IPS Ecommerce Lecture Notes4

8/3/2019 IPS Ecommerce Lecture Notes4

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Payment Systems For Electronic Commerce

The emergence of e-commerce has created new

financial needs that in many cases cannot be

effectively fulfilled by the traditional payment

systems.

Recognizing this, virtually all interested parties are

exploring various types of electronic payment

system and issues surrounding electronic paymentsystem and digital currency.


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E-payment systems

To transfer money over the

Networks/Internet

Methods of traditional payment

Check, credit card, or cash

Methods of electronic payment

Electronic cash, software wallets, smart cards,

and credit/debit cards

Scrip is digital cash minted by third-party

organizations

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Payment Systems For Electronic Commerce

Broadly electronic payment systems can be classified intofour categories:

Online Credit Card Payment System,

Online Electronic Cash System

Electronic Cheque System

Smart Cards based Electronic Payment System

Each payment system has its advantages and disadvantagesfor the customers and merchants. These payment systems

have numbers of requirements: e.g. security, acceptability,

convenience, cost, anonymity, control, and traceability.

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4

Digital Payment Systems

Digital payment system: Allows transfer of

value without transfer of physical objects.

Payment by bits rather than atoms.

00101 00 1 1110


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5

Characteristics of E-payment

Independence Interoperability and portability

Require intermediaries to provide security,identification, authentication and payment

support

Anonymity (Lack of face to face interaction)

Divisibility

Ease of use Transaction fees

Critical mass

Lack of trust


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Size of Electronic Payments

Electronic payment system is conducted in

different ecommerce categories such as

Business-to-Business (B2B), Business-to-Consumer (B2C), Consumer-to-Business

(C2B) and Consumer-to-Consumer (C2C).

Each of which has special characteristicsthat depend on the value of order.

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The Payment Process

SOURCE: PHILIP TROMP, PERAGO.COM

InitiatePayment

CompletePayment

Notify ofPayment

Agree onTrade

CompleteTrade

Buyer

BuyerPaymentAccessPoint

Bank Clearing House Bank

SellerPaymentAccess

PointSeller

BANKING SYSTEM

CUSTOMER PAYMENT SERVICE SYSTEM

NATIONAL ECONOMY / FINANCIAL MARKETS

Clear/Switch Settle

InstructPayment

INTERBANK SYSTEM

Central Bank
http://www.perago.com/http://www.perago.com/


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Electronic Payment= electronic movement of money

How is the money represented?

How is the transfer accomplished? Relationship to the central bank?

Security, auditability, nonrepudiation


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ePayment System Issues

Physical support (smart card, files, encrypted strings)

Value representation (denominations, numbers)

Location of value store (bank, electronic wallet)

Discharging power (who accepts it?) Mode of use (remote, face-to-face)

Methods of payment (credit transfer, jeton exchange)

Genuineness (is it valid? stolen? double-spent?)

Security (authentication, fraud prevention) Traceability (anonymity, privacy)

Scalability, cost


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INTERBANK SYSTEMSTransportation/Exchanges

CLEARING

Payment System Layers

Client A Client A1 Client A2

Branch A1Branch A2

Head Office BANK A

Client B Client B1 Client B2

Branch B1 Branch B2

Head Office BANK B

VALUE TRANSFERRED FROM

BANK TO BANK ON BOOKSOF CENTRAL BANK

SETTLEMENT BETWEENBRANCHES AND

CUSTOMERS ACCOUNTS1

23 3

3

2

2

Risk/Credit

Management

BANKS

Securities

Financial markets

SOURCE: WORLD BANK

CENTRAL BANK

FINAL SETTLEMENT


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Payment Issues

How does the payor know how much to pay?

(bill presentment, invoicing)

What mechanism will be used to pay (payment)?

When will payment be made (before, during, after)

How will the payments be added up? (clearance)? How will the payee receive real money (settlement)?

How will the payee credit the payor (reconciliation)?

What records are available to the parties (audit)?

Security for all the above

authentication of parties

prevention of forgery


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Security Requirements Message integrity

Durability (transactional, temporal)

Authentication

Non-repudiation

Auditability

Privacy Anonymity


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Methods of Payment

Cash transfer Cheque

Credit transfer, automated clearinghouse (ACH),

inter-bank transfer (EFT)

Credit cards and debit cards

Payment cards (Mondex, phone cards)

Aggregation (accumulation, e.g. Qpass)

Intermediaries or P2P payments (PayPal)
http://www.qpass.com/http://www.x.com/http://www.x.com/http://www.qpass.com/


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Payment Cards

The term payment card describes all types of plastic cards usedto make purchases

Credit card

Has a spending limit based on a users credit history Debit card

Removes an amount from a cardholders bank account

Transfers it to the sellers bank account

Charge card

Carries no spending limit

Amount charged is due at the end of the billing period


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Advantages and Disadvantages of

