Exploring E-Commerce Payment Options: Pros, Cons, and Methods

1. E-Commerce Payment Options By Laura Kinchen

2. Traditional Payment Methods Payment: The transfer of money from one individual or legal entity to another • Cash • Personal Cheques • Money orders (Bank note) • Credit cards • Debit cards

3. Requirements of E Payment Methods • Enable an honest customer to convince a seller to accept payment • Prevent a dishonest customer from making unauthorized or fraudulent payments • Ensure the privacy of honest participants • Scalable to very large numbers of customers • Integrate with existing and evolving systems

4. Pros and Cons of E-Payment • Pros: • Potential for great flexibility • Low transaction costs • Rapid and diverse purchase power • Cons: • Perfect copying of transactions is possible • Vulnerability to world-wide attack • Lack of anonymity, potential for privacy intrusion

5. E-Payment Methods • Credit and Debit card • Smart card • Digital Currency/Electronic Cash • E-Wallets • Peer-to-Peer Methods • Micro-payments • B2B

6. Credit-Cards • Credit card • Used for the majority of Internet purchases • Has a preset spending limit • Currently most convenient method • Most expensive e-payment mechanism • MasterCard: $0.29 + 2% of transaction value • Disadvantages • Does not work for small amount (too expensive) • Does not work for large amount (too expensive) • Charge card • No spending limit • Entire amount charged due at end of billing period

7. Credit Card Process • Merchants must set up merchant accounts to accept payment cards • Law prohibits charging payment card until merchandise is shipped • Payment card transaction requires: • Merchant to authenticate payment card • Merchant must check with card issuer to ensure funds are available and to put hold on funds needed to make current charge • Settlement occurs in a few days when funds travel through banking system into merchant’s account

8. Using a Credit Card on the Web SOURCE: PAYMENT PROCESSING INC.

9. Credit Card Fraud • Fraud is a major problem for E-commerce • The merchant has no legal proof of purchase unless the buyer uses authentication certificate • Companys such as Visa, nochargeback.com and CyberCash (now VeriSign) are working to limit fraud: • Visa has established high risk business models and best practices info for merchants • Nochargeback.com has lists of fraudlent cards, e-mail addresses and postal addresses

10. Smart Cards • Cards with computer chips embedded on their faces – very common in Europe • Used for health care, transportation, ID, retail, pay phones, loyalty programs, banking machines • Smart card readers interface with card and request user PIN for access • Bank machines can load cards with cash and then merchants can download cash from card • Returns anonymity of purchase to customer

11. Smart Cards • Ticketless travel • Authentication, ID • Medical records • Ecash • Store loyalty programs • Personal profiles • Government • Licenses • Mall parking

12. Pros and Cons of Smart Cards • Advantages: • Atomic, debt-free transactions • Feasible for very small transactions (information commerce) • (Potentially) anonymous • Security of physical storage • (Potentially) currency-neutral • Disadvantages: • Low maximum transaction limit (not suitable for B2B or most B2C) • High Infrastructure costs (not suitable for C2C) • Single physical point of failure (the card) • Not (yet) widely used

13. Digital Currency/E-Cash • Digital cash accounts like traditional bank accounts • Buyers deposit cash in the account and spend it at E-commerce sites (acct # is passed using secure proprietary protocol) • E-commerce merchants can feel sure of payment • Customers do not need a credit card and spending is limited to account balance

14. E-Cash Structure Merchant 1. Consumer buys e-cash from Bank 2. Bank sends e-cash bits to consumer (after charging that amount plus fee) 3. Consumer sends e-cash to merchant 4. Merchant checks with Bank that e-cash is valid (check for forgery or fraud) 5. Bank verifies that e-cash is valid 6. Parties complete transaction: e.g., merchant present e-cash to issuing back for deposit once goods or services are delivered Consumer still has (invalid) e-cash 5 4 Bank 3 2 1 Consumer

15. Pros and Cons of E-cash • Advantages • More efficient, eventually meaning lower prices • Lower transaction costs • Anybody can use it, unlike credit cards, and does not require special authorization • Disadvantages • Tax trail non-existent, like regular cash • Money laundering • Susceptible to forgery

16. E-Wallets • Established by financial institutions in partnership with member E-Commerce sites • Allows customer to submit billing and shipping info with one click at member sites • Also can store e-Cheques, e-Cash and credit card information • Makes shopping easier and more efficient • Eliminates need to repeatedly enter identifying information into forms to purchase • Works in many different stores to speed checkout • Amazon.com one of the first online merchants to eliminate repeat form-filling for purchases

17. Examples of E-Wallets • Agile Wallet • Developed by CyberCash • Allows customers to enter credit card and identifying information once, stored on a central server • Information pops up in supported merchants’ payment pages, allowing one-click payment • Does not support smart cards or CyberCash, but company expects to soon • eWallet • Developed by Launchpad Technologies • Free wallet software that stores credit card and personal information on users’ computer, not on a central server; info is dragged into payment form from eWallet • Information is encrypted and password protected • Works with Netscape and Internet Explorer

18. Person-to-Person Method • Digital cash via email (eCash.com) • PayPal.com – digital payment system • Acts as a trusted third party (e.g. auction purchase) • To send money: • Sender sets up an account and requests to send payment • Sender places payment into the receivers account by credit-card • Reciever is notified of payment via email • Receiver can transfer funds to bank account or request a cheque • There is also a request payment method • FOR FREE .. ? What is the their business model ?

19. Micro-Payments • Long distance phone call charge is an example of a micro-payment • Digital Equipment Corporatiion (DEC) researchers originally envisioned MPs: • Payment per newspaper article ($0.005) • Payment by stock quote ($0.001) • Payment per click (Qpass, Inc)

20. The Fall of Micro-Payments • Overly complicated for customer and business – technology & accounting • Income is very dependent on customer use (difficulties in cashflow management) • Customer anxiety – could act as a deterent • Difficulties in standardization – lost of different approaches, variant media

21. B2B (Business to Business) • B2B transactions are the fastest area of $ growth on the web • B2B transactions are substantially larger than B2C • Paymantech is major provider: • 24/7 availability, all manner of EFT supported • many management tools and reporting methods • Ecredit.com offers real-time automated credit approval and financing • TradeCard offers comprehensive B2B E-commerce facilities on an international scale