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E-commerce business. technology. society. Second Edition Kenneth C. Laudon Carol Guercio Traver 1 E-commerce business. technology. society. Second Edition Kenneth C. Laudon Carol Guercio Traver 1

Chapter 6 E-commerce Payment Systems Copyright © 2004 Pearson Education, Inc. 2 Chapter 6 E-commerce Payment Systems Copyright © 2004 Pearson Education, Inc. 2

Learning Objectives n n n Describe the features of traditional payment systems Discuss the Learning Objectives n n n Describe the features of traditional payment systems Discuss the current limitations of online credit card payment systems Understand the features and functionality of digital wallets Describe the features and functionality of the major types of digital payment systems in the B 2 C arena Describe the features and functionality of the major types of digital payment systems in the B 2 B arena Describe the features and functionality of electronic billing presentment and payment systems Copyright © 2004 Pearson Education, Inc. 3

Pay. Pal: The Money’s in the E-mail Page 305 4 Pay. Pal: The Money’s in the E-mail Page 305 4

Pay. Pal: The Money’s in the E-mail n n n One of e-commerce’s major Pay. Pal: The Money’s in the E-mail n n n One of e-commerce’s major success stories: n Went public in 2002; acquired by e. Bay October 2002 for $1. 5 billion An example of a “peer-to-peer” payment system Fills a niche that credit card companies avoided – individuals and small merchants Piggybacks on existing credit card and checking payment systems Weakness: suffers from relatively high levels of fraud Competitors include Western Union (Money. Zap), AOL (AOLQuickcash) and Citibank (C 2 it) Copyright © 2004 Pearson Education, Inc. 5

Types of Payment Systems n Cash n Checking Transfer n Credit Card n Stored Types of Payment Systems n Cash n Checking Transfer n Credit Card n Stored Value n Accumulating Balance Copyright © 2004 Pearson Education, Inc. 6

Cash n n n Legal tender defined by a national authority to represent value Cash n n n Legal tender defined by a national authority to represent value Most common form of payment in terms of number of transactions Instantly convertible into other forms of value without intermediation of any kind Portable, requires no authentication, and provides instant purchasing power “Free” (no transaction fee), anonymous, low cognitive demands Limitations: easily stolen, limited to smaller transaction, does not provide any float Copyright © 2004 Pearson Education, Inc. 7

Checking Transfer n n n Funds transferred directly via a signed draft or check Checking Transfer n n n Funds transferred directly via a signed draft or check from a consumer’s checking account to a merchant or other individual Most common form of payment in terms of amount spend Can be used for both small and large transactions Some float Not anonymous, require third-party intervention (banks) Introduce security risks for merchants (forgeries, stopped payments), so authentication typically required Copyright © 2004 Pearson Education, Inc. 8

Most Common Payment Systems, Based on Number Of Transactions Figure 6. 1, Page 309 Most Common Payment Systems, Based on Number Of Transactions Figure 6. 1, Page 309 9

Most Common Payment Systems, Based on Dollar Amount Figure 6. 2, Page 310 10 Most Common Payment Systems, Based on Dollar Amount Figure 6. 2, Page 310 10

Credit Card Represents an account that extends credit to consumers, permitting consumers to purchase Credit Card Represents an account that extends credit to consumers, permitting consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time n Credit card associations – Nonprofit associations (Visa, Master. Card) that set standards for issuing banks n Issuing banks – Issue cards and process transactions n Processing centers (clearinghouses) – Handle verification of accounts and balances n Copyright © 2004 Pearson Education, Inc. 11

Stored Value Accounts created by depositing funds into an account and from which funds Stored Value Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed n Examples: Debit cards, gift certificates, prepaid cards, smart cards n Debit cards: Immediately debit a checking or other demand-deposit account n Peer-to-peer payment systems such as Pay. Pal a variation n Copyright © 2004 Pearson Education, Inc. 12

Accumulating Balance Accounts that accumulate expenditures and to which consumers make period payments n Accumulating Balance Accounts that accumulate expenditures and to which consumers make period payments n Examples: utility, phone, American Express accounts n Copyright © 2004 Pearson Education, Inc. 13

Dimensions of Payment Systems Table 6. 1, Page 313 14 Dimensions of Payment Systems Table 6. 1, Page 313 14

Current Online Payment Systems Credit cards are dominant form of online payment, accounting for Current Online Payment Systems Credit cards are dominant form of online payment, accounting for around 80% of online payments in 2002 n New forms of electronic payment include: § Digital cash § Online stored value systems § Digital accumulating balance payment systems § Digital credit accounts § Digital checking n Copyright © 2004 Pearson Education, Inc. 15

