1. Chapter 12 Payment Systems for Electronic Commerce

2. Learning Objectives In this chapter, you will learn about: The ways that companies operating online collect payments from customers Credit and debit card processing for electronic commerce transactions The history and future for electronic cash The implementation of electronic cash systems How electronic wallets work The use of stored-value cards in electronic commerce Protocols used to protect credit card transactions

3. Electronic Payment Systems Electronic commerce involves the exchange of some form of money for goods and services. Implementation of electronic payment systems is in its infancy and still evolving. Electronic payments are far cheaper than the traditional method of mailing out paper invoices and then processing payments received.

4. Electronic Payment Systems Estimates of the cost of billing one person vary between $1 and $1.50. Sending bills and receiving payments over the Internet promises to drop the transaction cost to an average of 50 cents per bill. Today, three basic ways to pay for purchases dominate business-to-consumer commerce.

5. Electronic Payment Systems

6. Electronic cash distribution and payment can be handled by wallets, smart cards, or proprietary, limited-use scrip. Scrip is digital cash minted by a company instead of by a government. Several companies, such as eCash Technologies, sell software that enables Web merchants to a offer a variety of payment systems.

7. Electronic Payment Systems

8. Debit Cards, Credit Cards and Charge Cards A credit card, such as a Visa or a MasterCard, has a preset spending limit based on the user’s credit limit. A charge card, such as one from American Express, carries no preset spending limit. A debit card removes the amount of the charge from the cardholder’s account and transfers it to the seller’s bank. The collective term ‘payment card’ refers to credit cards, debit cards, and charge cards.

9. Advantages and Disadvantages of Payment Cards Advantages: Payment cards provide fraud protection. They have worldwide acceptance. They are good for online transactions. Disadvantages: Payment card service companies charge merchants per-transaction fees and monthly processing fees.

10. Payment Acceptance and Processing Open and closed loop systems will accept and process payment cards. A merchant bank or acquiring bank is a bank that does business with merchants who want to accept payment cards. Software packaged with your electronic commerce software can handle payment card processing automatically.

11. Payment Acceptance and Processing

12. Electronic Cash Electronic cash is a general term that describes the attempts of several companies to create a value storage and exchange system that operates online in much the same way that government-issued currency operates in the physical world. Concerns about electronic payment methods include: Privacy Security Independence Portability Convenience

13. Electronic Cash (cont.) Electronic cash should have two important characteristics in common with real currency: It must be possible to spend electronic cash only once. Electronic cash ought to be anonymous. The most important characteristic of cash is convenience. If electronic cash requires special hardware or software, it will not be convenient for people to use.

14. Electronic Cash (cont.)

15. Holding Electronic Cash: Online and Offline Cash Two approaches to holding cash: online storage and offline storage. Online cash storage means that an online bank is involved in all transfers of electronic cash. Offline cash storage is the virtual equivalent of money you keep in your wallet. However, it must prevent double or fraudulent spending.

16. Advantages of Electronic Cash Electronic cash transactions are more efficient and less costly than other methods. The distance that an electronic transaction must travel does not affect cost. The fixed cost of hardware to handle electronic cash is nearly zero. Electronic cash does not require that one party have any special authorization.

17. Disadvantages of Electronic Cash Electronic cash provides no audit trail. Because true electronic cash is not traceable, money laundering is a problem. Electronic cash is susceptible to forgery. So far, electronic cash is a commercial flop.

18. How Electronic Cash Works To establish electronic cash, a consumer goes in person to open an account with a bank. The consumer uses a digital certificate to access the bank through the Internet to make a purchase. Consumers can spend their electronic cash at sites that accept electronic cash for payment. The electronic cash must be protected from both theft and alteration.

19. Providing Security for Electronic Cash To prevent double spending, the main security feature is the threat of prosecution. A complicated two-part lock provides anonymous security that also signals when someone is attempting to double spend cash. One way to trace electronic cash is to attach a serial number to each electronic cash transaction.

20. Providing Security for Electronic Cash

21. Electronic Wallets An electronic wallet serves a function similar to a physical wallet; it holds credit cards, electronic cash, owner identification, and owner contact information provides owner contact information at an electronic commerce site’s checkout counter Some electronic wallets contain an address book.

