Electronic Payment
Systems
Objectives of this topic
At the end of this lesson, you should be able to
meet the following objectives
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
Collecting revenue from sales of goods
and services is a major activity when
running a business
Challenge in e-commerce
For businesses to reliably and efficiently
collect revenue from customers online
Reliably and trustworthy way for customers
to pay for goods and services online
Money
Customer Merchant
Goods & Services
Preferences of
Stakeholders
There are three stakeholders in most payment systems-
(p.298)
Consumer
Merchant
Financial institutions
Each has a different preferences of characteristics of
payment system
Customers
Prefer low-cost, low risk, refutable, convenient, reliable payment
mechanism
Merchant
Prefer low-cost, low risk, irrefutable, secure and reliable payment
mechanism
Financial institution
Prefer secure payment systems that transfer risks and costs to
consumers and merchants, while maximising transaction fees
payable to themselves
Types of Payment Systems
Emergence of e-commerce has
created new financial needs cannot be
fulfilled by traditional payment system
Example
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
Payment for online purchases
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
Digital cash
Online stored value systems
Digital accumulating balance payment systems
Digital credit accounts
Digital checking
Types of Electronic Payment
Systems
Digital cash
Systems that generate a private form of currency that can be
spent at e-commerce sites
Online stored value systems
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
Systems that accumulate small charges and bill the consumer
periodically (suitable for micropayments)
Digital credit accounts
Systems that extend the online functionality of existing credit
card payment systems
Digital checking
Systems that create digital checks for e-commerce remittances
and extend the functionality of existing bank checking systems
Credit Card E-Commerce
Transactions
How online credit card transaction works
(p.301)
Similar to in-store purchases
Major difference
Online merchants cannot see actual credit card
No card impression is taken
No signature is available
Categorised as Card Not Present (CNP) transaction
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
Digital credit accounts
Systems that extend the online functionality of existing credit
card payment systems
Online credit card transactions are processed in much the same way
that in-store purchases are, with the major differences being that
online merchants never see the actual card being used, no card
impression is taken, and no signature is available. Online credit card
transactions most closely resemble Mail Order-Telephone Order
(MOTO) transactions.
These types of purchases are also called Cardholder Not Present (CNP)
transactions and are the major reason that charges can be disputed
later by consumers. Since the merchant never sees the credit card, nor
receives a hand-signed agreement to pay from the customer, when
disputes arise, the merchant faces the risk that the transaction may be
disallowed and reversed, even though he has already shipped the
goods or the user has downloaded a digital product.
Credit Card E-Commerce
Transactions
How online credit card transaction
works
Five parties involved
Consumer
Merchant
Clearinghouse
Merchant bank
Issuing bank
Credit Card E-Commerce
Transactions
How online credit card transaction works (p.302)
Step one
When a consumer wants to make a purchase, he or she adds the item to
the merchant’s shopping cart. When the consumer wants to pay for
the items in the shopping cart, a secure tunnel through the Internet is
created using SSL/TLS. Using encryption, SSL/TLS secures the session
during which credit card information will be sent to the merchant and
protects the information from interlopers on the Internet
Step two
Once the consumer credit card information is received by the merchant,
the merchant contacts a clearinghouse. a clearinghouse is a financial
intermediary that authenticates credit cards and verifies account
balances.
Step three
The clearinghouse requests the issuing bank to authenticate and
verify the customer account balance
Step four
the issuing bank credits the account of the merchant at the
merchant’s bank.
Credit Card E-Commerce
Transactions
Secure Electronic Transaction
Protocol (SET)
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
Digital wallets
Similar function to our traditional wallet where
we keep our identification card (IC), money,
credit cards, receipts, photographs
Functions of a digital wallet
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
Digital cash (p. 306)
It is not a legal tender (not cash) but a form of value storage and value
exchange. Digital cash typically is based on an algorithm that
generates unique authenticated tokens representing cash value that
can be used “in the real world.” Examples of digital cash include Bitcoin
and Ethereum. Bitcoins are encrypted numbers (sometimes referred to as
cryptocurrency) that are generated by a complex algorithm using a peer-
to-peer network in a process referred to as “mining,” that requires
extensive computing power. Like real currency, Bitcoins have a fluctuating
value tied to open-market trading. Like cash, Bitcoins are anonymous—
they are exchanged via a 34-character alphanumeric address that the user
has, and do not require any other identifying information. Bitcoins have
recently attracted a lot of attention as a potential payment system.
E-Commerce Digital Payment
Systems
Business-2-Customer
Online stored value systems (complete)
Permit consumers to make instant, online payments to
merchants and other individuals based on value stored in an
online account. E.g PayPal, where people can use it to pay
one another even in small amounts with less charge . Other
example includes; pre-paid phone cards, debit cards, gift
certificates, and smart cards
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
Digital accumulating balance payment
systems (completed)
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. For example,
Utility and phone accounts accumulate a balance that must
be paid in full at the end of a time period.
This system is Ideal for purchasing digital products
such as music tracks, chapters of books, articles from
newspapers. However, credit card is not considered as
an accumulating balance system because the balance
accumulated is not restricted to a certain time period.
E-Commerce Digital Payment
Systems
Business-2-Customer
Digital checking payment systems
Systems that create digital checks for e-
commerce remittances and extend the
functionality of existing bank checking
systems for use as online shopping payment
tools.
Some systems are software-based
(example-Achex)
Some systems are hardware-based (eCheck)
in the form of a PC card
E-Commerce Digital Payment
Systems
Business-2-Business
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
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
Two main types of B-2-B payment
systems
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 (P.306)
Electronic billing presentment and payment
(EBPP)
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 realized
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
