E-Business , 8th Edition Chapter 11 Solutions Review Questions 1. In about 100 words, describe the difficulties that can arise for merchants that want to process “card not present” credit card transactions. Answer: One problem facing online businesses is that the level of fraud in online transactions is much higher than either in-person or telephone transactions of the same nature (that is, the same amount and the same type of good or service being purchased). Fewer than five percent of all credit card transactions are completed online, but those transactions are responsible for about 60 percent of the total dollar amount of credit card fraud. 2. In about 200 words, outline the reasons why a consumer who owns a credit card would want to use an electronic payment system, such as PayPal, for an Internet transaction. In an additional 200 words, outline the reasons that a small merchant might want to use an electronic payment system in addition to, or instead of, accepting credit cards. Answer: PayPal allows consumers to send money instantly and securely to anyone with an e-mail address, including an online merchant. PayPal transactions clear instantly so that the sender’s account is reduced and the receiver’s account is credited when the transaction occurs. In addition, individuals who use PayPal to send money to other individuals do not pay a transaction fee. Note that online merchants like PayPal because it eliminates the risks posed by other types of online payments. 3. In one paragraph, outline the problems that a company might encounter if it were to conduct international transactions using electronic cash. Answer: Using electronic cash provides no audit trail. That is, electronic cash is just like real cash in that it cannot be easily traced. Because true electronic cash is not traceable, another problem arises: money laundering. In addition, just as physical currency can be counterfeited, electronic cash is susceptible to forgery. However, it is much more difficult to forge electronic cash than it is to use a fraudulently obtained credit card number. 4. In about 100 words, explain what electronic wallets are and how they can be useful to consumers. Answer: An electronic 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. Electronic wallets give consumers the benefit of entering their information just once, instead of having to enter their information at every site with which they want to do business. 5. In about 200 words, outline the advantages and disadvantages of smart cards for online merchants. Answer: A smart card can store about 100 times the amount of information that a magnetic strip plastic card can store. 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 safer than conventional credit cards because the information stored on a smart card is encrypted. The disadvantages of smart cards are: Liability issues if the card is stolen Too much data on one card - if lost or stolen, this could be a problem Privacy issues 6. In Japan, consumers use their mobile phones to pay at vending machines and for small purchases such as subway fares and movie rentals. In about 100 words, outline reasons that you think mobile phone payment systems have not become widely used in the United States. Answer: Response may vary. Students may point out that in order for this system to succeed, banks, credit card companies, phone operators and makers, and retailers must cooperate. Consumers must also be convinced that their data will be secured. 7. Many banks have decided that the best way to combat the threat of phishing attacks is to educate their customers. In about 100 words, outline the contents of a letter that a bank could use to warn its customers about possible phishing attacks. Be sure to include tips for spotting a phishing e-mail and specific advice regarding what to do (or not do) with it. Answer: The letter should include the following tips: Be suspicious of any email with urgent requests for personal financial information Do not click on the links in an email Avoid filling out forms in email messages that ask for personal financial information Always ensure that you are using a secure Web site when submitting credit card or other sensitive information via your Web browser Exercises 1. Matt Remes has formed a small business and has just completed building an electronic commerce Web site that sells subscriptions to special-interest newsletters. The titles range from Apple Growers Digest to Wilderness Backpacking Newsletter. Many organizations and individuals produce the newsletters, and Matt’s role is to raise the visibility of these somewhat obscure publications. The newsletters are published and available either biweekly or monthly. Unlike traditional subscription services, Matt’s business has an agreement from all newsletter publishers that he can sell subscriptions for single issues or for periods of up to three years. He does not want to allow subscribers to use their payment cards to purchase a subscription that is less than two years in duration. But he finds that nearly 60 percent of the first-time customers on his site prefer to order a sample issue before committing to a subscription of a year or more. In about 200 words, describe existing systems that Matt could use to provide his subscribers with a system that does not depend on payment cards. Answer: Answers will vary, but should include the following: • Offer a sample issue and a discount on a one year (or two year) subscription. • Set up PayPal accounts, realizing that even though he will have to pay a fee, most people still prefer to pay with credit or debit cards. • Accept checks, money orders, or cashier’s checks and offer discounts to those who pay with this method. 