22. Electronic Wallets (cont.) Electronic wallets make shopping more efficient. Electronic wallets fall into two categories based on where they are stored: Server-side electronic wallet Client-side electronic wallet

23. Electronic Wallets (cont.) Electronic wallets store shipping and billing information, including a consumer’s first and last names, street address, city, state, country, and zip or postal code. Electronic wallets automatically enter required information into checkout forms.

24. Microsoft.NET Passport Microsoft Passport Wallet comes preinstalled in Internet Explorer 4.0 and higher versions. All the personal data you enter into your Microsoft Passport, including; your name, address, and credit card information, are encrypted and password- protected. Passport consists of four integrated services: Passport single sign-in service, Passport Wallet Service, Kids Passport service, and public profiles.

25. Microsoft.NET Passport

26. The W3C Proposed Standard The W3C Electronic Commerce Interest Group (ECIG) developed a set of standards called the the Common Markup for Micropayment Per-Fee-Links. This standard identifies existing system micropayment types of online connections, stored- value systems, and combined online-offline systems.

27. The ECML Standard The consortium of America Online, Compaq, Dell, IBM, Microsoft, Visa USA, and MasterCard has agreed on a technology called ECML, or electronic commerce modeling language. The ECML standard will expedite online processing for customers by simplifying the form-filling procedure.

28. Stored-Value Cards A stored-value card can be an elaborate smart card or a simple plastic card with a magnetic strip that records the currency balance. A smart card is better suited for Internet payment transactions because it has limited processing capability.

29. Smart Card A smart card is a plastic card with an embedded microchip containing information about you. A smart card can store about 100 times the amount of information that a magnetic strip plastic card can store. A smart card contains private user information, such as financial facts, private encryption keys, account information, credit card numbers, health insurance information, etc.

30. Smart Card

31. Mondex Smart Card Mondex is a smart card that holds and dispenses electronic cash. Mondex requires special equipment, such as a ‘card reader’, to process. Containing a microcomputer chip, Mondex cards can accept electronic cash directly from a user’s bank account.

32. Mondex Smart Card

33. Secure Electronic Transaction (SET) Protocol SET is a secure protocol jointly designed by MasterCard and Visa with the backing of Microsoft, Netscape, IBM, GTE, SAIC, and other companies. The purpose of SET is to provide security for card payments as they traverse the Internet between merchant sites and processing banks.

34. Chapter 13 Planning for Electronic Business

35. Learning Objectives In this chapter, you will learn about: Identifying the value of electronic commerce initiatives Aligning implementation plans with strategies Deciding which electronic commerce project elements to outsource

36. Learning Objectives (cont.) Selecting Web hosting services Using incubators and fast venturing techniques to launch Internet business initiatives Using project and portfolio management techniques to plan and control electronic commerce activities Staffing electronic commerce activities

37. Planning the Electronic Commerce Project A successful business plan for an electronic commerce initiative should include activities that will: Identify the initiative’s specific objectives Link those objectives to business strategies Manage the implementation of those business strategies Oversee the continuing operations of the initiative after it is launched

38. Identifying Objectives Common objectives include: Increasing sales in existing markets Opening new markets Serving existing customers better Identifying new vendors Coordinating more efficiently with existing vendors Recruiting employees more effectively Resource decisions should consider the expected benefits and costs of meeting the objectives.

39. Linking Objectives to Business Strategies Businesses can use downstream strategies, which are tactics that improve the value that the business provides to its customers. Businesses can pursue upstream strategies that focus on reducing costs or generating value by working with suppliers or inbound logistics.

40. Linking Objectives to Business Strategies The Web is an attractive sales channel. The Web can be used to complement business strategies and improve competitive positions. Electronic commerce opportunities can inspire businesses to undertake many activities.

41. Linking Objectives to Business Strategies More companies are taking a closer look at the benefits and costs of their electronic commerce projects. A good business plan will set specific objectives for the benefits to be achieved and costs to be incurred. Companies use pilot Web sites to test an electronic commerce idea, and then release a production version when it works well.

