Online Monetary Transactions

1. Online Monetary Transactions Kazan State University Instructor: Sasa Dekleva

2. Outline • Credit cart transactions • Transaction processing • Enablers • Fraud • Digital currencies • E-Wallets • Peer-to-peer payment • Smart cards • Micropayments • Business-to-business transactions • E-billing • Payment standards

3. Introduction • Secure electronic funds transfer is crucial to e-commerce • Examination of how individuals and organizations conduct monetary transactions on the Internet • Credit-card transactions, digital cash and e-wallets, smart cards, micropayments and electronic bill presentment and payment • Electronic-payment enablers

4. Credit Card Transactions • Popular form of payment for online purchases • Initial resistance due to security concerns • 95% of retail purchases paid for by credit cards • To accept credit-card payments, a merchant must have a merchant account • Traditional merchant accounts accept onlyPOS (point-of-sale) transactions • Card-not-present (CNP) transaction • Merchant does not see actual card being used in the purchase • The merchants are liable for chargebacks • a transaction for which the card-issuing institution will not be paid

5. Online Credit-Card Transaction • Authorization • The money is available to complete the transaction • Acquiring bank or processor • The bank with which the merchant holds an account • Issuing bank • The bank from which the buyer obtained the credit card, and the credit-card association • Verification • Money issued to merchant after product/service is distributed

6. Online Credit Card Transaction • Step 1 • Consumer makes a purchase at an online store, credit card information received by e-store • Step 2 • Credit card information is sent from the merchant to the acquiring bank • Step 3 and Step 4 • The issuing bank accepts the transaction and the authorization code is sent back • Step 5 • The merchant ships the product and payment is issued

7. Options for Enabling Internet Payments • Develop in-house transaction processing capability by • building the connections with in-house resources • purchasing payment-processing software • Outsource the process to third-party gateway services • Outsource payment processing as part of an outsourced e-commerce solution

8. In-House/Software Solution • Advantages • organization maintains control of the process in-house • is not vulnerable to potential outages by outsourced processors • Disadvantages • high initial costs • implementation takes time • requires in-house e-commerce expertise • requires 24 x 7 system monitoring • Providers of payment processing software include: IBM, Trintech, HP Verifone, PaylinX, Atomic Software, Spyrus and ICVerify and Tellan

9. Outsourced Payment Gateway Solution • Advantages • low start-up costs • is quick to implement • customers pay only for transactions that are processed • requires few in-house resources • will scale as transaction volume increases • technical enhancements are handled by outsourcer • flexibility exists for selecting acquiring bank

10. Outsourced Payment Gateway Solution • Disadvantages • control is in the hands of the outsourcer • vulnerability to possible system outages • may be costly over time when transaction volumes become large • Providers of outsourced Internet payment gateway services include CyberCash, Signio CyberSource, iTransact, Vitessa, SkipJack, ATS Gateway, WorldPay, Authorize.net and First Ecom.com

11. E-Commerce Hosted Solution • Advantages • low initial costs • nonstrategic functions are outsourced • Disadvantages • control and customized applications are limited • transaction costs may be high • Many ISPs and ASPs provide merchant e-commerce and payment hosting solutions and the number is growing rapidly; Earthlink, PSINet, Mindspring and ICOM are just a few

12. Online Credit-Card Fraud • Chargeback • When a credit-card holder claims a purchase was made by an unauthorized individual, or when a purchase was not received • The charges in question are not the responsibility of the credit-card holder • On the Internet, neither a scan of the card nor a signature is registered and the cost is incurred by the merchant

13. Digital Currency • Digital cash • Stored electronically, used to make online electronic payments • Similar to traditional bank accounts • Used with other payment technologies (digital wallets) • Alleviates some online credit-card transactions security fears • Allows those with no credit cards to shop online • Merchants accepting digital-cash payments avoid credit-card transaction fees • Early e-cash methods have failed • First Virtual left the business • DigiCash failed to attract interest in its architecture • CyberCash terminated its CyberCoin e-cash program

14. Digital Currency • Gift cash, often sold as points, can be redeemed at leading shopping sites • An effective way of giving those without credit cards, the ability to make purchases on the Web • Flooz • Points-based rewards • Points are acquired for completing specified tasks including visiting Web sites, registering or buying products • Points can then be redeemed • Beenz

15. E-Wallets • E-wallets • Keep track of your billing and shipping information so that it can be entered with one click at participating sites • Store e-checks, e-cash and credit-card information • Credit-card companies offer a variety of e-wallets • Visa e-wallets • MBNA e-wallet allows one-click shopping at member sites • Entrypoint.com offers a personalized desktop toolbar that includes an e-wallet • A group of e-wallet vendors have standardized technology with Electronic Commerce Modeling Language (ECML)

16. Alternate Consumer Payment Options • Checks or money orders through the mail • Cash on delivery (COD) • Debit cards • Offer an alternative for card-holders to access their accounts • Funds are instantly deducted from checking account • Can withdraw cash from Automatic Teller Machines (ATMs) • Checking-account numbers • Companies such as AmeriNet allow merchants to accept checking-account numbers as a valid form of payment • AmeriNet provides authorization, account settlement, distribution and shipping (fulfillment) and customer service inquiries

