Electronic Commerce

Electronic Payments

15/07/2009 10:00:18 Academic Excellence in Technology

Education 1
 Session Objectives
 Topics to be Covered
 To analyse the properties of cash, cheques and credit cards
 To describe the requirements for Internet-based payment
System Models
 To discuss the following electronic payment systems:
 Payment cards
 Paypal
 And E-Wallets
 To discuss the order fulfillment phase
 Payment Systems
 After creating a Web site that allows a customer to choose an
item for purchase, a payment must be made before the item is
shipped
 When we walk into a “real world” store we basically have
three ways to pay for an item. These are:
 Cash (most common form of payment)
 Cheques
 Payment card (i.e. debit cards, credit cards, smart cards or
automated teller machine (ATM) cards)
 These account for more than 85% of consumer
transactions worldwide
 Payment Systems Cont’d

Cash has some important properties:

It is convenient since it is easy to use, to carry and
easy to handle in small quantities
It is widely accepted
It provides anonymity
It does not have associated processing fees
It has no audit trail (maintains privacy)
 Payment Systems Cont’d
There are several problems associated with the
use of cash, however which include:
It is easy to lose
It is difficult to trace (e.g. when used in criminal
activities)
It introduces a security risk when being transported
It is time-consuming to count, organise and
manage
 Payment Systems Cont’d

A Cheque, on the other hand is “… a

written order by an account holder to his
banker to pay a specified sum of money to
the bearer or named recipient.”3
 Payment Systems Cont’d
 Day 1: Any cheque collected during the first day will be
processed by the collecting bank that evening
 This information is passed electronically through the Inter Bank
Data Exchange (a secure network) to the paying bank clearing
centre.
 Day 2: Cheques are delivered to an Exchange centre
 Day 3: Cheques are reviewed by the paying bank and a
decision is made whether to pay or return them
 Clearly one of the problems associated with
cheques is the clearing time
 Payment Systems Cont’d
Electronic Payments
 An e-commerce payment environment requires a
more complex design which includes:
 Payment security
 Transaction privacy
 System integrity
 Customer authentication
 The purchaser’s promise to pay
 Payment Systems Cont’d
Electronic Payments Cont’d
 Electronic payments are financial transactions
that do not require paper
 Electronic payments are far cheaper than mailing
paper checks
 Cost of billing a person by mail ranges from US$1
to US$1.50
 Billing a person electronically cost about US$0.50
 Replacing paper bills also saves on trees
 Payment Systems Cont’d

Electronic Payments Cont’d

Four properties should be considered:
Acceptability: Must be widely accepted, by
customers and merchants alike
Ease of Integration: Effective Web interface
Customer base: It should be financially viable
Ease of use and access
 Payment Systems Cont’d
Payment Cards
Payment cards include:
 Credit Cards
 Debit Cards
 Charge Cards

www.paylessbills.com/ credit_cards.htm
 Payment Systems Cont’d

Payment Cards Cont’d

The main categories of payment cards are:
Credit cards (e.g. Visa)
Debit cards
Charge Cards
 Payment Systems Cont’d

Payment Cards Cont’d

If a merchant wants to sell merchandise on
the Web they must accept credit cards
because:
It is the most widely accepted form of payment
It is the most popular
 Payment Systems Cont’d
Payment Cards Cont’d
To be able to accept payments via credit cards:
 The seller must open a merchant account
 A search can be made online for a list of credit and
merchant services (some US banks include Bank of
America and National Data Corporation)
 With this account the seller can accept and process
credit cards
 During processing only the card numbers and transactions
are known (normally authorisation is provided through a
customer signing a payment slip).
 Payment Systems Cont’d
Payment Cards Cont’d
To be able to accept payments via credit cards:
 A secure and encrypted line is required to accept
payments
 The most popular solution used is Secure Socket Layer
(SSL) which is built into Netscape Navigator and
Microsoft’s Internet Explore browser
 A shopping cart is also required to allow users to
collect their purchase
 The shopping cart connects to a payment processing
system, calculates costs and taxes and generates a bill
 Payment Systems Cont’d

Payment Cards Cont’d

The processing of credit cards is
complicated, however the following
diagram highlights the important steps
 Payment Systems Cont’d

Payment Cards Cont’d

 Payment Systems Cont’d
Payment Cards Cont’d
1. The customer places the order on the merchant’s
Web site (shipping and payment information is
included)
2. The customer verifies the order
3. The encrypted order is sent to the payment server
by the merchant
4. The payment server receives the payment
information, takes it behind a firewall, reformats
it and forwards to to the merchant bank over a
secure, dedicated line
 Payment Systems Cont’d

Payment Cards Cont’d

5. The merchant bank forwards an
authorisation request to the issuing bank
for approval or denial and the decision is
sent back to the payment server
6. The approval or denial is communicated
back to the merchant and delivered to the
customer
 Payment Systems Cont’d
Payment Cards Cont’d
Some of the characteristics of credit cards include:
 Interest is charged on outstanding balances not
paid off within a given time
 The merchant’s account is credited immediately
 Cardholders are only liable for $50 (by law) if
their card is stolen or lost
 Cardholders can dispute charges or purchases for
the 30-day period after the purchase
 The spending limit is based on credit history
 Payment Systems Cont’d