42. Measuring Benefit Objectives Many companies create Web sites to build their brands or enhance existing marketing programs. These companies can set goals in terms of increased brand awareness, as measured by market research surveys. Companies that sell goods or services on their sites can measure sales volumes in units or dollars.

43. Measuring Benefit Objectives Companies can use a variety of similar measurements to assess the benefits of other electronic commerce initiatives. Supply chain managers can measure supply cost reductions, quality improvements, etc.

44. Measuring Benefit Objectives

45. Measuring Cost Objectives Many changes in the cost of hardware are downward. The increasing sophistication of software provides an ever-increasing demand for newer hardware. The project budget must include the cost of hiring, training, and personnel.

46. Measuring Cost Objectives Based on data collected in separate recent surveys, International Data Corporation and the GartnerGroup both estimated that the cost for a large company to build and implement an adequate entry-level electronic commerce site was about $1 million. About 79% of that cost was labor related 10% was the cost of software 11% was the cost of hardware

47. Measuring Cost Objectives Recent estimates of the cost to build small Web sites have continued to increase as more companies establish themselves on the Web. Expensive features, such as shopping carts and search engines, have become standard on even the most basic sites. Analysts have estimated the minimum dollar amount needed to open an entry level electronic commerce Web site at $150,000.

48. Measuring Cost Objectives

49. The McKinsey study estimated costs for two types of magazine sites: a full portal site that would serve as a destination in itself and a more limited magazine companion site. The full portal site cost estimate was $2.4 million to build and $4.3 million per year to maintain, with a staff of 35 people. The companion site cost estimate was $150,000 to build and $270,000 per year to maintain, with a staff of two people.

50. Measuring Cost Objectives Kmart’s Web store, Blue-Light.com, cost more than $140 million to create. The site is certainly well designed and highly functional, but the typical visitor would never guess how much this site cost.

51. Measuring Cost Objectives

52. Comparing Benefits to Costs If the benefits exceed the cost of a project by a comfortable margin, the company invests in the project. Companies should evaluate each element of their electronic commerce strategies using this cost/benefit approach. Managers often use return on investment (ROI) to evaluate any capital investment.

53. Comparing Benefits to Costs

54. Although most companies evaluate the anticipated value of electronic commerce initiatives in some way before approving them, many companies see these projects as absolute necessities. These companies fear being left behind as competitors stake their claims in the online market space. The value of early positioning in a new market is so great that many companies are willing to invest large amounts of money with few near-term profit prospects.

55. Comparing Benefits to Costs Newspaper Web sites are a good example of this desire to establish a foothold in the online market space. Profitable electronic commerce initiatives in the newspaper business, such as Gannet’s USA Today and The Wall Street Journal’s WSJ.com sites, are few.

56. Strategies for Web Site Development The evolution of Web site functions: From the static brochures of the early days of electronic commerce To transaction processing tools To today’s automated homes for business processes of all kinds

57. Strategies for Web Site Development

58. The transformation of Web site functions occurred rapidly, taking only a year or two in most companies. Few businesses have caught up with the changes in terms of how they develop Web sites. The purposes and scope of Web sites have increased greatly, but few businesses today manage them as the dynamic business applications they have become.

59. Strategies for Web Site Development Many large and medium-sized companies have found it extremely difficult to develop new information systems and Web sites that work with their existing systems to create new markets or reconfigure their supply chains.

60. Internal Development vs. Outsourcing The key to success is finding the right balance between outside and inside support for the project. Hiring another company to provide the outside support for the project is called outsourcing.

61. The Internal Team The first step in determining which parts of a project to outsource is to create an internal team that is responsible for the project. Business knowledge and creativity are much more important than technical expertise in establishing successful electronic commerce.

62. The Internal Team (cont.) Measuring the achievement of an internal team is very important. Customer satisfaction, number of sales leads generated, and reductions in order-processing time are examples of metrics that can provide a sense of the team’s level of accomplishment.

63. Early Outsourcing In many electronic commerce projects, the company outsources the initial site design and development to launch the project quickly. The outsourcing team then trains the company’s employees in the new technology before handing the operation of the site over to them. This approach is called early outsourcing.

