Chapter 6

Report
E-commerce
business. technology. society.
Second Edition
Kenneth C. Laudon
Carol Guercio Traver
Copyright © 2004 Pearson Education, Inc.
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Chapter 6
E-commerce Payment Systems
Copyright © 2004 Pearson Education, Inc.
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Learning Objectives
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Describe the features of traditional payment systems
Discuss the current limitations of online credit card
payment systems
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
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PayPal: The Money’s in the E-mail
Page 305
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PayPal: The Money’s in the E-mail
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One of e-commerce’s major success stories:
 Went public in 2002; acquired by eBay October
2002 for $1.5 billion
An example of a “peer-to-peer” payment system
Fills a niche that credit card companies avoided –
individuals and small merchants
Piggybacks on existing credit card and checking
payment systems
Weakness: suffers from relatively high levels of fraud
Competitors include Western Union (MoneyZap),
AOL (AOLQuickcash) and Citibank (C2it)
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Types of Payment Systems
 Cash
 Checking
Transfer
 Credit Card
 Stored Value
 Accumulating Balance
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Cash
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Legal tender defined by a national authority to
represent value
Most common form of payment in terms of number of
transactions
Instantly convertible into other forms of value without
intermediation of any kind
Portable, requires no authentication, and provides
instant purchasing power
“Free” (no transaction fee), anonymous, low cognitive
demands
Limitations: easily stolen, limited to smaller
transaction, does not provide any float
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Checking Transfer
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Funds transferred directly via a signed draft or check
from a consumer’s checking account to a merchant
or other individual
Most common form of payment in terms of amount
spend
Can be used for both small and large transactions
Some float
Not anonymous, require third-party intervention
(banks)
Introduce security risks for merchants (forgeries,
stopped payments), so authentication typically
required
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Most Common Payment Systems, Based on Number
Of Transactions
Figure 6.1, Page 309
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Most Common Payment Systems, Based
on Dollar Amount
Figure 6.2, Page 310
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Credit Card
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Represents an account that extends credit to
consumers, permitting consumers to purchase items
while deferring payment, and allows consumers to
make payments to multiple vendors at one time
Credit card associations – Nonprofit associations
(Visa, MasterCard) that set standards for issuing
banks
Issuing banks – Issue cards and process transactions
Processing centers (clearinghouses) – Handle
verification of accounts and balances
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Stored Value
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Accounts created by depositing funds into an
account and from which funds are paid out or
withdrawn as needed
Examples: Debit cards, gift certificates,
prepaid cards, smart cards
Debit cards: Immediately debit a checking or
other demand-deposit account
Peer-to-peer payment systems such as
PayPal a variation
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Accumulating Balance
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Accounts that accumulate expenditures and
to which consumers make period payments
Examples: utility, phone, American Express
accounts
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Dimensions of Payment Systems
Table 6.1,
Page 313
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Current Online Payment Systems
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Credit cards are dominant form of online payment,
accounting for around 80% of online payments in
2002
New forms of electronic payment include:
 Digital cash
 Online stored value systems
 Digital accumulating balance payment systems
 Digital credit accounts
 Digital checking
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Online Merchants’ Actual and
Preferred Online Payments
Figure 6.3, Page 315
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How an Online Credit Card
Transaction Works
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Processed in much the same way that instore purchases are
Major difference is that online merchants do
not see or take impression of card, and no
signature is available (CNP transactions)
Participants include consumer, merchant,
clearinghouse, merchant bank (acquiring
bank) and consumer’s card issuing bank
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How an Online Credit Transaction
Works
Figure 6.4,
Page 317
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Limitations of Online Credit
Card Payment Systems
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Security – neither merchant nor consumer
can be fully authenticated
Cost – for merchants, around 3.5% of
purchase price plus transaction fee of 20-30
cents per transaction
Social equity – many people do not have
access to credit cards (young adults, plus
almost 100 million other adult Americans who
cannot afford cards or are considered poor
risk)
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Insight on Society: The Right to Shop
Digital Divide: Some groups don’t have same access
to computers and Internet that others do
 Digital “have nots” include:
 Households with incomes below $35,000
 Those without college educations
 People living in rural areas
 African-Americans and Hispanics
 Seniors over 65
 Disabled
 Most recent Department of Commerce study --most
of above groups gaining access to computers and
Internet due to falling computer prices and free or low
cost ISPs
 But without credit cards, still hard for people to shop
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The SET (Secure Electronic
Transaction) Protocol
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Authenticates cardholder and merchant identity
through use of digital certificates
An open standard developed by MasterCard and
Visa
Transaction process similar to standard online credit
card transaction, with more identity verification
Thus far, has not caught on much, due to costs
involved in integrating SET into existing systems, and
lack of interest among consumers
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How SET Transactions Work
