Electronic Payment System

Electronic Payment Systems Electronic Banking • Any banking activity accessed by electronic means – bank and non-bank providers – three distinct areas 1. retail (small-value) payments/services 2. wholesale (large-value) payments/services 3. other payments/services 1870s: began with transfer of funds by telegraph in US 1968: ATMs appear – as the most visible example of electronic banking – now about 250,000 in number in US 1990s: Internet => rapid growth of electronic financial services In 1998 in US – cash (87%) dominates the volume of payments transactions, but – the value of transactions is dominated by electronic 2 transfers (89%) • • • • Retail vs Wholesale Electronic Payments • Retail (small-value) – individual payments for goods and services (by cash and checks) – electronic payments will lower the costs of operating the payments system – geographic boundaries for delivering retail banking services practically eliminated by electronic services – privacy issues and potential for fraud and theft • Wholesale (large-value) – payments between businesses, banks, governments 3 Retail vs Wholesale Electronic Payments • Internet banking: both retail and wholesale services – retail services for bill payments and brokerage services – also wholesale services for corporate customers, such as derivatives trading, foreign exchange, letters of credit, and global treasury services • Automatic Teller Machines (ATMs): retail services – – – – full-service ATMs to merely cash dispensers available proprietary systems shared/regional systems national/international systems: network externalities 4 Electronic (Digital) Money • Many forms – Online accounts: for transfer over the Internet – Stored value cards • contain a magnetic strip recording its value • belong to a closed system: can only be used at specific locations • can be reloaded with additional funds for payment – Smart cards (also called an electronic purse) • contain a computer chip recording its value • belong to an open system: can be used at multiple locations • can be reloaded with additional funds for payment – Credit cards • ―read‖ by Electronic Data Capture (EDC) terminals at PoS • thanks to a cryptographic standard, known as secure electronic transactions (SET), can also be used over the Internet – Debit cards: more recently 5 Electronic (Digital) Money • Advantages and disadvantages – Fast, convenient, used in stores and over Internet (network externalities) – Not all merchants accept all forms of electronic money – Security and privacy could be problems: need to verify identity – Government policy is unclear on deposit insurance, who can ―coin‖ digitised money, and control of this money supply 6 Wholesale (Large-Value) Transfers • Fedwire – a real-time gross settlements (RTGS) system: processes each transaction individually rather than in batches (over time) – the Fed grants finality: assumes credit risk of the funds transfer 7 Wholesale (Large-Value) Transfers • CHIPS: Clearing House Interbank Payments System – operated in New York since 1970 as an electronic replacement for paper checks in international dollar payments – multilateral netting is provided to get each participant’s single net position vis-à-vis other participants: same-day settlement – largest privately operated payments system, never failed to settle – settlement risk: credit + unwinding (order reversal) + liquidity risk 8 Wholesale (Large-Value) Transfers • SWIFT: • Society for Worldwide Interbank Financial Telecommunications (in Belgium) – cooperatively owned by banks around the world – used primarily for communications, and CHIPS and Fedwire handle payments transfers 9 Electronic Payments: A Critical Element in EC Support Services • E-payments: payments made online – The overwhelming majority of Web purchases are made with credit cards – This may change in the future 10 Deficiencies of Credit Card Payments – 95 percent of all e-commerce are B2B transactions • Electronic payments are more likely to involve EFTs or electronic checks • Credit cards cannot be used for large sums of B2B transactions – A large amount of fraud with online credit card shopping occurs that results in chargebacks to the merchants 11 Electronic Payments • Chargeback problem—a chargeback means that the customer refuses to pay, claiming that the purchase was made by someone else Happens in Internet transactions: • Four times more frequently than catalog sales • Nine times more frequently than in brick-and-mortar sales 12 Electronic Payments • ―Best practices‖ used by merchants when conducting credit card transactions: – implementing a firewall – using encryption and antivirus software – incorporating intercompany security practices 13 Electronic Payments – However, since 2002, e-tailers see credit card fraud as a solvable problem. – Risk management techniques and fraudprevention software are widely available 14 Electronic Payments – combatfraud.org offer fraudprotection services • Members access the site’s database of credit card numbers, e-mail addresses, and postal addresses used for purchases that resulted in a chargeback • Merchants check for ―deadbeats‖ at this site and then refuse to accept charges from them 15 Electronic Payments Methods • Electronic payment cards (credit, debit, charge) • Virtual credit cards • E-wallets (or e-purses) • Smart cards • Electronic cash (several variations) 16 Electronic Payments Methods • • • • Wireless payments Stored-value card payments Loyalty cards Person-to-person payment methods • Payments made electronically at kiosks 17 Electronic Payments Methods • E-payments for B2B – Electronic checks – Purchasing cards – Electronic letters of credit – Electronic funds transfer (EFT) – Electronic benefits transfer (EBT) Other innovative methods, including e-lines of credit 18 Electronic Payments Methods • Five parties involved in e-payments: 1. 2. 3. 4. 