CHAPTER FOUR

E-COMMERCE PAYMENT SYSTEMS AND SECURITY ISSUES

• Electronic Payment system is a financial exchange that takes place online between buyers
and sellers.
• Payments are an integral part of doing business, whether in the traditional way or online.
• In most cases, traditional payment systems are not effective for EC (using cash, writing
a check, sending a money order have several limitations in EC).
• Usually in e-commerce, payments between buyers and sellers can take place
electronically.
4.1 Properties and Types of E-Payment Systems
In order to understand e-commerce payment systems, let us be familiar with the various types of
payment systems.
Types of payment systems
1. Electronic cash (also called e-cash, token or digital cash)
Digital Cash: This is standard money converted into an electronic format to pay for online
purchases. It was one of the first forms of alternative payment systems developed for e commerce.
It is a form of value storage and value exchange that have limited convertibility into other forms
of value and that do require intermediaries to convert.
The properties of Digital cash are: ‐
▪ Must have a monetary value
▪ It must be backed by cash [currency],bank authorized credit or a bank certified cashier’s che
ck
▪ Digital cash is based on cryptographic systems called “Digital Signatures” similar t
o the signatures used by banks on paper cheques to authenticate a customer.
▪ Maintenance of sufficient money in the account is required to back any purchase.
▪ Must be interoperable or exchangeable as payment for other digital cash, paper cash,
goods or services, lines of credit, bank notes or obligations, electronic benefit transfers and t
he like.

Advantages of Digital Cash

– Primary advantage is with purchase of items less than £5
– Lower transaction costs
– Anybody can use it, unlike credit cards, and does not require special authorization
– Cost-effective for small payment
– User can transfer his electronic coins to other user
– No need to apply credit card
– Anonymous feature
Disadvantages of Digital Cash

• It is not suitable for large payment because of lower security

• Client must use wallet software in order to store the withdrawn coins from the bank

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Digicash: How First Generation Digital Cash Worked

To use Digi-cash, a consumer first had to establish an account at a bank that was using the Digi-
cash system. Once an account was established, the consumer then downloaded digital wallets
software, onto his or her computer’s hardware. Digital wallet (e-wallet)-is similar to analog wallet
is authenticate the consumer through the use of digital certificate or other encryption methods,
stores and transfers value, and secure the payment process from the consumer to the merchant.
Then the consumer could request a transfer of digital cash. Then the Digi-cash bank store the cash
to the consumers digital wallets.
Once the digital wallet had cash, the consumer could spend that cash at merchants who were
willing to accept it. Here the software would deduct the cash from the digital wallet and transfer it
to the merchant.

The merchant could then transfer the cash back to the bank to conform that it had not been double
spent. Finally the bank would cancel the e-coins and credit the merchant’s account at the bank.
2. Digital Checking Payment Systems
• E-checks are similar to regular checks, and they are used mostly in business-to-
business (B2B) e-commerce applications.

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 • Seek to extend the functionality of existing checking accounts for use as online shopping
payment tools
How Digital Checking Works: E-check

1. E-check requires users to obtain a hardware based electronic checkbook from a traditional
bank (it reads consumers card). The electronic checkbook contains the consumer’s digital
signature in the form of a private key. It also contains the issuing bank’s public keys.
2. Using software provided with the check form and sends it to a merchant over the internet.
The communication is encrypted and contains the consumer’s digital signature, public key,
and the issuing bank’s digital signature.
3. Upon the receipt, the merchant authenticates the digital signature of both the sender and
the issuing bank using their respective public keys.
4. Then the merchant deposits the check at its bank
5. A higher-level certificate authority, such as the Federal Reserve Bank, certifies the issuing
bank’s public key.
6. The consumer’s bank then transfers funds to the merchant’s bank
3. Payment Card
Businesspeople often use the term payment card as a general term to describe all types of plastic
cards that consumers (and some businesses) use to make purchases. The main categories of
payment cards are credit cards, debit cards, and charge cards.

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  Credit Card
It is important to understand credit card because it is the dominant form of online payment.

* Represents an account that extends credit to consumers, permits consumers to purchase

items while deferring payment, allows consumers to make payments to multiple vendors at
one time.

* 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 cards also offer consumers considerable float.