Online Merchants’ Actual and Preferred Online Payments Figure 6. 3, Page 315 16 Online Merchants’ Actual and Preferred Online Payments Figure 6. 3, Page 315 16

How an Online Credit Card Transaction Works Processed in much the same way that How an Online Credit Card Transaction Works Processed in much the same way that instore purchases are n Major difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions) n Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bank n Copyright © 2004 Pearson Education, Inc. 17

How an Online Credit Transaction Works Figure 6. 4, Page 317 18 How an Online Credit Transaction Works Figure 6. 4, Page 317 18

Limitations of Online Credit Card Payment Systems Security – neither merchant nor consumer can Limitations of Online Credit Card Payment Systems Security – neither merchant nor consumer can be fully authenticated n Cost – for merchants, around 3. 5% of purchase price plus transaction fee of 20 -30 cents per transaction n Social equity – many people do not have access to credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or are considered poor risk) n Copyright © 2004 Pearson Education, Inc. 19

Insight on Society: The Right to Shop Digital Divide: Some groups don’t have same Insight on Society: The Right to Shop Digital Divide: Some groups don’t have same access to computers and Internet that others do n Digital “have nots” include: n Households with incomes below $35, 000 n Those without college educations n People living in rural areas n African-Americans and Hispanics n Seniors over 65 n Disabled n Most recent Department of Commerce study --most of above groups gaining access to computers and Internet due to falling computer prices and free or low cost ISPs n But without credit cards, still hard for people to shop Copyright © 2004 Pearson Education, Inc. n 20

The SET (Secure Electronic Transaction) Protocol Authenticates cardholder and merchant identity through use of The SET (Secure Electronic Transaction) Protocol Authenticates cardholder and merchant identity through use of digital certificates n An open standard developed by Master. Card and Visa n Transaction process similar to standard online credit card transaction, with more identity verification n Thus far, has not caught on much, due to costs involved in integrating SET into existing systems, and lack of interest among consumers n Copyright © 2004 Pearson Education, Inc. 21

How SET Transactions Work Figure 6. 5, Page 320 22 How SET Transactions Work Figure 6. 5, Page 320 22

Digital Wallets Concept of digital wallet relevant to many of the new digital payment Digital Wallets Concept of digital wallet relevant to many of the new digital payment systems n Seeks to emulate the functionality of traditional wallet n Most important functions: § Authenticate consumer through use of digital certificates or other encryption methods § Store and transfer value § Secure payment process from consumer to merchant n Two major categories: § Client-based digital wallets – Gator. com, Master. Card Wallet § Server-based digital wallets – MSN Wallet n Copyright © 2004 Pearson Education, Inc. 23

Promised Functionality of Digital Wallets Table 6. 2, Page 323 24 Promised Functionality of Digital Wallets Table 6. 2, Page 323 24

Types of Digital Wallets Figure 6. 5, Page 324 25 Types of Digital Wallets Figure 6. 5, Page 324 25

Digital Cash One of the first forms of alternative payment systems n Not really Digital Cash One of the first forms of alternative payment systems n Not really “cash” – rather, are forms of value storage and value exchange that have limited convertibility into other forms of value, and require intermediaries to convert n Many of early examples have disappear; concepts survive as part of P 2 P payment systems n Copyright © 2004 Pearson Education, Inc. 26

Examples of Digital Cash Table 6. 3, Page 326 27 Examples of Digital Cash Table 6. 3, Page 326 27

Digicash: How First Generation Digital Cash Worked Figure 6. 7, Page 327 28 Digicash: How First Generation Digital Cash Worked Figure 6. 7, Page 327 28

Online Stored Value Systems Permit consumers to make instant, online payments to merchants and Online Stored Value Systems Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account n Rely on value stored in a consumer’s bank, checking or credit card account n Copyright © 2004 Pearson Education, Inc. 29

Online Stored Value Systems Table 6. 4, Page 328 30 Online Stored Value Systems Table 6. 4, Page 328 30

How Ecount. com Works: A Stored Value System Figure 6. 8, Page 330 31 How Ecount. com Works: A Stored Value System Figure 6. 8, Page 330 31

Insight on Business: Rocketcash. com An example of an online stored value system n Insight on Business: Rocketcash. com An example of an online stored value system n Aimed at teenagers n Funds can be deposited in a Rocket. Cash account, which functions like a credit card and allows teens to buy products online n Copyright © 2004 Pearson Education, Inc. 32

Smart Cards as Stored Value Systems Another kind of stored value system based on Smart Cards as Stored Value Systems Another kind of stored value system based on credit-card sized plastic cards that have embedded chips that store personal information n Two types: § Contactless n Examples: Mondex, American Express Blue n Copyright © 2004 Pearson Education, Inc. 33