Figure 6.5,
Page 320
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Digital Wallets
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Concept of digital wallet relevant to many of the new
digital payment systems
Seeks to emulate the functionality of traditional wallet
Most important functions:
 Authenticate consumer through use of digital
certificates or other encryption methods
 Store and transfer value
 Secure payment process from consumer to
merchant
Two major categories:
 Client-based digital wallets – Gator.com,
MasterCard Wallet
 Server-based digital wallets – MSN Wallet
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Promised Functionality of
Digital Wallets
Table 6.2,
Page 323
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Types of Digital Wallets
Figure 6.5, Page 324
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Digital Cash
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One of the first forms of alternative payment
systems
Not really “cash” – rather, are forms of value
storage and value exchange that have limited
convertibility into other forms of value, and
require intermediaries to convert
Many of early examples have disappear;
concepts survive as part of P2P payment
systems
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Examples of Digital Cash
Table 6.3, Page 326
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Digicash: How First Generation
Digital Cash Worked
Figure 6.7,
Page 327
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Online Stored Value Systems
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Permit consumers to make instant, online
payments to merchants and other individuals
based on value stored in an online account
Rely on value stored in a consumer’s bank,
checking or credit card account
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Online Stored Value Systems
Table 6.4, Page 328
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How Ecount.com Works: A
Stored Value System
Figure 6.8,
Page 330
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Insight on Business: Rocketcash.com
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An example of an online stored value system
Aimed at teenagers
Funds can be deposited in a RocketCash
account, which functions like a credit card
and allows teens to buy products online
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Smart Cards as Stored Value Systems
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Another kind of stored value system based on
credit-card sized plastic cards that have
embedded chips that store personal
information
Two types:
 Contact
 Contactless
Examples: Mondex, American Express Blue
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Digital Accumulating Balance
Payment Systems
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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
Examples: Qpass and iPin
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Digital Accumulating Balance
Payment Systems
Table 6.5, Page 332
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Digital Credit Card Payment Systems
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Extend the functionality of existing credit
cards for use as online shopping payment
tools
Focus specifically on making use of credit
cards safer and more convenient for online
merchants and consumers
Example: eCharge
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Digital Credit Card Payment Systems
Table 6.6, Page 333
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How a Digital Credit Card Payment
Systems Works: eCharge
Figure 6.9, Page 334
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Digital Checking Payment Systems
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Extend the functionality of existing checking
accounts for use as online shopping payment
tools
Examples: eCheck, Achex (MoneyZap)
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Digital Checking Payment Systems
Table 6.7, Page 335
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How Digital Checking Works: eCheck
Figure 6.10, Page 336
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Digital Payment Systems and
the Wireless Web
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Mobile payment (m-payments) systems not
very well established yet in U.S, but with
growth in Wi-Fi and 3G cellular phone
systems, this is beginning to change
Example: Qpass, AT&T and Wayport venture
to provide mobile payment and billing called
GoPort
Gartner predicts m-payments worldwide will
total at least $30 billion by 2002; majority of
transactions will be micro-m-payments
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Insight on Technology: Wireless Payments
Follow Wi-Fi and Cellular Growth
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In Europe, already a number of phone-based
transaction systems
In U.S., development of Wi-Fi and Bluetooth
expected to drive growth
Prerequisites:
 Development of the technology
 Technology must become widely available
 Technology needs backing of most of major
stakeholders
Challenge: Getting all the players to agree on a
common secure platform for wireless e-commerce
payment systems
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B2B Payment Systems
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More complex than B2C
Two main types:
 Systems that replace traditional banks
(example: Actrade)
 Existing banking systems extending to B2B
marketplace (example: Orbian)
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Key Features of B2B Payment Systems
Table 6.8,
Page 340
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Electronic Billing Presentment
and Payment
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Online payment systems for monthly bills
EBPP expected to grow rapidly, to nearly half
all U.S. households by 2006
Different types of business models in EBPP
market include:
 Biller-direct
 Consolidator
 Portal
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Growth of the EBPP Market
Figure 6.11, Page 342
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Types of EBPP Systems
Figure 6.12, Page 344
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Case Study: CheckFree – On Top of
Electronic Billing, for Now
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Market leader in online billing and payment
Faces a number of challenges:
 Industry changing fast and leadership precarious
 Although market is growing, consumers have
traditionally resisted online bill payment
 Conflict strategic goals of stakeholders
(merchants, banks, credit companies, billing firms
and consumers)
 Technology changes: XML-based vs. proprietary
 Competitors: PayPal, Metaventa
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CheckFree: On Top of
Electronic Billing, for Now
Page 346
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