Credit cards are issued based on the customer's income level, credit history, and total wealth. The
customer uses these cards to buy goods and services or get cash from the participating financial
institutions. The customer is supposed to pay his or her debts during the payment period; otherwise
interest will accumulate.
Advantages:
➢ Payment cards provide fraud protection.
➢ They have worldwide acceptance (nearly!).
➢ It is easy and simple for a buyer to e-mail her or his credit card number to the seller.
➢ They are good for online transactions.
Disadvantages:
 Payment card service companies charge merchants per-transaction fees and monthly
processing fees.
 They are not suitable for very small or very large payments.
•
It is not cost-justified to use a credit card for small payments.
•
Due to security issues, these cards have a limit and cannot be used for excessively large
transactions.
 Many people resist online credit-card transactions because of security concerns.
• The risk here is that hackers will be able to read the credit card number.
• Customers fear credit-card fraud by merchants and third parties. However, most credit
cards, such as Visa®, Mastercard® and American Express have features that enable
secure online and offline payments.
How online credit card transaction works:

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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.
There are five parties involved in an online credit card purchase.
1. Consumer 4. Merchant bank
2. Merchant 5. The consumer’s card issuing bank
3. Clearing house

* An Online credit card transaction begins with a purchase when a consumer wants to make
a purchase, he or she adds the item to the merchant’s shopping cart.

* When the consumer wants to pay for the items in the shopping cart, a secure tunnel through
the internet is created using SSL (Secure Sockets Layer). SSL does not authenticate
either the merchant or the consumer

* Once the consumer credit card information is received by the merchant, the merchant
software contacts a clearinghouse.

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 * A clearinghouse is a financial intermediary that authenticates credit cards and verifies
account balances. The clearinghouse contacts the issuing bank to verify the account
information

* Once verified, the issuing bank credits the account of the merchant at the merchant’s bank
(usually this occurs at night in a batch process).

* The debit to the consumer account is transmitted to the consumer in a monthly statement.
To accept payment cards payments, a merchant must have a merchant account with a bank. The
buyer will be required to submit their credit-card number, expiration date and shipping and
billing information when making a purchase online using a payment card. A customer using
his/her browser clicks on a product on the merchant's web site and adds it to an electronic
shopping cart.
 A debit card looks like a credit card, but it works quite differently. Instead of charging
purchases against a credit line, a debit card removes the amount of the sale from the
cardholder’s bank account and transfers it to the seller’s bank account.

Debit cards are issued by the cardholder’s bank and usually carry the name of a major credit card
issuer, such as Visa or MasterCard, by agreement between the issuing bank and the credit card
issuer. By branding their debit cards (with the Visa or MasterCard name), banks ensure that their
debit cards will be accepted by merchants who recognize the credit card brand names.

 A charge card, offered by companies such as American Express, carries no spending limit,
and the entire amount charged to the card is due at the end of the billing period. Charge cards
do not involve lines of credit and do not accumulate interest charges.
4. ELECTRONIC WALLETS

As consumers are becoming more enthusiastic about online shopping, they have begun to tire of
repeatedly entering detailed shipping and payment information each time they make online
purchases. One way to avoid the problem of having to repeatedly fill out purchase information,
while at the same time eliminating the need to store the information on a merchant’s server, is to
use an electronic wallet (e-wallet). An e-wallet is a software component that is downloaded to a
user’s PC and in which the user stores credit card numbers and other personal information.
An electronic wallet (sometimes called an e-wallet), serving a function similar to a physical wallet,
holds credit card numbers, electronic cash, owner identification, and owner contact information
and provides that information at an electronic commerce site’s checkout counter.

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When the user shops at a merchant who accepts the e-wallet, the user can perform one-click
shopping, with the e-wallet automatically filling in the necessary information. Credit card
companies like Visa and MasterCard offer e-wallet services, as do Yahoo!, America Online (called
Quick Checkout), and Microsoft (Passport).
Electronic wallets fall into two categories based on where they are stored. A server-side
electronic wallet stores a customer’s information on a remote server belonging to a particular
merchant or wallet publisher. For example, if you enter your information on a site such as
Amazon.com and choose to store that information so you do not have to enter it when you next
visit the site, Amazon.com stores your information in a server-side electronic wallet.