17. Peer-To-Peer Transactions • Allow online monetary transfers between consumers • eCash allows the transfer of digital cash via e-mail between two people who have accounts at eCash-enabled banks • PayPal (acquired by X.com) offers X payments • Allows user to send money to anyone with an e-mail address • Can be used to enable credit-card payment for auction items in real time (the transaction begins processing immediately after it is initiated), reducing the risk of fraud or overdrawn accounts • BillPoint(Wells Fargo/eBay venture) • Allows buyers to submit electronic payments to sellers’ checking accounts • Tradesafe.com(partnering with Fleet Bank) larger transactions, B2B • Other providers: ProPay, eMoneyMail (BankOne), eCount, MoneyZap (First Data Corp.), PayMe.com

18. P2P Payments • Two primary P2P methods • Funds are moved from one consumer’s bank account to another at the time of the transaction • cannot be repudiated easily • buyers have no recourse for faulty sales because sellers are not validated by the payment providers • a "buyer beware" situation • Individuals receive credit card payments • P2P credit card payments enable buyers to dispute transactions • sellers are more likely to actually receive payments because a buyer's fear of fraudulent sellers is reduced • payers credit card numbers are hidden from payees • no wait for payments to arrive • fees are higher than for direct account transfers

19. P2P Payments • Most person-to-person payment services work via e-mail • The sender gives a bank-account or credit-card number to the service • The service sends the recipient an e-mail alert • The recipient can then have the money transferred to his or her bank account, or receive a paper check • NYCE's system eliminates these cumbersome procedures • Its solution would enable financial institutions and their customers to make real-time P2P payments via • automated teller machines (ATMs) • Web-accessible personal computers • other devices

20. P2P Providers • X.com (acquired PayPal.com) • ProPay • BillPoint (Wells Fargo/eBay venture) • TradeSafe (partnering with Fleet Bank) • eMoneyMail (BankOne) • eCount • MoneyZap (First Data Corp.) • PayMe.com

21. Smart Cards • Smart card • Card with computer chip embedded on its face, holds more information than ordinary credit card with magnetic strip • Contact smart cards • To read information on smart cards and update information, contact smart cards need to be placed in a smart card reader • Contactless smart cards • Have both a coiled antenna and a computer chip inside, enabling the cards to transmit information • Can require the user to have a password, giving the smart card a security advantage over credit cards • Information can be designated as "read only" or as "no access" • Possibility of personal identity theft

22. Inside a Smart Chip

23. Debit/Credit Cards Electronic Purse Transportation Health Telecommunications Loyalty Pay-TV Network Security ID/Access Business Applications

24. Mobile Communication Applications • Typical Wireless intranet services include: • e-mail • secure access to corporate databases • stock trading • mobile banking • ticketing • shopping • betting • Subscriber identity module is critical; it performs: • network identification and user authentication • additional security layers • storage and execution of user-configurable applications

25. M-Commerce • Leonia Bank of Finland • Offers Internet banking customers SIM cards for their GSM phones with an embedded digital certificate • Consumers to identify themselves as they conduct financial transactions via a mobile phone • Telecom Italia-Mobile • Issued over 3 million smart cards for its customers' handsets last year • SIM cards identify customers • Telecom Italia offers services such as mobile banking, audible e-mail, and computer games

26. Advantages of Using Smart Cards • There are three reasons to move to chip: • fraud can be reduced because: • chips are harder to duplicate than magnetic stripes • the chip can hold customer data that can foil criminals • processing costs are reduced as merchants reduce the frequency of calls into a central database to check a cardholder's credit • new features can be added to smart cards to generate new revenue and to retain customers

27. Micropayments • Credit card transactions are too expensive for payments below $10 • Micropayments • Single-click purchasing • Requires a password and one mouse click • vendors typically receive a 10 to 35 percent share of the purchase price • Several vendors • QPass gathers charges for a user's purchases into a single monthly credit card charge • Cha Technologies uses preloaded accounts, billing an amount (typically $20) to a consumer's credit card account • Trivnet and iPin are signing up ISPs to bill their customers for Internet purchases

28. Visa Cash • A stored value card contains money stored as electronic value • The cardholder inserts the card into a terminal and presses a button to deduct the purchase amount • There is no personal identification number (PIN), no signature, and no identification • Visa Cash issues three types of cards: • disposable (less expensive to manufacture and process) • reloadable • multiapplication (consumers have the advantage of stored value on a credit, debit, or ATM card that they already have) • Visa Cash is promoting Common Electronic Purse Specification (CEPS)

29. Strengths • Offers several security options • Uses existing settlement infrastructure • Offers disposable and reloadable cards • Can be combined with debit, credit, and multiapplication cards • Strength of Visa brand • Reduces cash handling costs • No person-to-person transfers • Physical and virtual world use

30. Limitations • Still Mostly in the Pilot Stage • Investment in Specialized Terminals • Fees for Low-Value Transactions

