Chapter Electronic Payment Systems 10.1 Traditional Electronic Payment Systems for Electronic Commerce In electronic commerce, the challenges of payment transactions were initially underestimated Business via the internet and mobile telephony has so far been dominated by the methods of payment customary in traditional business. However, in light of technological progress and stricter legislation, traditional business models are coming up against their limits more and more often Secure, user-friendly and low-priced innovative payment solutions are urgently required to boost internationally oriented e-commerce. Value-creating market players from payment system providers, service providers, network operators and producers of terminals to financial institutions pin great hopes on the rapid progress with new payment systems. Security is a key criterion for electronic payment systems. Critical issues are authorisation, authentication, privacy, integrity, theft and the corruption of data. Unauthorised access by third parties, misuse and manipulation must be ruled out. It has to be ensured that information on the volume, execution date and purpose of a transaction is consistent Sellers are reluctant to invest in the infrastructure of payment systems which are so far used by only a small number of buyers. Only a few buyers choose solutions used by just a small number of sellers. Only a system which far exceeds the critical mass and spreads rapidly in the short run has a chance of succeeding in the market in the long term. On a short-term horizon micro-payments offer good opportunities for innovative payment schemes. Mobile payment systems can be regarded as the most promising solutions; starting virtually from scratch, their market share will probably rise to 5% in Western Europe in the next five years. In view of the expansion of already established applications, however, the new schemes will decline in importance over the long term. Fewer than three of the currently over 100 innovative systems will be able to survive Electronic payment systems are becoming more attractive for large financial institutions. The systems already used in traditional offline business and which have been adapted to meet the new demands of e-business(credit cards and, especially in Germany debit cards, and smart cards) have very good prospects of convincing online customers. In the medium term mobile phone-based payment systems will be an even more valuable channel for e-business than internet-based systems. Nevertheless, the innovative systems will be pushed aside by expanded traditional solutions in the longer term 10.1.1Cash E-cash: the digital equivalent of paper currency and coins, which enables secure and anonymous purchase of low-priced items Micropayments: small payments, usually under $10 Wireless payments: Vodafone "m-pay bill"system that enables wireless subscribers to use their mobile phones to make micropayments Qpass(qpass. com): Charges to account, are charged to a specified credit card on a monthly basis 10.1.2 Note Items in some categories(e. g, Tickets) might lose their value if they are not sold by a particular date. For time-sensitive(or perishable) items, eBay gives sellers the ability to specify that if the buyer pays the Buy It Now price or Fixed Price for the item, the payment must be made immediately through Pay Pal. Normally, eBay ends an item and creates a transaction when a buyer agrees to purchase the item. If the seller chooses to require immediate payment, e Bay ends the item(or decrements the quantity in a multi-item listing) and creates a transaction after the
Chapter10 Electronic Payment Systems 10.1 Traditional Electronic Payment Systems for Electronic Commerce In electronic commerce, the challenges of payment transactions were initially underestimated. Business via the internet and mobile telephony has so far been dominated by the methods of payment customary in traditional business. However, in light of technological progress and stricter legislation, traditional business models are coming up against their limits more and more often. Secure, user-friendly and low-priced innovative payment solutions are urgently required to boost internationally oriented e-commerce. Value-creating market players – from payment system providers, service providers, network operators and producers of terminals to financial institutions – pin great hopes on the rapid progress with new payment systems. Security is a key criterion for electronic payment systems. Critical issues are authorisation, authentication, privacy, integrity, theft and the corruption of data. Unauthorised access by third parties, misuse and manipulation must be ruled out. It has to be ensured that information on the volume, execution date and purpose of a transaction is consistent. Sellers are reluctant to invest in the infrastructure of payment systems which are so far used by only a small number of buyers. Only a few buyers choose solutions used by just a small number of sellers. Only a system which far exceeds the critical mass and spreads rapidly in the short run has a chance of succeeding in the market in the long term. On a short-term horizon, micro-payments offer good opportunities for innovative payment schemes. Mobile payment systems can be regarded as the most promising solutions; starting virtually from scratch, their market share will probably rise to 5% in Western Europe