Electronic Commerce
COMP3210
Session 7: Processing Payments On-line and the
Fulfilment Phase
Dr. Paul Walcott
2
Dr. Paul Walcott - Department of Computer Science, Mathematics and Physics, University of the West Indies,
Cave Hill Campus, Barbados, W.I.; email pwalcott@uwichill.edu.bb; © 2005
Session Objectives
• The objectives of this session are:
– To analyse the properties of cash, cheques and credit
cards
– To describe the requirements for Internet-based
payment System Models
– To discuss the following electronic payment systems:
• Payment cards
• Paypal
• And E-Wallets
– To discuss the order fulfilment phase
Payment Systems1,2,3
• After creating a Web
site that allows a
customer to choose
an item for purchase,
a payment must be
made before the item
is shipped
http://www.amig.com/cservice/images/payment.jpg
Payment Systems Cont’d
• When we walk into a “real world” store we
basically have three ways to pay for an item.
These are:
– Cash (most common form of payment)
– Cheques
– Payment card (i.e. debit cards, credit cards, smart
cards or automated teller machine (ATM) cards)
• These account for more than 85% of consumer transactions
worldwide
Payment Systems Cont’d
• Cash has some important properties:
– It is convenient since it is easy to use, to carry
and easy to handle in small quantities
– It is widely accepted
– It provides anonymity
– It does not have associated processing fees
– It has no audit trail (maintains privacy)
Payment Systems Cont’d
• There are several problems associated
with the use of cash, however which
include:
– It is easy to lose
– It is difficult to trace (e.g. when used in
criminal activities)
– It introduces a security risk when being
transported
– It is time-consuming to count, organise and
manage
Payment Systems Cont’d
• A Cheque, on the other hand is “… a
written order by an account holder to his
banker to pay a specified sum of money to
the bearer or named recipient.”3
• The process of clearing a cheque takes
three days in the UK 3 and is completed as
follows:
Payment Systems Cont’d
– Day 1: Any cheque collected during the first day will
be processed by the collecting bank that evening
• This information is passed electronically through the Inter
Bank Data Exchange (a secure network) to the paying bank
clearing centre.
– Day 2: Cheques are delivered to an Exchange centre
– Day 3: Cheques are reviewed by the paying bank and
a decision is made whether to pay or return them
• Clearly one of the problems associated with
cheques is the clearing time
Payment Systems Cont’d
• A payment system which is increasing in
popularity in the US is electronic transfer
• There are two tests that should be
considered when transferring money.
These are:
– The ACID Test
– The ICES Test
Payment Systems Cont’d
The Acid Test
• The ACID test has four properties:
– Atomicity: The complete transaction must occur (e.g.
a payment of $50 means that the intended
recipient(s) will receive the $50)
– Consistency: All parties in the transaction must agree
to the exchange
– Isolation: The given transaction must be independent
of all other transactions
– Durability: The exchange must be reversible
Payment Systems Cont’d
The ICES Test
• The ICES test also has four properties:
– Interoperability: Money from a given system must be
able to move back and forth between other systems
(e.g. moving money from system X to cash)
– Conservation: Does the money hold its value over
time (temporal consistency); how easy is it to store
and access (temporal durability)
– Economy: Transaction processing should be cheap
– Scalability: How many users can be handled at the
same time?
Payment Systems Cont’d
Atomicity Consistency Isolation
Cash
Cheque
Credit Card
Yes
Yes
Yes
Yes
Yes
No
No
Yes
No
InterConservatio Economy
operabilit
n
y
Durability
Yes
Yes
Yes
Scalabilit
y
Cash
Yes
No
Yes
Yes
Cheque
No
Yes
No
Yes
Credit Card
No
N/A
No
Yes
Payment Systems Cont’d
• Cash satisfies all the ACID and ICES properties
except conservation since it is not easy to store
and access large amounts (temporal durability)
• Cheques are:
– not isolated since during the clearing of a cheque
someone can withdraw money from the account, or
even stop the cheque.
