Online Payment Transactions

Traditional and Electronic Payment Methods

Chapter 3

Money and Banking• Money serves as a measure of value, a

medium of exchange

• Money exists in a number of forms

• Cash– Coin, paper money

• Near Cash– Checks, drafts, money orders, credit cards

Check Processing

Encryption/Decryption of Transactions

Check

• A written order on a bank or other financial institution to pay money belonging to the signer to the presenter of the check

• The most popular offline settlement method

• Not efficient for e-commerce

Money Order

• An order for the payment of a specified amount of money

• Usually issued by the post office or a bank or other financial institution

• Popular with people who do not have bank accounts or where checks are not acceptable

Credit Card

• Used to settle charges for goods or services

• Card holders pay their bills monthly and pay interest on unpaid account balances

• Issued by banks or financial institutions

• Visa and MasterCard are clearing houses for member institutions

Charge Cards

• Similar to credit cards

• Customer pays bill in full each month

• AMEX card is a popular example

Debit Cards

• Similar to credit card in operation from merchant’s perspective

• Similar to a check from customer’s perspective

Payment Processing

• A merchant must have– A merchant account– Payment processing software– Procedures to protect customers and guard

against fraud

Merchant Account

• An account with a financial institution to accept charges

• Must apply for account and be accepted

• Supply bank with financial information about anticipated transaction volume and type of business

• The bank charges for this service

Merchant Account• Charge-backs result from customer refusal

to pay a charge for a number of reasons, including returned goods, billing errors, and fraudulent charges.

• Charge-backs can be expensive and the bank may charge higher fees for higher risk enterprises and “situations.”

High Risk Factors• Customer not present (telephone and

Internet sales_

• High risk products or services (gambling, “politically incorrect,” or non-traditional products)

Payment Processing Software

• Software to facilitate authorization of customer charges to credit or debit charge account.

• Alternative is to outsource to 3rd party for a fee.

Verification Software

Security for Charge Settlement• Security must be provided for customer

transaction.

• Secure Sockets Layer (SSL) technology provides encrypted transmission of data between customer and a secure server.

Authentication

• SSL requires a digital certificate that verifies a sender’s identity.

• An e-business obtains its certificate from a certificate authority such as VeriSign.

A Digital Certificate

Fraud• Credit card fraud is a major problem

• As high as 1.15 percent of transactions were found to be fraudulent

• Security: how much do you want? – Too much will cost sales but reduce fraud to

nearly nothing, and too little will result in higher losses.

Security Measures• Verify validity of charge.

• Ship via currier and require receipt signature.

• Require and verify the complete address and telephone number of customer.

• Reject orders from anonymous email addresses.

Electronic Payment Forms• Various alternative payment forms include:

• Electronic Cash– Electronic checks– Smart cards– Person-to-person payment systems

Electronic Cash• Variety of products available

• Allow for online purchases without a credit account

• Allow customer to avoid sharing account data while guaranteeing payment to vendor

Smart Cards

• A store value card

• Popular in Europe; not yet common in North America

• Needs special equipment to work with a PC

Electronic Checks

• An electronic version of a paper check

• Essentially a form of Electronic Funds Transfer (EFT)

Person to Person Systems

• A way to send money, a funds transfer

Person to Person Payment

Person to Person (P2P) System