Chapter 12
Electronic Payment Systems
Electronic Commerce Prentice Hall? 2006 2
Learning Objectives
1,Understand the shifts that are occurring with regards to
non-cash and online payments.
2,Discuss the players and processes involved in using
credit cards online.
3,Discuss the different categories and potential uses of
smart cards.
4,Discuss various online alternatives to credit card
payments and identify under what circumstances they
are best used.
Electronic Commerce Prentice Hall? 2006 3
Learning Objectives
5,Describe the processes and parties involved in e-
checking.
6,Describe payment methods in B2B EC,including
payments for global trade.
7,Discuss electronic bill and invoice presentment and
payment.
8,Understand the sales tax implications of e-payments.
Electronic Commerce Prentice Hall? 2006 4
The Payment Revolution
Crucial Factors
– Independence
– Interoperability and portability
– Security
– Anonymity
– Divisibility
– Ease of use
– Transaction fees
– Regulations
Electronic Commerce Prentice Hall? 2006 5
Using Payments Cards Online
payment card
Electronic card that contains information that can
be used for payment purposes
Three forms of payment cards:
– Credit cards
– Charge cards
– Debit cards
Electronic Commerce Prentice Hall? 2006 6
Using Payments Cards Online
Processing Credit Cards Online
authorization
Determines whether a buyer’s card is active and
whether the customer has sufficient funds
settlement
Transferring money from the buyer’s to the
merchant’s account
Electronic Commerce Prentice Hall? 2006 7
Using Payments Cards Online
Processing Credit Cards Online
payment service provider (PSP)
A third-party service connecting a merchant’s
EC systems to the appropriate acquirers,PSPs
must be registered with the various card
associations they support
Electronic Commerce Prentice Hall? 2006 8
Using Payments Cards Online
– Key participants in processing credit card payments
online include the following:
Acquiring bank
Credit card association
Customer
Issuing bank
Merchant
Payment processing service
Processor
Electronic Commerce Prentice Hall? 2006 9
Using Payments Cards Online
Fraudulent Credit Card Transactions
Address Verification System (AVS)
Detects fraud by comparing the address entered on a
Web page with the address information on file with
cardholder’s issuing bank
Electronic Commerce Prentice Hall? 2006 10
Using Payments Cards Online
card verification number (CVN)
Detects fraud by comparing the verification number
printed on the signature strip on the back of the card
with the information on file with the cardholder’s
issuing bank
Electronic Commerce Prentice Hall? 2006 11
Using Payments Cards Online
Fraudulent Credit Card Transactions
– Additional tools used to combat fraud include:
Manual review
Fraud screens and decision models
Negative files
Card association payer authentication services
Electronic Commerce Prentice Hall? 2006 12
Using Payments Cards Online
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 Commerce Prentice Hall? 2006 13
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
Electronic Commerce Prentice Hall? 2006 14
Exhibit 12.2 Smart Card
Electronic Commerce Prentice Hall? 2006 15
Smart Cards
Types of Smart Cards
contact card
A smart card containing a small gold plate on the face
that when inserted in a smart card reader makes
contact and passes data to and from the embedded
microchip
Electronic Commerce Prentice Hall? 2006 16
Smart Cards
Types of Smart Cards
contactless (proximity) card
A smart card with an embedded antenna,by means
of which data and applications are passed to and from
a card reader unit or other device without contact
between the card and the card reader
Electronic Commerce Prentice Hall? 2006 17
Smart Cards
smart card reader
Activates and reads the contents of the chip on a
smart card,usually passing the information on to a
host system
smart card operating system
Special system that handles file management,
security,input/output (I/O),and command execution
and provides an application programming interface
(API) for a smart card
Electronic Commerce Prentice Hall? 2006 18
Smart Cards
Applications of Smart Cards
– Retail Purchases
e-purse
Smart card application that loads money from a
card holder’s bank account onto the smart card’s
chip
Common Electronic Purse Specification (CEPS)
Standards governing the operation and
interoperability of e-purse offerings
– Transit Fares
– E-Identification
Electronic Commerce Prentice Hall? 2006 19
Smart Cards
Applications of Smart Cards
– Transit Fares
To eliminate the inconvenience of multiple types of tickets
used in public transportation,most major transit operators
in the United States are implementing smart card fare-
ticketing systems
– E-Identification
Because they have the capability to store personal
information,including pictures,biometric identifiers,digital
signatures,and private security keys,smart cards are
being used in a variety of identification,access control,
and authentication applications
Electronic Commerce Prentice Hall? 2006 20
Smart Cards
Applications of Smart Cards in Health Care
