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 Good for e-commerce? What is a cashier’s check? Checks have been around how long?

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 Good for e-commerce?

Credit Card Used to settle charges for goods or services Card holders pay their bills monthly and pay interest on unpaid account balances Issued by banks or financial institutions Visa and MasterCard are clearinghouses for member institutions Other credit card types?

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

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

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 (p. 73) about anticipated transaction volume and type of business The bank charges for this service

Merchant Account Chargebacks result from customer refusal to pay a charge for a number of reasons, including returned goods, billing errors, and fraudulent charges. Chargebacks 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. – Authorize.Net – CyberCash – ICVerify

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. – Encryption terms p. 76

Authentication SSL requires a digital certificate that verifies a sender’s identity. An e-business obtains its certificate from a certificate authority such as VeriSign. Secure Electronic Transactions (SET) – p. 77 E-wallet – p. 78

A Digital Certificate

Fraud Credit card fraud is a major problem – Online CC fraud 12x more than traditional As high as 1.15% of online transactions were found to be fraudulent vs % traditional Charge backs – Online – 64% ; Traditional – 44% Security: how much do you want? – Too much will cost sales but reduce fraud to nearly nothing, and too little will result in higher losses.

Security Measures – p. 79 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. Disposable credit card numbers

Electronic Payment Forms Various alternative payment forms include: Electronic Cash – Electronic checks – Smart cards – Person-to-person payment systems 2001 – CC 95% of online purchases Projected 2003 – CC 75-81% - reality?

Electronic Cash Variety of products available Allow for online purchases without a credit account Allow customer to avoid sharing account data while guaranteeing payment to vendor Examples – Beenz – Cybergold – Flooz

Smart Cards A store value card Popular in Europe (Mondex); 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) $.50 vs. $.75-$3.00 processing costs Scanned via MICR – account #, routing #, & check serial #

Person to Person Systems A way to send money, a funds transfer

Person to Person Payment

Person to Person (P2P) System