Traditional Types of Payment Systems There are five generic types of payment systems, each with different characteristics, that are exist in physical world. Cash Cash is legal tender defined by a national authority to represent value. Most common form of payment in terms of number of transactions. Why is cash still so popular today? Cash is portable, requires no authentication, and provides instant purchasing power for those who possess it. Copyright © 2010 Pearson Education, Inc. Slide 5-1 The advantages of using cash as a form of payment are: Instantly convertible into other forms of value without intermediation. Cash allow micro payments (payments of small amounts) There is no financial risk for the merchant. The sale cannot be repudiated (an advantage for the merchant). No expensive special hardware is required to complete a sale. Copyright © 2010 Pearson Education, Inc. The disadvantages of using cash as a form of payment are: There is financial risk to the consumer in carrying cash for purchases as it can be easily lost or stolen. It does not provide any float time for the consumer: there is no time period between the purchase of the item and the actual payment. Cash purchases tend to be final and irreversible (permanent ) unless the seller agrees upon a return policy. There is no security against unauthorized use. Copyright © 2010 Pearson Education, Inc. Checking transfer Second most common payment form. A checking transfer, which represents funds transferred directly via a signed draft or check from a consumer’s (customer) checking account to a merchant or other individual. Checks can be used for small and large transactions but not for micro payments (less than $1). Checks have some float . (time to clear) as Dubai Islamic Bank takes 3 days after deposit in Pakistan. Check also introduce security risks for merchants. Forged more easily than a cash They also cancelled before they clear They may bounce if there is not enough money in the account Copyright © 2010 Pearson Education, Inc. Slide 5-4 Credit card A credit card represents an account that extends credit to consumers, permits consumers to purchase items while deferring (postpone) payments. Credit card associations such as Visa and MasterCard are nonprofit organizations that set the standards for the banks that issue the credit cards. The banks (issuing banks) are the institutions that actually issue the cards, process the transactions, receive and calculate the payments, and charge and receive the interest. Third party processing centers or clearinghouses usually handle verification of accounts and balances. Copyright © 2010 Pearson Education, Inc. Slide 5-5 Clearing House Concept First, a consumer presents credit card information to the merchant. The merchant transmits this data, along with their merchant ID code, to a clearinghouse (also referred to as a processor or acquirer). The clearinghouse might be the bank that has issued the merchant their credit card account, but it is more likely a firm that has contracted with the merchant's bank to clear charges in exchange for a flat fee and a percentage of every charge processed. The data is transmitted by reading the card and merchant numbers over the phone, by using a credit card POS (point of sale) terminal, or some other piece of software to transmit the information from a computer. The clearinghouse contacts the bank that issued the consumer's credit card and verifies that the charge is acceptable. If it is accepted, the clearinghouse then sends a confirmation message to the merchant. At the same time, the available credit from the customer's credit card is frozen by the amount of the transaction. At the end of a business day, the merchant (actually, the merchant's computer or credit card terminal) calls the clearinghouse and verifies all transactions for that day to ensure that the merchant's system and the clearinghouse agree on the transactions that have occurred during that day. Once the merchant and the clearinghouse agree on the day's transactions, the clearinghouse starts the process of transferring the money from the credit card bank to the merchant's bank account. Copyright © 2010 Pearson Education, Inc. Credit cards offer consumers a line of credit and the ability to make small and large purchases instantly. They are widely accepted as a form of payment, reduce the risk of theft associated with carrying cash, and increase consumer convenience. Credit card also offer consumers considerable float. With a credit card, for instance, a consumer typically need not actually pay for goods purchased until receiving a credit card bill 30 days after. Issuer bank also charge transaction fee from merchant. Credit cards have less finality than other payment systems because consumers can refute or repudiate purchases under certain circumstances (such as card stolen). It increase risk for merchant and issuer bank. Copyright © 2010 Pearson Education, Inc. Stored Value (stored value cards) Stored value payment systems are created by depositing funds into accounts from which funds can be withdrawn as needed. They are similar to checking transfers in that funds