– not interoperable (since it is difficult for them to move
between different systems)
– Not economical since processing them is expensive
Payment Systems Cont’d
• Credit cards are:
– Not isolated since another transaction might be
processed before a given transaction although the
actual date/time of the transaction was afterwards
– Not interoperable (since it is difficult for them to move
between different systems)
– Not atomic since although the seller is guaranteed
payment the credit card issuer may lose out if the
card is stolen or used fraudulently
– Not economic since credit card processing is
expensive especially for transactions of small value
Payment Systems Cont’d
Electronic Payments
• An e-commerce payment environment requires
a more complex design which includes:
–
–
–
–
–
Payment security
Transaction privacy
System integrity
Customer authentication
The purchaser’s promise to pay
• Primarily, these are security issues which will be
covered in Session 10, “Securing a Web site”
Payment Systems Cont’d
Electronic Payments Cont’d
• Electronic payments are financial transactions
that do not require paper
• Electronic payments are far cheaper than
mailing paper checks
• Cost of billing a person by mail ranges from
US$1 to US$1.50
• Billing a person electronically cost about
US$0.50
• Replacing paper bills also saves on trees
Payment Systems Cont’d
Electronic Payments Cont’d
• Four properties (in addition to the ACID
and ICES Tests) should also be
considered:
– Acceptability: Must be widely accepted, by
customers and merchants alike
– Ease of Integration: Effective Web interface
– Customer base: It should be financially viable
– Ease of use and access
Payment Systems Cont’d
Payment Cards
Payment cards include:
• Credit Cards
• Debit Cards
• Charge Cards
www.paylessbills.com/ credit_cards.htm
Payment Systems Cont’d
Payment Cards Cont’d
• The main categories of payment cards
are:
– Credit cards (e.g. Visa)
– Debit cards
– Charge Cards
Payment Systems Cont’d
Payment Cards Cont’d
• If a merchant wants to sell merchandise
on the Web they must accept credit cards
because:
– It is the most widely accepted form of
payment
– It is the most popular
Payment Systems Cont’d
Payment Cards Cont’d
To be able to accept payments via credit cards:
• The seller must open a merchant account
– A search can be made online for a list of credit and
merchant services (some US banks include Bank of
America and National Data Corporation)
• With this account the seller can accept and
process credit cards
– During processing only the card numbers and
transactions are known (normally authorisation is
provided through a customer signing a payment slip).
Payment Systems Cont’d
Payment Cards Cont’d
To be able to accept payments via credit cards:
• A secure and encrypted line is required to
accept payments
– The most popular solution used is Secure Socket
Layer (SSL) which is built into Netscape Navigator
and Microsoft’s Internet Explore browser
• A shopping cart is also required to allow users to
collect their purchase
– The shopping cart connects to a payment processing
system, calculates costs and taxes and generates a
bill
Payment Systems Cont’d
Payment Cards Cont’d
• The processing of credit cards is
complicated, however the following
diagram highlights the important steps
Payment Systems Cont’d
Payment Cards Cont’d
Payment Systems Cont’d
Payment Cards Cont’d
1. The customer places the order on the
merchant’s Web site (shipping and payment
information is included)
2. The customer verifies the order
3. The encrypted order is sent to the payment
server by the merchant
4. The payment server receives the payment
information, takes it behind a firewall,
reformats it and forwards to to the merchant
bank over a secure, dedicated line
Payment Systems Cont’d
Payment Cards Cont’d
5. The merchant bank forwards an
authorisation request to the issuing bank
for approval or denial and the decision is
sent back to the payment server
6. The approval or denial is communicated
back to the merchant and delivered to
the customer
Payment Systems Cont’d
Payment Cards Cont’d
Some of the characteristics of credit cards include:
• Interest is charged on outstanding balances not
paid off within a given time
• The merchant’s account is credited immediately
• Cardholders are only liable for $50 (by law) if
their card is stolen or lost
• Cardholders can dispute charges or purchases
for the 30-day period after the purchase
• The spending limit is based on credit history
Payment Systems Cont’d
Payment Cards Cont’d
• Several charges are associated with credit card
processing
– Firstly, a set-up fee that might cost a few hundred
dollars (US$)
– A fee of 2-4% of the value of each transaction
processed
– Statement fees
– And a minimum monthly charge of US$20-$50
Payment Systems Cont’d
Payment Cards Cont’d
• Some of the issues associated with credit cards
are:
– They leave a complete audit trail
