1. Electronic Commerce Payment Systems
Chapter 12
Electronic Commerce Payment Systems

2. Learning Objectives
1. Describe cross-border EC and the issues that arise in EC payments. 2. Describe the major changes in retail and their impacts on EC payments. 3. Discuss the different payment cards used online and processing methods. 4. Discuss the different categories and potential uses of smart cards. 5. Describe the issues with and solutions to online micropayments. 6. Understand PayPal and 3rd party payment gateways. 7. Understand the major types and methods of mobile payments. 8. Describe the differences and key characteristics of digital and virtual currencies.

3. CHANGING RETAIL LANDSCAPE
Omni-Channel Retail
Overall, worldwide retail sales are growing, but EC retail sales are growing faster
There is no doubt that the number of retail stores and retail square footage are on the decline
So is the foot traffic within most stores
A lot of this decline is a function of online shopping, but this doesn’t mean that stores completely dying
It does mean that the shopping experiences we know today are morphing into something different, so that strictly keeping score of in-store versus online dollars may be moot

4. CHANGING RETAIL LANDSCAPE
Cash versus Non-Cash Transactions
Both offline and online non-cash payments are on the rise
In absolute terms this doesn’t mean that cash payments are declining and ultimately dying
In fact they are actually increasing but at a slower rate than non-cash payments
Cash accounts for 85% of global consumer transactions, although this percentage varies widely by country

5. CHANGING RETAIL LANDSCAPE
There is a substantial push by a number of governments to eliminate cash transactions as much as possible
This pattern between cash and non-cash consumer transactions mirrors the pattern between offline and online retail sales
Globally, cards (credit and debit) are the most frequently used, followed by digital payment systems

6. CHANGING RETAIL LANDSCAPE
Move to Mobile
Not surprisingly, the rapid adoption of smartphones is also highlighted by the number of global shipments of new smartphones versus the combined shipments of other computer-based devices including tablets, 2-in-1 hybrid tablets, portable PCs, and desktop PCs
Older consumers still use PCs

7. Figure 12.1 Percent of total country online EC spend by device
Source: Constructed from data in Keith, M. “Global E-Commerce Sales, Trends, and Statistics.” September 2, remarkety.com/global-ecommerce-sales-trends-and-statistics-2015 (accessed December 2016).

8. CHANGING RETAIL LANDSCAPE
Implications for EC Payments
Those merchants with both a physical and digital presence, tended to run their online business as a simple, albeit separate, extension of their offline world
Innovations aimed at supplementing, modifying, or replacing some aspect of electronic payments number in the thousands
“Hidden digital payments” to describe this overall collection of activities and divided the payments into four main types including:
Closedloop cards and mobile apps
Digital wallets
Mobile money
Virtual currencies

9. USING PAYMENT CARDS ONLINE
Credit cards
Charge cards
Debit cards
Credit Card Reading
Stationary card readers
Portable card readers
Mobile readers

10. USING PAYMENT CARDS ONLINE
Processing Cards Online
Authorization*
Settlement*
There are a number of parties involved in both processes including:
Customer
Merchant
Issuing bank
Merchant acquiring bank
Credit card (association) network
Payment service provider

11. USING PAYMENT CARDS ONLINE
Although the entire authorization process involves a number of parties, it usually takes a few seconds
While cards are obviously convenient for both the consumer and the merchant, they cost the merchant money
Discount rate*
Interchange rate*
The EC merchant may:
Own the payment software
Use a point-of-sale (POS) system operated by a card acquirer
Use a POS system operated by a payment service provider. Merchants can rely on payment service providers (PSPs)

12. Figure 12.2 Credit card payment procedure (Drawn by D. King)
$100
Payment
Service/Gateway
Provider
(Merchant)
Acquirer
Bank
Customer
(Card Holder)
(Card)
Issuing
Credit Card
Network
Billing Stmt.
Merchant Bank Acct.
Batch
Authorization Cycle
Settlement Cycle 1 2 4 5 6 7 8 9 11 12 13 15 10
Merchant 17 3 14 16
Figure 12.2 Credit card payment procedure (Drawn by D. King)

13. USING PAYMENT CARDS ONLINE
Fraudulent Card Transactions
Costs associated with combating fraudulent transactions
These include the costs of tools and systems to review orders, the costs of manually reviewing orders, and the revenue that is lost from erroneously rejecting valid orders
The key tools used in combating fraud are:
Card verification number (CVN)*
Address Verification System (AVS)*
Customer order history
Negative lists
Postal address validation service

14. SMART CARDS Smart Card*
Smart cards are used for a wide variety of purposes including:
Telecom
Financial
Government and healthcare
Device manufactures
Other

15. SMART CARDS Types of Smart Cards Contact card *
Contactless (proximity) card*
Smart card reader*
Hybrid cards and combi cards combine the properties of contact and proximity cards into one card

16. SMART CARDS Stored-Value Cards* Applications of Smart Cards
Stored-value cards come in two varieties:
Closed-loop (single purpose)
Open loop (multiple purposes)
Applications of Smart Cards
Retail Purchases
Transit Fares

17. Figure 12.3 Singapore electronic road pricing system
(Source: Photo taken by J. K. Lee March 2013.)

18. EC MICROPAYMENTS Micropayments (e-micropayments)*
From the viewpoint of many vendors, credit or debit cards are too expensive for processing small payments
There are five basic micropayment models that have enjoyed some amount of success
Aggregation
Direct payment
Stored-value
Subscriptions
À la carte

19. PAYPAL AND OTHER 3RD PARTY PAYMENT GATEWAYS
While credit and debit cards dominate e-commerce payments, one alternative that has succeeded is PayPal (and its clones)
eBay sellers and buyers opened up PayPal accounts that were secured by a bank or credit card account
At the completion of an auction, the payment transactions were conducted via the seller’s and buyer’s PayPal accounts
In this way, the bank or credit card accounts remained confidential

20. PAYPAL AND OTHER 3RD PARTY PAYMENT GATEWAYS
While PayPal provides a number of services, at their core they are a full-service 3rd party payment gateway
Basically, they eliminate the need for a merchant to deal with the intricacies and complexities of authorization and settlement in online payment
The also eliminate the need for merchants to handle card information and for customers to provide their financial information with every transaction.