are stored and withdrawn, but a paper check need not be written. Stored value payment systems include prepaid phone cards, debit cards, gift certificates, and smart cards (ARY digital card). Both stored value payment systems and checking transfers are dependent upon funds being available in an account. Neither is convertible without intermediation, and both involve only a small transaction fee for large purchases. However, stored value systems do not give the consumer any float time, and they are more expensive for the merchant because special hardware is required to read and process the stored numbers on the cards. Copyright © 2010 Pearson Education, Inc. Slide 5-8 Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Accumulating Balance A method and a system facilitate payments. Accounts that accumulate expenditures and to which consumers make period payments Traditional examples include utility and phone bills, all of which accumulate balances, usually over a specified period (typically a month), and then are paid in full at the end of the period. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Accumulated Balance Just Concept A credit card is not considered an accumulating balance system because the balance accumulated is not restricted to a certain time period. Utility or phone accounts accumulate a balance which must be paid in full at the end of a time period (usually one month). while credit cards permit purchases to be made on a deferred payment plan with no restriction on time and interest charged on the balance due. Copyright © 2010 Pearson Education, Inc. Types of E-commerce Payment Systems Special electronic payment systems have been developed to pay for goods electronically on the Internet. Electronic payment systems for the Internet include the following systems: Copyright © 2010 Pearson Education, Inc. Slide 5-15 Credit cards Credit cards are the dominant form of online payment. Credit cards account for 55 percent of online payments in the United States and about 50 percent of online purchases outside the United States. Online credit card transactions are processed in much the same way that in-store purchases are, with the major differences being that online merchants never see the actual card being used, no card impression is taken, and no signature is available. These type of purchases are also called CNP (Card Not Present) transactions. Major difference is, since the merchant never sees the credit card, nor receives a hand – signed agreement to pay from the consumer, when disputes arise, the merchant faces the risk that the transaction may be disallowed and reversed, even though he has already shipped the goods or the user had downloaded a digital product. Copyright © 2010 Pearson Education, Inc. Slide 5-16 Figure Below illustrates the online credit card purchasing cycle. There are 5 parties involved in an online credit card purchase: Consumer, Consumer Bank, Merchant ,Merchant Bank (or acquiring Bank) and Clearing House. In order to accept payments by credit card, online merchants mush have a merchant account established with a bank or financial institution. A merchant account is simply a bank account that allows companies to process credit card payments and receive funds from those transaction. ONLINE BANK TRANSACTION CYCLE: An online transaction begins with a purchase. 1) When a consumer wants to make a purchase, he or she adds the item to the merchant’s site shopping cart. When consumer comes on payment step, a secure tunnel through the Internet is created using SSL. 2) If SSL is not implemented by a Certification Authority, then there is no authentication between the merchant or the consumer. The transaction parties have to trust one another. 3) Once received credit card information by the merchant, the merchant software contacts a clearing house. Clearing House contacts the issuing bank to authenticate and verify the account information. 4) Once verified, the issuing bank credits the account of the merchant at the merchant’s bank (usually its end of the day – in a batch process) 5) The debit to the consumer account is transmitted to the consumer in a monthly statement. Copyright © 2010 Pearson Education, Inc. How an Online Credit Transaction Works Figure 5.16, Page 315 Copyright © 2010 Pearson Education, Inc. Slide 5-18 Credit cards Enablers Companies that have a merchant account still need to buy or build a means of handling the online transaction; securing the merchant account is only step one in a two part process. Second step is Internet payment service provider (Clearing house) who provide the software for online credit card transaction processing. For example, Authorize.net is an Internet payment service provider. It helps a merchant secure an account with on of its merchant account provider partners (usually Merchant Bank), and then provides payment processing software for installation on the merchant's server. The software collects the transaction information from the merchant’s site and then routes it via the Authorize.net “payment gateway” to the appropriate bank (customer bank), ensuring that customers are authorized to make