31. Visa Cash • Accountable versus non-accountable systems • Open versus closed systems • How Visa Cash Works? • The transaction flow depends on the organization supporting Visa Cash • Funds are loaded on the chip; no online authorization is required • Consumer initiates the purchase by inserting a card into a small terminal at the point of sale • The consumer verifies the purchase amount by pushing a single button • At a vending machine, the consumer simply inserts the card at a machine and makes a selection

32. Visa Cash Sample Ranges

33. How Visa Cash Works

34. Business-to-Business (B2B) Transactions • Business-to-business (B2B) transactions • Fastest growing sector of e-commerce payments • Payments are often larger than B2C transactions and involve complex business accounting systems • PaymentechTM • Payment solution provider for Internet point-of-sale transactions • Brick-and-mortar and electronic merchants choose from transaction-processing options including debit cards, credit cards, checks and EBT authorization and settlement • EBT (Electronic Benefits Transfer) • Defined by the USDA as the electronic transfer of government funds to retailers for the benefit of the needy

35. B2B Transactions • eCredit provides real-time, credit-transaction capabilities of B2B size • Clareon facilitates B2B transactions by providing digital payment and settlement services • Payment is digitally signed, secured and authenticated via digital payment authentication (DPA) • Compatible with all enterprise resource planning (ERP) systems and can adapt electronic records for companies, banks and each member of a given transaction

36. B2B Transactions • Electronic consolidation and reconciliation of the business transaction process • Companies can keep track of a transaction from order-to-payment settlement while reducing administrative costs, errors, waste and complexity in the supply chain • eTime Capital • Order-fulfillment providers • Companies attempting to bring supply chain expertise and logistical services to Internet businesses  • Internet-based electronic B2B transactions will augment, but not replace, traditional Electronic Data Interchange (EDI) systems

37. TradeCard • Provides a global B2B e-commerce infrastructure • Cross-border data management and payment • Buyer creates pre-formatted electronic purchase order and presents document to seller • Purchase order data stored electronically in TradeCard database, and electronic invoices and packing slips are produced from data • Uses a patented "data compliance engine" to check documents against original purchase order • If discrepancies are found, concerned parties are notified immediately and can negotiate to resolve the conflict

38. TradeCard • TradeCard awaits delivery confirmation from a third-party logistics services provider (3PL) • Industry terminology for a shipping company • When confirmation is received and compliance met, TradeCard completes the financial transaction by sending request for payment to the buyer’s financial institution • TradeCard enables large-scale and large-dollar commerce without credit-card payment through direct interaction with existing financial institutions

39. Developing Payment Standards • Essential to the success of e-commerce • Businesses offering domestic and international services must have assurance that payment will be received, that it is secure and that it is valid • Open Financial Exchange (OFX) • Developed and presented by Intuit, Microsoft and Checkfree in 1997 • To serve as a standard mechanism for the exchange of financial information

40. Jalda • Developed by Ericsson • An open standard online payment system that connects content providers (anyone selling a good or service on the Internet) with an Internet Payment Provider (IPP) • Accommodates transactions involving small fees • Purchases can be made through the Web and using wireless devices • A PIN code authorizes the transaction

41. Paybox: Pan-European Mobile Payments • Paybox uses the mobile phone as an authorization and confirmation device • Payments can be made to: • e-commerce Web sites • directly to merchants • as cash transfers between individuals • Current business model: • charge a small consumer subscription fee (5 euros per annum) • charge merchants for each transaction with an average commission of around 3 percent

42. Paybox Payment Process A Web Paybox transaction operates as follows: • A user selects a product to purchase on a Web site and opts to pay via Paybox • The user enters his/her mobile phone number as a payment identifier (for users unwilling to disclose their mobile number to merchants, Paybox provides an alternative ID) • The merchant's system contacts Paybox with the payment request and user ID • The Paybox IVR system calls the user's mobile phone and asks the user to enter a PIN • The user enters a PIN number to confirm the payment • After a few seconds the user receives an SMS message as payment confirmation • Payments are debited from the user's bank account • Paybox consolidates merchant payments and forwards them twice a month

43. Paybox Technology • Paybox uses: • a centralized Envox interactive voice response (IVR) system that uses a voice over IP European backbone provided by KPNQwest • application code is built and maintained in-house and runs in an Apache/Tomcat environment hosted on Hewlett-Packard servers using an Oracle database • Technically complex system that has required more than 50 person years of effort to develop to its current state • Support is provided by a combination of e-mail, call centers and Web FAQ pages • Peak performance of this architecture is claimed to be around 1,000 payments per minute • Can be scaled to support future systems exploiting data-enabled phones at rates of up to 10,000 transactions per minute

44. Paybox History and Ownership • Established in Germany in 1999 • In the second half of 2000, expanded into Spain, then Sweden and Austria • United Kingdom planned to follow in late 2001 • In the first half of 2001, there were approximately 300,000 consumer subscribers and 5,000 merchants in Germany with a much smaller number in other countries • Paybox is a private company; 50 percent is owned by Deutsche Bank and 4.8 percent by debitel • Competitors: PayPal (United States), Movilpago and Caixamovil (Spain), Sonera Mobile Pay (Finland), and Mint (Sweden)