CIT By Mohammed A. Saleh

 The Payment Revolution  Using Payment Cards Online  Smart Cards  Store-Value Cards  E-Micropayments  E-Checking  E-Bill Presentment and Payment  B2B E-Payments  The Sales Tax Issue  PKI Infrastructure 2

FlyLady adopts PayPal The Problem  Marley started an group created to provide one to one coaching to help subscribers with their organization skills.  Group grew to 60,000 members.  Organization was put online to offer products and the company was called flylady.net  Payments were processed through mail-order and fulfill order and a merchant account.  Problem was the processing fees. 3

 In the real world credit card payment are ubiquitous.  Unfortunately for small startups like FlyLady, the cost incurred in accepting credit card payments can make a difference between profit and loss.  The task of setting up a full-blown, secure B2C site that accepts credit card payments can be daunting.  Fortunately, FlyLady's customers suggested a viable alternative - PayPal 4

The Solution  Anyone who has used eBay is familiar with PayPal. - It acquired PayPal in Oct PayPal has a use base of over 50 million members - Member accounts are linked with bank accounts/ credit cards and can be used to transfer funds to and from an individual or businesses. 5

 In 2003, PayPal processed $12.2 billion in payments, 70% involved buying and selling on online auctions.  For a small medium-sized business, PayPal is easy to set up and integrate into an existing site.  PayPal handles credit card payments but it is not a credit card gateway.  Businesses that offer PayPal as a payment alternative do not need to pass a credit check, install a special software or deal with complex banking agreements. 6

 No need to gather credit card numbers from buyers or collect sensitive financial information.  Online merchants get started by setting up a PayPal business account, logging into the account and create a payment button.  It takes minutes to do that.  PayPal charges merchants a fee of 30 cents, plus 1.9% to 2.9% of each transaction. 7

The Results  FlyLady was able to implement a “Buy Now” payment button.  Its fulfillment process is based on PayPal’s reporting tools.  Each day the company logs onto PayPal and downloads the transaction file, which are then imported into a desktop software for for sorting the data and creating shipping labels, which are then handed over to the warehouse for fulfillment. 8

Lessons Learnt …  B2C purchases are paid for by credit card.  For merchants the costs of servicing card payments are high.  Steep transaction costs, potential chargeback fees for fraudulent transactions and costs of creating and administering a secure EC site.  PayPal is the most successful e-payment alternative there is. 9

Sapsford (2004) “ A currency can be anything that all members of a society agree it should be.” 10 Shells 10 th Century B.C Mal coins 10 th – 16th Century B.C Checks Introduced (Middle Ages) In 1960, Paper Money Introduced In 1950 Credit Cards Introduced et

 Still in the midst of the revolution with cards and e-payments taking the place of cash and checks.  In 2003, the combined use of credit and debit cards for in-store payments exceeded the combined use of cash and checks. Facts from Federal Reserve System In 1999, debit card payment went from 21% to 31% while cash dropped from 39% to 32%. - E- payments in the US exceeded check payments for the first time in

 Implications of these trends make online businesses have the support for credit card payment.  Soon, debit card payments will surpass credit card payment.  Merchants having international markets need to support a variety of e- payment methods e.g. bank transfers, e-checks, gift cards, instant credit and so on. CyberSource (2004) – merchants supporting multiple payment types have higher order conversions resulting in increased revenue. 12

 Despite the early introduction of a payment system, it take years for it to gain a widespread acceptance. - credit cards were introduced in the 1950’s but did not reach widespread use until the 1980’s  A crucial element in the success of any e- payment method is the “chicken-and-egg” problem. 13

 Factors come into to play in determining whether a particular e-payment method achieves a critical mass.  Crucial factors:  Independence - Some forms require specialized H/W and S/W to make the payment. - Requires a seller to install specialized S/W to receive and authorize payment. - Less likely to succeed. 14

 Interoperability and Portability - All forms of EC run on specialized systems that are linked with enterprise systems and applications. - An e-payment method must mesh with the existing systems and be supported by standard computing platforms.  Security - How safe is the transfer? - What are the consequences of the transfer being compromised? 15

- If the risk for the payer is higher than the risk of the payee, then the method is less likely to be accepted.  Anonymity - A payment method should make the identities and purchase patterns of buyers anonymous.  Divisibility - Credit cards are accepted for minimum and maximum range. - A method that can address the extremes of the two has a chance of being widely accepted. 16

 Ease of Use - In B2C credit cards offer the ease of use. - In B2B payments, the question is whether e- payment methods can replace the existing off- line methods of procurement.  Transaction Fees - A merchant pays a fee of up to 3% of the items purchase price. - It prohibits the support for smaller purchases. 17

 Regulations - All methods are governed by international, federal and state regulations. 18

 Electronic cards that contain information that can be used for payment purposes.  Come in three forms: Credit cards - Provides the holder with credit to make up to a limit fixed by the card issuer - Rarely have an annual fee. - Charged with high interests on their unpaid balances. - Predominant cards are Visa, MasterCard and EuroPay. 19

Credit Card 20

Charge cards - Balance on a charge card is supposed to be paid in full upon receipt of the monthly payment. - Holders receive a loan for 30 to 45 days equal to the balance of their statement. - They have an annual fee. - Such cards include, American Express’s Green Card and the Diner’s Club card 21

Debit cards - Money for a purchased item comes directly out of the holder’s checking account. - Actual transfer takes place within 1 to 2 days. - Predominant types are MasterCard, Visa and EuroPay. 22

 Involves two major phases: authorization and settlement. Authorization: determines whether a buyer’s card is active and whether the customer has sufficient funds. Settlement: involves transfer of money from the buyer’s to the merchant’s account.  Performance of these phases varies depending on: 23

type of payment card system configuration used by the merchant to process payment.  Three basic configuration for processing online payments. Merchant may: i. Own the payment software - Purchase and integrate a payment-processing module with its EC software. - Module communicates with a payment gateway run by an acquiring bank or 3 rd party. 24

i. Use a POS operated by an acquirer - Merchants can redirect card holders to a POS run by an acquirer - The POS handles the complete payment process and directs cardholders back to the merchant site once payment is complete. - Merchant only deals with order information. - Find an acquirer that handles multiple cards and payment instruments. 25

i. Use a POS operated by a payment service provider - Merchants can rely on servers operated by third parties known as payment service providers (PSPs) - PSPs connect to appropriate acquirers and must be registered with various card associations they support. PSP is Payment Service Providers and NOT Portable Sony PlayStation 26

 Payment cards and processing system for both offline (card present) and online (car not present) have similar processes and participants.  Based on the comparison, the key participants in processing credit card payments online include: Acquiring bank – offers a special a/c called Internet Merchant Account for card authorization and payment processing Credit card association – financial institution providing the credit and debit card 27

Customer – the individual processing the card Issuing bank – financial institution providing the customer with the card Merchant – company selling products and services Payment processing service – service providing connectivity among merchants, customers and financial networks Processor – data centre that processes credit card transactions and settles funds. 28