Electronic Payment Systems

1. Electronic Payment Systems

2. Objectives of this topic • At the end of this lesson, you should be able to meet the following objectives • Describe the types of electronic payment systems • Explain how online credit card payment systems work and discuss their current limitations • Understand the features and functionality of digital wallets • Describe the features and functionality of the major types of digital payment systems in the B2C arena • Describe the features and functionality of the major types of digital payment systems in the B2B arena • Describe the features and functionality of electronic billing presentment and payment systems

3. Introduction • Collecting revenue from sales of goods and services is a major activity when running a business • Challenge in e-commerce • For businesses to reliably and efficiently collect revenue from customers online • Reliably and trustworthy way for customers to pay for goods and services online Customer Money Merchant Goods & Services

4. Preferences of Stakeholders • There are three stakeholders in most payment systems • Consumer • Merchant • Financial institutions • Each has a different preferences of characteristics of payment system • Customers • Prefer low-cost, low risk, refutable, convenient, reliable payment mechanism • Merchant • Prefer low-cost, low risk, irrefutable, secure and reliable payment mechanism • Financial institution • Prefer secure payment systems that transfer risks and costs to consumers and merchants, while maximising transaction fees payable to themselves

5. Types of Payment Systems • Emergence of e-commerce has created new financial needs cannot be fulfilled by traditional payment system • Example • Auctions between customers require a peer-to-peer payment method via e-mail • Some types of online products require micropayments where price of merchandise is very small (RM 1.99 for a ring tone, and RM 4.99 monthly subscription fee to get daily information of commodity prices)

6. Types of Payment Systems • Payment for online purchases • Credit cards most popular in U.S. • Checks and cash-on-delivery popular in Europe • Bank transfers, cash-on-delivery popular in Japan • New forms of payment systems • Digital cash • Online stored value systems • Digital accumulating balance payment systems • Digital credit accounts • Digital checking

7. Types of Electronic Payment Systems • Digital cash • Systems that generate a private form of currency that can be spent at e-commerce sites • Online stored value systems • Systems that rely on prepayments, debit cards, or checking accounts to create value in an account that can be used for e-commerce shopping • Digital accumulating balance payment systems • Systems that accumulate small charges and bill the consumer periodically (suitable for micropayments) • Digital credit accounts • Systems that extend the online functionality of existing credit card payment systems • Digital checking • Systems that create digital checks for e-commerce remittances and extend the functionality of existing bank checking systems

8. Credit Card E-Commerce Transactions • How online credit card transaction works • Similar to in-store purchases • Major difference • Online merchants cannot see actual credit card • No card impression is taken • No signature is available • Categorised as Card Not Present (CNP) transaction • CNP is the major reason why customer can dispute charges • Merchant face the risk of transactions disallowed and reversed even when goods have already been shipped or digitally downloaded

9. Credit Card E-Commerce Transactions • How online credit card transaction works • Five parties involved • Consumer • Merchant • Clearinghouse • Merchant bank • Issuing bank

10. Credit Card E-Commerce Transactions • How online credit card transaction works • Step one • When customer wants to pay, a secure tunnel through the Internet is created using SSL and credit card information is sent to the merchant • Step two • Once the credit card information is received, the merchant contacts a clearinghouse • Step three • The clearinghouse requests the issuing bank to authenticate and verify the customer account balance • Step four • Issuing bank credits merchant account

11. Credit Card E-Commerce Transactions • Secure Electronic Transaction Protocol (SET) • An open standard for the e-commerce industry developed and offered by MasterCard and Visa as a way to facilitate and encourage improved security for credit card transactions

12. E-Commerce Digital Payment SystemsBusiness-2-Customer • Digital wallets • Similar function to our traditional wallet where we keep our identification card (IC), money, credit cards, receipts, photographs • Functions of a digital wallet • Authenticate the consumer through the use of digital certificates or other encryption methods • Store and transfer value • Secure payment process from customer to merchant

13. E-Commerce Digital Payment SystemsBusiness-2-Customer • Digital cash • It is not a legal tender (not cash) but a form of value storage and value exchange

14. E-Commerce Digital Payment SystemsBusiness-2-Customer • Online stored value systems • Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account • Some systems require the user to sign up and transfer money from their credit card accounts into an online stored value account

15. E-Commerce Digital Payment SystemsBusiness-2-Customer • Digital accumulating balance payment systems • Allows users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the month • Ideal for purchasing digital products such as music tracks, chapters of books, articles from newspapers

16. E-Commerce Digital Payment SystemsBusiness-2-Customer • Digital checking payment systems • Seek to extend the functionality of existing checking accounts for use as online shopping payment tools • Some systems are software-based (example-Achex) • Some systems are hardware-based (eCheck) in the form of a PC card

17. E-Commerce Digital Payment SystemsBusiness-2-Business • Most payment systems of B-2-B are similar to those in B-2-C • However, they pose special challenges and are much more complex than B-2-C payments • Many business documents may be needed to facilitate the transaction • Must link to existing ERP systems that integrate inventory, production, shipping, and other corporate data, and into EDI systems • Larger size of transaction than B-2-C • More frequent than B-2-C

18. E-Commerce Digital Payment SystemsBusiness-2-Business • Two main types of B-2-B payment systems • Systems that replace traditional banks (Digital checking) • Existing banking systems extending to the B2B market (balance transfer)

19. E-Commerce Digital Payment SystemsBusiness-2-Business • Electronic billing presentment and payment (EBPP) • New forms of online payment systems for monthly bills • Average cost of $3 to process bills physically but only 33 cents to process electronically • EBPP services allow consumers to view bills electronically and pay them through EFT from banks or credit card accounts • Market for EBPP will grow once it is realised • the amount of savings through online billing • Payments can be received more quickly

20. End of Notes Please go back to the beginning of this slide presentation and go through the topic objectives to evaluate whether you have achieved them If you have not, please re-read the notes until you achieve all the objectives