1. E-commerce business. technology. society. Kenneth C. Laudon
Second Edition
Kenneth C. Laudon
Carol Guercio Traver
Copyright © 2004 Pearson Education, Inc.

2. Chapter 6 E-commerce Payment Systems
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3. Learning Objectives
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 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
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4. PayPal: The Money’s in the E-mail
Page 305
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5. PayPal: The Money’s in the E-mail
One of e-commerce’s major success stories:
Went public in 2002; acquired by eBay 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 (MoneyZap), AOL (AOLQuickcash) and Citibank (C2it)
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6. Types of Payment Systems
Cash
Checking Transfer
Credit Card
Stored Value
Accumulating Balance
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7. Cash 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
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8. Checking Transfer
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
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9. Most Common Payment Systems, Based on Number Of Transactions
Figure 6.1, Page 309
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10. Most Common Payment Systems, Based on Dollar Amount
Figure 6.2, Page 310
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11. 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
Credit card associations – Nonprofit associations (Visa, MasterCard) that set standards for issuing banks
Issuing banks – Issue cards and process transactions
Processing centers (clearinghouses) – Handle verification of accounts and balances
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12. Stored Value
Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed
Examples: Debit cards, gift certificates, prepaid cards, smart cards
Debit cards: Immediately debit a checking or other demand-deposit account
Peer-to-peer payment systems such as PayPal a variation
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13. Accumulating Balance
Accounts that accumulate expenditures and to which consumers make period payments
Examples: utility, phone, American Express accounts
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14. Dimensions of Payment Systems
Table 6.1,
Page 313
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15. Current Online Payment Systems
Credit cards are dominant form of online payment, accounting for around 80% of online payments in 2002
New forms of electronic payment include:
Digital cash
Online stored value systems
Digital accumulating balance payment systems
Digital credit accounts
Digital checking
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16. Online Merchants’ Actual and Preferred Online Payments
Figure 6.3, Page 315
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17. How an Online Credit Card Transaction Works
Processed in much the same way that in-store purchases are
Major difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions)
Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bank
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18. How an Online Credit Transaction Works
Figure 6.4,
Page 317
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19. Limitations of Online Credit Card Payment Systems
Security – neither merchant nor consumer can be fully authenticated
Cost – for merchants, around 3.5% of purchase price plus transaction fee of cents per transaction
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)
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20. Insight on Society: The Right to Shop
Digital Divide: Some groups don’t have same access to computers and Internet that others do
Digital “have nots” include:
Households with incomes below $35,000
Those without college educations
People living in rural areas
African-Americans and Hispanics
Seniors over 65
Disabled
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
But without credit cards, still hard for people to shop online
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21. The SET (Secure Electronic Transaction) Protocol
Authenticates cardholder and merchant identity through use of digital certificates
An open standard developed by MasterCard and Visa
Transaction process similar to standard online credit card transaction, with more identity verification
Thus far, has not caught on much, due to costs involved in integrating SET into existing systems, and lack of interest among consumers
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22. How SET Transactions Work
Figure 6.5,
Page 320
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23. Digital Wallets
Concept of digital wallet relevant to many of the new digital payment systems
Seeks to emulate the functionality of traditional wallet
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
Two major categories:
Client-based digital wallets – Gator.com, MasterCard Wallet
Server-based digital wallets – MSN Wallet
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24. Promised Functionality of Digital Wallets
Table 6.2,
Page 323
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25. Types of Digital Wallets
Figure 6.5, Page 324
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26. Digital Cash One of the first forms of alternative payment systems
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
Many of early examples have disappear; concepts survive as part of P2P payment systems
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27. Examples of Digital Cash
Table 6.3, Page 326
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28. Digicash: How First Generation Digital Cash Worked
Figure 6.7,
Page 327
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29. Online Stored Value Systems
Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account
Rely on value stored in a consumer’s bank, checking or credit card account
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30. Online Stored Value Systems
Table 6.4, Page 328
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31. How Ecount.com Works: A Stored Value System
Figure 6.8,
Page 330
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32. Insight on Business: Rocketcash.com
An example of an online stored value system
Aimed at teenagers
Funds can be deposited in a RocketCash account, which functions like a credit card and allows teens to buy products online
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33. 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
Two types:
Contact
Contactless
Examples: Mondex, American Express Blue
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34. 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
Examples: Qpass and iPin
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35. Digital Accumulating Balance Payment Systems
Table 6.5, Page 332
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36. Digital Credit Card Payment Systems
Extend the functionality of existing credit cards for use as online shopping payment tools
Focus specifically on making use of credit cards safer and more convenient for online merchants and consumers
Example: eCharge
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37. Digital Credit Card Payment Systems
Table 6.6, Page 333
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38. How a Digital Credit Card Payment Systems Works: eCharge
Figure 6.9, Page 334
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39. Digital Checking Payment Systems
Extend the functionality of existing checking accounts for use as online shopping payment tools
Examples: eCheck, Achex (MoneyZap)
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40. Digital Checking Payment Systems
Table 6.7, Page 335
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41. How Digital Checking Works: eCheck
Figure 6.10, Page 336
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42. 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 3G cellular phone systems, this is beginning to change
Example: Qpass, AT&T and Wayport venture to provide mobile payment and billing called GoPort
Gartner predicts m-payments worldwide will total at least $30 billion by 2002; majority of transactions will be micro-m-payments
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43. Insight on Technology: Wireless Payments Follow Wi-Fi and Cellular Growth
In Europe, already a number of phone-based transaction systems
In U.S., development of Wi-Fi and Bluetooth expected to drive growth
Prerequisites:
Development of the technology
Technology must become widely available
Technology needs backing of most of major stakeholders
Challenge: Getting all the players to agree on a common secure platform for wireless e-commerce payment systems
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44. B2B Payment Systems More complex than B2C Two main types:
Systems that replace traditional banks (example: Actrade)
Existing banking systems extending to B2B marketplace (example: Orbian)
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45. Key Features of B2B Payment Systems
Table 6.8,
Page 340
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46. Electronic Billing Presentment and Payment
Online payment systems for monthly bills
EBPP expected to grow rapidly, to nearly half all U.S. households by 2006
Different types of business models in EBPP market include:
Biller-direct
Consolidator
Portal
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47. Growth of the EBPP Market
Figure 6.11, Page 342
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48. Types of EBPP Systems Figure 6.12, Page 344
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49. Case Study: CheckFree – On Top of Electronic Billing, for Now
Market leader in online billing and payment
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: PayPal, Metaventa
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50. CheckFree: On Top of Electronic Billing, for Now
Page 346
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