Payment mechanisms

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Payment mechanisms
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• The presence of convenient electronic payment
  mechanisms provides an enormous advantage to
  on-line transactions across the Internet. It is
  difficult to manage cash directly in an
  electronic world it is much easier to send
  account numbers that represent virtual money with
  reasonable guarantees of safety and security.

3

• Credit cards are most widely used in eCommerce
  transactions as they effectively provide a
  pre-screening of the potential customer as to
  credit-worthiness and reliabilitya cardholder is
  more likely to hold a job and pay bills on
  timeif not, card privileges are revoked. The
  transaction history of charges and payments is
  retained, and this greatly enhances the risk
  assessment process for a given transaction.

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The credit agencies

• The evaluation of credit-worthiness is a big
  business credit reporting agencies exist as
  intermediaries that collect financial
  transactional data (and information relating to
  debts and judgements) to help assess an
  individuals credit rating.
• (equifax, transunion, experian, old TRW)

5
The credit rating

• is a numeric rating, ranging from 350 (high
  risk) to 850 (low risk) factors include the
  credit history, level of debt, types and amount
  of credit available, and the relative age of
  the debt.

6
Fraud detection

• Companies are deploying sophisticated software
  that makes an assessment as to whether a
  particular transaction is acceptable or
  potentially fraudulent. It is a relatively easy
  matter to examine the transaction history of an
  individual and make an assessment of risk for
  each new transaction.

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• The risk assessment is based upon an evaluation
  of the pending transaction, and whether it falls
  within the pattern established by the user over
  time. The more the card is used in daily
  affairs, the more likely that routine purchases
  can be identified and cleared, while exceptional
  purchases would be flagged as potential
  problems.

8

• Outcomes could range from approving the
  transaction to rejecting the transaction and
  freezing the account due to the irregular
  activity until such time as the cardholder can
  verify that the transaction is legitimate.

9

• The routine first step for any credit card
  approval process would include the following
  inquiries
•  
•   Is the account number a valid number?
•  Is the current date less than the expiration
  date on the card?
•   Is the account up-to-date on payments?
• Is the credit balance sufficient to make the
  purchase?

10

• A negative answer to any of the preceding
  questions would result in a rejection of the
  purchase request. Issuing companies have
  recently begun to include additional
  considerations in the approval process based upon
  the transaction history, such as
•  Has the customer shopped in that store before?
  
• Is the amount consistent with previous purchase
  amounts?
•   If there is a discernible pattern to prior
  purchases, does the new request fit the pattern?

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• Specific red flag indicators might include the
  following
•          Is the amount significantly larger than
  typical purchases either by the customer or at
  that store?
•          Does the merchant have a relatively
  high incidence rate of fraudulent purchases?
•          Has there been a series of large
  purchases in multiple locations in a short time
  frame?
•          Is the charge request coming from a
  foreign country, with no prior user history in
  that country?

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• n the booming on-line auction markets the
  transactions are often between individuals, and
  it is much less likely that individuals will
  maintain merchant accounts with credit card
  companies. Payment options for an average
  auction buyer were more limited initially,
  confined to money orders and personal checks.

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• This void in auction market payment options
  quickly drew a variety of mid-level payment
  intermediaries that effectively served as
  clearinghouses for auction sales.

14

• The basic idea for an intermediary is that it
  would set up its own merchant accounts, then
  require individual buyers and sellers to register
  with the intermediary. The buyer begins with a
  modest ceiling of, say, 500.00, and upon making
  a purchase uses the intermediary account to pay
  the seller. The buyer settles the account with
  the intermediary either by using a credit card or
  keeping money (perhaps from unrelated auction
  site sales) on account.

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• The seller, confident that the intermediary
  stands behind the sale, immediately sends the
  item to the buyer. The intermediary keeps a
  small percentage of the sale for handling the
  transaction and associated risks.

16

• An analogous need for intermediary services is
  rapidly developing in countries that lack some of
  the personal credit options that exist in the
  U.S. The U.S. intermediaries are essentially
  on-line companies with little or no physical
  presence they rely heavily on the standard model
  for credit card processing, whereas elsewhere the
  intermediary might be an Internet café that
  offers browsing, order placement, payment, and
  delivery acceptance services at a community-based
  level.

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• The concept of an intermediary role, outside that
  of auction services, is potentially enhanced with
  the wallet concept, whereby an intermediary
  (most famously, Microsoft) would retain customer
  transaction data and manage related online
  eCommerce transactions, for a small
  transaction-based fee.

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• The concentration of data associated with the
  Microsoft service is unprecedented, potentially
  gathering all transaction data related to every
  on-line consumer over time. It will be
  interesting to see how the wallet concept in
  general, and the Microsoft plan in particular,
  moves forward.

19

• As an alternative to card-based services, there
  is a growing interest in the concept of virtual
  money, or digital cash, which is electronic
  money that can be spent much as cash is now. In
  some implementations it is possible to connect
  the user with the digital money in others the
  user remains relatively anonymous.

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• In this model, the user first ascertains how much
  money is required to complete a specific
  purchase. The user buys a fixed amount of
  digital cash in advance, from a specialized
  merchant, and spends the corresponding
  certificate once at a participating merchants
  on-line enterprise. The merchant then submits
  the certificate to the authorizing agent and is
  credited with the appropriate amount of money.

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• An interesting fraud-detection feature in the
  case of anonymous digital cash is that if a
  particular certificate is somehow spent a second
  time, then the user is mathematically, provably
  identified and revealed.