– Storing vital medical information in case of emergencies
– Preventing patients from obtaining multiple prescriptions
from different physicians
– Verifying a patient’s identity and insurance coverage
– Speeding up the hospital or emergency room admissions
process
Electronic Commerce Prentice Hall? 2006 21
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
Electronic Commerce Prentice Hall? 2006 22
Smart Cards
Securing Smart Cards
– Smart cards store or provide access to either valuable
assets or to sensitive information
– Because of this,they must be secured against theft,
fraud,or misuse
– The possibility of hacking into a smart card is
classified as a,class 3” attack,which means that the
cost of compromising the card far exceeds the
benefits
Electronic Commerce Prentice Hall? 2006 23
Stored-Value Cards
stored-value card
A card that has monetary value loaded onto it
and that is usually rechargeable
Electronic Commerce Prentice Hall? 2006 24
E-Micropayments
e-micropayments
Small online payments,typically under US $10
Companies with e-micropayment products:
– BitPass (bitpass.com)
– Paystone (paystone.com)
– PayLoadz (payloadz.com)
– Peppercoin (peppercoin.com)
Electronic Commerce Prentice Hall? 2006 25
E-Checking
e-check
A legally valid electronic version or
representation of a paper check
Automated Clearing House (ACH) Network
A nationwide batch-oriented electronic funds
transfer system that provides for the interbank
clearing of electronic payments for participating
financial institutions
Electronic Commerce Prentice Hall? 2006 26
E-Checking
Benefits of e-check processing:
– It reduces the merchant’s administrative costs by
providing faster and less paper-intensive collection of
funds
– It improves the efficiency of the deposit process for
merchants and financial institutions
Electronic Commerce Prentice Hall? 2006 27
E-Checking
Benefits of e-check processing:
– It speeds the checkout process for consumers
– It provides consumers with more information about
their purchases on their account statements
– It reduces the float period and the number of checks
that bounce because of insufficient funds (NSFs)
Electronic Commerce Prentice Hall? 2006 28
Exhibit 12.3 Processing E-Checks with
Authorize.Net
Electronic Commerce Prentice Hall? 2006 29
Electronic Bill Presentment and Payment
electronic bill presentment and payment
(EBPP)
Presenting and enabling payment of a bill online,
Usually refers to a B2C transaction
Electronic Commerce Prentice Hall? 2006 30
Exhibit 12.4 E-Bill Presentment
Electronic Commerce Prentice Hall? 2006 31
Electronic Bill Presentment and Payment
Types of E-Billing
– Online banking
– Biller direct
– Bill consolidator
Electronic Commerce Prentice Hall? 2006 32
Electronic Bill Presentment and
Payment
Advantages of E-Billing
– Reduction in expenses related to billing and
processing payments
– Electronic advertising inserts can be customized to
the individual customer
– Reduces customer’s expenses
Electronic Commerce Prentice Hall? 2006 33
Exhibit 12.5 E-Billing Process for
Single Biller
Electronic Commerce Prentice Hall? 2006 34
Exhibit 12.6 E-Billing Processes for
Bill Consolidator
Electronic Commerce Prentice Hall? 2006 35
B2B Electronic Payments
Current B2B Payment Practices
– Financial supply chains of most companies are
characterized by inefficiencies created by a number of
factors,including,
The time required to create,transfer,and process paper
documentation
The cost and errors associated with manual creation and
reconciliation of documentation
The lack of transparency in inventory and cash positions
when goods are in the supply chain
Disputes arising from inaccurate or missing data
Fragmented point solutions that do not address the complete
end-to-end processes of the trade cycle
Electronic Commerce Prentice Hall? 2006 36
B2B Electronic Payments
Enterprise Invoice Presentment and Payment
enterprise invoice presentment and payment
(EIPP)
Presenting and paying B2B invoices online
– EIPP Models
Seller Direct
Buyer Direct
Consolidator
Electronic Commerce Prentice Hall? 2006 37
B2B Electronic Payments
– EIPP Options
ACH Network
purchasing cards (p-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
Electronic Commerce Prentice Hall? 2006 38
B2B Electronic Payments
Fedwire or Wire Transfer
letter of credit (LC)
A written agreement by a bank to pay the seller,on
account of the buyer,a sum of money upon
presentation of certain documents
Electronic Commerce Prentice Hall? 2006 39
Exhibit 12.7 Clareon
Online Transaction Service
Electronic Commerce Prentice Hall? 2006 40
The Sales Tax Issue
Because of the complexities,many online
businesses (B2C and B2B) rely on specialized
third-party software and services to calculate the
taxes associated with a sale
Electronic Commerce Prentice Hall? 2006 41
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?
Electronic Commerce Prentice Hall? 2006 42
Summary
1,Payment revolution.
2,Using payment cards online.
3,Smart cards.
4,Stored-value cards.
5,E-micropayments.
6,E-checking.
7,Electronic bill presentment and payment.
8,B2B electronic payments.
9,Tax issues.
