Electronic Commerce Systems

(Payment Systems)
 Electronic Commerce
Payment System
The use of digital technologies to pay for
product and services electronically is known
as Electronic Payment System.
In US market
 55% transactions paid by cash

 29% by check

 16% by credit, debit, and other electronic

transactions
Electronic Commerce
Information Flows
 Payment Systems

 In order to understand e-commerce payment

systems, you first need to be familiar with the
various types of generic payment systems.
There are five main types of payment
systems:
 Cash
 Checking transfer
 Credit cards
 Stored value
 Accumulating balance
 Payment Systems
 Cash: Cash is legal tender defined by a
national authority to represent value.
 Checking transfer: Funds transferred directly
via a signed draft or check from a consumer’s
checking account to a merchant or other
individual.
 Credit cards: Represents an account that
extends credit to consumers, permits
consumers to purchase items while deferring
payment, and allows consumers to make
payments to multiple vendors at one time.
 Payment Systems

 Stored value: Account created by

depositing funds into an account and
from which funds are paid out or
withdrawn as needed.
 Accumulating balance: Account that
accumulates expenditure and to which
consumers makes periodic payments.
 Payment Methods

 Payment on Delivery: In this method,

payment for the goods is collected at the
point of delivery by the deliverer. This is a
method that has been popular with small
goods sent through postal services that can
be delivered by hand. This method allows
for shipping as soon as the order is
confirmed. In Bangladesh, this method has
been adopted by some B2C vendors.
 Payment Methods
 Payment at Bank: In this method, after an
online purchase is made, the consumer is
provided with a web page containing the
payment amount and some specific code or
identification number for the purchase and
the vendor the item is bought from. The
consumer prints out the page, and then
pays the amount physically at a local bank.
After the payment is transferred to the
vendor’s account, the vendor ships the
goods.
 Payment Methods

 Advance Payment: In this method, the buyer

pays for the goods before shipment takes
place. Although this method of payment is
ideal for sellers, it is often difficult to find
buyers who will agree to the terms, other than
in some special B2B transactions, where the
parties generally know each other from
before-hand.
 Payment Methods

 Stored-Value Cards: In this method, a

consumer can purchase a card with a
specific amount of value stored in it.
The card can then be used to buy
certain goods or services from the
Internet, and proportionate amount gets
deducted each time a purchase is
made.
Electronic Payment Example
 Security Schemes in Electronic
Payment Systems
 Four Essential Security Schemes
 Authentication – A method to verify the buyer’s
identity before payment is authorized.
 Encryption – A process of making messages
unreadable except by those who have an
authorized decryption key.
 Integrity- Ensuring that information will not be
accidentally or maliciously altered or destroyed
during transmission
 Non-repudiation – protection against
customers’ denial of orders placed and against
merchants’ denial of payments made.
Most Common Payment Systems, Based
on Number or Transactions
Most Common Payment Systems, Based
on Amount
Dimensions of Payment Systems
 E-commerce Payment
systems
 The emergence of e-commerce has
created new financial needs that in
some cases cannot effectively fulfilled
by traditional payment systems. E-
commerce payments can be very
different depending on traditions and
infrastructure.
 Current E-commerce Payment
Systems
 Online credit card transaction: A bank
account that allows companies to process
credit card payments and receive funds from
those transactions. Use of credit card for e-
Commerce payment is one of the most major
forms of electronic fund transfer. Credit card
payments have the advantage of being simple
and fast, with the added advantage that sellers
can receive confirmation of payment in a very
short time, prior to shipping the goods.
 Electronic Credit Card
system on the internet

The Players
 Cardholder
 Merchant
 Card issuer
 Acquirer
 Card brand
 Process of using Credit Card

 Issue a credit card to a potential card holder

 The cardholder shows it to merchant
whenever he or she purchases by credit
card
 The merchant asks for approval from the
brand company and once authorized
transaction is paid by credit and merchant
keeps the sales slip
 Merchant sends the slip to acquiring bank
for collection and pays a fee for the service
 Process of using Credit Card

 The bank asks the brand to clear the

credit amount
 The brand asks the issuer bank to clear
the said amount
 The amount is transferred from the
issuer to the brand
 The issuing bank send monthly
statement to the card holder for the
outstanding balance
How an Online Credit Card
Transaction Works?
 Limitations of Online Credit Card
Payment Systems

 Security
 Neither the merchant not the consumer can be fully
authenticated
 Merchant Risk
 Consumers can repudiate charges
 Cost
 Roughly 3.5% of purchase plus transaction fee
 Social Equity
 Young adults do not have credit cards
 Almost 100 million adult Americans cannot afford cards
or are considered poor risks
 Payment Methods

 Digital wallet: It is a software that

stores credit card and owner
identification information and provides
this data automatically during
electronic commerce purchase
transactions.
 Digital Cash

 Also called e-cash. Digital Cash

generate a private form of currency that
can be spent at e-commerce sites.
 An alternative payment system
developed for e-commerce in which
unique, authenticated tokens
representing cash value are transmitted
from consumers to merchants.
 Digital Cash

 Digital forms of value storage or

value exchange that have limited
convertibility into other forms of
value and require intermediaries to
convert
 Online store value systems
 Online stored value payment systems permit
consumers to make instant, online payments to
merchants and other individuals based on value
stored in an online account
 Smart cards as store value systems are based
on credit-card-sized plastic cards that have
embedded chips that store personal information
 Online store value systems rely on
prepayments, debit cards, or checking accounts
to create value in an account that can be used
for e-commerce shopping
 Smart Cards

Smart card: It is a credit card size plastic

card that stores digital information and
that can be used for electronic payments
in place of cash.
An electronic card containing an
embedded microchip that enables
predefined operations or the addition,
deletion, or manipulation of information on
the card.
Smart Card
 Smart Cards

 Applications of Smart Cards in Health

Care
 Storing vital medical information in case of
emergencies
 Providing medical practitioners with secure
access to a patient’s complete medical history
 Speeding up the payment and claims process
 Enabling patients to access their medical
records over the Internet
 Digital accumulating balance
payment
 Digital accumulating balance payment
system 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. It accumulates small charges and
bill the consumer periodically. These
systems are especially suited for
processing micropayments for digital
accounts
Wireless Payment systems
 Electronic Billing Presentation
and Payment

 New forms of online payment systems

for monthly bills
 Allow consumers to view bills
electronically and pay them through
electronic funds transfers from bank or
credit card accounts
EFT (Electronic fund transfer)

 EFT (Electronic fund transfer):

Electronic fund transfer is a computer-
based system that facilitates the
transfer of money or the processing of
financial transactions between two
financial institutions.
 Managerial Issues

1. What B2C payment methods should

we use?
2. What B2B payment methods should
we use?
3. Should we use an in-house payment
mechanism or outsource it?
4. How secure are e-payments?
 General Guidelines to
E-payment
 Use a secure web browser
 Read the website’s privacy policy
carefully
 Figure out the merchant’s refund and
return policies in advance of the final
purchase.
 Investigate the trustworthiness of the
merchant before you initiate a
purchase.
 General Guidelines to
E-payment

 Keep a record of all online

transactions and check e-mail and
other contacts regularly.
 Review your credit card statements
line by line to ensure authenticity.
Thank
You