21. PAYPAL AND OTHER 3RD PARTY PAYMENT GATEWAYS
Amazon, the leading online retailer, has started to make forays into this 3rd party payment arena with their Amazon Payments system
Globally, PayPal is also the market leading gateway

22. MOBILE PAYMENTS Types of Mobile Payments Mobile payment*
From the standpoint of the various parties, any successful mobile system needs to overcome the following sorts of issues:
For Buyer: Security (fraud protection), privacy, ease of use, choice of mobile device
For Seller: Security (getting paid on time), low cost of operations, adoption by sufficient number of users, improved speed of transactions
For Network Operator: Availability of open standards, cost of operation, inter-operability, and flexibility and roaming
For Financial Institutions: Fraud protection and reduction, security (authentication, integrity, non-repudiation

23. MOBILE PAYMENTS Four types of mobile payments: Consumer Merchant
Person-to-Person (P2P)
Institutional

24. MOBILE PAYMENTS Mobile Consumer Payments – Wallets, Clouds, and Loops
Mobile digital wallet*
Device-Based Digital Wallets
Example: Wearable Wallets from MasterCard and Coin
Cloud-Based Digital Wallets
Closed-Loop Systems
Example: Starbucks Closed-Loop Wallet

25. MOBILE PAYMENTS Mobile Point of Sale Example: Square (squareup.com)
Person-to-Person (P2P) Payments

26. Mobile Payment
Service Provider
3. Create a password
Telco
Server
2. Confirm
Phone Number
4. Send password to mobile phone
Online
Site
5. Input password and purchase
Wireless
Telco
1. Request Purchase; Input mobile number
1. Include in phone bill
Customer
Figure 12.4 Process of mobile payment service (Drawn by D. King & J. K. Lee)

27. Mobile Payment
Service Provider
3. Create a password
Telco
Server
2. Confirm
Phone Number
4. Send password to mobile phone
Online
Site
5. Input password and purchase
Wireless
Telco
1. Request Purchase; Input mobile number
1. Include in phone bill
Customer
Figure 12.4 Process of mobile payment service (Drawn by D. King & J. K. Lee)

28. DIGITAL AND VIRTUAL CURRENCIES
Types of Digital Currencies
Fiat currency*
Electronic money*
Virtual currency*
Digital currency*
Convertible virtual currency*
Non-convertible virtual currency*
Size of the Virtual Currency Market

29. DIGITAL AND VIRTUAL CURRENCIES
Bitcoin and Other Cryptocurrencies
Bitcoin Background
Bitcoin it was the first to come up with a decentralized system that offered a useable solution to what is known as the double-spend problem
Like the dollar or any other currency, a bitcoin is a unit of account that possesses a number of the key characteristics
Durable
Divisible
Countable
Transportable
Fungible
Verifiable

30. DIGITAL AND VIRTUAL CURRENCIES
How Does Bitcoin Work?
Public ledger: Essentially, it is a digital file tracking every Bitcoin transaction – time, date, participants, amount, and transfer of ownership of bitcoins – that has ever occurred since the first bitcoin was issued
Blockchain*
Unlike a company ledger, the Bitcoin blockchain is public, this means that anyone can view it
While Bitcoin is a payment system for exchanging value, at its technical base it is a messaging system built on its peer-to-peer (Internet) network

31. DIGITAL AND VIRTUAL CURRENCIES
Bitcoin private key*
Bitcoin address*
When someone wants to execute a transaction, he or she uses his or her private key to digitally sign a message that includes:
Input
Amount
Output

32. DIGITAL AND VIRTUAL CURRENCIES
Advantages and Disadvantages of Bitcoin
Some of the more frequently cited advantages include:
Anonymity
Simplifies Financial Transactions
Merchant Friendly
Support Cross-Border Commerce
Free from Government Manipulation
Some of the more frequently cited disadvantages include:
Not yet widely accepted
Fluctuating valuation
Transactions are irreversible
Private keys can be lost

33. DIGITAL AND VIRTUAL CURRENCIES
Bitcoin Competitors and the Future of Math-Based Currencies
Ethereum
Ripple
Litecoin

34. Figure 12.6 Bitcoin Web Wallet (Drawn by D. King)

35. MANAGERIAL ISSUES How will you address the omni-channel imperative?
What payment methods should you support?
What micropayment strategy should your e-marketplace support?
Which mobile systems could influence your business?
Should we outsource our payment gateway service?
Should we accept virtual currencies as a form of payment?
How secure are e-payments?

36. SUMMARY Cross-Border EC Changing retail landscape
Using payment cards online
Smart cards
EC micropayments
PayPal and 3rd party payment gateways
Mobile payments
Digital and virtual currencies.