Traditional and Electronic
Payment Methods
Chapter 3
Money and Banking
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Money serves as a measure of value, a
medium of exchange
Money exists in a number of forms
Cash
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Coin, paper money
Near Cash
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Checks, drafts, money orders, credit cards
Check Processing
Encryption/Decryption of Transactions
Check
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A written order on a bank or other financial
institution to pay money belonging to the
signer to the presenter of the check
The most popular offline settlement method
Good for e-commerce?
What is a cashier’s check?
Checks have been around how long?
Money Order
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An order for the payment of a specified
amount of money
Usually issued by the post office or a bank or
other financial institution
Popular with people who do not have bank
accounts or where checks are not acceptable
Good for e-commerce?
Credit Card
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Used to settle charges for goods or services
Card holders pay their bills monthly and pay
interest on unpaid account balances
Issued by banks or financial institutions
Visa and MasterCard are clearinghouses for
member institutions
Other credit card types?
Charge Cards
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Similar to credit cards
Customer pays bill in full each month
AMEX card is a popular example
Diners Club another example
Debit Cards
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Similar to credit card in operation from
merchant’s perspective
Similar to a check from customer’s
perspective
Pros & Cons
Payment Processing
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A merchant must have
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A merchant account
Payment processing software
Procedures to protect customers and guard
against fraud
Merchant Account
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An account with a financial institution to
accept charges
Must apply for account and be accepted
Supply bank with financial information (p. 73)
about anticipated transaction volume and
type of business
The bank charges for this service
Merchant Account
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Chargebacks result from customer refusal to
pay a charge for a number of reasons,
including returned goods, billing errors, and
fraudulent charges.
Chargebacks can be expensive and the bank
may charge higher fees for higher risk
enterprises and “situations.”
High Risk Factors
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Customer not present (telephone and
Internet sales)
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High risk products or services (gambling,
“politically incorrect,” or non-traditional
products)
Payment Processing Software
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Software to facilitate authorization of
customer charges to credit or debit charge
account.
Alternative is to outsource to 3rd party for a
fee.
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Authorize.Net
CyberCash
ICVerify
Verification Software
Security for Charge Settlement
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Security must be provided for customer
transaction.
Secure Sockets Layer (SSL) technology
provides encrypted transmission of data
between customer and a secure server.
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Encryption terms p. 76
Authentication
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SSL requires a digital certificate that verifies
a sender’s identity.
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An e-business obtains its certificate from a
certificate authority such as VeriSign.
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Secure Electronic Transactions (SET) – p. 77
E-wallet – p. 78
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A Digital Certificate
Fraud
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Credit card fraud is a major problem
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As high as 1.15% of online transactions were found
to be fraudulent vs. .06-.09% traditional
Charge backs
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Online CC fraud 12x more than traditional
Online – 64% ; Traditional – 44%
Security: how much do you want?
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Too much will cost sales but reduce fraud to nearly nothing,
and too little will result in higher losses.
Security Measures – p. 79
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Verify validity of charge.
Ship via currier and require receipt signature.
Require and verify the complete address and
telephone number of customer.
Reject orders from anonymous email
addresses.
Disposable credit card numbers
Electronic Payment Forms
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Various alternative payment forms include:
Electronic Cash
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Electronic checks
Smart cards
Person-to-person payment systems
2001 – CC 95% of online purchases
Projected 2003 – CC 75-81% - reality?
Electronic Cash
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Variety of products available
Allow for online purchases without a credit
account
Allow customer to avoid sharing account
data while guaranteeing payment to vendor
Examples
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Beenz
Cybergold
Flooz
Smart Cards
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A store value card
Popular in Europe (Mondex); not yet
common in North America
Needs special equipment to work with a PC
Electronic Checks
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An electronic version of a paper check
Essentially a form of Electronic Funds
Transfer (EFT)
$.50 vs. $.75-$3.00 processing costs
Scanned via MICR – account #, routing #, &
check serial #
www.paybycheck.com
Person to Person Systems
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A way to send money, a funds transfer
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www.paypal.com
Person to Person Payment
Person to Person (P2P) System