Electronic Payment Systems
Electronic Commerce Prentice Hall? 2006 2
Learning Objectives
1,Understand the shifts that are occurring with regards to
non-cash and online payments.
2,Discuss the players and processes involved in using
credit cards online.
3,Discuss the different categories and potential uses of
smart cards.
4,Discuss various online alternatives to credit card
payments and identify under what circumstances they
are best used.
Electronic Commerce Prentice Hall? 2006 3
Learning Objectives
5,Describe the processes and parties involved in e-
checking.
6,Describe payment methods in B2B EC,including
payments for global trade.
7,Discuss electronic bill and invoice presentment and
payment.
8,Understand the sales tax implications of e-payments.
Electronic Commerce Prentice Hall? 2006 4
The Payment Revolution
Crucial Factors
– Independence
– Interoperability and portability
– Security
– Anonymity
– Divisibility
– Ease of use
– Transaction fees
– Regulations
Electronic Commerce Prentice Hall? 2006 5
Using Payments Cards Online
payment card
Electronic card that contains information that can
be used for payment purposes
Three forms of payment cards:
– Credit cards
– Charge cards
– Debit cards
Electronic Commerce Prentice Hall? 2006 6
Using Payments Cards Online
Processing Credit Cards Online
authorization
Determines whether a buyer’s card is active and
whether the customer has sufficient funds
settlement
Transferring money from the buyer’s to the
merchant’s account
Electronic Commerce Prentice Hall? 2006 7
Using Payments Cards Online
Processing Credit Cards Online
payment service provider (PSP)
A third-party service connecting a merchant’s
EC systems to the appropriate acquirers,PSPs
must be registered with the various card
associations they support
Electronic Commerce Prentice Hall? 2006 8
Using Payments Cards Online
– Key participants in processing credit card payments
online include the following:
Acquiring bank
Credit card association
Customer
Issuing bank
Merchant
Payment processing service
Processor
Electronic Commerce Prentice Hall? 2006 9
Using Payments Cards Online
Fraudulent Credit Card Transactions
Address Verification System (AVS)
Detects fraud by comparing the address entered on a
Web page with the address information on file with
cardholder’s issuing bank
Electronic Commerce Prentice Hall? 2006 10
Using Payments Cards Online
card verification number (CVN)
Detects fraud by comparing the verification number
printed on the signature strip on the back of the card
with the information on file with the cardholder’s
issuing bank
Electronic Commerce Prentice Hall? 2006 11
Using Payments Cards Online
Fraudulent Credit Card Transactions
– Additional tools used to combat fraud include:
Manual review
Fraud screens and decision models
Negative files
Card association payer authentication services
Electronic Commerce Prentice Hall? 2006 12
Using Payments Cards Online
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 Commerce Prentice Hall? 2006 13
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
Electronic Commerce Prentice Hall? 2006 14
Exhibit 12.2 Smart Card
Electronic Commerce Prentice Hall? 2006 15
Smart Cards
Types of Smart Cards
contact card
A smart card containing a small gold plate on the face
that when inserted in a smart card reader makes
contact and passes data to and from the embedded
microchip
Electronic Commerce Prentice Hall? 2006 16
Smart Cards
Types of Smart Cards
contactless (proximity) card
A smart card with an embedded antenna,by means
of which data and applications are passed to and from
a card reader unit or other device without contact
between the card and the card reader
Electronic Commerce Prentice Hall? 2006 17
Smart Cards
smart card reader
Activates and reads the contents of the chip on a
smart card,usually passing the information on to a
host system
smart card operating system
Special system that handles file management,
security,input/output (I/O),and command execution
and provides an application programming interface
(API) for a smart card
Electronic Commerce Prentice Hall? 2006 18
Smart Cards
Applications of Smart Cards
– Retail Purchases
e-purse
Smart card application that loads money from a
card holder’s bank account onto the smart card’s
chip
Common Electronic Purse Specification (CEPS)
Standards governing the operation and
interoperability of e-purse offerings
– Transit Fares
– E-Identification
Electronic Commerce Prentice Hall? 2006 19
Smart Cards
Applications of Smart Cards
– Transit Fares
To eliminate the inconvenience of multiple types of tickets
used in public transportation,most major transit operators
in the United States are implementing smart card fare-
ticketing systems
– E-Identification
Because they have the capability to store personal
information,including pictures,biometric identifiers,digital
signatures,and private security keys,smart cards are
being used in a variety of identification,access control,
and authentication applications
Electronic Commerce Prentice Hall? 2006 20
Smart Cards
Applications of Smart Cards in Health Care