their purchases. Then funds for the transaction are transferred to the merchant’s bank account. Copyright © 2010 Pearson Education, Inc. Slide 5-19 Limitations of Online Credit cards Payments Sys Security Neither the merchant nor the consumer can be fully authenticated if SSL is not implemented by CA’s authority. SSL provide only merchant’s verification but not client (its optional) SET provide two way authentication , but its difficult to implement by merchant and client because to much complex. Repudiation: Consumer can repudiate online transaction. Cost – Transaction fee is charge from merchant. Social equity – Millions of customers do not have credit cards. Copyright © 2010 Pearson Education, Inc. Slide 5-20 Digital wallets Emulates functionality of wallet by authenticating consumer, storing and transferring value, and securing payment process from consumer to merchant. Digital wallets make paying for purchases over the Web more efficient by eliminating the need for shoppers to enter their address and credit card information repeatedly each time they buy something. A digital wallet securely stores credit card and owner identification information and provides that information at an electronic commerce site’s “checkout counter.” The digital wallet enters the shopper’s name, credit card number, and shipping information automatically when invoked to complete the purchase. Copyright © 2010 Pearson Education, Inc. Slide 5-21 Example: Amazon.com’s 1-Click Shopping, which enables a consumer to fill in shipping and credit card information automatically by clicking one button, uses electronic wallet technology. MSN Wallet, MasterCard Wallet, Google checkout and America Online’s Quick Checkout are other digital wallet systems. The merchant receives some additional transaction guarantees that the user has been authenticated by Google or other trusted identity. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Digital cash (Electronic cash or e – cash ) An alternative payment system developed for e- commerce in which unique, authenticated tokens representing cash value are transmitted from consumer to merchants. In these scheme, users would deposit money in a bank or provide a credit card. Banks would issue digital tokens (unique encrypted numbers) for various denominations of cash, and consumers could “spend” these at merchants sites. In return merchants submit these electronic token in its bank. Digital cash can also be used for micropayments or larger purchases. Digital cash is currency represented in electronic form that moves outside the normal network of money (paper currency, coins, checks, credit cards). Copyright © 2010 Pearson Education, Inc. Slide 5-25 Users are supplied with client software and can exchange money with another e-cash user over the Internet or with a retailer accepting ecash. eCoin.net is an example of a digital cash service. In addition to facilitating micropayments, digital cash can be useful for people who do not have credit cards and wish to make Web purchases. Other examples include, E – gold, DigiCash, First Virtual and millicent etc. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Online stored value systems (online payment account) Stored value payment systems enable consumers to make instant online payments to merchants and other individuals based on value stored in a digital account. Online value systems rely on the value stored in a consumer’s bank, checking, or credit card account . Ecount.com offers a prepaid debit account for online purchases. Other Exmaples: PayPal, smart cards Copyright © 2010 Pearson Education, Inc. Slide 5-28 Paypal is a Web-based peer-to-peer payment systems have sprung up to serve people who want to send money to vendors or individuals who are not set up to accept credit card payments. The party sending money uses his or her credit card / debit card or to create an account with the designated payment at a Web site (such as) dedicated to peer-to-peer payments. The recipient (individual or merchant) “picks up” the payment by visiting the Web site (paypal) and supplying information about where to send the payment (a bank account or a physical address). PayPal has become a popular peer-to-peer payment system. Paypal is now available in 190 countries and has about 165 million account holders. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. A smart card is a plastic card the size of a credit card that stores digital information. The smart card can store health records, identification data, or telephone numbers, or it can serve as an “electronic purse” in place of cash. The Mondex and American Express Blue smart cards contain electronic cash and can be used to transfer funds to merchants in physical storefronts and to merchants on the Internet. Both are contact smart cards that require use of special card-reading devices whenever the cards need to transfer cash to either an online or offline merchant. (Internet users must attach a smart card reader to their PCs to use the card. To pay for a Web purchase, the user would swipe the smart card through the card reader.) Copyright © 2010 Pearson Education, Inc. Digital