5. Customer/payer/buyer Merchant/payee/seller Issuer Regulator Automated Clearing House (ACH) 19 Electronic Payments Methods • Automated Clearing House (ACH): Electronic network that connects financial institutions for the purpose of making funds transfers 20 Electronic Payments Methods Characteristics of successful e-payment methods • Independence • Interoperability and portability • Security • Anonymity • Divisibility • Ease of use • Transaction fees • Critical mass 21 Security for Electronic Payments • Security for e-payments – Standards for e-payments—it is necessary to have generally accepted protocols • SSL (TLS) • SET 22 Security for Electronic Payments • Other security measures – Both the funds that are being transferred and the consumer data must be protected • intelligent agents • biometrics 23 Electronic Cards and Smart Cards • Payment card: Electronic card that contains information that can be used for payment purposes – Credit cards – Charge cards – Debit cards 24 Electronic Cards and Smart Cards 25 Electronic Cards and Smart Cards • Card gateway: An online connection that ties a merchant’s systems to the backend processing systems of the credit card issuer 26 Electronic Cards and Smart Cards • Virtual credit card: An epayment system in which a credit card issuer gives a special transaction number that can be used online in place of regular credit card numbers • Debit checking accounts— Western Western Union’s MoneyZap service 27 Electronic Cards and Smart Cards • Security risks with credit cards – Stolen cards – Reneging by the customer – Theft of card details stored on the merchant’s computer 28 Electronic Cards and 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 29 Electronic Cards and Smart Cards 30 Electronic Cards and 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 so passes data to and from the embedded microchip 31 Electronic Cards and 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 32 Electronic Cards and Smart Cards • Securing smart cards Stored-value card: A card that has monetary value loaded onto it, and is usually rechargeable • Some smart cards show account numbers • Most store the information in encrypted form • Cost to the attacker so far exceeds the benefits of hacking into these cards 33 Electronic Cards and Smart Cards • Applications of smart cards – Loyalty cards – Financial applications – Information technology cards – Health and social welfare information cards – Transportation – Identification 34 E-Cash and Innovative Payment Systems • E-cash alternatives to credit cards for Micropayments: Small payments, usually under $10 – Vodafone’s “m-pay bill” system – Qpass 35 E-Cash and Innovative Payment Systems • Stored-value cards and other innovations – Visa Cash: A stored-value card designed to handle small purchases or micropayments; sponsored by Visa – Visa Bucks: prepaid card designed for teens 36 E-Cash and Innovative Payment Systems – Mondex: A stored-value card designed to handle small purchases or micropayments; sponsored by Mondex, a subsidiary of MasterCard – Campus cards: money value is not stored on the card, but in an account equivalent to the card’s ID number 37 E-Cash and Innovative Payment Systems • E-loyalty and rewards programs: – Electronic script: A form of electronic money (or points), issued by a third party as part of a loyalty program; can be used by consumers to make purchases at participating stores MyPoints-CyberGold (mypoints.com) 38 E-Cash and Innovative Payment Systems • Prepaid stored-value cards The customer has a prepaid storedvalue card, they are more likely to be loyal to the card sponsor, at least until the stored value runs out • Telephone cards • Starbuck’s – RocketCash (rocketcash.com) combines an online cash account with a rewards program 39 E-Checking • E-check: The electronic version or representation of a paper check – Eliminate the need for expensive process reengineering and taking advantage of the banking industry – Can be used by all bank customers who have checking accounts 40 E-Checking 41 B2B Electronic Payments • Financial supply chains (FSC) – FSC parallels the physical supply chain – Follows a buyer’s transaction activities related to cash flow, which start with a purchase order and end in settlement with the seller 42 B2B Electronic Payments • Typical segments of the FCS: – Segment 1: Examination of catalogs, electronic order entry – Segment 2: Online negotiations, culminating in a preliminary agreement – Segment 3: Credit check, seller validation, payment assurance, financing 43 B2B Electronic Payments – Segment 4: Invoice presentment, verification of delivery, “trade service” quote, and booking – Segment 5: Data matching, discrepancy resolution, final payment calculation, buyer approval, currency exchange calculation (if needed), and arrangements for automatic payment – Segment 6: Payment instructions, money transfer, debit and credit notices 44 B2B Electronic Payments • B2B payment solutions – Purchasing cards: Specialpurpose payment cards issued to a company’s employees to be used solely for purchasing non-strategic materials and services up to a preset dollar limit 45 B2B Electronic Payments • Benefits accrued from the use of purchasing cards – Productivity gains Purchasing departments freed from day-to-day procurement activities; focus on relationships with suppliers – Bill consolidation Consolidated into a single invoice that can be paid electronically through EDI or EFT 46 B2B Electronic Payments 47 B2B Electronic Payments 48 B2B Electronic Payments • Benefits to the buyers, agency where they work, and the merchant – Payment reconciliation – Expedited payments – Management reports – Control 49 B2B Electronic Payments 50 B2B Electronic Payments • Global B2B payments – 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 51 B2B Electronic Payments • Benefits of LCs to the seller – payment is highly assured if all the terms and conditions stipulated are met – credit risk is reduced – political/country risk is reduced when confirmed by a bank in the seller’s country 52 B2B Electronic Payments • Benefits of LCs to the buyer – allows the buyer to negotiate for a lower purchase – buyer may expand its sources of supply and bargaining power – funds withdrawn from the buyer’s account only after the documents have been inspected giving the buyer a bit more time to hold its money 53 B2B Electronic Payments • Tradecard payments in B2B global tracing – Members of Tradecard interact with each other via the TradeCard system • checks purchase orders for both parties • waits for a confirmation from a logistics company that deliveries have been made and received • authorizes payment to complete the financial transaction between the buyer and seller 54 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 oursource? 4. How secure are e-payments? 55 Summary 1. Crucial factors determining the success of an e-payment method. 2. Online credit card players and processes. 3. Categories and potential uses of smart cards. 4. Online alternatives to credit card payments. 56 Summary 5. E-check processes and involved parties. 6. Payment methods in B2B, including global trade. 7. Bill presentment and payment. 8. Special payment methods. 57