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Chapter 7

Electronic Payment Systems

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Learning Objectives

In this chapter, you will learn about:• Distinct methods to collect payments from

customers• The history and near-term future for

electronic cash• The implementation of electronic cash

systems• Electronic wallets and how they work

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Learning Objectives

• The role of smart cards in electronic commerce

• Credit and debit card processing for electronic commerce transactions

• The most popular electronic payment systems

• The SET protocol and how it protects credit card transactions

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The Basics of 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.

• Four technologies to be used: electronic cash, software wallets, smart cards, and credit/debit cards.

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Electronic Cash

• Electronic cash is attractive in two arenas:– in the sale of goods and services of less than $10– in the sale of higher-priced goods and services to those

without access to credit cards

• Internet payments for items costing from a few cents to approximately $10 are called micropayments.

• Companies offer micropayment systems include iPin, eChange, Qpass, 1ClickBrands, and PayPal.com.

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Electronic Cash

• Concerns about electronic payment methods include:– privacy and security– independence– portability– divisibility– convenience

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Electronic Cash

• 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

• Beenz is a kind of scrip that consumers can earn and exchange for goods and services.

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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.

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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.

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Disadvantages of Electronic Cash

• The concept of an Internet tax poses many problems and questions.

• Because true electronic cash is not traceable, money laundering is a problem.

• Electronic cash is susceptible to forgery.

• Electronic cash is, so far, a commercial flop.

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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.

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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.

Click to see Figure 7-3:

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Electronic Cash Systems

• Compaq Computer’s electronic cash technology allows users to use its NetCoin electronic cash.

• CyberCash created CyberCoin for micropayments.

• No standards were ever developed for the entire electronic cash system.

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CheckFree

• CheckFree provides online payment processing services to both large corporations and individual Internet users.

• CheckFree permits users to pay all their bills with online electronic checks.

• CheckFree signed an agreement with Yahoo! to provide Yahoo! customers the option of paying directly from the Yahoo! site.

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Clickshare

• Clickshare is an electronic cash system aimed at magazine and newspaper publishers.

• Users with an ISP that supports Clickshare are automatically registered with Clickshare.

• Clickshare tracks users with the standard HTTP Web protocol.

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DigiCash (eCash)

• DigiCash was a trailblazer in the electronic cash field.

• DigiCash made software products that allowed users to purchase goods and services on the Internet and pay for them using anonymous electronic cash.

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eCoin.Net

• ECoins are electronic tokens issued by eCoin.net.• Consumers can use the tokens to pay for online

goods.• The electronic cash is stored in an eCoin wallet on

the consumer’s computer.• The eCoin system uses a three-link chain

consisting of a consumer, a merchant, and the eCoin server.

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InternetCash

• InternetCash provides electronic currency that is very similar to traditional cash.

• Customers must first purchase an InternetCash card from stores such as Circle K.

• Customers then go online and activate their cards by entering a 20-digit code and creating a PIN.

• Once their card is activated, customers can pay for purchases using the InternetCash card at any site accepting them.

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MilliCent

• MilliCent is an electronic scrip system that does not issue one standard currency.

• Each participating merchant creates and sells its own scrip to a broker at discount.

• Consumers register with one broker and buy broker scrip in bulk.

• Paying for an item involves simply transferring a merchant’s scrip to the merchant in exchange for a purchased item.

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PayPal

• PayPal.com is a free service that earns a profit on the float, which is money that is deposited in PayPal account.

• PayPal is very popular with eBay auction customers.

• PayPal allows customers to send money instantly and securely to anyone with an e-mail address, including an online merchant.

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Loyalty and Rewards Systems

• Scrip is a form of electronic cash that is stored on your computer or on the server of the scrip vendor.

• Loyalty and rewards programs endorsed by various Web stores frequently use scrip to reward Web visitors.

• Flooz and beenz are two most popular brands of scrip.

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Beenz

• Beenz is a brand of scrip that is marketed as a loyalty reward program for Internet consumers.

• Consumers collect beenz and later redeem them for merchandise at participating merchant Web sites.

• On average, on beenz is worth approximately one cent.

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Flooz

• Flooz is scrip that you purchase using a credit card and either use for your own purchases or send to a recipient as a gift or payment.

• Flooz is redeemable for purchases at any merchant that accepts it.

• The Flooz exchange rate is one Flooz equals to one dollar.

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Electronic Wallets

• An electronic wallet serves a function similar to a physical wallet, also:– Holds credit cards, electronic cash, owner

identification, and owner contact information– Provides owner contact information at an

electronic commerce site’s checkout counter– Contains an address book

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Electronic Wallets

• 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

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Electronic Wallets

• Electronic wallets are particularly useful and save a lot of time to fill out electronic checkout counter form.

• Electronic wallets can enter required information into checkout forms automatically.

• MasterCard offers its own electronic wallet, called the MasterCard e-wallet.

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eWallet

• EntryPoint produces eWallet, a free wallet software that consumers download and install on their computer.

• eWallet stores personal and payment information inside the electronic wallet.

• To protect your information, eWallet is encrypted and password protected.

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Microsoft 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.

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The W3C Proposed Standard

• The W3C proposed standards for electronic wallets will impact every vendor’s wallet offerings.

• The W3C Electronic Commerce Interest Group (ECIG) developed the Common Markup for Web Micropayment Systems public working draft.

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The ECML Standard

• The consortium of America Online, Brodia, Compaq, CyberCash, 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.

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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.

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What is a Smart Card?

• A smart card is a plastic card with an embedded microchip containing information about you.

• A smart card contains private user information such as financial facts, private encryption keys, account information, credit card numbers, health insurance information, etc.

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Mondex Smart Card

• Mondex is a smart card that holds and dispenses electronic cash.

• Mondex requires special equipment such as card reader to process.

• Containing a microcomputer chip, Mondex cards can accept electronic cash directly from a user’s bank account.

Click to see Figure 7-18:

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Credit 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.

• The collective term “payment card” will refer to both types of card.

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Advantages and Disadvantages of Payment Cards

• Advantages:– Payment cards provide fraud protection– Their worldwide acceptance– They are good for online transactions

• Disadvantages:– Payment card service companies charge

merchants per-transaction fee and monthly processing fee

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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.

Click to see Figure 7-19:

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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.

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Secure Electronic Transaction (SET) Protocol

• The SET specification uses public key cryptography and digital certificates for validating both consumers and merchants.

• The SET protocol provides confidentiality, data integrity, user and merchant authentication, and consumer nonrepudiation.