64. Late Outsourcing The company does the initial design, development, implementation, and operates the system until it becomes stable. After the company has gained all the competitive advantages provided by the system, the maintenance of the electronic commerce system can be outsourced. This approach is called late outsourcing.

65. Partial Outsourcing In partial outsourcing, the company identifies specific portions of the project that can be completely designed, developed, implemented, and operated by another firm that specializes in a particular function. E-mail systems, electronic payment systems, and Web hosting are examples of partial outsourcing projects.

66. Partial Outsourcing Another common example of partial outsourcing is an electronic payment system. Web hosting is one of the most common elements of electronic commerce initiatives that companies outsource using partial outsourcing.

67. Selecting a Hosting Service The internal team should be responsible for selecting the ISP that will provide the site’s hosting service. For smaller electronic commerce projects, teams can consult an ISP directory, such as ‘The List’. For larger Web sites, the team will want to obtain the advice of consultants or other firms that rate ISPs and CSPs, such as ‘Keynote Systems’.

68. Selecting a Hosting Service (cont.) The factors to evaluate when selecting a hosting service include: Functionality Reliability Bandwidth and server scalability Security Backup and disaster recovery Cost

69. Selecting a Hosting Service (cont.) Determine the functionality offered by a hosting service and carefully evaluate whether that functionality will be sufficient to meet the needs of your Web site. Because the company’s information on customers, products, pricing, and other data will be placed in the hands of the service provider, the vendor’s security policies and practices are very important.

70. New Methods for Implementing Partial Outsourcing New ways of implementing the partial outsourcing strategy have evolved for Web businesses. Two of the more popular methods are: Incubators Fast venturing

71. Incubators An incubator is a company that offers start-up companies a physical location with offices, accounting and legal assistance, computers, and Internet connections at a very low monthly cost. Incubators might offer seed money, management advice, and marketing assistance. In exchange, the incubators receive an ownership interest in the company.

72. Incubators Some companies have created internal incubators. A number of companies have used internal incubators in the past to develop technologies that the companies planned to use in their main business operations. Recently companies, such as Matsushita Electric’s U.S. Panasonic division, have started internal incubators to help launch new companies that will grow to become important strategic partners.

73. Fast Venturing In fast venturing, an existing company that wants to launch an electronic commerce initiative joins external equity partners and operational partners to scale up the project rapidly. Equity partners are usually banks or venture capitalists. Operational partners are firms that have experience in moving projects along.

74. Fast Venturing

75. Managing Electronic Commerce Implementations The best way to manage any complex business software implementation is to use formal project management techniques. Individual projects can become so large that it becomes impossible for managers to maintain control without some kind of assistance.

76. Project Management Project management is a collection of formal techniques for planning and controlling the activities undertaken to achieve a specific goal. The project plan includes criteria for cost, schedule, and performance. It helps project managers make intelligent trade-off decisions regarding these three criteria.

77. Project Management (cont.) Project managers use specific application software called project management software to help them manage projects. Microsoft Project and Primavera Project Planner are tools for managing resources and schedules.

78. Project Management (cont.) Project management software can help the team manage the tasks assigned to consultants, technology partners, and outsourced service providers. The Project Management Institute is a not-for-profit organization devoted to the promotion of professional project management practices.

79. Project Portfolio Management Project portfolio management is a technique in which each project is monitored as if it were an investment in a financial portfolio. In project portfolio management, the CEO assigns a ranking for each project based on its importance to the strategic goals of the business and its level of risk.

80. Staffing the Operation Regardless of outsourcing, an internal team must determine the staffing needs of the electronic commerce initiative. The general areas of staffing include: Business management Application specialists Customer service staff Systems administration Network operations staff Database administration

81. Staffing the Operation Some companies outsource parts of their customer relationship management operation to independent call centers. A call center is a company that handles incoming customer telephone calls and e-mails for other companies.

82. Post-Implementation Audits A post-implementation audit is a formal review of a project after it is up and running. The post-implementation audit gives managers a chance to examine the objectives, performance specifications, and cost estimates; to schedule delivery dates that were established in its planning stage; and to compare them to what actually happened.