1. LECTURE 7 REF: CHAPTER 11 ELECTRONIC COMMERCE PAYMENT SYSTEMS PREPARED BY : L. Nouf Almujally Copyright © 2010 Pearson Education, Inc. 1

2. Learning Objectives 1. Understand the shifts that are occurring with regard to online payments. 2. Discuss the players and processes involved in using credit cards online. 3. Discuss the different categories and potential uses of smart cards. 4. Discuss stored-value cards and identify under what circumstances they are best used. 5. Describe the situations where e-micropayments are used and the alternative ways for handling these situations. Copyright © 2010 Pearson Education, Inc. 10-2

3. 11.1 The Payment Revolution Today, we are in the midst of a worldwide payment revolution, with cards and electronic payments taking the place of cash and checks Copyright © 2010 Pearson Education, Inc. 11-3

4. Critical factors that come into play in determining whether a particular method of e-payment achieves critical mass: – Independence( need sw and HW) – Interoperability and Portability (linked with other system) – Security – Anonymity – Divisibility – Ease of Use – Transaction Fees – International Support – Regulations Copyright © 2010 Pearson Education, Inc. 11-4 11.1 The Payment Revolution

5. 11.2 Using Payment Cards Online payment card Electronic card that contains information that can be used for payment purposes. Two forms of payment cards: 1. Credit cards Provides the holder with credit to make purchases up to a limit fixed by card issuer. E.g., Visa, MasterCard 2. Debit cards The money for a purchased item comes directly out of the holder’s checking account. E.g., Visa and MasterCard Copyright © 2010 Pearson Education, Inc. 11-5

6. 11.2 Using Payment Cards Online PROCESSING CARDS ONLINE Two phases: 1. authorization Determines whether a buyer’s card is active and whether the customer has sufficient funds 2. settlement Transferring money from the buyer’s to the merchant’s account Copyright © 2010 Pearson Education, Inc. 11-6

7. 11.2 Using Payment Cards Online There are three basic configurations for processing online payments used by merchants: Own the payment software Use a point of sale system (POS) operated by an acquirer Use a POS operated by a payment service provider payment service provider (PSP) A third-party service connecting a merchant’s EC system to the appropriate acquiring bank or financial institution. PSPs must be registered with the various card associations they support Copyright © 2010 Pearson Education, Inc. 11-7 Copyright © 2010 Pearson Education, Inc.

8. 11.2 Using Payment Cards Online The key participants in processing card payments online include the following: – Acquiring bank: offer special account called “internet Merchant Account” that enable card authorization and payment processing – Credit card association : financial institution providing card services to banks (e.g., Visa and master card ) – Customer: the individual owning the card – Issuing bank: financial institution that provide the customer with card – Merchant: the company that sell product and services – Payment processing service : the service provided connectivity among merchants, customers, and financial networks that enable authorization and payment. – Processor : the data center that processes card transactions to merchants Copyright © 2010 Pearson Education, Inc. 11-8

9. 9 1.Cardholder presents an account as payment for a purchase. 2.The transaction information is submitted to the merchant’s acquiring bank for processing. 3.The acquiring bank sends transaction information through Interchange, a credit card network of financial entities. 4.Interchange routes the transaction to the cardholder’s issuing bank. 5.The issuing bank determines if there are available funds in the cardholder’s account to approve the transaction. 6.Interchange relays authorized or declined results to the merchant’s acquiring bank. 7.The merchant’s acquiring bank relays this information back to the merchant. 8.The merchant completes their transaction with the cardholder according to the information provided.

10. 11.2 Using Payment Cards Online FRAUDULENT CARD TRANSACTIONS - The key tools used in combating fraud: Address Verification System (AVS) Detects fraud by comparing the address entered on a Web page with the address information on file with the cardholder’s issuing bank Manual review The staff manually review suspicious orders card verification number (CVN) Detects fraud by comparing the verification number printed on the signature strip on the back of the card with the information on file with the cardholder’s issuing bank Negative lists file the include customer’s information(IP Add, name, shipping add. Contact #). Customer transaction is matched against this file and flagged if has problem 11-10 Copyright © 2010 Pearson Education, Inc.

11. 11.3 Smart Cards smart card An electronic card containing an embedded microchip that enables predefined operations or the addition, deletion, or manipulation of information on the card Copyright © 2010 Pearson Education, Inc. 11-11

12. 11.3 Smart Cards TYPES OF SMART CARDS – contact card A smart card containing a small gold plate on the face that when inserted in a smart card reader makes contact and passes data to and from the embedded microchip – contactless (proximity) card A smart card with an embedded antenna, by means of which data and applications are passed to and from a card reader unit or other device without contact between the card and the card reader Copyright © 2010 Pearson Education, Inc. 11-12 Copyright © 2010 Pearson Education, Inc.

13. smart card reader Activates and reads the contents of the chip on a smart card, usually passing the information on to a host system smart card operating system Special system that handles file management, security, input/output (I/O), and command execution, and provides an application programming interface (API) for a smart card Copyright © 2010 Pearson Education, Inc. 11-13 11.3 Smart Cards

14. APPLICATIONS OF SMART CARDS Retail Purchases Transit Fares Copyright © 2010 Pearson Education, Inc. 11-14 11.3 Smart Cards

15. 11.4 Stored-Value Cards stored-value card A card that has monetary value loaded onto it and that is usually rechargeable Stored-value cards come in two varieties: Closed loop : are single-purpose cards issued by a specific merchant or merchant group to allow users to make purchases from the value associated with the card. A closed-loop card can only be spent for its initial value Open loop : are multipurpose cards that can be used to make debit transactions at a variety of retailers and can have additional value added in at any time. Copyright © 2010 Pearson Education, Inc. 11-15

16. 11.5 E-Micropayments E-micropayments Small online payments, typically under $10 Five basic micropayment models that do not depend specially or directly on credit or debit cards : 1. Aggregation: payment are batched and processed after a certain time has expired ( ex. 20 business days) or reached certain amount ( ex. 20$). E.g., Apple’s iTunes) 2. Direct payment: micropayments are added to monthly bill. E.g., phone bill 3. Subscriptions: single payment covers access to content for defined period of time. E.g., gaming company, newspapers 4. À la carte: process purchases as they occur and relay on the volume of purchases. E.g., McDonald’s Copyright © 2010 Pearson Education, Inc. 11-16

17. Electronic Cash Systems PayPal is a global e-commerce business allowing payments and money transfers to be made through the Internet 17

18. Copyright © 2010 Pearson Education, Inc. 18