1. Copyright © 2004 Pearson Education, Inc. Slide 6-1 Chapter 6 E-commerce Payment Systems Extra notes on e-payment (JMD, modified 2007)

2. Copyright © 2004 Pearson Education, Inc. Slide 6-2 PayPal: The Money’s in the E-mail Page 305

3. Copyright © 2004 Pearson Education, Inc. Slide 6-3 PayPal http://www.paypal.com/ http://www.onlinemerchantnetwork.com/ Online Payment Processing guide Fraud Prevetion

4. Copyright © 2004 Pearson Education, Inc. Slide 6-4 PayPal: The Money’s in the E-mail One of e-commerce’s major success stories: Went public in 2002; acquired by eBay October 2002 for $1.5 billion An example of a “peer-to-peer” payment system Fills a niche that credit card companies avoided – individuals and small merchants Piggybacks on existing credit card and checking payment systems Weakness: suffers from relatively high levels of fraud Competitors include Western Union (MoneyZap), AOL (AOLQuickcash) and Citibank (C2it)

5. Copyright © 2004 Pearson Education, Inc. Slide 6-5 Types of Payment Systems Cash Checking Transfer Credit Card Stored Value Accumulating Balance

6. Copyright © 2004 Pearson Education, Inc. Slide 6-6 Cash Legal tender (nations) Most common Instantly convertible (exchange for any goods) Portable, no authentication “Free” to use, simple Anonymous Limitations: easily stolen, limited to smaller transaction, does not provide any float (interest)

7. Copyright © 2004 Pearson Education, Inc. Slide 6-7 Checking Transfer Funds transferred directly via a signed draft or check common (in US) for small and large transactions Some float (interest) Not anonymous, require third-party intervention (banks) Introduce security risks for merchants (forgeries, stopped payments), so authentication typically required

8. Copyright © 2004 Pearson Education, Inc. Slide 6-8 Credit Card Represents an account that extends credit to consumers, permitting consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time Credit card associations – Nonprofit associations (Visa, MasterCard) that set standards for issuing banks Issuing banks – Issue cards and process transactions Processing centers (clearinghouses) – Handle verification of accounts and balances

9. Copyright © 2004 Pearson Education, Inc. Slide 6-9 Stored Value Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed Examples: Debit cards, gift certificates, prepaid cards, smart cards Debit cards: Immediately debit a checking or other demand-deposit account Peer-to-peer payment systems such as PayPal a variation

10. Copyright © 2004 Pearson Education, Inc. Slide 6-10 Accumulating Balance Accounts that accumulate expenditures and to which consumers make period payments Examples: utility, phone, American Express accounts

11. Copyright © 2004 Pearson Education, Inc. Slide 6-11 Dimensions of Payment Systems Table 6.1, Page 313

12. Copyright © 2004 Pearson Education, Inc. Slide 6-12 Current Online Payment Systems Credit cards are dominant form of online payment, accounting for around 80% of online payments in 2002 New forms of electronic payment include:  Digital cash  DigiCash, a pioneering firm in the area, declared bankruptcy in 1998 and sold its 16 patents and its domain name to eCash Technologies. eCash in 2001 was having its own troubles. http://www.ecash.com/declared bankruptcyhttp://www.ecash.com/  Online stored value systems  Digital accumulating balance payment systems  Digital credit accounts  Digital checking

13. Copyright © 2004 Pearson Education, Inc. Slide 6-13 How an Online Credit Card Transaction Works Processed in much the same way that in- store purchases are Major difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions) Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bank

14. Copyright © 2004 Pearson Education, Inc. Slide 6-14 How an Online Credit Transaction Works Figure 6.4, Page 317

15. Copyright © 2004 Pearson Education, Inc. Slide 6-15 Limitations of Online Credit Card Payment Systems Security – neither merchant nor consumer can be fully authenticated Cost – for merchants, around 3.5% of purchase price plus transaction fee of 20-30 cents per transaction Social equity – many people do not have access to credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or are considered poor risk)

16. Copyright © 2004 Pearson Education, Inc. Slide 6-16 The SET (Secure Electronic Transaction) Protocol Authenticates cardholder and merchant identity through use of digital certificates An open standard developed by MasterCard and Visa Transaction process similar to standard online credit card transaction, with more identity verification Thus far, has not caught on much, due to costs involved in integrating SET into existing systems, and lack of interest among consumers Secure Electronic Transaction SET is the first global security standard for trading via the Internet.