Payment Cards Advantages:

Widespread acceptance

Usually have built-in security for merchants

Disadvantage:

Payment card service companies charge merchants per-transaction fees and monthly processing fees


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Payment Acceptance and Processing

Steps followed once a merchant receives a

consumers payment card information:

Merchant authenticates payment card

Merchant checks with payment card issuer

To ensure that credit or funds are available

Puts a hold on the credit line or the funds needed to cover the

charge

Settlement of balance with the issuer


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Open and Closed Loop Systems

Closed loop systems

Card issuer pays the merchants that accept the card directly

and does not use an intermediary

Open loop systems

Involve three or more parties (e.g., systems using Visa or

MasterCard)


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Electronic Cash

Term that describes any value storage and

exchange system created by a private entity that:

Does not use paper documents or coins

Can serve as a substitute for government-issued

physical currency


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Privacy and Security of

Electronic Cash

Concerns about electronic payment methods include:

Privacy and security

Independence

Portability

Convenience

Advantages of electronic cash include being:

Independent and portable


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Holding Electronic Cash: Online and Offline Cash

Online cash storage

Trusted third party is involved in all transfers of electronic cash

Holds consumers cash accounts

Offline cash storage

Virtual equivalent of money kept in a wallet

No third party is involved in the transaction

Double-spending

Spending electronic cash twice


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Advantages and Disadvantages of Electronic Cash

Advantages of electronic cash:

Transactions are more efficient

Costs less than processing credit card transactions

Disadvantages of electronic cash: No audit trail

Money laundering and fraud

Susceptible to forgery


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Electronic Cash Systems

PayPal Founding in 2000 and purchased by eBay in 2002

Provides payment processing services to businesses and

to individuals

Peer-to-peer (P2P) payment system

Free payment clearing service for individuals


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Electronic Wallets

Electronic wallet (e-wallet):A software

component in which a user stores credit

card numbers and other personalinformation; when shopping online, the user

simply clicks the e-wallet to automatically

fill in information needed to make apurchase


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E-Wallets (cont.)

Digital identity (digital ID):A set of digital

information that is associated with a

particular individual and is used to identifythat individual for security purposes


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E-Wallets (cont.)

Hold credit card numbers, electronic cash, owner

identification, and contact information

Give consumers the benefit of entering their

information just once

Make shopping more efficient


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E-Wallets (cont.)

E-wallet as an authenticator

1. The user contacts the merchant to place an

order2. The authentication/registry part of the e-

wallet generates a pair of keys called session

keys


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E-Wallets (cont.)

1. The user decrypts the first session key, using

their private key

2. The merchant decrypts the ticket, using its

private key, retrieving the users name and thesecond session key


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E-Wallets (cont.)


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Electronic Wallets

Server-side electronic wallet

Stores a customers information on a remote server

belonging to a particular merchant or wallet publisher

Client-side electronic wallet

Stores a consumers information on his or her own

computer


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Credit Cards The most expensive ePayment mechanism MasterCard: $0.29 + 2% of transaction value

A $100 charge costs the merchant $2.29

Currently the most convenient method Advantage: allows credit

People can buy more than they can afford

Disadvantages:

doesnt work for small amounts (too expensive)

doesnt work for large amounts (too expensive)


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Credit Card Transaction

1. BUYER TENDERS CREDIT CARD INFO TO SELLER

4. BUYERS BANKAUTHORIZES/REJECTS

2. SELLER TRANSMITSPAYMENT DATA TOSELLERS BANK

10. BUYERS BANKSENDS BILL TOBUYER

3. SELLERS BANKASKS BUYERS BANKFOR AUTHORIZATION

BUYERSBANK

SELLERSBANK

BUYER

5. SELLERS BANKNOTIFIES SELLER

6. SELLER SHIPS GOODS TO BUYER

11. BUYER PAYSBUYERS BANKUSING SOMEOTHER METHOD

OF PAYMENT

9. BUYERS BANK PAYSSELLERS BANK

HOW?HOW MUCH?

CLEARANCES:2. HOW MUCH SHOULD SELLER GET?-- HOW MUCH SHOULD EACH BANK GET/PAY?

10. HOW MUCH SHOULD BUYERS BILL BE?

SETTLEMENTS:7. SELLER GETS PAID9. SELLERS BANK GETS PAID

11. BUYERS BANK GETS PAID

7. END OF DAY,SELLER UPLOADSCOMPLETEDTRANSACTIONSTO BANK

SELLER

8. SELLERS BANKCREDITS SELLERSACCOUNT


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CLEARING HOUSE(FEDERAL RESERVE)

MELLON

BANK A

. . .BANK Z

CITIBANK

Clearing Payment Orders (Check)

CUSTOMER CMU

OF MELLON BANK PAY SHAMOS $100CUSTOMER SHAMOS

OF CITIBANK

-100

CITIBANK

CUSTOMER A

CUSTOMER B

. . .

