Lesson 05-I E-commerce Payments ISM 41113, Electronic Commerce By: S. Sabraz Nawaz Senior Lecturer in MIT Department of MIT Faculty of Management and Commerce, SEUSL

Payment Systems ISM 41113: E-Commerce, By S. Sabraz Nawaz

Generic Types of Payment Systems CASH: Is the legal tender defined by national authority to represent value and is the most common form of payment in terms of number of transactions. It is instantly convertible into other forms of value without intermediation of any other institution. It is portable, no authentication required and provides instant purchasing power for those who posses it. Micropayments are allowed. No transaction fee for using it. Anonymous and difficult to trace ISM 41113: E-Commerce, By S. Sabraz Nawaz

Generic Types of Payment Systems CHECKING TRANSFER: Represents funds transferred directly via a single draft or check from a consumer’s checking account to a merchant or other individual. Second most common form of payment in terms of transactions Can be used for small and large transactions Not anonymous and requires third party institution to work. Can be forged easily than cash; so authentication required. They can be cancelled before being cleared in bank. ISM 41113: E-Commerce, By S. Sabraz Nawaz

Generic Types of Payment Systems CREDIT CARD: Represents an account that extends credit to consumers, permits consumers to purchase items while differing payment, and allows them to make payment to multiple vendors with one instrument. Credit card associations such as Visa and MasterCard are non profit associations that set standards for the issuing bank that actually issues the card and processes transactions. Processing centres or clearinghouses handle verification of accounts and balances. Issuing banks are the financial intermediaries. Consumers can repudiate the purchases under certain circumstances. ISM 41113: E-Commerce, By S. Sabraz Nawaz

Generic Types of Payment Systems STORED VALUE: Accounts created by depositing funds into an account and from which funds re paid out or withdrawn as needed are stored value payment systems. Similar to checking account but no checks are written. E.g.: debit cards, prepaid cards. Debit cards immediately debits a checking or other demand deposit account. P2P payment systems such as PayPal are variations on the stored value concept. ISM 41113: E-Commerce, By S. Sabraz Nawaz

Generic Types of Payment Systems ACCUMULATING BALANCE: Accounts that accumulate expenditures and to which consumers make periodic payments are accumulating balance payment systems. E.g.: utilities such as water, electricity, phone accounts that accumulate balances and then are paid in full at the end of the period. ISM 41113: E-Commerce, By S. Sabraz Nawaz

E-Commerce Payment Systems: ONLINE CREDIT CARD TRANSACTION Online credit card transactions are processed in much the same way that in-store purchases are, except that the online merchants never see the actual card being used, no card impression taken, and no signature available. Five parties involved in an online credit card purchase: consumers, merchant, clearinghouse, merchant bank, consumer’s card issuing bank. ISM 41113: E-Commerce, By S. Sabraz Nawaz

How an online credit card transaction works ISM 41113: E-Commerce, By S. Sabraz Nawaz

Limitations of ONLINE CREDIT CARD TRANSACTION Systems Most important limitations involve security, merchant risk, administrative and transaction costs, and social equity. Neither merchant nor the consumer can be fully authenticated; a merchant can be criminal collecting card details. Consumers can repudiate the transaction. Administrative cost of setting up online credit card system etc. Transaction costs for merchants; roughly 3.5% of the purchase plus some transaction fee. Credit cards are not very democratic because millions of young adults do not have credit cards because they are not considered for cards. ISM 41113: E-Commerce, By S. Sabraz Nawaz

Alternative Online Payment Systems Limitations of the online credit card payment systems have opened way for alternatives. Most significant one is PayPal which enables individuals and businesses with email accounts to make and receive limited payments. It is an example of online stored value payment system that permits consumers to make instant online payments to merchants and other individuals based on value stored in an online account. ISM 41113: E-Commerce, By S. Sabraz Nawaz

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