CS 3700: Introduction to E-Commerce

10. Electronic Payment Systems

Valdosta State University

Chunlei Liu

Traditional Payment Methods

How do you pay? What are the cost and risks?

Cash (20%)
Checks (60%)
o Clearinghouses
o Magnetic Ink Characters Recognition (MICR)
o Costs: 1% of U.S. Gross Domestic Product
Payment cards (20%)
o Credit cards
Cost: 2.5% to issuer, 0.16% to association, 1.34% to acquirer
o Charge cards
o Debit cards
o

Valdosta State University

Chunlei Liu

Electronic Payment Methods

How do you pay electronically?

Payment cards: Credit cards/Debit cards

Electronic fund transfer
Smart cards
Digital cash and script
E-wallets
Digital checks
Electronic billing

What are the problems with electronic payment?

Many youths do not have credit or debit cards

Credit cards are not prevalent outside US
Transaction fees (~4%) is not suitable for B2B
Fraud and chargeback

Valdosta State University

Chunlei Liu

What Is a Good E-payment Method?

What characteristics a successful e-payment method

should have?

Independence
Interoperability and portability
Security
Anonymity
Divisibility
Ease of use
Transaction fees
International support
Regulations

Valdosta State University

Chunlei Liu

Using Payment Cards Online

Processing cards online

authorization
Determines whether a buyers card is active and whether
the customer has sufficient funds.
settlement
Transferring money from the buyers to the merchants
account.

Valdosta State University

Chunlei Liu

Using Payment Cards Online

Merchants use three basic configurations for processing

online payments:
1. Own the payment software
2. Use a point of sale system (POS) operated by an acquirer
3. Use a POS operated by a payment service provider
o payment service provider (PSP)
A third-party service connecting a merchants EC system
to the appropriate acquiring bank or financial institution.
PSPs must be registered with the various card associations
they support.

Valdosta State University

Chunlei Liu

Processing Card Payments

Participants in processing card payments online

Acquiring bank
Credit card association
Customer
Issuing bank
Merchant
Payment processing service
Processor

Valdosta State University

Chunlei Liu

Valdosta State University

Chunlei Liu

Key Tools Used In Combating Fraud

Address Verification System (AVS)

Detects fraud by comparing the address entered on a Web
page with the address information on file with the
cardholders issuing bank.
Manual review
Fraud screens and automated decision models
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 cardholders issuing bank.
Card association payer authentication services
Negative lists

Valdosta State University

Chunlei Liu

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.

Valdosta State University

Chunlei Liu

10

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.
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.

Operations of 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.

Applications of smart cards

Retail purchases
Transit fares

Valdosta State University

Chunlei Liu

11

E-Micropayments

e-micropayments
Small online payments, typically under $10.
Five basic micropayment models that do not depend
solely or directly on credit or debit cards:
1.
2.
3.
4.
5.

Aggregation
Direct payment
Stored value
Subscriptions
la carte

Valdosta State University

Chunlei Liu

12

E-Checking

e-check
A legally valid electronic version or representation of
a paper check.

Valdosta State University

Chunlei Liu

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