Payment Domain-Training Manual
Date: 07/18/2011
Software Subsidiary of Consulting Engineers Corp
11480, Sunset Hills Road, Suite 200 EReston, VA 20190-5208 Phone: 703-481-2100
Fax: 703-481-3200
CONTRIBUTION
Name: Arvind Rana Dushyant
Prateek
Praveen Yadav
Sanjay Sajwan
INDEX
Chapter - 1 Introduction and Overview of Payments Technology Solutions ... 3
Chapter - 2 E-Commerce ... 14
Chapter - 3 Payments Terminologies with Definition and Meanings ... 25
3.1 Acquirers ... 25
3.2 Independent Sales Organizations ... 26
3.3 Point of Sale ... 26
3.4 Electronic Bill Presentment & Payment ... 27
3.5 Issuer ... 28
3.6 EMV... 28
Chapter - 4 Electronic Prepaid Instruments ... 30
4.1 Prepaid Gift Cards ... 30
4.1.1 Mobile & Virtual gift cards ... 30
4.1.2 Mobile Payments ... 31
4.1.3 Premium SMS/USSD based transactional payments ... 31
4.1.4 Direct Mobile Billing ... 32
4.1.5 Mobile web payments (WAP) ... 32
4.1.6 Direct operator billing ... 33
4.1.7 Credit Card ... 33
4.1.8 Online Wallets ... 33
4.1.9 Contactless Near Field Communication ... 34
4.2 Credit and Debit Instruments ... 34
4.2.1 Credit Card ... 34
4.2.2 Debit Card ... 38
4.3 Stored-value card ... 38
4.4 Closed system prepaid cards ... 39
4.5 Semi-closed system prepaid cards ... 39
4.6 Open system prepaid cards ... 39
4.7 Contactless Payment System and Devices ... 40
4.8 Radio-frequency identification (RFID) ... 40
4.9 Current Use of RFID ... 41
4.10 Near field communication (NFC) - ... 41
4.11 NFC Current Uses ... 41
4.12 NFC-enabled handsets ... 43
Chapter - 5 Payment Gateway and Payment Processor ... 44
Chapter - 6 Payment Card Industry Security Standards ... 56
Chapter - 7 Card Present and Card Not Present Transactions ... 58
Chapter - 8 Transaction Flow in Card Processing ... 61
Chapter - 9 Security in the Payments Processing Chain ... 64
Chapter - 10 Payment Protocols ... 77
Chapter - 1
Introduction and Overview of Payments
Technology Solutions
1.1 A Short History of Payment Methods
Before the development of items that represented generally accepted units of value, an ad hoc system of exchange was the most common. If one man had a sheep he could live without, he might swap it for a set of tools someone else didn’t need. By 3,000BC, the Mesopotamians in Asia (Mesopotamia is Greek for “land between the rivers” - in this case the Tigris and Euphrates - now partly contained by Iraq) had begun to unify payments.
The term “shekel” became a unit of weight and currency and referred to a specific amount of barley. In this way it has a modern parallel in the Pound Sterling, which was originally a pound - in weight – of silver but which became today’s basic unit. On the other side of the world, seashells in Polynesia began to be used as cash. They were of no real significance themselves but became cherished for their appearance and therefore coveted.
This particularly applied to the cowry shell, the home of a sea snail from which - via Italian - we get the term porcelain.
By around 700BC, the Greeks were using metal coins as money and metal of various types was preferred in most places as it was not easily destroyed, was very portable and could be reformed as required. Gold was the first and remains the most valued coin, partly for its rarity. As coins were minted and reminted they often became debased with cheaper, more common metals which archaeologists now use to help date them (aside from any obvious stamps).
Coins quickly gave rise to markets and towns built on trade, and cities no longer had to be built in the protective shadow of a castle. Craftsmen developed and the guilds were formed to protect their business. Economies grew ever bigger and more complex and methods had to be devised to represent ever greater sums of money. Bills of exchange were created in the great Italian city-states of the Middle Ages, such as Florence, which became the first kinds of credit: payment at a future date was guaranteed by the holder in return for the bill, which could then be used as if it were money itself.