Digital Accumulating Balance Payment Systems Allows users to make micropayments and purchases on the Digital Accumulating Balance Payment Systems 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 n Examples: Qpass and i. Pin n Copyright © 2004 Pearson Education, Inc. 34

Digital Accumulating Balance Payment Systems Table 6. 5, Page 332 35 Digital Accumulating Balance Payment Systems Table 6. 5, Page 332 35

Digital Credit Card Payment Systems Extend the functionality of existing credit cards for use Digital Credit Card Payment Systems Extend the functionality of existing credit cards for use as online shopping payment tools n Focus specifically on making use of credit cards safer and more convenient for online merchants and consumers n Example: e. Charge n Copyright © 2004 Pearson Education, Inc. 36

Digital Credit Card Payment Systems Table 6. 6, Page 333 37 Digital Credit Card Payment Systems Table 6. 6, Page 333 37

How a Digital Credit Card Payment Systems Works: e. Charge Figure 6. 9, Page How a Digital Credit Card Payment Systems Works: e. Charge Figure 6. 9, Page 334 38

Digital Checking Payment Systems Extend the functionality of existing checking accounts for use as Digital Checking Payment Systems Extend the functionality of existing checking accounts for use as online shopping payment tools n Examples: e. Check, Achex (Money. Zap) n Copyright © 2004 Pearson Education, Inc. 39

Digital Checking Payment Systems Table 6. 7, Page 335 40 Digital Checking Payment Systems Table 6. 7, Page 335 40

How Digital Checking Works: e. Check Figure 6. 10, Page 336 41 How Digital Checking Works: e. Check Figure 6. 10, Page 336 41

Digital Payment Systems and the Wireless Web Mobile payment (m-payments) systems not very well Digital Payment Systems and the Wireless Web Mobile payment (m-payments) systems not very well established yet in U. S, but with growth in Wi-Fi and 3 G cellular phone systems, this is beginning to change n Example: Qpass, AT&T and Wayport venture to provide mobile payment and billing called Go. Port n Gartner predicts m-payments worldwide will total at least $30 billion by 2002; majority of transactions will be micro-m-payments n Copyright © 2004 Pearson Education, Inc. 42

Insight on Technology: Wireless Payments Follow Wi-Fi and Cellular Growth In Europe, already a Insight on Technology: Wireless Payments Follow Wi-Fi and Cellular Growth In Europe, already a number of phone-based transaction systems n In U. S. , development of Wi-Fi and Bluetooth expected to drive growth n Prerequisites: § Development of the technology § Technology must become widely available § Technology needs backing of most of major stakeholders n Challenge: Getting all the players to agree on a common secure platform for wireless e-commerce payment systems n Copyright © 2004 Pearson Education, Inc. 43

B 2 B Payment Systems More complex than B 2 C n Two main B 2 B Payment Systems More complex than B 2 C n Two main types: § Systems that replace traditional banks (example: Actrade) § Existing banking systems extending to B 2 B marketplace (example: Orbian) n Copyright © 2004 Pearson Education, Inc. 44

Key Features of B 2 B Payment Systems Table 6. 8, Page 340 45 Key Features of B 2 B Payment Systems Table 6. 8, Page 340 45

Electronic Billing Presentment and Payment Online payment systems for monthly bills n EBPP expected Electronic Billing Presentment and Payment Online payment systems for monthly bills n EBPP expected to grow rapidly, to nearly half all U. S. households by 2006 n Different types of business models in EBPP market include: § Biller-direct § Consolidator § Portal n Copyright © 2004 Pearson Education, Inc. 46

Growth of the EBPP Market Figure 6. 11, Page 342 47 Growth of the EBPP Market Figure 6. 11, Page 342 47

Types of EBPP Systems Figure 6. 12, Page 344 48 Types of EBPP Systems Figure 6. 12, Page 344 48

Case Study: Check. Free – On Top of Electronic Billing, for Now Market leader Case Study: Check. Free – On Top of Electronic Billing, for Now Market leader in online billing and payment n Faces a number of challenges: § Industry changing fast and leadership precarious § Although market is growing, consumers have traditionally resisted online bill payment § Conflict strategic goals of stakeholders (merchants, banks, credit companies, billing firms and consumers) § Technology changes: XML-based vs. proprietary § Competitors: Pay. Pal, Metaventa n Copyright © 2004 Pearson Education, Inc. 49

Check. Free: On Top of Electronic Billing, for Now Page 346 50 Check. Free: On Top of Electronic Billing, for Now Page 346 50