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 Good for e-commerce?

What is a cashier’s check? Checks have been around how long?

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

Good for e-commerce?

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 clearinghouses for

member institutions Other credit card types?

Charge Cards

Similar to credit cards Customer pays bill in full each month AMEX card is a popular example Diners Club another example

Debit Cards

Similar to credit card in operation from merchant’s perspective

Similar to a check from customer’s perspective

Pros & Cons

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 (p. 73)

about anticipated transaction volume and type of business

The bank charges for this service

Merchant Account

Chargebacks result from customer refusal to pay a charge for a number of reasons, including returned goods, billing errors, and fraudulent charges.

Chargebacks 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.– Authorize.Net– CyberCash– ICVerify

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.– Encryption terms p. 76

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.

Secure Electronic Transactions (SET) – p. 77 E-wallet – p. 78

A Digital Certificate

Fraud

Credit card fraud is a major problem– Online CC fraud 12x more than traditional

As high as 1.15% of online transactions were found to be fraudulent vs. .06-.09% traditional

Charge backs– Online – 64% ; Traditional – 44%

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 – p. 79

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.

Disposable credit card numbers

Electronic Payment Forms

Various alternative payment forms include: Electronic Cash

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

2001 – CC 95% of online purchases Projected 2003 – CC 75-81% - reality?

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 Examples

– Beenz– Cybergold– Flooz

Smart Cards

A store value card Popular in Europe (Mondex); 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) $.50 vs. $.75-$3.00 processing costs

Scanned via MICR – account #, routing #, & check serial #

www.paybycheck.com

Person to Person Systems

A way to send money, a funds transfer

www.paypal.com

Person to Person Payment

Person to Person (P2P) System