– They are insecure
• A signature does not get verified which makes it difficult to
assure the identity of a person
– Merchant accounts are difficulty to get from banks
• The banks review financial records and business history
– Credit card are not economical for small payments
Payment Systems Cont’d
Payment Cards Cont’d
• The difficult of securing a merchant
account may be overcome through the use
of third parties who are willing to process
credit cards e.g. iBill (http://ibill.com)
• iBill charges 15% of the company’s total
revenue for a two week period (this charge
will not exceed US$10,000)
Payment Systems Cont’d
Payment Cards Cont’d
• Debit cards
– The sale amount is removed from user’s account and
transferred to the sellers account
– Limited by funds in account plus overdraft (if present)
• Charge cards (e.g. American Express)
– Has no spending limit
– The amount due on the card is due at the end of the
billing period
– They do not accumulate interest payments
Payment Systems Cont’d
Payment Cards Cont’d
• Some vendors provide single-use-cards
which are valid for a single transaction
– A unique card number is issued
– This helps with card details security
Payment Systems Cont’d
Payment Cards Cont’d
• Some advantages of Payment Cards
– In the US card holder’s liability is limited to
US$50 when used fraudulently
– Accepted worldwide
• Currency conversion handled by card issuer
– Ease of use, no special hardware required
Payment Systems Cont’d
Payment Cards Cont’d
• Some disadvantages of Payment Cards
– Service companies charge merchants pertransaction and monthly processing fees
– Price of goods for the consumer might be
slightly higher as a result
• A limit is placed on the minimum amount allowed
to spend (e.g. 5 pounds in the UK)
Other Payment Methods
• For other payment methods read the following
presentations:
– PayPal
http://scitec.uwichill.edu.bb/cmp/online/comp3210/pre
sentations/DanaBabb.ppt
– Metered Payments
http://scitec.uwichill.edu.bb/cmp/online/comp3210/pre
sentations/LeeHarvey.ppt
– E-Wallets
http://scitec.uwichill.edu.bb/cmp/online/comp3210/pre
sentations/ShawnHolder.ppt
The Fulfilment Phase2
• After the customer has paid for the
product(s) then it is the merchant’s
responsibility to deliver it
• The customer generally expects that the
product(s) will be delivered in a quick and
timely fashion
The Fulfilment Phase Cont’d
• The fulfilment process includes:
– Sourcing items from a warehouse
– Packing these items
– Shipping
– Answering questions about the order
• This might be done online through order
management software where the customer is able
to track their order
The Fulfilment Phase Cont’d
• The fulfilment process includes (cont’d):
– Giving the customer a bill or verifying an
online payment
– Determining whether the customer is satisfied
with the delivery
The Fulfilment Phase Cont’d
• From the customer’s point of view
fulfilment is the most critical part of the
shopping experience
• If the customer is dissatisfied with the
fulfilment process, it can really damage the
merchant’s reputation
– E.g. Toys R Us during Christmas 1999 failed
to deliver items; a costly mistake
The Fulfilment Phase Cont’d
• Recognising the importance of fulfilment,
Amazom.com in 1999 spent US$300
million on 3 million square feet of
warehouse space
The Fulfilment Phase Cont’d
• Tax is also a part of the fulfilment phase
• Different countries and even different
States in the USA have different tax rules
– E.g. in New Jersey there is no tax on clothing,
while in California there is
• In some cases (e.g. in the US), state, city
and county tax must be considered
The Fulfilment Phase Cont’d
• To alleviate the tax calculation burden it is
recommended that tax software be used
– E.g. include Taxware and Cybersource
The Fulfilment Phase Cont’d
• One further issue that must be considered is
inventory fulfilment
• Some of the questions that must be asked are:
– Are the required products available?
– Are the products offered for sale (on the Web site)
linked to the inventory?
– Should customers be notified of out-of-stock items?
The Fulfilment Phase Cont’d
• In conclusion, credit cards are the most widely
used method of payment on the Internet
– There are some alternatives for niche markets, such
as Paypal whose focus is primarily C2C e-commerce
and small businesses
• It should also be clear that the order fulfilment
phase is an extremely important part of the
shopping experience
• If a merchant fails to deliver, or fails to deliver on
time then it can badly damage their reputation
References
[1] Schneider, Gary, P., “Electronic Commerce: The second wave”, Thomson
Course Technology, Fifth Annual Edition, 2004
[2] Awad, Elias, M., “Electronic Commerce: From Vision to Fulfillment”,
Second Edition, Prentice Hall, 2004
[3] APACS, “Cheque and Credit Clearing Company”, 2000. Online
document available at
www.apacs.org.uk/about_apacs/htm_files/chequecred.htm