A client-side electronic wallet stores a consumer’s information on his or her own computer. Many
of the early electronic wallets were client-side wallets that required users to download the wallet
software. This need to download software onto every computer used to make purchases is a chief
disadvantage of client-side wallets. Server-side wallets, on the other hand, remain on a server and
thus require no download time or installation on a user’s computer
5. STORED-VALUE CARDS

Today, most people carry a number of plastic cards—credit cards, debit cards, charge cards,
driver’s license, health insurance card, employee or student identification card, and others. One
solution that could reduce all those cards to a single plastic card is called a stored-value card.

A stored-value card is an elaborate smart card with a microchip or a plastic card with a magnetic
strip that records the currency balance. The microchip can store more information than a magnetic
strip. More importantly, it can include a tiny computer processor that enables the smart card to do
its own calculations and storage operations right on the card. The card readers needed for smart
cards are different, too. Common stored-value cards include prepaid phone, copy, subway, and bus
cards. Many people use the terms “stored- value card” and “smart card” interchangeably.

How Ecount.com Works: A Stored Value System

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1. A consumer first establishes an account with e-count funded by credit or debit card.
2. Then e-count will verify the accounts and its balance with the consumer’s card issuing bank.
3. The consumer make purchase anywhere on the web where e-count is accepted.
4. E-count immediately debits the consumer’s account and transfers the fund to the merchant.
5. At the end of the month the consumer’s card issuing bank send a statement showing the debit
to E-count.
Smart Cards- A smart card is a stored-value card that is a plastic card with an embedded
microchip that can store information. Although some people refer to stored-value cards as smart
cards, they are not really the same. True smart cards contain a microprocessor (chip) and can store
a considerable amount of information (more than 100 times that of a stored-value card) and can
conduct processing. Such cards are multipurpose, Advanced smart cards have the ability to transfer
funds, pay bills, buy from vending machines, or pay for services such as those offered on television
or PCs. Also, it can hold private user data, such as financial facts, encryption keys, account
information, credit card numbers, health insurance information, medical records, and so on. Smart
cards are broadly classified into two groups:

Contact: This type of smart card must be inserted into a special card reader to be read and
updated. A contact smart card contains a microprocessor chip that makes contact with electrical
connectors to transfer the data.

Contact-less: This type of smart card can be read from a short distance using radio frequency. A
contact-less smart card also contains a microprocessor chip and an antenna that allows data to be
transmitted to a special card reader without any physical contact. This type of smart card is useful
for people who are moving in vehicles or on foot.

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Some of the advantages of smart cards include the following:
• Stored many types of information • Portable
• Not easily duplicated • Low cost to issuers and users
• Not occupy much space • Included high security
The disadvantages of smart cards are the lack of universal standards for their design and utilization.
On the other hand, smart card applications are expected to increase as a result of the resolution of
these disadvantages in the near future
Person-to-person (P2P) payment
P2P is one of the newest and fastest-growing payment schemes. They enable the transfer of funds
between two individuals for a variety of purposes like repaying money borrowed from a friend,
sending money to students at college, paying for an item purchased at an online auction, or sending
a gift to a family member.
A peer-to-peer payment service allows the transfer of digital cash (e-Cash) via e-mail between two
people who have accounts at e-Cash-enabled banks. Peer-to peer transactions allow online
financial transfers between consumers. One example of peer-to-peer payment service is PayPal.
Transactions through PayPal are immediate, the service is free for individuals sending money to
one another and the payee is not required to enter any credit-card information. Businesses pay a
small transaction fee. PayPal allows a user to send money to anyone with an e-mail address,
regardless of what bank either person uses, or whether or not the recipient is pre-registered with
the service.
Assume you want to send money to someone over the Internet. First, you select a service and open
up an account with the service. Basically, this entails creating a user name, a password, giving
them your e-mail address, and providing the service with a credit card or bank account number.
Next, you add funds from your credit card or bank account to your P2P account. Once the account
has been funded you’re ready to send money. You access PayPal (for example) with your user
name and password. Now you specify the e-mail address of the person to receive the money, along
with the dollar amount that you want to send. An e-mail is sent to the payee’s e-mail address. The
e-mail will contain a link back to the service’s Web site. When the recipient clicks on the link, he
or she will be taken to the service. The recipient will be asked to set up an account to which the
money that was sent will be credited. The recipient can then credit the money from this account to
either his or her credit card or bank account. The payer pays a small amount (around $1) per
transaction.
Micropayments- Internet payments for items costing from a few cents to approximately a dollar
Small payment- Payments of less than $10