Objectives

In this chapter, you will learn about:

• The basic functions of online payment systems
• The use of payment cards in electronic
commerce
• The history and future of electronic cash
• How electronic wallets work
• The use of stored-value cards in electronic
commerce

E-Commerce: The Second Wave, Fifth Annual Edition 1

 Online Payment Basics
• Cash, checks, credit cards, and debit cards
– Account for more than 90 percent of all
consumer payments in the United States
• Most popular consumer electronic transfers
are automated payments of
– Auto loans
– Insurance payments
– Mortgage payments made from consumers’
checking accounts
E-Commerce: The Second Wave, Fifth Annual Edition 2
 Payment Methods for all Types of U.S.
Consumer Transactions, 2005 Projections

E-Commerce: The Second Wave, Fifth Annual Edition 3

 Online Payment Basics (Continued)

• Scrip

– Digital cash minted by a company instead of

by a government

– Cannot be exchanged for cash

– Like a gift certificate that is good at more than

one store

E-Commerce: The Second Wave, Fifth Annual Edition 4

 Payment Cards
• Describe all types of plastic cards used to
make purchases

• Credit card

– Has spending limit based on user’s credit

history

E-Commerce: The Second Wave, Fifth Annual Edition 5

 Payment Cards (Continued)

• Debit card
– Removes amount from cardholder’s bank
account
– Transfers it to seller’s bank account

• Charge card
– Carries no spending limit
– Amount charged is due at end of billing period

E-Commerce: The Second Wave, Fifth Annual Edition 6

 Advantages and Disadvantages of
Payment Cards
• Advantage
– Worldwide acceptance

– Built-in security for merchants

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

E-Commerce: The Second Wave, Fifth Annual Edition 7

 Payment Acceptance and Processing
• Steps followed once merchant receives
consumer’s 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 credit line or the funds needed
to cover the charge
– Settlement occurs

E-Commerce: The Second Wave, Fifth Annual Edition 8

 Open and Closed Loop System

• Closed loop systems

– Card issuer pays merchants that accept the
card directly and does not use an intermediary

• Open loop systems

– Involve three or more parties
– Systems using Visa or MasterCard are
examples

E-Commerce: The Second Wave, Fifth Annual Edition 9

 Merchant Accounts
• To process payment cards for Internet
transactions
– Online merchant must set up merchant
account
• New merchant must supply
– Business plan
– Details about existing bank accounts
– Business and personal credit history

E-Commerce: The Second Wave, Fifth Annual Edition 10

 Processing Payments Online
• InternetSecure
– Provides secure payment card services
• First Data
– Provides merchant payment card processing
services with the following programs
• ICVERIFY, PCAuthorize, and WebAuthorize
• Banks connect to an Automated Clearing House
(ACH) through
– Highly secure, private leased telephone lines

E-Commerce: The Second Wave, Fifth Annual Edition 11

 Processing a Payment Card
Transaction

E-Commerce: The Second Wave, Fifth Annual Edition 12

 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
• Attractive in two arenas
– Sale of goods and services of less than $10
– Sale of higher-priced goods and services to
those without credit cards
E-Commerce: The Second Wave, Fifth Annual Edition 13
 Micropayments and Small Payments
• Micropayments

– Internet payments for items costing from a few

cents to approximately a dollar

• Small payments

– Payments of less than $10

E-Commerce: The Second Wave, Fifth Annual Edition 14

Privacy and Security of Electronic Cash
• Concerns about electronic payment methods
include
– Privacy and security
– Independence
– Portability
– Convenience
• Advantages of electronic cash
– Independent and portable

E-Commerce: The Second Wave, Fifth Annual Edition 15

 eCharge Home Page

E-Commerce: The Second Wave, Fifth Annual Edition 16

 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

E-Commerce: The Second Wave, Fifth Annual Edition 17

 Advantages and Disadvantages of
Electronic Cash
• Advantages of electronic cash
– Transactions are more efficient
– Transfer on the Internet costs less than
processing credit card transactions
• Disadvantages of electronic cash
– Use provides no audit trail
– Problem of money laundering arises
– Susceptible to forgery

E-Commerce: The Second Wave, Fifth Annual Edition 18

 Providing Security for Electronic Cash
• Cryptographic algorithms
– Keys to creating tamperproof electronic cash
that can be traced back to its origins
• Anonymous electronic cash
– Electronic cash that cannot be traced back to
the person who spent it
• Creating truly anonymous electronic cash
– Requires bank to issue electronic cash with
embedded serial numbers

E-Commerce: The Second Wave, Fifth Annual Edition 19

 Detecting Double-Spending of
Electronic Cash

E-Commerce: The Second Wave, Fifth Annual Edition 20

 Electronic Cash Systems
• CheckFree

– Largest online bill processor in the world

– Provides online payment processing services

• Clickshare

– An electronic cash system aimed at magazine

and newspaper publishers

E-Commerce: The Second Wave, Fifth Annual Edition 21

 Electronic Cash Systems (Continued)
• InternetCash
– Provides electronic currency that is very similar
to traditional cash
– Customers must first purchase an InternetCash
card from a store
• PayPal
– Provides payment processing services to
businesses and to individuals
– Peer-to-peer (P2P) payment system
• Free payment clearing service for individuals

