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Chapter 7

• Electronic Payment Systems

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Learning Objectives

• In this chapter, you will learn about
• Distinct methods to collect payments from
  customers
• The history and near-term future for electronic
  cash
• The implementation of electronic cash systems
• Electronic wallets and how they work

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Learning Objectives

• The role of smart cards in electronic commerce
• Credit and debit card processing for electronic
  commerce transactions
• The most popular electronic payment systems
• The SET protocol and how it protects credit card
  transactions

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The Basics of Electronic Payment Systems

• Electronic commerce involves the exchange of some
  form of money for goods and services.
• Implementation of electronic payment systems is
  in its infancy and still evolving.
• Four technologies to be used electronic cash,
  software wallets, smart cards, and credit/debit
  cards.

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Electronic Cash

• Electronic cash is attractive in two arenas
• in the sale of goods and services of less than
  10
• in the sale of higher-priced goods and services
  to those without access to credit cards
• Internet payments for items costing from a few
  cents to approximately 10 are called
  micropayments.
• Companies offer micropayment systems include
  iPin, eChange, Qpass, 1ClickBrands, and
  PayPal.com.

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Electronic Cash

• Concerns about electronic payment methods
  include
• privacy and security
• independence
• portability
• divisibility
• convenience

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Electronic Cash

• Electronic cash should have two important
  characteristics in common with real currency
• it must be possible to spend electronic cash only
  once
• electronic cash ought to be anonymous
• Beenz is a kind of scrip that consumers can earn
  and exchange for goods and services.

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Online and Offline Cash

• Two approaches to holding cash online storage
  and offline storage.
• Online cash storage means that an online bank is
  involved in all transfers of electronic cash.
• Offline cash storage is the virtual equivalent of
  money you keep in your wallet. However, it must
  prevent double or fraudulent spending.

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Advantages of Electronic Cash

• Electronic cash transactions are more efficient
  and less costly than other methods.
• The distance that an electronic transaction must
  travel does not affect cost.
• The fixed cost of hardware to handle electronic
  cash is nearly zero.
• Electronic cash does not require that one party
  have any special authorization.

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Disadvantages of Electronic Cash

• The concept of an Internet tax poses many
  problems and questions.
• Because true electronic cash is not traceable,
  money laundering is a problem.
• Electronic cash is susceptible to forgery.
• Electronic cash is, so far, a commercial flop.

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How Electronic Cash Works

• To establish electronic cash, a consumer goes in
  person to open an account with a bank.
• The consumer uses a digital certificate to access
  the bank through the Internet to make a purchase.
• Consumers can spend their electronic cash at
  sites that accept electronic cash for payment.
• The electronic cash must be protected from both
  theft and alteration.

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Providing Security for Electronic Cash

• To prevent double spending, the main security
  feature is the threat of prosecution.
• A complicated two-part lock provides anonymous
  security that also signals when someone is
  attempting to double spend cash.
• One way to trace electronic cash is to attach a
  serial number to each electronic cash
  transaction.
• Click to see Figure 7-3

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Electronic Cash Systems

• Compaq Computers electronic cash technology
  allows users to use its NetCoin electronic cash.
• CyberCash created CyberCoin for micropayments.
• No standards were ever developed for the entire
  electronic cash system.

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CheckFree

• CheckFree provides online payment processing
  services to both large corporations and
  individual Internet users.
• CheckFree permits users to pay all their bills
  with online electronic checks.
• CheckFree signed an agreement with Yahoo! to
  provide Yahoo! customers the option of paying
  directly from the Yahoo! site.

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Clickshare

• Clickshare is an electronic cash system aimed at
  magazine and newspaper publishers.
• Users with an ISP that supports Clickshare are
  automatically registered with Clickshare.
• Clickshare tracks users with the standard HTTP
  Web protocol.

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DigiCash (eCash)

• DigiCash was a trailblazer in the electronic cash
  field.
• DigiCash made software products that allowed
  users to purchase goods and services on the
  Internet and pay for them using anonymous
  electronic cash.

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eCoin.Net

• ECoins are electronic tokens issued by eCoin.net.
• Consumers can use the tokens to pay for online
  goods.
• The electronic cash is stored in an eCoin wallet
  on the consumers computer.
• The eCoin system uses a three-link chain
  consisting of a consumer, a merchant, and the
  eCoin server.

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InternetCash

• InternetCash provides electronic currency that is
  very similar to traditional cash.
• Customers must first purchase an InternetCash
  card from stores such as Circle K.
• Customers then go online and activate their cards
  by entering a 20-digit code and creating a PIN.
• Once their card is activated, customers can pay
  for purchases using the InternetCash card at any
  site accepting them.

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MilliCent

• MilliCent is an electronic scrip system that does
  not issue one standard currency.
• Each participating merchant creates and sells its
  own scrip to a broker at discount.
• Consumers register with one broker and buy broker
  scrip in bulk.
• Paying for an item involves simply transferring a
  merchants scrip to the merchant in exchange for
  a purchased item.