accumulated balance payment Accumulated balance digital payment systems enable users to make micropayments and purchases on the Web, accumulating a debit balance that they must pay periodically on their credit card or telephone bills. It mean, Balances accumulate and customers are billed monthly with their regular phone , credit card bill. IPIN has been widely adopted by online music sites that sell music tracks for 99 cents. It invoices customers through existing consumer billing services such as telephone and wireless service companies, Internet service providers, and banks. PaymentOne , payment plus (AOL service )and Trivnet enable consumers to charge small purchases to their monthly telephone bill. Copyright © 2010 Pearson Education, Inc. Slide 5-32 Copyright © 2010 Pearson Education, Inc. Digital checking: Digital checking payment systems, such as Western Union MoneyZap and eCheck, extend the functionality of existing checking accounts so they can be used for online shopping payments. Digital checks are less expensive than credit cards and much faster than traditional paper-based checking. These checks are encrypted with a digital signature that can be verified and used for payments in electronic commerce. Electronic check systems are useful in business-to-business electronic commerce. Copyright © 2010 Pearson Education, Inc. Slide 5-34 Copyright © 2010 Pearson Education, Inc. Wireless Payment Systems Mean payments through wireless devices such as mobiles. Use of mobile handsets as payment devices well-established in Europe, Japan, South Korea Japanese mobile payment systems E-money (stored value) , Mobile debit cards ,Mobile credit cards Japanese cell phones act like mobile wallets, containing a variety of payment mechanisms. Also Consumers can pay merchants by simply waving the cell phone at a merchants payment device that accept payments. Because Japanese cell phones can act as bar code reader. Not fully established yet in the United States Majority of purchases are digital content for use on cell phone In Europe and asia, cell phone users can pay for a very wide variety of real goods and services, and their, phones are integrated into a wide array of financial institutions. Copyright © 2010 Pearson Education, Inc. Slide 5-36 Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Electronic Billing Presentment and Payment (EBPP) Electronic billing presentment and payment systems EBPPS are used for paying routine monthly bills. They enable users to view their bills electronically and pay them through electronic fund transfers from bank or credit card accounts. These services support payment for online and physical store purchases of goods or services after the purchase has taken place. They notify purchasers about bills that are due, present the bills, and process the payments. 40% + of households in 2009 used some EBPP; expected to grow significantly also used in Pakistan various bank offer pay your utility bills online. Companies implementing a biller – direct system can either develop their own system in-house, install a system acquired from a third-party (outsource) EBPP software vandor or by other mean such as from Application Service Provider. Copyright © 2010 Pearson Education, Inc. Slide 5-39 Copyright © 2010 Pearson Education, Inc. Two competing EBPP business models: 1. Biller-direct (dominant model) Model The biller – direct system was originally created by utility companies that send millions fo bills each month. Their purpose is to make it easier for their customers to pay their utility bills routinely online. Today, telephone and credit card companies also often offer this service, as well as number of individual stores (such as in USA). 2. Consolidator Modlel In this model, a third party, such as a financial institution (banks) or portal, aggregates all bills for consumers and ideally permits on – stop bill payment. Financial institutions have been more successful than portals (such as Yahoo! Bill Pay) in attracting online bill payers. There are two types i. Think Consolidator In thick consolidation, both the bill summary and bill detail are stored at the consolidator's site. ii. Thin Consolidator In thin Consolidation , only the summary bill information is available, and the consumer must click on a link to access a detailed bill that is stored at another location, such as the biller’s site or elsewhere. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc. Consolidator model Copyright © 2010 Pearson Education, Inc. The consolidator Model faces several challenges. For billers, using the consolidator model means an increased time lag between billing an payment, and also inserts an intermediary b/w the company and its customer. For consumers, security continues to be major issue. Most consumers are unwilling to pay any kind of fee to pay bills online, and many are concerned about sharing personal financial information with non – financial institutions. Today more and more banks are offering online bill payment free to some or all of their customers as an enticement. Copyright © 2010 Pearson Education, Inc. Copyright © 2010 Pearson Education, Inc.