2. Bonnie Carson has owned and managed her gift and card shop in the Central Shopping Mall for three years. Business has been good, but Bonnie wanted to expand her business. A year ago, she hired a Web designer and built a Web site hosted by a national Internet service provider. Part of the monthly ISP fee for her merchant site includes the software needed to process credit card purchases. She has obtained a merchant account with a national credit card processing company. Bonnie’s Web-based business is beginning to pick up. She wants to provide more payment options to her customers. Write a report in which you advise Bonnie on the use of payment processing services such as PayPal. Identify at least three reasons that Bonnie should use such a service and at least three reasons why she should not. Answer: Answers will vary. Advantages of using PayPal include: • Low cost • Flexible and easy to Use • Automatic payment tracking • PayPal buyer protection • Fraud Detection: PayPal claims to have "one of the lowest loss rates in the online retail industry." • Merchant Tools: PayPal has a number of automated tools to make your life easier including financial reporting and shipping calculation. Disadvantages are minimal, but might include: • The need to offer and maintain other payment options if customers do not want to use PayPal • Initial set up of the PayPal account • Extra upkeep with correspondence, passwords, etc. 3. Evan Moskowitz has formed an Internet training company called Teach-U-Comp to market and sell computer programming courses online. Each course costs $95, and students receive continuing education units (CEUs) based on the duration of the course and its level of difficulty. Evan expects to sell about 50 courses each month during his first few years in operation. He would like the company to accept credit cards as payment for the courses. Evan is busy creating the online content and installing the course delivery software, so he hired you to investigate payment processing options for the site. Use your favorite search engine or the Open Directory Card Services page to identify three companies that process credit card payments for Web sites that sell services. Examine the processing services offered and fees charged by these three companies and choose one that you believe would be best for Teach-U-Comp. Write a 300-word report in which you summarize your findings. In the conclusion to your report, clearly state which company you would recommend to Evan and explain why. Answer: Responses will vary. Students may consider the following payment processors: www.authorize.net , www.cdgcommerce.com , and www.npc.net and comment on the following: 1. Costs associated with the different e-wallets 2. Ease of use 3. Standards (or lack of standards) 4. Customization (could Evan use the ECML to his own advantage to customize the e-commerce project to his training company?) 4. During the Internet business expansion of the late 1990s, several major banks launched peer-to-peer payment systems. None of these systems was successful in competing with the PayPal system you learned about in this chapter. Two of the bank systems were Citibank’s c2it and Bank One’s eMoneyMail. In about 300 words, outline the reasons why you believe these two banks were unable to overcome PayPal’s first-mover advantage. You can use your library, links in the Online Companion, and your favorite search engines to conduct your research. Answer: Reponses will vary. According to eBay CEO Meg Whitman, "Brands are quick-drying cement." PayPal had first-mover advantage. It launched in October 1999; eBay's acquired its own payment service, Billpoint, in May 1999, but did not fully launch it until April 2000. The PayPal brand is now stamped like cement into eBay users' minds. Significant disadvantages of c2it included: c2it was not widely used by auction buyers and sellers. Users often complain about the registration process of signing up for c2it. c2it significantly limited transaction amounts. Cases Case 1: First Internet Bank of Indiana 1. Answers will vary. Possible concerns include: How secure is customer information? How is financial data backed up? Is customer service available? What types of funds are FDIC insured? What is the policy regarding identity theft? 2. Answers will vary. The First IB Web site offers very limited resources for small business customers. The site home page contains a prominent link to a "Business Accounts" section, but this section is quite small and only offers brief information on business checking, money market savings, regular savings, and certificate of deposit accounts. 3. Answers will vary, but should address the risk of criminals appropriating the logo and design elements of First IB and conducting phishing expeditions that could trick some First IB customers into exposing their personal account information. Case 2: The Moose Hut 1. Answers will vary based on the payment processing options selected. Students should describe each payment processing option and include specific advantages and disadvantages for each. The decision should be based on factors such as the handling of all major credit cards, currency conversions, availability to Canadian merchants, and payment processing costs. 2. Answers will vary based on the solution provided in question one. The option selected should solve the payment processing needs unique to TMH.