Electronic Commerce Semester 1 Term 1 Lecture 18

Electronic Payment Systems Electronic payment is an integral part of electronic commerce Broadly defined, electronic payment is a financial exchange that takes place online between buyers and sellers The content of this exchange is usually some form of digital financial instrument (such as encrypted credit card numbers, electronic cheques or digital cash)

Stimulating Factors Three factors are stimulating interest among financial institutions in electronic payments: decreasing technology costs, reduced operational and processing costs, and increasing online commerce The desire to reduce costs is one major reason for the increase in electronic payments

Simplifying Consumer Payments Recently, several innovations helped to simplify consumer payments: –Innovations affecting consumers: credit and debit cards, ATMs, loyalty cards and electronic banking –Innovations enabling online commerce: digital cash, electronic cheques and smart cards –Innovations affecting companies: the payment mechanisms that banks provide to corporate customers e.g. automated clearing houses

Limitations of Traditional Payment Instruments Off-line payment methods make two fundamental assumptions: –The transacting parties - buyer and seller - will at some time be in each other’s physical presence –There will be a sufficient delay in the payment process for detection of fraud, overdraft and other problems to be identified and corrected –These assumptions are not valid for e-commerce

Problems with Traditional Payment Methods Traditional payment methods do not work online for the following reasons: –Lack of convenience –Lack of security –Lack of coverage –Lack of eligibility –Lack of support for microtransactions

Lack of Convenience Traditional payment methods generally require that the consumer leave the online platform and use the telephone or send a cheque in order to make payment

Lack of Security In order to make a traditional payment over the Internet, a consumer has to provide card/payment account details and other personal information online Leaving the Internet and providing the card/payment account details over the telephone and/or by mail also entails security risks

Lack of Coverage Credit cards only work with signed-up merchants, and do not generally support individual-to-individual or direct business- to-business payment transactions

Lack of Eligibility Not all potential buyers have suitable credit ratings to allow them access to credit cards and/or checking accounts

Lack of Support for Microtransactions Many payments made over the Internet are of sufficiently low value that the cost of a phone call or letter may be too high of an overhead The cost of handling these payment method is often too high for the seller to break even