E-Commerce: The Second Wave, Fifth Annual Edition 22

PayPal Payment Method Search Option
on eBay Main Search Page

E-Commerce: The Second Wave, Fifth Annual Edition 23

 Electronic Wallets

• 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

E-Commerce: The Second Wave, Fifth Annual Edition 24

 Electronic Wallets (Continued)
• Server-side electronic wallet

– Stores customer’s information on a remote

server belonging to a particular merchant or
wallet publisher

• Client-side electronic wallet

– Stores consumer’s information on his or her

own computer

E-Commerce: The Second Wave, Fifth Annual Edition 25

 Microsoft .NET Passport
• An electronic wallet operated by Microsoft

• Passport consists of four integrated services

– Passport single sign-in service (SSI)

– Passport Wallet service

– Kids Passport service

– Public profiles

E-Commerce: The Second Wave, Fifth Annual Edition 26

 Microsoft .NET Passport Home Page

E-Commerce: The Second Wave, Fifth Annual Edition 27

 Yahoo! Wallet
• An electronic wallet offered by the Web portal
site Yahoo!

• Lets users store information about several

major credit and charge cards

• Many industry observers and privacy rights

activist groups are concerned about
electronic wallets

E-Commerce: The Second Wave, Fifth Annual Edition 28

 W3C Micropayment Standards
Development Activity
• Common Markup for Micropayment Per-Fee-
Links
– Standards developed by W3C Electronic
Commerce Interest Group (ECIG)
– Provide extensible and interoperable way to
embed micropayment information in Web page
• Extensible system
– One that developers can add to (or extend)
without voiding any earlier work on the system
E-Commerce: The Second Wave, Fifth Annual Edition 29
W3C Proposed Micropayment HTML Tags

E-Commerce: The Second Wave, Fifth Annual Edition 30

 The ECML Standard
• Electronic Commerce Modeling Language
(ECML)
– Users can enter credit card and address
information once into an ECML-capable
electronic wallet
– Any existing wallet can be redesigned to follow
the ECML standard
– Users control access to their ECML electronic
wallets

E-Commerce: The Second Wave, Fifth Annual Edition 31

 Stored-Value Cards

• Can be an elaborate smart card with a

microchip that records currency balance

• Common stored-value cards

– Prepaid phone, copy, subway, and bus cards

E-Commerce: The Second Wave, Fifth Annual Edition 32

 Magnetic Strip Cards
• Cannot send or receive information
• Cannot increment or decrement value of cash
stored on the card
• Processing must be done on a device into
which card is inserted
• Smart card
– Better suited for Internet payment transactions

E-Commerce: The Second Wave, Fifth Annual Edition 33

 Smart Cards
• Stored-value cards

• Can hold private user data, such as financial

facts

• Can store about 100 times more information

than a magnetic strip plastic card

• Safer than conventional credit cards

E-Commerce: The Second Wave, Fifth Annual Edition 34

 Octopus Smart Card Information on
the Hong Kong Citybus Site

E-Commerce: The Second Wave, Fifth Annual Edition 35

 Smart Cards (Continued)
• Smart Card Alliance
– Promotes benefits of smart cards
– Promotes widespread acceptance of multiple-
application smart card technology
– Members include companies in banking,
financial services, computer technology, and
healthcare
– Promotes compatibility among smart cards,
card reader devices, and applications

E-Commerce: The Second Wave, Fifth Annual Edition 36

 Mondex
• Smart card that holds and dispenses
electronic cash
• Introduced in 1990 and now part of
MasterCard International
• Can accept electronic cash directly from a
user’s bank account
• Card carries real cash in electronic form
– Risk of theft may deter users from loading it
with very much money

E-Commerce: The Second Wave, Fifth Annual Edition 37

 Mondex (Continued)

• Steps in using a Mondex card to transfer

electronic cash from buyer to seller

1. Card user inserts Mondex card into reader

2. Merchant’s terminal requests payment

3. Customer’s card checks merchant’s digital

signature

E-Commerce: The Second Wave, Fifth Annual Edition 38

 Steps in using a Mondex Card to
Transfer Electronic Cash from Buyer to
Seller (Continued)

4. Merchant’s terminal checks customer’s just-

sent digital signature for authenticity

5. Once electronic cash is deducted from the

cardholder’s card
• Same amount is transferred into the
merchant’s electronic cash account

E-Commerce: The Second Wave, Fifth Annual Edition 39

 Mondex Smart Card Processing

E-Commerce: The Second Wave, Fifth Annual Edition 40

 Summary

• Most popular forms of payment on the

Internet

– Credit card

– Debit card

– Charge cards (payment cards)

E-Commerce: The Second Wave, Fifth Annual Edition 41

 Summary
• Electronic cash
– Form of online payment
– Slow to catch on in the United States
– Especially useful for making micropayments
– Advantages
• Portable, anonymous, and usable for
international transactions

E-Commerce: The Second Wave, Fifth Annual Edition 42

 Summary
• Electronic wallets
– Provide convenience to online shoppers
– Eliminate need to reenter payment card and
shipping information at site’s electronic
checkout counter
• Stored-value cards
– Physical devices that hold information
• Smart cards
– Intended to replace collection of plastic cards
people now carry
E-Commerce: The Second Wave, Fifth Annual Edition 43