in the next five years. In view of the expansion of already established applications, however, the new schemes will decline in importance over the long term. Fewer than three of the currently over 100 innovative systems will be able to survive. Electronic payment systems are becoming more attractive for large financial institutions. The systems already used in traditional offline business and which have been adapted to meet the new demands of e-business (credit cards and, especially in Germany debit cards, and smart cards) have very good prospects of convincing online customers. In the medium term mobile phone-based payment systems will be an even more valuable channel for e-business than internet-based systems. Nevertheless, the innovative systems will be pushed aside by expanded traditional solutions in the longer term. 10.1.1 Cash ▪ E-cash: the digital equivalent of paper currency and coins, which enables secure and anonymous purchase of low-priced items ▪ Micropayments: small payments, usually under $10 ▪ Wireless payments: Vodafone “m-pay bill” system that enables wireless subscribers to use their mobile phones to make micropayments ▪ Qpass (qpass.com): Charges to qpass account, are charged to a specified credit card on a monthly basis 10.1.2 Note Items in some categories (e.g., Tickets) might lose their value if they are not sold by a particular date. For time-sensitive (or perishable) items, eBay gives sellers the ability to specify that if the buyer pays the Buy It Now price or Fixed Price for the item, the payment must be made immediately through PayPal. Normally, eBay ends an item and creates a transaction when a buyer agrees to purchase the item. If the seller chooses to require immediate payment, eBay ends the item (or decrements the quantity in a multi-item listing) and creates a transaction after the
payment has been processed When testing this feature in the Sandbox, do not complete testing of Pay Pal payments. The Sandbox is not integrated with any Pay Pal test environment and therefore does not support end-to-end testing for PayPal payment processing. " Test"payments you make via PayPal in th Sandbox may go to the production PayPal site, which may result in real payments being made A seller can choose to require immediate payment for Fixed Price and Buy It Now items, including eBay Stores Inventory items, in categories that support immediate payment (If an item is listed in two categories, both categories must support immediate payment. )If a Buy It Now item ends as an auction, the immediate payment requirement does not apply 10.1.3Credit Card Look out for credit card companies spreading holiday cheer. Their"gifts"of higher credit limits and deferred payments look good, but only for the short term A five-minute phone call to your credit card issuer could save you hundreds, even thousands, of dollars in interest charges. " There's no incentive for them to lower your rate unless you call The squeaky wheel gets the oil, " says Brad Dakake, a consumer advocate with Massachusetts Public Interest Research Group. Not convinced that a credit card company will give you a lower Interest rate Just ecause vou ca all and ask nicely? Check out the results of a national survey conducted by the U.s. Public Interest Research Group in March 2002. Fifty consumers of all credit backgrounds called credit card issuers and asked for lower rates. More than half, 56 percent scored lower rates. How low did the rates go? The 28 consumers who landed lower rates saw the APRs on their cards drop from an average of 16 percent to 10. 47 percent Slicing interest rates by more than one-third by making a quick phone call is pretty impressive. A handful of consumers did exceptionally well One cardholder from Colorado saw his 14.99 percent rate reduced to zero for six months Thats quite a deal Another cardholder from New Mexico saw the APR on her credit card drop from 31. 12 percent to 14.65 percent Until she called, she had no idea she'd been paying a penalty interest rate She didn't realize that for six months she was paying this outrageous 31 percent interest rate, says Dakake, the principal author of the rate reduction survey and study 10.2 Electronic Check systems 10. 2. 1 Define and Characterics of Electriconic Payment The e-check system is basically an electronic implementation of the paper check system Leverage check payment systems Fit within current business practices, eliminate need for process reengineering Work like paper check with fewer manual steps Designed to meet needs of businesses and consumers(state of the art security systems) Used by all bank customers with checking accounts Enhance existing bank accounts with new EC features Benefits of e-checking for industry-wide savings Online check collection process Online notices of check returns Truncating paper checks at bank of first deposit 10.2.2 Tools of Electronic Payment 1)Payment cards electronic cards that contain information that can be used for payment purposes. There are three common types of payment cards Credit cards: provides holder with credit to make purchases up to a limit fixed by the card Charge cards: balance on a charge card is supposed to be paid in full upo monthly statement
