service </li></ul></ul></ul><ul><ul><ul><li>Processor </li></ul></ul></ul>
  9. 9. Using Payments Cards Online <ul><li>Fraudulent Credit Card Transactions </li></ul><ul><ul><li>Address Verification System (AVS) </li></ul></ul><ul><ul><li>Detects fraud by comparing the address entered on a Web page with the address information on file with cardholder’s issuing bank </li></ul></ul>
  10. 10. Using Payments Cards Online <ul><ul><li>card verification number (CVN) </li></ul></ul><ul><ul><li>Detects fraud by comparing the verification number printed on the signature strip on the back of the card with the information on file with the cardholder’s issuing bank </li></ul></ul>
  11. 11. Using Payments Cards Online <ul><li>Fraudulent Credit Card Transactions </li></ul><ul><ul><li>Additional tools used to combat fraud include: </li></ul></ul><ul><ul><ul><li>Manual review </li></ul></ul></ul><ul><ul><ul><li>Fraud screens and decision models </li></ul></ul></ul><ul><ul><ul><li>Negative files </li></ul></ul></ul><ul><ul><ul><li>Card association payer authentication services </li></ul></ul></ul>
  12. 12. Using Payments Cards Online <ul><li>virtual credit card </li></ul><ul><li>An e-payment system in which a credit card issuer gives a special transaction number that can be used online in place of regular credit card numbers </li></ul>
  13. 13. Smart Cards <ul><li>smart card </li></ul><ul><li>An electronic card containing an embedded microchip that enables predefined operations or the addition, deletion, or manipulation of information on the card </li></ul>
  14. 14. Exhibit 12.2 Smart Card
  15. 15. Smart Cards <ul><li>Types of Smart Cards </li></ul><ul><ul><li>contact card </li></ul></ul><ul><ul><li>A smart card containing a small gold plate on the face that when inserted in a smart card reader makes contact and passes data to and from the embedded microchip </li></ul></ul>
  16. 16. Smart Cards <ul><li>Types of Smart Cards </li></ul><ul><ul><li>contactless (proximity) card </li></ul></ul><ul><ul><li>A smart card with an embedded antenna, by means of which data and applications are passed to and from a card reader unit or other device without contact between the card and the card reader </li></ul></ul>
  17. 17. Smart Cards <ul><ul><li>smart card reader </li></ul></ul><ul><ul><li>Activates and reads the contents of the chip on a smart card, usually passing the information on to a host system </li></ul></ul><ul><ul><li>smart card operating system </li></ul></ul><ul><ul><li>Special system that handles file management, security, input/output (I/O), and command execution and provides an application programming interface (API) for a smart card </li></ul></ul>
  18. 18. Smart Cards <ul><li>Applications of Smart Cards </li></ul><ul><ul><li>Retail Purchases </li></ul></ul><ul><ul><ul><li>e-purse </li></ul></ul></ul><ul><ul><ul><li>Smart card application that loads money from a card holder’s bank account onto the smart card’s chip </li></ul></ul></ul><ul><ul><ul><li>Common Electronic Purse Specification (CEPS) </li></ul></ul></ul><ul><ul><ul><li>Standards governing the operation and interoperability of e-purse offerings </li></ul></ul></ul><ul><ul><li>Transit Fares </li></ul></ul><ul><ul><li>E-Identification </li></ul></ul>
  19. 19. Smart Cards <ul><li>Applications of Smart Cards </li></ul><ul><ul><li>Transit Fares </li></ul></ul><ul><ul><ul><li>To eliminate the inconvenience of multiple types of tickets used in public transportation, most major transit operators in the United States are implementing smart card fare-ticketing systems </li></ul></ul></ul><ul><ul><li>E-Identification </li></ul></ul><ul><ul><ul><li>Because they have the capability to store personal information, including pictures, biometric identifiers, digital signatures, and private security keys, smart cards are being used in a variety of identification, access control, and authentication applications </li></ul></ul></ul>
  20. 20. Smart Cards <ul><li>Applications of Smart Cards in Health Care </li></ul><ul><ul><li>Storing vital medical information in case of emergencies </li></ul></ul><ul><ul><li>Preventing patients from obtaining multiple prescriptions from different physicians </li></ul></ul><ul><ul><li>Verifying a patient’s identity and insurance coverage </li></ul></ul><ul><ul><li>Speeding up the hospital or emergency room admissions process </li></ul></ul>
  21. 21. Smart Cards <ul><li>Applications of Smart Cards in Health Care </li></ul><ul><ul><li>Storing vital medical information in case of emergencies </li></ul></ul><ul><ul><li>Providing medical practitioners with secure access to a patient’s complete medical history </li></ul></ul><ul><ul><li>Speeding up the payment and claims process </li></ul></ul><ul><ul><li>Enabling patients to access their medical records over the Internet </li></ul></ul>
  22. 22. Smart Cards <ul><li>Securing Smart Cards </li></ul><ul><ul><li>Smart cards store or provide access to either valuable assets or to sensitive information </li></ul></ul><ul><ul><li>Because of this, they must be secured against theft, fraud, or misuse </li></ul></ul><ul><ul><li>The possibility of hacking into a smart card is classified as a “class 3” attack, which means that the cost of compromising the card far exceeds the benefits </li></ul></ul>