17. Copyright © 2004 Pearson Education, Inc. Slide 6-17 How SET Transactions Work Figure 6.5, Page 320

18. Copyright © 2004 Pearson Education, Inc. Slide 6-18 Digital Wallets Concept of digital wallet relevant to many of the new digital payment systems Seeks to emulate the functionality of traditional wallet Most important functions:  Authenticate consumer through use of digital certificates or other encryption methods  Store and transfer value  Secure payment process from consumer to merchant Two major categories:  Client-based digital wallets – Gator.com, MasterCard Wallet  Server-based digital wallets – MSN Wallet

19. Copyright © 2004 Pearson Education, Inc. Slide 6-19 Promised Functionality of Digital Wallets Table 6.2, Page 323

20. Copyright © 2004 Pearson Education, Inc. Slide 6-20 E-Payment Innovation TrendsInnovationCase-studiesInvitationMy vieweBusiness.pt High-tech services «Made in Portugal» The main portuguese ATM service provider (Multibanco) is one of the most developed and innovative in the world Apart from the basic operations, the ATM network provides: “Telemultibanco”, which associates a mobile number to a certain bank account, allowing mobile transactions “Railway-CP”, which allows to buy train tickets at the ATM machines (operation receipt replaces usual ticket) “Via Verde” and “Access”, which allow non-stop in traditionally time- consuming toll operations (motorway, fueling and parking) “PMB-Electronic Purse”, a rechargeable card “Show ticket sales”, for concerts or sport events, if the promoting companies provide this service “MBNet”, special ID service for online shopping www.sibs.pt

21. Copyright © 2004 Pearson Education, Inc. Slide 6-21 Digital Cash One of the first forms of alternative payment systems Not really “cash” – rather, are forms of value storage and value exchange that have limited convertibility into other forms of value, and require intermediaries to convert Many of early examples have disappear; concepts survive as part of P2P payment systems

22. Copyright © 2004 Pearson Education, Inc. Slide 6-22 Examples of Digital Cash Table 6.3, Page 326

23. Copyright © 2004 Pearson Education, Inc. Slide 6-23 Digicash: How First Generation Digital Cash Worked Figure 6.7, Page 327

24. Copyright © 2004 Pearson Education, Inc. Slide 6-24 Online Stored Value Systems Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account Rely on value stored in a consumer’s bank, checking or credit card account

25. Copyright © 2004 Pearson Education, Inc. Slide 6-25 Mobile phones and scratch cards If you live in rural Africa, your payment options are pretty limited and so, therefore, is your participation in the wider economy. If you don't live within a hundred miles of a bank, don't have a cheque book and have never even seen a credit card or a PC, then how do you send money (perhaps for goods you want from a market) to someone else? In that environment, mobile phones provide an easy and convenient mechanism: you buy a scratch card, scratch off the panel to get the voucher number and then text that number to your counterparty. Voila! You've now sent $20, or whatever, a few hundred miles across the country for the price of a text message. And the person you sent it to can start using it right away.

26. Copyright © 2004 Pearson Education, Inc. Slide 6-26 More on mobile phones On 16 June 2004, Japan's mobile phone operator, NTT DoCoMo, announced i-mode FeliCa, a service for new handsets to act as electronic wallets. The new handsets will be available in July 2004 with Sony's contactless smartcard chips embedded in them.mobile phone DoCoMo introduced a virtual shopping mall for mobile customers in 2003. It enabled customers to purchase goods and pay by debit or credit card or by charging the transaction to their phone bills. Now, an i-mode FeliCa user will be able to wave the handsets over a sensor to pay transit fares, buy goods or confirm his or her personal identity to gain access to a location. i-mode FeliCa will allow users to buy from the 9,000 outlets participating in Sony's Edy e-money system. DoCoMo's system brings together the worlds of prepaid and postpaid transactions. customers

27. Copyright © 2004 Pearson Education, Inc. Slide 6-27 e-points http://www.epointsystem.org/ Advantages Anonymity Decentralization Micropayments Open Source No preparations necessary Peer-to-peer system http://www.epointsystem.org/~nagydani/ICETE2005.p df http://www.epointsystem.org/~nagydani/ICETE2005.p df

28. Copyright © 2004 Pearson Education, Inc. Slide 6-28 Online Stored Value Systems Table 6.4, Page 328

29. Copyright © 2004 Pearson Education, Inc. Slide 6-29 Micropayment systems Peppercoin: A low-cost electronic payment system for processing micropayments based on the work of Ron Rivest, father of the RSA Public Key crypto-security system, and Silvio Micali, two of the world's leading cryptographers and information security experts. http://www.peppercoin.com/ Clickshare allows a consumer to have one account at a most-trusted website and buy from other websites without having to pass around a credit-card number, register or give out personal information. One ID, one account, one bill. http://www.clickshare.com/

30. Copyright © 2004 Pearson Education, Inc. Slide 6-30 Merchant accounts PayPal An international system which allows individuals to send money to each other by e-mail. The service started in the United States but by November 2000 was available in 25 different countries. http://www.paypal.com/ WebMerchant Account -An online credit card processing and international merchant accounts and ecommerce for online business. http://www.paypal.com/

