Transcript Traditional and Electronic Payment Methods

Traditional and Electronic
Payment Methods
Chapter 3
Money and Banking
• Money serves as a measure of value, a
medium of exchange.
• Money exists in a number of forms
• Cash
– Coin, paper money
• Near Cash
– checks, drafts, money orders, credit cards
Check Processing
Encryption/decryption of Transactions
Check
• A written order on a bank or other financial
institution to pay money belonging to the
signer to the presenter of the check
• The most popular offline settlement method.
• Not efficient for e-commerce
Money Order
• An order for the payment of a specified
amount of money
• Usually issued by the post office or a bank
or other financial institution.
• Popular with people who do not have bank
accounts or where checks are not acceptable
Credit Card
• Used to settle charges for goods or services.
• Card holders pay their bill monthly and pay
interest on unpaid account balance.
• Issued by banks or financial institutions.
• Visa and master card are clearing houses for
member institutions.
Charge Cards
• Similar to credit cards
• Customer pays bill in full each month
• AMEX card is popular example
Debit Cards
• Similar to credit card in operation from
merchant’s perspective.
• Similar to a check from customer’s
perspective.
Payment Processing
• A merchant must have
– A merchant account
– Payment processing software
– Procedures to protect customers and guard
against fraud
Merchant account
• An account with a financial institution to
accept charges.
• Must apply for account and be accepted.
• Supply bank with financial information
about anticipated transaction volume and
type of business.
• The bank charges for this service.
Merchant accounts
• Charge-backs result from customer refusal
to pay a charge for a number of reasons,
including returned goods, billing errors, and
fraudulent charges.
• Charge-backs can be expensive and the
bank may charge higher fees for higher risk
enterprises and “situations”.
High Risk factors
• Customer not present: telephone and
internet sales.
• High risk products or services: Gambling,
“politically incorrect”, or non-traditional
products.
Payment Processing Software
• Software to facilitate authorization of
customer charges to credit or debit charge
account.
• Alternative is to outsource to 3rd party for a
fee.
Verification Software
Security for charge settlement
• Security must be provided for customer
transaction.
• Secure Sockets Layer (SSL) technology
provides encrypted transmission of data
between customer and a secure server
Authentication
• SSL requires a digital certificate that
verifies a sender’s identity.
• An e-business obtains their certificate from
a certificate authority such as VeriSign
A Digital Certificate
Fraud
• Credit card fraud is a major problem: as
much as 1.15 percent of transactions were
found to be fradulent.
• It’s a matter of economics. How much
security do you want? Too much will cost
sales but reduce fraud to near 0. Too little
securitywill result in higher losses
Some Security Measures
• Verify validity of charge.
• Ship via currier and require receipt
signature.
• Require and verify the complete address
and telephone number of customer.
• Reject orders from anonymous email
addresses.
Other electronic payment forms
• Various alternative payment forms
–
–
–
–
Electronic Cash
Electronic checks
Smart cards
Person-to-person payment systems
Electronic Cash
• Variety of products
• Allow for on line purchases without a credit
account
• Allow customer to avoid sharing account
data while guaranteeing payment to vendor
Smart Cards
• A store value card
• Popular in Europe; not yet common in
North America
• Needs special equipment to work with a PC
Electronic Checks
• An electronic version of a paper check
• Essentially a form of Electronic Funds
Transfer (EFT)
Person-to-Person Systems
• A way to sent money, a funds transfer.
Person to Person Payment
P2P Systems