1. Electronic Payment Systems

2. Objectives of this topic
At the end of this lesson, you should be able to meet the following objectives
Describe the types of electronic payment systems
Explain how online credit card payment systems work and discuss their current limitations
Understand the features and functionality of digital wallets
Describe the features and functionality of the major types of digital payment systems in the B2C arena
Describe the features and functionality of the major types of digital payment systems in the B2B arena
Describe the features and functionality of electronic billing presentment and payment systems

3. Introduction
Collecting revenue from sales of goods and services is a major activity when running a business
Challenge in e-commerce
For businesses to reliably and efficiently collect revenue from customers online
Reliably and trustworthy way for customers to pay for goods and services online
Customer
Money
Merchant
Goods & Services

4. Preferences of Stakeholders
There are three stakeholders in most payment systems
Consumer
Merchant
Financial institutions
Each has a different preferences of characteristics of payment system
Customers
Prefer low-cost, low risk, refutable, convenient, reliable payment mechanism
Prefer low-cost, low risk, irrefutable, secure and reliable payment mechanism
Financial institution
Prefer secure payment systems that transfer risks and costs to consumers and merchants, while maximising transaction fees payable to themselves

5. Types of Payment Systems
Emergence of e-commerce has created new financial needs cannot be fulfilled by traditional payment system
Example
Auctions between customers require a peer-to-peer payment method via
Some types of online products require micropayments where price of merchandise is very small (RM 1.99 for a ring tone, and RM 4.99 monthly subscription fee to get daily information of commodity prices)

6. Types of Payment Systems
Payment for online purchases
Credit cards most popular in U.S.
Checks and cash-on-delivery popular in Europe
Bank transfers, cash-on-delivery popular in Japan
New forms of payment systems
Digital cash
Online stored value systems
Digital accumulating balance payment systems
Digital credit accounts
Digital checking

7. Types of Electronic Payment Systems
Digital cash
Systems that generate a private form of currency that can be spent at e-commerce sites
Online stored value systems
Systems that rely on prepayments, debit cards, or checking accounts to create value in an account that can be used for e-commerce shopping
Digital accumulating balance payment systems
Systems that accumulate small charges and bill the consumer periodically (suitable for micropayments)
Digital credit accounts
Systems that extend the online functionality of existing credit card payment systems
Digital checking
Systems that create digital checks for e-commerce remittances and extend the functionality of existing bank checking systems

8. Credit Card E-Commerce Transactions
How online credit card transaction works
Similar to in-store purchases
Major difference
Online merchants cannot see actual credit card
No card impression is taken
No signature is available
Categorised as Card Not Present (CNP) transaction
CNP is the major reason why customer can dispute charges
Merchant face the risk of transactions disallowed and reversed even when goods have already been shipped or digitally downloaded

9. Credit Card E-Commerce Transactions
How online credit card transaction works
Five parties involved
Consumer
Merchant
Clearinghouse
Merchant bank
Issuing bank

10. Credit Card E-Commerce Transactions
How online credit card transaction works
Step one
When customer wants to pay, a secure tunnel through the Internet is created using SSL and credit card information is sent to the merchant
Step two
Once the credit card information is received, the merchant contacts a clearinghouse
Step three
The clearinghouse requests the issuing bank to authenticate and verify the customer account balance
Step four
Issuing bank credits merchant account

11. Credit Card E-Commerce Transactions
Secure Electronic Transaction Protocol (SET)
An open standard for the e-commerce industry developed and offered by MasterCard and Visa as a way to facilitate and encourage improved security for credit card transactions

12. E-Commerce Digital Payment Systems Business-2-Customer
Digital wallets
Similar function to our traditional wallet where we keep our identification card (IC), money, credit cards, receipts, photographs
Functions of a digital wallet
Authenticate the consumer through the use of digital certificates or other encryption methods
Store and transfer value
Secure payment process from customer to merchant

13. E-Commerce Digital Payment Systems Business-2-Customer
Digital cash
It is not a legal tender (not cash) but a form of value storage and value exchange

14. E-Commerce Digital Payment Systems Business-2-Customer
Online stored value systems
Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account
Some systems require the user to sign up and transfer money from their credit card accounts into an online stored value account

15. E-Commerce Digital Payment Systems Business-2-Customer
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
Ideal for purchasing digital products such as music tracks, chapters of books, articles from newspapers

16. E-Commerce Digital Payment Systems Business-2-Customer
Digital checking payment systems
Seek to extend the functionality of existing checking accounts for use as online shopping payment tools
Some systems are software-based (example-Achex)
Some systems are hardware-based (eCheck) in the form of a PC card

17. E-Commerce Digital Payment Systems Business-2-Business
Most payment systems of B-2-B are similar to those in B-2-C
However, they pose special challenges and are much more complex than B-2-C payments
Many business documents may be needed to facilitate the transaction
Must link to existing ERP systems that integrate inventory, production, shipping, and other corporate data, and into EDI systems
Larger size of transaction than B-2-C
More frequent than B-2-C

18. E-Commerce Digital Payment Systems Business-2-Business
Two main types of B-2-B payment systems
Systems that replace traditional banks (Digital checking)
Existing banking systems extending to the B2B market (balance transfer)

19. E-Commerce Digital Payment Systems Business-2-Business
Electronic billing presentment and payment (EBPP)
New forms of online payment systems for monthly bills
Average cost of $3 to process bills physically but only 33 cents to process electronically
EBPP services allow consumers to view bills electronically and pay them through EFT from banks or credit card accounts
Market for EBPP will grow once it is realised
the amount of savings through online billing
Payments can be received more quickly

20. End of Notes
Please go back to the beginning of this slide presentation and go through the topic objectives to evaluate whether you have achieved them
If you have not, please re-read the notes until you achieve all the objectives