E-Commerce: Electronic Payment Systems

Module 02
Electronic Payment Systems

Online Payment Basics:

ü  Cash, checks, credit cards, and debit cards account for more than 90 percent of all consumer payments in the United States.

ü  Most popular consumer electronic transfers are automated payments of:

ä         Auto loans

ä         Insurance payments

ä         Mortgage payments made from consumers’ checking accounts.

ü  Scrip

ä         Digital cash minted by a company instead of by a government

ä         Cannot be exchanged for cash

ä         Like a gift certificate that is good at more than one store

Payment Cards:

ü  The term payment card describes all types of plastic cards used to make purchases

ä         Credit card: Has a spending limit based on a user’s credit history.

ä         Debit card:

ü  Removes an amount from a cardholder’s bank account

ü  Transfers it to the seller’s bank account.

ä         Charge card:

ü  Carries no spending limit

ü  Amount charged is due at the end of the billing period

ü  Advantages:

ä         Worldwide acceptance

ä         Built-in security for merchants

ü  Disadvantage:

ä         Payment card service companies charge merchants per-transaction fees and monthly processing fees.

Payment Acceptance and Processing:

ü  Steps followed once a merchant receives a consumer’s payment card information:

ä         Merchant authenticates payment card 

ä         Merchant checks with payment card issuer  

-          To ensure that credit or funds are available

-          Puts a hold on the credit line or the funds needed to cover the charge

ä         Settlement occurs.

ü  Closed loop systems

ä         Card issuer pays the merchants that accept the card directly and does not use an intermediary

ü  Open loop systems

ä         Involve three or more parties

ä         Systems using Visa or MasterCard are examples

Merchant Accounts:

ü  To process payment cards for Internet transactions an online merchant must set up a merchant account

ü  New merchants must supply:

ä         Business plans

ä         Details about existing bank accounts

ä         Business and personal credit histories

Why are controls needed?

Processing Payment Cards Online:

ü  Internet Secure:

ä         Provides secure payment card services

ü  First Data:

ä         Provides merchant payment card processing services with the following programs:

ä         ICVERIFY and Web Authorize

ü  Banks connect to an Automated Clearing House (ACH) through highly secure, private leased telephone lines.

Electronic Cash:

ü  Term that describes any value storage and exchange system created by a private entity that:

ä         Does not use paper documents or coins

ä         Can serve as a substitute for government-issued physical currency

ü  Attractive in two arenas:

ä         Sale of goods and services of less than $10

ä         Sale of goods and services to those without credit cards

ü  Concerns about electronic payment methods include:

ä         Privacy and security

ä         Independence

ä         Portability

ä         Convenience

ü  Advantages of electronic cash include being:

ä         Independent and portable.

Micropayments and Small Payments:

ü  Micropayments:

ä         Internet payments for items costing from a few cents to approximately a dollar

ü  Small payments:

ä         Payments of less than $10.

Holding Electronic Cash: Online and Offline Cash:

ü  Online cash storage:

ä         Trusted third party is involved in all transfers of electronic cash

ä         Holds consumers’ cash accounts

ü  Offline cash storage:

ä         Virtual equivalent of money kept in a wallet

ä         No third party is involved in the transaction

ü  Double-spending:

ä         Spending electronic cash twice

ü  Advantages of electronic cash:

ä         Transactions are more efficient

ä         Transfer on the Internet costs less than processing credit card transactions

ü  Disadvantages of electronic cash:

ä         Use provides no audit trail

ä         Problem of money laundering arises

ä         Susceptible to forgery.

Providing Security for Electronic Cash:

ü  Cryptographic algorithms:

ä         Keys to creating tamperproof electronic cash that can be traced back to its origins

ü  Anonymous electronic cash:

ä         Electronic cash that cannot be traced back to the person who spent it

ü  Creating truly anonymous electronic cash:

ä         Requires a bank to issue electronic cash with embedded serial numbers.

Electronic Cash Systems:

ü  Check Free:

ä         Largest online bill processor in the world

ä         Provides online payment processing services 

ü  Click share:

ä         An electronic cash system aimed at magazine and newspaper publishers

ü  PayPal:

ä         Provides payment processing services to businesses and to individuals

ä         Peer-to-peer (P2P) payment system

ä         Free payment clearing service for individuals.

Electronic Wallets:

ü  Hold credit card numbers, electronic cash, owner identification, and contact information

ü  Give consumers the benefit of entering their information just once

ü  Make shopping more efficient

ü  Server-side electronic wallet:

ü  Stores a customer’s information on a remote server belonging to a particular merchant or wallet publisher

ü  Client-side electronic wallet:

ü  Stores a consumer’s information on his or her own computer

 

Other Cards:

ü  Stored Value Cards:

ä         Stored-value cards can be an elaborate smart card with a microchip that records currency balance

ä         Common stored-value cards include: Prepaid phone, copy, subway, and bus cards

ü  Magnetic strip cards:

ä         Cannot send or receive information

ä         Cannot increment or decrement value of cash stored on the card

ä         Processing must be done on a device into which the card is inserted.

ü  Smart cards are better suited for Internet payment transactions

ä         Are stored-value cards

ä         Can hold private user data, such as financial facts

ä         Can store about 100 times more information than a magnetic strip plastic card

ä         Safer than conventional credit cards

Phishing Attacks:

ü  Basic structure:

ä         Attacker sends e-mail messages to a large number of recipients

ä         Message states that an account has been compromised and the matter should be corrected 

ä         Message includes a link

ä         User enters a login name and password, which  the perpetrator captures

ä         Once inside a victim’s account, the perpetrator can access personal information.

ü  Countermeasures

ä         Most important step that companies can take today is to educate Web site users

ä         Many companies contract consulting firms that specialize in anti-phishing work

ä         Anti-phishing technique is to monitor online chat rooms used by criminals