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PayPal

• PayPal.com is a free service that earns a profit
  on the float, which is money that is deposited in
  PayPal account.
• PayPal is very popular with eBay auction
  customers.
• PayPal allows customers to send money instantly
  and securely to anyone with an e-mail address,
  including an online merchant.

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Loyalty and Rewards Systems

• Scrip is a form of electronic cash that is stored
  on your computer or on the server of the scrip
  vendor.
• Loyalty and rewards programs endorsed by various
  Web stores frequently use scrip to reward Web
  visitors.
• Flooz and beenz are two most popular brands of
  scrip.

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Beenz

• Beenz is a brand of scrip that is marketed as a
  loyalty reward program for Internet consumers.
• Consumers collect beenz and later redeem them for
  merchandise at participating merchant Web sites.
• On average, on beenz is worth approximately one
  cent.

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Flooz

• Flooz is scrip that you purchase using a credit
  card and either use for your own purchases or
  send to a recipient as a gift or payment.
• Flooz is redeemable for purchases at any merchant
  that accepts it.
• The Flooz exchange rate is one Flooz equals to
  one dollar.

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Electronic Wallets

• An electronic wallet serves a function similar to
  a physical wallet, also
• Holds credit cards, electronic cash, owner
  identification, and owner contact information
• Provides owner contact information at an
  electronic commerce sites checkout counter
• Contains an address book

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Electronic Wallets

• Electronic wallets make shopping more efficient.
• Electronic wallets fall into two categories based
  on where they are stored
• Server-side electronic wallet
• Client-side electronic wallet

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Electronic Wallets

• Electronic wallets are particularly useful and
  save a lot of time to fill out electronic
  checkout counter form.
• Electronic wallets can enter required information
  into checkout forms automatically.
• MasterCard offers its own electronic wallet,
  called the MasterCard e-wallet.

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eWallet

• EntryPoint produces eWallet, a free wallet
  software that consumers download and install on
  their computer.
• eWallet stores personal and payment information
  inside the electronic wallet.
• To protect your information, eWallet is encrypted
  and password protected.

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Microsoft Passport

• Microsoft Passport Wallet comes preinstalled in
  Internet Explorer 4.0 and higher versions.
• All the personal data you enter into your
  Microsoft Passport, including your name, address,
  and credit card information, are encrypted and
  password-protected.
• Passport consists of four integrated services
  Passport single sign-in service, Passport Wallet
  Service, Kids Passport service, and public
  profiles.

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The W3C Proposed Standard

• The W3C proposed standards for electronic wallets
  will impact every vendors wallet offerings.
• The W3C Electronic Commerce Interest Group (ECIG)
  developed the Common Markup for Web Micropayment
  Systems public working draft.

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The ECML Standard

• The consortium of America Online, Brodia, Compaq,
  CyberCash, Dell, IBM, Microsoft, Visa USA, and
  MasterCard has agreed on a technology called
  ECML, or electronic commerce modeling language.
• The ECML standard will expedite online processing
  for customers by simplifying the form-filling
  procedure.

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Stored-Value Cards

• A stored-value card can be an elaborate smart
  card or a simple plastic card with a magnetic
  strip that records the currency balance.
• A smart card is better suited for Internet
  payment transactions because it has limited
  processing capability.

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What is a Smart Card?

• A smart card is a plastic card with an embedded
  microchip containing information about you.
• A smart card contains private user information
  such as financial facts, private encryption keys,
  account information, credit card numbers, health
  insurance information, etc.

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Mondex Smart Card

• Mondex is a smart card that holds and dispenses
  electronic cash.
• Mondex requires special equipment such as card
  reader to process.
• Containing a microcomputer chip, Mondex cards can
  accept electronic cash directly from a users
  bank account.
• Click to see Figure 7-18

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Credit and Charge Cards

• A credit card, such as a Visa or a MasterCard,
  has a preset spending limit based on the users
  credit limit.
• A charge card, such as one from American Express,
  carries no preset spending limit.
• The collective term payment card will refer to
  both types of card.

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Advantages and Disadvantages of Payment Cards

• Advantages
• Payment cards provide fraud protection
• Their worldwide acceptance
• They are good for online transactions
• Disadvantages
• Payment card service companies charge merchants
  per-transaction fee and monthly processing fee

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Payment Acceptance and Processing

• Open and closed loop systems will accept and
  process payment cards.
• A merchant bank or acquiring bank is a bank that
  does business with merchants who want to accept
  payment cards.
• Software packaged with your electronic commerce
  software can handle payment card processing
  automatically.
• Click to see Figure 7-19

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Secure Electronic Transaction (SET) Protocol

• SET is a secure protocol jointly designed by
  MasterCard and Visa with the backing of
  Microsoft, Netscape, IBM, GTE, SAIC, and other
  companies.
• The purpose of SET is to provide security for
  card payments as they traverse the Internet
  between merchant sites and processing banks.

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Secure Electronic Transaction (SET) Protocol

• The SET specification uses public key
  cryptography and digital certificates for
  validating both consumers and merchants.
• The SET protocol provides confidentiality, data
  integrity, user and merchant authentication, and
  consumer nonrepudiation.