  23. 23. Stored-Value Cards <ul><li>stored-value card </li></ul><ul><li>A card that has monetary value loaded onto it and that is usually rechargeable </li></ul>
  24. 24. E-Micropayments <ul><li>e-micropayments </li></ul><ul><li>Small online payments, typically under US $10 </li></ul><ul><li>Companies with e-micropayment products: </li></ul><ul><ul><li>BitPass ( ) </li></ul></ul><ul><ul><li>Paystone ( ) </li></ul></ul><ul><ul><li>PayLoadz ( ) </li></ul></ul><ul><ul><li>Peppercoin ( ) </li></ul></ul>
  25. 25. E-Checking <ul><li>e-check </li></ul><ul><li>A legally valid electronic version or representation of a paper check </li></ul><ul><li>Automated Clearing House (ACH) Network </li></ul><ul><li>A nationwide batch-oriented electronic funds transfer system that provides for the interbank clearing of electronic payments for participating financial institutions </li></ul>
  26. 26. E-Checking <ul><li>Benefits of e-check processing: </li></ul><ul><ul><li>It reduces the merchant’s administrative costs by providing faster and less paper-intensive collection of funds </li></ul></ul><ul><ul><li>It improves the efficiency of the deposit process for merchants and financial institutions </li></ul></ul>
  27. 27. E-Checking <ul><li>Benefits of e-check processing: </li></ul><ul><ul><li>It speeds the checkout process for consumers </li></ul></ul><ul><ul><li>It provides consumers with more information about their purchases on their account statements </li></ul></ul><ul><ul><li>It reduces the float period and the number of checks that bounce because of insufficient funds (NSFs) </li></ul></ul>
  28. 28. Exhibit 12.3 Processing E-Checks with Authorize.Net
  29. 29. Electronic Bill Presentment and Payment <ul><li>electronic bill presentment and payment (EBPP) </li></ul><ul><li>Presenting and enabling payment of a bill online. Usually refers to a B2C transaction </li></ul>
  30. 30. Exhibit 12.4 E-Bill Presentment
  31. 31. Electronic Bill Presentment and Payment <ul><li>Types of E-Billing </li></ul><ul><ul><li>Online banking </li></ul></ul><ul><ul><li>Biller direct </li></ul></ul><ul><ul><li>Bill consolidator </li></ul></ul>
  32. 32. Electronic Bill Presentment and Payment <ul><li>Advantages of E-Billing </li></ul><ul><ul><li>Reduction in expenses related to billing and processing payments </li></ul></ul><ul><ul><li>Electronic advertising inserts can be customized to the individual customer </li></ul></ul><ul><ul><li>Reduces customer’s expenses </li></ul></ul>
  33. 33. Exhibit 12.5 E-Billing Process for Single Biller
  34. 34. Exhibit 12.6 E-Billing Processes for Bill Consolidator
  35. 35. B2B Electronic Payments <ul><li>Current B2B Payment Practices </li></ul><ul><ul><li>Financial supply chains of most companies are characterized by inefficiencies created by a number of factors, including: </li></ul></ul><ul><ul><ul><li>The time required to create, transfer, and process paper documentation </li></ul></ul></ul><ul><ul><ul><li>The cost and errors associated with manual creation and reconciliation of documentation </li></ul></ul></ul><ul><ul><ul><li>The lack of transparency in inventory and cash positions when goods are in the supply chain </li></ul></ul></ul><ul><ul><ul><li>Disputes arising from inaccurate or missing data </li></ul></ul></ul><ul><ul><ul><li>Fragmented point solutions that do not address the complete end-to-end processes of the trade cycle </li></ul></ul></ul>
  36. 36. B2B Electronic Payments <ul><li>Enterprise Invoice Presentment and Payment </li></ul><ul><ul><li>enterprise invoice presentment and payment (EIPP) </li></ul></ul><ul><ul><li>Presenting and paying B2B invoices online </li></ul></ul><ul><ul><li>EIPP Models </li></ul></ul><ul><ul><ul><li>Seller Direct </li></ul></ul></ul><ul><ul><ul><li>Buyer Direct </li></ul></ul></ul><ul><ul><ul><li>Consolidator </li></ul></ul></ul>
  37. 37. B2B Electronic Payments <ul><ul><li>EIPP Options </li></ul></ul><ul><ul><ul><li>ACH Network </li></ul></ul></ul><ul><ul><ul><li>purchasing cards (p-cards) </li></ul></ul></ul><ul><ul><ul><li>Special-purpose payment cards issued to a company’s employees to be used solely for purchasing nonstrategic materials and services up to a preset dollar limit </li></ul></ul></ul>
  38. 38. B2B Electronic Payments <ul><ul><ul><li>Fedwire or Wire Transfer </li></ul></ul></ul><ul><ul><ul><li>letter of credit (LC) </li></ul></ul></ul><ul><ul><ul><li>A written agreement by a bank to pay the seller, on account of the buyer, a sum of money upon presentation of certain documents </li></ul></ul></ul>
  39. 39. Exhibit 12.7 Clareon Online Transaction Service
  40. 40. The Sales Tax Issue <ul><li>Because of the complexities, many online businesses (B2C and B2B) rely on specialized third-party software and services to calculate the taxes associated with a sale </li></ul>
  41. 41. Managerial Issues <ul><li>What B2C payment methods should we use? </li></ul><ul><li>What B2B payment methods should we use? </li></ul><ul><li>Should we use an in-house payment mechanism or outsource it? </li></ul><ul><li>How secure are e-payments? </li></ul>
  42. 42. Summary <ul><li>Payment revolution. </li></ul><ul><li>Using payment cards online. </li></ul><ul><li>Smart cards. </li></ul><ul><li>Stored-value cards. </li></ul><ul><li>E-micropayments. </li></ul><ul><li>E-checking. </li></ul><ul><li>Electronic bill presentment and payment. </li></ul><ul><li>B2B electronic payments. </li></ul><ul><li>Tax issues. </li></ul>