– Storing vital medical information in case of emergencies
– Preventing patients from obtaining multiple prescriptions
from different physicians
– Verifying a patient’s identity and insurance coverage
– Speeding up the hospital or emergency room admissions
process
Electronic Commerce Prentice Hall? 2006 21
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
Electronic Commerce Prentice Hall? 2006 22
Smart Cards
Securing Smart Cards
– Smart cards store or provide access to either valuable
assets or to sensitive information
– Because of this,they must be secured against theft,
fraud,or misuse
– The possibility of hacking into a smart card is
classified as a,class 3” attack,which means that the
cost of compromising the card far exceeds the
benefits
Electronic Commerce Prentice Hall? 2006 23
Stored-Value Cards
stored-value card
A card that has monetary value loaded onto it
and that is usually rechargeable
Electronic Commerce Prentice Hall? 2006 24
E-Micropayments
e-micropayments
Small online payments,typically under US $10
Companies with e-micropayment products:
– BitPass (bitpass.com)
– Paystone (paystone.com)
– PayLoadz (payloadz.com)
– Peppercoin (peppercoin.com)
Electronic Commerce Prentice Hall? 2006 25
E-Checking
e-check
A legally valid electronic version or
representation of a paper check
Automated Clearing House (ACH) Network
A nationwide batch-oriented electronic funds
transfer system that provides for the interbank
clearing of electronic payments for participating
financial institutions
Electronic Commerce Prentice Hall? 2006 26
E-Checking
Benefits of e-check processing:
– It reduces the merchant’s administrative costs by
providing faster and less paper-intensive collection of
funds
– It improves the efficiency of the deposit process for
merchants and financial institutions
Electronic Commerce Prentice Hall? 2006 27
E-Checking
Benefits of e-check processing:
– It speeds the checkout process for consumers
– It provides consumers with more information about
their purchases on their account statements
– It reduces the float period and the number of checks
that bounce because of insufficient funds (NSFs)
Electronic Commerce Prentice Hall? 2006 28
Exhibit 12.3 Processing E-Checks with
Authorize.Net
Electronic Commerce Prentice Hall? 2006 29
Electronic Bill Presentment and Payment
electronic bill presentment and payment
(EBPP)
Presenting and enabling payment of a bill online,
Usually refers to a B2C transaction
Electronic Commerce Prentice Hall? 2006 30
Exhibit 12.4 E-Bill Presentment
Electronic Commerce Prentice Hall? 2006 31
Electronic Bill Presentment and Payment
Types of E-Billing
– Online banking
– Biller direct
– Bill consolidator
Electronic Commerce Prentice Hall? 2006 32
Electronic Bill Presentment and
Payment
Advantages of E-Billing
– Reduction in expenses related to billing and
processing payments
– Electronic advertising inserts can be customized to
the individual customer
– Reduces customer’s expenses
Electronic Commerce Prentice Hall? 2006 33
Exhibit 12.5 E-Billing Process for
Single Biller
Electronic Commerce Prentice Hall? 2006 34
Exhibit 12.6 E-Billing Processes for
Bill Consolidator
Electronic Commerce Prentice Hall? 2006 35
B2B Electronic Payments
Current B2B Payment Practices
– Financial supply chains of most companies are
characterized by inefficiencies created by a number of
factors,including,
The time required to create,transfer,and process paper
documentation
The cost and errors associated with manual creation and
reconciliation of documentation
The lack of transparency in inventory and cash positions
when goods are in the supply chain
Disputes arising from inaccurate or missing data
Fragmented point solutions that do not address the complete
end-to-end processes of the trade cycle
Electronic Commerce Prentice Hall? 2006 36
B2B Electronic Payments
Enterprise Invoice Presentment and Payment
enterprise invoice presentment and payment
(EIPP)
Presenting and paying B2B invoices online
– EIPP Models
Seller Direct
Buyer Direct
Consolidator
Electronic Commerce Prentice Hall? 2006 37
B2B Electronic Payments
– EIPP Options
ACH Network
purchasing cards (p-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
Electronic Commerce Prentice Hall? 2006 38
B2B Electronic Payments
Fedwire or Wire Transfer
letter of credit (LC)
A written agreement by a bank to pay the seller,on
account of the buyer,a sum of money upon
presentation of certain documents
Electronic Commerce Prentice Hall? 2006 39
Exhibit 12.7 Clareon
Online Transaction Service
Electronic Commerce Prentice Hall? 2006 40
The Sales Tax Issue
Because of the complexities,many online
businesses (B2C and B2B) rely on specialized
third-party software and services to calculate the
taxes associated with a sale
Electronic Commerce Prentice Hall? 2006 41
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?
Electronic Commerce Prentice Hall? 2006 42
Summary
1,Payment revolution.
2,Using payment cards online.
3,Smart cards.
4,Stored-value cards.
5,E-micropayments.
6,E-checking.
7,Electronic bill presentment and payment.
8,B2B electronic payments.
9,Tax issues.