SHAMOS

CUSTOMER Z

MELLON BANK

CUSTOMER A

CUSTOMER CMU

. . .

CUSTOMER Y

CUSTOMER Z

1. CMU SENDS CHECK TO SHAMOS

2. SHAMOS DEPOSITSCHECK AT CITI

3. CITIBANK CREDITSSHAMOS WITH $100

4. CITI SENDS CHECKTO CLEARING HOUSE

5. CLEARING HOUSE ADDS $100 TO CITI,SUBTRACTS $100 FROM MELLON

8. CLEARING HOUSESENDS CHECK TOMELLON

7. MELLONDEDUCTS $100FROM CMUACCOUNT

9. MELLON SENDSCHECK BACK TO CMU

6. CLEARINGHOUSE SENDSMELLONDEBIT INFO

+100

+100

-100


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Settling Payment Orders (Checks)

CLEARING HOUSE(FEDERAL RESERVE)

MELLON

BANK A

. . .

BANK Z

CITIBANK

+34,299,321

-107,071,775

MELLON BANK

CUSTOMER A

CUSTOMER CMU

. . .

CUSTOMER Y

CUSTOMER Z

+3167

-15085

+728103

+35529

CITIBANK

CUSTOMER A

CUSTOMER B

. . .

SHAMOS

CUSTOMER Z

+100

+2786

-988713

-31872

REAL-TIME GROSSSETTLEMENT SYSTEM

(FEDWIRE)MELLON

BANK A

. . .

BANK Z

CITIBANK

CLEARING

HOUSE

1. AT END OF DAY, EACHBANK HAS A NET POSITIVEOR NEGATIVE CLEARING

HOUSE BALANCE

2. BANKS WITH NEGATIVEBALANCES MUST PAY;THOSE WITH POSITIVE

BALANCES RECEIVEMONEY

+107,071,775

-107,071,775

+34,299,321

3. CLEARING HOUSE INFORMSCITI IT MUST PAY $107,071,775

4. CITI PAYS THE CLEARINGHOUSE THROUGH RTGS

5. CLEARING HOUSE ADVISESMELLON IT WILLRECEIVE $34,299,321

6. CLEARING HOUSE PAYSMELLON $34,299,321

P P l


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PayPal

ACCOUNTHOLDER A

ACCOUNTHOLDER AS

BANK

ACCOUNTHOLDER X

PAYPAL

ACCOUNT A

. . .

ACCOUNT X

ACCOUNTHOLDER XS

BANK

ACH

PROCESSOR

ACCOUNTHOLDER AS

CREDIT CARD

INTERNET EMAIL

PAYPALSBANK

1. A PAYS X VIAPAYPAL (A HASENOUGH IN PAYPAL

ACCOUNT)

6. PAYPAL NOTIFIESX OF PAYMENT. XCHOOSES PAYMENT

METHOD

2. OR: PAYPALCHARGES XS

CREDIT CARD

3. OR: PAYPALINITIATES ACHDEBIT

4. FUNDS AREDEPOSITED INPAYPALS BANK

7. OR: PAYPALINITIATES

ACH CREDIT

5. PAYPAL CREDITSXS PAYPAL ACCOUNT

8. OR: PAYPAL MAILS CHECK TO X


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PayPal Concepts

Merchants pay low fees; individuals pay nothing Interest paid on deposits

Mass (bulk) payments possible

Business model: fees + float

FDIC pass-through insurance Against bankruptcy of PayPal

Different protection for fraud

Mobile payments supported


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Electronic Bill Presentment

and Payment E-billing

Presentment: The presentation and hosting

on a specialized Web server of informationthat is typically printed on a bill

Two models of presentment

common-biller directthird-party consolidators


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Electronic Bill Presentment and Payment (cont.)

l i ill d


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Electronic Bill Presentment and Payment (cont.)


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Prentice Hall 2004 41


and Payment (cont.) Paying bills at ATMs

Customer receives the bill

Go to any ATM, slide in their bank card,enter a password, and go to bill paymentson the menu

Insert the account number of the biller and

the amount to be paidCustomer gets a printed receipt showing

that the payment has been made


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and Payment (cont.) Advantages of e-billing

For the billing firm:

Reduction in expenses Enables better customer service

Electronic ad inserts can be customized


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and Payment (cont.) Advantages of e-billing

For the customer:

Reduces customers expenses Simplifies and centralizes payment processing and

provides better record keeping

Customers review and pay bills at virtually any

time, giving them direct control over the timing ofthe payment


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and Payment (cont.) Checkfree (checkfree.com) leading third-party

e-billing vendor

Consolidates and aggregates all of a customers bills

into a single presentment

Set up payments with companies that do not offerelectronic billing

Alerts users to problems with any payments

Users can export the transaction records to Quickenor Microsoft Money

Documents

IPS Ecommerce Lecture Notes4