31. Copyright © 2004 Pearson Education, Inc. Slide 6-31 Smart Cards as Stored Value Systems Another kind of stored value system based on credit- card sized plastic cards that have embedded chips that store personal information Two types:  Contact  Contactless Examples: Mondex, American Express Blue http://projects.bus.lsu.edu/cases/mondex/mondex.ht ml http://projects.bus.lsu.edu/cases/mondex/mondex.ht ml

32. Copyright © 2004 Pearson Education, Inc. Slide 6-32 Modex http://www.mondex.com/ http://www.mondex.com/ What is Mondex®? Mondex, part of the MasterCard International suite of smart card products, enables cardholders to carry, store and spend cash value using a payment card. It is faster than handling conventional currency, and in many cases safer. It behaves exactly like cash, offering immediate transfer of value while requiring no signature, PIN or transaction authorization. The unique Mondex platform allows its use in multiple channels where cash cannot be used including: Internet Mobile phones Interactive television

33. Copyright © 2004 Pearson Education, Inc. Slide 6-33 Digital Accumulating Balance Payment Systems Allows users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the month Examples: Qpass and iPin

34. Copyright © 2004 Pearson Education, Inc. Slide 6-34 Digital Accumulating Balance Payment Systems Table 6.5, Page 332

35. Copyright © 2004 Pearson Education, Inc. Slide 6-35 Digital Credit Card Payment Systems Extend the functionality of existing credit cards for use as online shopping payment tools Focus specifically on making use of credit cards safer and more convenient for online merchants and consumers Example: eCharge

36. Copyright © 2004 Pearson Education, Inc. Slide 6-36 Digital Credit Card Payment Systems Table 6.6, Page 333

37. Copyright © 2004 Pearson Education, Inc. Slide 6-37 How a Digital Credit Card Payment Systems Works: eCharge Figure 6.9, Page 334

38. Copyright © 2004 Pearson Education, Inc. Slide 6-38 Digital Checking Payment Systems Extend the functionality of existing checking accounts for use as online shopping payment tools Examples: eCheck, Achex (MoneyZap)

39. Copyright © 2004 Pearson Education, Inc. Slide 6-39 Digital Checking Payment Systems Table 6.7, Page 335

40. Copyright © 2004 Pearson Education, Inc. Slide 6-40 How Digital Checking Works: eCheck Figure 6.10, Page 336

41. Copyright © 2004 Pearson Education, Inc. Slide 6-41 Digital Payment Systems and the Wireless Web Mobile payment (m-payments) systems not very well established yet in U.S, but with growth in Wi-Fi and 3G cellular phone systems, this is beginning to change Example: Qpass, AT&T and Wayport venture to provide mobile payment and billing called GoPort Gartner predicts m-payments worldwide will total at least $30 billion by 2002; majority of transactions will be micro-m-payments

42. Copyright © 2004 Pearson Education, Inc. Slide 6-42 Insight on Technology: Wireless Payments Follow Wi-Fi and Cellular Growth In Europe, already a number of phone-based transaction systems In U.S., development of Wi-Fi and Bluetooth expected to drive growth Prerequisites:  Development of the technology  Technology must become widely available  Technology needs backing of most of major stakeholders Challenge: Getting all the players to agree on a common secure platform for wireless e-commerce payment systems

43. Copyright © 2004 Pearson Education, Inc. Slide 6-43 B2B Payment Systems More complex than B2C Two main types:  Systems that replace traditional banks (example: Actrade)  Existing banking systems extending to B2B marketplace (example: Orbian)

44. Copyright © 2004 Pearson Education, Inc. Slide 6-44 Key Features of B2B Payment Systems Table 6.8, Page 340

45. Copyright © 2004 Pearson Education, Inc. Slide 6-45 Electronic Billing Presentment and Payment Online payment systems for monthly bills EBPP expected to grow rapidly, to nearly half all U.S. households by 2006 Different types of business models in EBPP market include:  Biller-direct  Consolidator  Portal

46. Copyright © 2004 Pearson Education, Inc. Slide 6-46 Growth of the EBPP Market Figure 6.11, Page 342

47. Copyright © 2004 Pearson Education, Inc. Slide 6-47 Types of EBPP Systems Figure 6.12, Page 344

48. Copyright © 2004 Pearson Education, Inc. Slide 6-48 Case Study: CheckFree – On Top of Electronic Billing, for Now Market leader in online billing and payment Faces a number of challenges:  Industry changing fast and leadership precarious  Although market is growing, consumers have traditionally resisted online bill payment  Conflict strategic goals of stakeholders (merchants, banks, credit companies, billing firms and consumers)  Technology changes: XML-based vs. proprietary  Competitors: PayPal, Metaventa

49. Copyright © 2004 Pearson Education, Inc. Slide 6-49 CheckFree: On Top of Electronic Billing, for Now Page 346