Payment Cards Cont’d

 Several charges are associated with credit card
processing
 Firstly, a set-up fee that might cost a few hundred dollars
(US$)
 A fee of 2-4% of the value of each transaction processed
 Statement fees
 And a minimum monthly charge of US$20-$50
 Payment Systems Cont’d
Payment Cards Cont’d
 Some of the issues associated with credit cards
are:
 They leave a complete audit trail
 They are insecure
 A signature does not get verified which makes it difficult to assure
the identity of a person
 Merchant accounts are difficulty to get from banks
 The banks review financial records and business history
 Credit card are not economical for small payments
 Payment Systems Cont’d

Payment Cards Cont’d

The difficult of securing a merchant
account may be overcome through the use
of third parties who are willing to process
credit cards e.g. iBill (http://ibill.com)
iBill charges 15% of the company’s total
revenue for a two week period (this charge
will not exceed US$10,000)
 Payment Systems Cont’d
Payment Cards Cont’d
 Debit cards
 The sale amount is removed from user’s account and
transferred to the sellers account
 Limited by funds in account plus overdraft (if present)
 Charge cards (e.g. American Express)
 Has no spending limit
 The amount due on the card is due at the end of the billing
period
 They do not accumulate interest payments
 Payment Systems Cont’d

Payment Cards Cont’d

Some vendors provide single-use-cards
which are valid for a single transaction
A unique card number is issued
This helps with card details security
 Payment Systems Cont’d

Payment Cards Cont’d

Some advantages of Payment Cards
In the US card holder’s liability is limited to
US$50 when used fraudulently
Accepted worldwide
 Currency conversion handled by card issuer
Ease of use, no special hardware required
 Payment Systems Cont’d

Payment Cards Cont’d

Some disadvantages of Payment Cards
Service companies charge merchants per-
transaction and monthly processing fees
Price of goods for the consumer might be slightly
higher as a result
 A limit is placed on the minimum amount allowed to
spend (e.g. 5 pounds in the UK)
 Other Payment Methods
 For other payment methods read the following
presentations:
 PayPal
http://scitec.uwichill.edu.bb/cmp/online/comp3210/present
ations/DanaBabb.ppt
 Metered Payments
http://scitec.uwichill.edu.bb/cmp/online/comp3210/present
ations/LeeHarvey.ppt
 E-Wallets
http://scitec.uwichill.edu.bb/cmp/online/comp3210/present
ations/ShawnHolder.ppt
 The Fulfilment Phase2

After the customer has paid for the

product(s) then it is the merchant’s
responsibility to deliver it
The customer generally expects that the
product(s) will be delivered in a quick and
timely fashion
 The Fulfilment Phase Cont’d

The fulfilment process includes:

Sourcing items from a warehouse
Packing these items
Shipping
Answering questions about the order
 This might be done online through order management
software where the customer is able to track their order
 The Fulfilment Phase Cont’d

The fulfilment process includes (cont’d):

Giving the customer a bill or verifying an online
payment
Determining whether the customer is satisfied with
the delivery
 The Fulfilment Phase Cont’d

From the customer’s point of view

fulfilment is the most critical part of the
shopping experience
If the customer is dissatisfied with the
fulfilment process, it can really damage the
merchant’s reputation
E.g. Toys R Us during Christmas 1999 failed to
deliver items; a costly mistake
 The Fulfilment Phase Cont’d

Tax is also a part of the fulfilment phase

Different countries and even different
States in the USA have different tax rules
E.g. in New Jersey there is no tax on clothing,
while in California there is
In some cases (e.g. in the US), state, city and
county tax must be considered
 The Fulfilment Phase Cont’d
 One further issue that must be considered is
inventory fulfilment
 Some of the questions that must be asked are:
 Are the required products available?
 Are the products offered for sale (on the Web site) linked
to the inventory?
 Should customers be notified of out-of-stock items?
 The Fulfilment Phase Cont’d
 In conclusion, credit cards are the most widely
used method of payment on the Internet
 There are some alternatives for niche markets, such as
Paypal whose focus is primarily C2C e-commerce and
small businesses
 It should also be clear that the order fulfilment
phase is an extremely important part of the
shopping experience
 If a merchant fails to deliver, or fails to deliver on
time then it can badly damage their reputation
 References

[1] Schneider, Gary, P., “Electronic Commerce: The second wave”, Thomson
Course Technology, Fifth Annual Edition, 2004
[2] Awad, Elias, M., “Electronic Commerce: From Vision to Fulfillment”,
Second Edition, Prentice Hall, 2004
[3] APACS, “Cheque and Credit Clearing Company”, 2000. Online document
available at www.apacs.org.uk/about_apacs/htm_files/chequecred.htm

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