Traditional and Electronic Payment Methods Chapter 3

Money and Banking Money serves as a measure of value, a medium of exchange. Money exists in a number of forms Cash –Coin, paper money Near Cash –checks, drafts, money orders, credit cards

Check Processing

Encryption/decryption of Transactions

Check A written order on a bank or other financial institution to pay money belonging to the signer to the presenter of the check The most popular offline settlement method. Not efficient for e-commerce

Money Order An order for the payment of a specified amount of money Usually issued by the post office or a bank or other financial institution. Popular with people who do not have bank accounts or where checks are not acceptable

Credit Card Used to settle charges for goods or services. Card holders pay their bill monthly and pay interest on unpaid account balance. Issued by banks or financial institutions. Visa and master card are clearing houses for member institutions.

Charge Cards Similar to credit cards Customer pays bill in full each month AMEX card is popular example

Debit Cards Similar to credit card in operation from merchant’s perspective. Similar to a check from customer’s perspective.

Payment Processing A merchant must have –A merchant account –Payment processing software –Procedures to protect customers and guard against fraud

Merchant account An account with a financial institution to accept charges. Must apply for account and be accepted. Supply bank with financial information about anticipated transaction volume and type of business. The bank charges for this service.

Merchant accounts Charge-backs result from customer refusal to pay a charge for a number of reasons, including returned goods, billing errors, and fraudulent charges. Charge-backs can be expensive and the bank may charge higher fees for higher risk enterprises and “situations”.

High Risk factors Customer not present: telephone and internet sales. High risk products or services: Gambling, “politically incorrect”, or non-traditional products.

Payment Processing Software Software to facilitate authorization of customer charges to credit or debit charge account. Alternative is to outsource to 3 rd party for a fee.

Verification Software

Security for charge settlement Security must be provided for customer transaction. Secure Sockets Layer (SSL) technology provides encrypted transmission of data between customer and a secure server

Authentication SSL requires a digital certificate that verifies a sender’s identity. An e-business obtains their certificate from a certificate authority such as VeriSign

A Digital Certificate

Fraud Credit card fraud is a major problem: as much as 1.15 percent of transactions were found to be fradulent. It’s a matter of economics. How much security do you want? Too much will cost sales but reduce fraud to near 0. Too little securitywill result in higher losses

Some Security Measures Verify validity of charge. Ship via currier and require receipt signature. Require and verify the complete address and telephone number of customer. Reject orders from anonymous addresses.

Other electronic payment forms Various alternative payment forms –Electronic Cash –Electronic checks –Smart cards –Person-to-person payment systems

Electronic Cash Variety of products Allow for on line purchases without a credit account Allow customer to avoid sharing account data while guaranteeing payment to vendor

Smart Cards A store value card Popular in Europe; not yet common in North America Needs special equipment to work with a PC

Electronic Checks An electronic version of a paper check Essentially a form of Electronic Funds Transfer (EFT)

Person-to-Person Systems A way to sent money, a funds transfer.

Person to Person Payment

P2P Systems