payment has been processed. When testing this feature in the Sandbox, do not complete testing of PayPal payments. The Sandbox is not integrated with any PayPal test environment and therefore does not support end-to-end testing for PayPal payment processing. "Test" payments you make via PayPal in the Sandbox may go to the production PayPal site, which may result in real payments being made. A seller can choose to require immediate payment for Fixed Price and Buy It Now items, including eBay Stores Inventory items, in categories that support immediate payment. (If an item is listed in two categories, both categories must support immediate payment.) If a Buy It Now item ends as an auction, the immediate payment requirement does not apply. 10.1.3Credit Card Look out for credit card companies spreading holiday cheer. Their ''gifts" of higher credit limits and deferred payments look good, but only for the short term. A five-minute phone call to your credit card issuer could save you hundreds, even thousands, of dollars in interest charges. "There's no incentive for them to lower your rate unless you call. The squeaky wheel gets the oil," says Brad Dakake, a consumer advocate with Massachusetts Public Interest Research Group. Not convinced that a credit card company will give you a lower interest rate just because you call and ask nicely? Check out the results of a national survey conducted by the U.S. Public Interest Research Group in March 2002. Fifty consumers of all credit backgrounds called credit card issuers and asked for lower rates. More than half, 56 percent, scored lower rates. How low did the rates go? The 28 consumers who landed lower rates saw the APRs on their cards drop from an average of 16 percent to 10.47 percent. Slicing interest rates by more than one-third by making a quick phone call is pretty impressive. A handful of consumers did exceptionally well. One cardholder from Colorado saw his 14.99 percent rate reduced to zero for six months. That's quite a deal. Another cardholder from New Mexico saw the APR on her credit card drop from 31.12 percent to 14.65 percent. Until she called, she had no idea she'd been paying a penalty interest rate. "She didn't realize that for six months she was paying this outrageous 31 percent interest rate," says Dakake, the principal author of the rate reduction survey and study. 10.2 Electronic Check systems 10.2.1 Define and Characterics of Electriconic Payment The e-check system is basically an electronic implementation of the paper check system. ▪ Leverage check payment systems ▪ Fit within current business practices, eliminate need for process reengineering ▪ Work like paper check with fewer manual steps ▪ Designed to meet needs of businesses and consumers (state of the art security systems) ▪ Used by all bank customers with checking accounts ▪ Enhance existing bank accounts with new EC features Benefits of e-checking for industry-wide savings ▪ Online check collection process ▪ Online notices of check returns ▪ Truncating paper checks at bank of first deposit ▪ Creating new cash management product opportunitie. 10.2.2 Tools of Electronic Payment 1. Payment Cards 1)Payment cards electronic cards that contain information that can be used for payment purposes. There are three common types of payment cards: ▪ Credit cards: provides holder with credit to make purchases up to a limit fixed by the card issuer. ▪ Charge cards: balance on a charge card is supposed to be paid in full upon receipt of monthly statement
Debit card: cost of a purchase drawn directly from holders checking account 2) The Players in the credit card system The cardholder: a consumer or a corporate purchaser who uses credit cards to pay merchants The merchant: the entity that accepts credit cards and offers goods or services in exchange The cared issuer: a financial institution(usually a bank) that establishes accounts for cardholders and issues credit cards The acquirer: a financial institution(usually a bank) that establishes an account for enchants and acquires the vouchers of authorized sales shi The card brand: bank card associations of issuers and acquirers (like Visa and Master Card), which are created to protect and advertise the card brand, establish and enforce rules for use and acceptance of their bank cards, and provide networks to connect the involved financial institutions. The brand authorizes the credit-based transaction and guarantees the payment to merchants. Sometimes, the issuing bank performs the business of the brand 3)The process of using credit cards Issuer s100 s250 Authorization Shipment s134 Merchant Figure 10-1 The process of using credit card Credit card gateway: an online connection that ties a merchants systems to the back-end processing systems of the credit card issuer Virtual credit card: an e-payment system in which a credit card issuer gives a special transaction number that can be used online in place of regular credit card numbers Electronic wallets(e-wallets): a software component in which a user stores credit card numbers and other personal information; when shopping online, the user simply clicks the e-wallet to automatically fill in information needed to make a purchase 4)Security risks with credit cards Stolen cards Reneging by the customer-authorizes a payment and later denies it Theft of card details stored on merchants computer computer storing information so it cannot be accessed directly from the Web 2. Purchasing Cards Purchasing cards: special-purpose payment cards issued to a companys employees to be used solely for purchasing nonstrategic materials and services up to a preset dollar limit 1)Benefits of using purchasing cards
