Electronic Payment Systems
Objectives of this topic
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At the end of this lesson, you should be able to meet
the following objectives
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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
Introduction
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Collecting revenue from sales of goods and
services is a major activity when running a
business
Challenge in e-commerce
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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
Goods & Services
Merchant
Preferences of Stakeholders
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There are three stakeholders in most payment systems
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Consumer
Merchant
Financial institutions
Each has a different preferences of characteristics of payment
system
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Customers
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Merchant
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Prefer low-cost, low risk, refutable, convenient, reliable payment
mechanism
Prefer low-cost, low risk, irrefutable, secure and reliable payment
mechanism
Financial institution
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Prefer secure payment systems that transfer risks and costs to
consumers and merchants, while maximising transaction fees
payable to themselves
Types of Payment Systems
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Emergence of e-commerce has created new
financial needs cannot be fulfilled by
traditional payment system
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Example
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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)
Types of Payment Systems
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Payment for online purchases
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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
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Digital cash
Online stored value systems
Digital accumulating balance payment systems
Digital credit accounts
Digital checking
Types of Electronic Payment Systems
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Digital cash
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Online stored value systems
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Systems that accumulate small charges and bill the consumer
periodically (suitable for micropayments)
Digital credit accounts
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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
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Systems that generate a private form of currency that can be spent at
e-commerce sites
Systems that extend the online functionality of existing credit card
payment systems
Digital checking
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Systems that create digital checks for e-commerce remittances and
extend the functionality of existing bank checking systems
Credit Card E-Commerce
Transactions
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How online credit card transaction works
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Similar to in-store purchases
Major difference
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Online merchants cannot see actual credit card
No card impression is taken
No signature is available
Categorised as Card Not Present (CNP) transaction
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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
Credit Card E-Commerce
Transactions
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How online credit card transaction
works
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Five parties involved
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Consumer
Merchant
Clearinghouse
Merchant bank
Issuing bank
Credit Card E-Commerce
Transactions
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How online credit card transaction works
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Step one
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Step two
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Once the credit card information is received, the merchant
contacts a clearinghouse
Step three
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When customer wants to pay, a secure tunnel through the
Internet is created using SSL and credit card information is sent
to the merchant
The clearinghouse requests the issuing bank to authenticate
and verify the customer account balance
Step four
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Issuing bank credits merchant account
Credit Card E-Commerce
Transactions
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Secure Electronic Transaction Protocol
(SET)
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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
E-Commerce Digital Payment Systems
Business-2-Customer
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Digital wallets
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Similar function to our traditional wallet where we
keep our identification card (IC), money, credit
cards, receipts, photographs
Functions of a digital wallet
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Authenticate the consumer through the use of
digital certificates or other encryption methods
Store and transfer value
Secure payment process from customer to
merchant
E-Commerce Digital Payment Systems
Business-2-Customer
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Digital cash
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It is not a legal tender (not cash) but a form of
value storage and value exchange
E-Commerce Digital Payment Systems
Business-2-Customer
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Online stored value systems
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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
E-Commerce Digital Payment Systems
Business-2-Customer
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Digital accumulating balance payment
systems
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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
E-Commerce Digital Payment Systems
Business-2-Customer
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Digital checking payment systems
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Seek to extend the functionality of existing
checking accounts for use as online shopping
payment tools
Some systems are software-based (exampleAchex)
Some systems are hardware-based (eCheck) in
the form of a PC card
E-Commerce Digital Payment Systems
Business-2-Business
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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
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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
E-Commerce Digital Payment Systems
Business-2-Business
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Two main types of B-2-B payment
systems
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Systems that replace traditional banks
(Digital checking)
Existing banking systems extending to the
B2B market (balance transfer)
E-Commerce Digital Payment Systems
Business-2-Business
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Electronic billing presentment and payment (EBPP)
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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
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the amount of savings through online billing
Payments can be received more quickly
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