▪ Debit card: cost of a purchase drawn directly from holder’s checking account (demand-deposit account). 2)The Players in the credit card system ▪ The cardholder: a consumer or a corporate purchaser who uses credit cards to pay merchants. ▪ The merchant: the entity that accepts credit cards and offers goods or services in exchange for payments. ▪ The cared issuer: a financial institution (usually a bank) that establishes accounts for cardholders and issues credit cards. ▪ The acquirer: a financial institution (usually a bank) that establishes an account for merchants and acquires the vouchers of authorized sales slips. ▪ The card brand: bank card associations of issuers and acquirers (like Visa and MasterCard), which are created to protect and advertise the card brand, establish and enforce rules for use and acceptance of their bank cards, and provide networks to connect the involved financial institutions. The brand authorizes the credit-based transaction and guarantees the payment to merchants. Sometimes, the issuing bank performs the business of the brand. 3)The process of using credit cards Figure 10-1 The process of using credit cards ▪ Credit card gateway: an online connection that ties a merchant’s systems to the back-end processing systems of the credit card issuer. ▪ Virtual credit card: an e-payment system in which a credit card issuer gives a special transaction number that can be used online in place of regular credit card numbers. ▪ Electronic wallets (e-wallets): a software component in which a user stores credit card numbers and other personal information; when shopping online; the user simply clicks the e-wallet to automatically fill in information needed to make a purchase. 4)Security risks with credit cards ▪ Stolen cards. ▪ Reneging by the customer—authorizes a payment and later denies it. ▪ Theft of card details stored on merchant’s computer—isolate computer storing information so it cannot be accessed directly from the Web. 2. Purchasing Cards Purchasing cards: special-purpose payment cards issued to a company’s employees to be used solely for purchasing nonstrategic materials and services up to a preset dollar limit. 1)Benefits of using purchasing cards
Productivity gains Bill consolidation aym Preferred pricing 2)Participants Process of using a Purchasing Card Place Orde Provide Data Receive Payment Make Payment Provide Cards Submit Transaction Request Cards Request Authorization Process Payment Processor Processo Request Authorization Request Authorization Figure 10-2 The participants and the process of using a purchasing card 3. Smart Card Smart card: an electronic card containing an embedded microchip that enables predefined ations or Card bod Source: Gemplus-All About Smart Cards
▪ Productivity gains. ▪ Bill consolidation. ▪ Payment reconciliation. ▪ Preferred pricing. ▪ Management reports. ▪ Control. 2)Participants & Process of Using a Purchasing Card Figure 10-2 The participants and the process of using a purchasing card 3.Smart Cards Smart card: an electronic card containing an embedded microchip that enables predefined operations or the addition, deletion, or manipulation of information on the card
Figure 10-3 Smart card 4. Securing smart cards Theoretically, it is possible to"hack" "into a smart card Most cards can now store the information in encrypted form Same cards can also encrypt and decrypt data that is downloaded or read from the card Cost to the attacker of doing so far exceeds the benefit Important applications of smart cards use Information techno Health and social welfare Transportation ■ Identification Stores cash downloaded from bank or credit card account Visa cash-a stored-value card designed to handle small purchases or micropayments, sponsored by Visa. Mondex--a stored-value card designed to handle small purchases or micropayments by Mondex, a subsidiary of Master Card 10.2.3 E-Check mode e CHECK SECURE PROCESS DIAGRAM eOECK Secure waNt a off. yatren fata eCHECK s Figure 10-4 E-Check Mode 10.3. International Security Schemes in Electronic Payment Systems 10.3.1 Secure Sockets Layer(SSL) Protocol Digital certificates encrypt data using Secure Sockets Layer (SSL) technology, the industry-standard method for protecting web communications developed by Netscape
Figure 10-3 Smart card 4.Securing smart cards ▪ Theoretically, it is possible to “hack” into a smart card ▪ Most cards can now store the information in encrypted form ▪ Same cards can also encrypt and decrypt data that is downloaded or read from the card ▪ Cost to the attacker of doing so far exceeds the benefits Important applications of smart cards use: ▪ Loyalty ▪ Financial ▪ Information technology ▪ Health and social welfare ▪ Transportation ▪ Identification 5.Stored-Value Cards Stores cash downloaded from bank or credit card account ▪ Visa cash—a stored-value card designed to handle small purchases or micropayments; sponsored by Visa. ▪ Mondex—a stored-value card designed to handle small purchases or micropayments; sponsored by Mondex, a subsidiary of MasterCard. 10.2.3 E-Check Mode Figure 10-4 E-Check Mode 10.3. International Security Schemes in Electronic Payment Systems 10.3.1 Secure Sockets Layer (SSL) Protocol Digital certificates encrypt data using Secure Sockets Layer (SSL) technology, the industry-standard method for protecting web communications developed by Netscape