The notion of credit was a giant leap for money and sent economies soaring to the heights (and depths) modern countries have experienced in recent years. As business got ever bigger, banks were required as, initially, safehouses but then as the source of loans. They created money extra money for themselves by offering interest on savings and using the funds they held for profitable investment. Banknotes representing a set value – which could, in theory, be redeemed at the bank in question - followed suit and many banks continued to print their own money in England until as late as the end of the 17th century.
International trade required the setting of exchange rates between currencies among which was the “gold standard” set by Britain in the 1800s which dictated the precise value in gold of a pound note. Vast values for international banking developed, including the “titan” – a £100million individual note used by the Bank of England for accounting purposes.
Banks are now trialling “contactless payment” in which the electronic chips in a card need only be passed through the magnetic field of a receiver in a shop to pay for a massage or a new pair of shoes. It’s a very long way from a string of cowry shells.
1.2 Contemporary Payment Technology Landscape
The once-common question "Cash or credit?" has fallen into disuse, the contemporary "Credit or debit?" stealing the title of most-asked question in checkout lines across the country. Modern technological advances have enabled cashless transactions to grow substantially in a relatively short period of time. Merchants now have fast, uninterrupted connections to global payment networks, allowing them to instantly check to see if Jane Doe can actually afford that pair of shoes or not. For customers, electronic payments allow them to avoid carrying around excess cash, offer protection in the event of loss or theft, and give them access to online retailers. The rise of the Internet has helped spur the proliferation of new payment technologies as well. Using cash or paper checks for online purchases is impractical and slow, leading to increased demand for fast, electronic payment methods.
The rise of new payment technologies has spawned the growth of an industry dedicated to processing cashless transactions. There are a large number of electronic payment processors, who serve as intermediaries between customer, merchants, and financial institutions. Additionally, both retailers and banks need special software and equipment to maintain the electronic payment network, giving rise to companies specializing in these products. As cash becomes less and less frequently used, the companies involved in executing electronic transactions could benefit substantially.
1.3 Overview of the Payment System in US
The development of the payment system in the United States has been influenced by many diverse factors. Firstly, there are numerous financial intermediaries that provide payment, clearing and settlement services. Over 20,000 deposit-taking institutions offer some type of payment service. Privately operated payment systems range from the localised interbank associations that clear cheques for their members or operate automated teller machine (ATM) or point of sale (POS) networks to the nationwide credit and debit card networks and a major “large-value” electronic funds transfer system. In addition, the central bank plays a significant role in the payment system through the provision of a wide range of interbank payment services.
Secondly, the legal framework governing payment activity as well as the regulatory structure for financial institutions that provide payment services in the United States is complex. Financial institutions are chartered at either the state or federal level, and are supervised by one or more agencies at the state or federal level, or both.
Thirdly, a variety of payment instruments and settlement mechanisms are available to discharge payment obligations between and among financial institutions and their customers. These payment instruments vary considerably in their characteristics, such as cost, technology, convenience, funds availability and finality, as well as in orientation towards consumer, commercial and interbank transactions. The large-value electronic funds transfer mechanisms are used to discharge the bulk of the dollar value of all payments in the United States. By contrast, the majority, by volume, of all payments in the United States, particularly those involving retail transactions, continues to be settled through the use of paper-based instruments, particularly cash and cheques. The use of electronic payment mechanisms, such as the Automated Clearing House (ACH) and ATM and POS networks, however, have been growing rapidly. In addition, innovation and competition have led to the use of new instruments and systems that rely increasingly on electronic payment mechanisms.
The size and complexity of financial markets in the United States have created significant payment and settlement interdependencies involving the banking system, money and capital markets, and associated derivative markets. Market participants and the Federal Reserve have for many years pursued measures to strengthen major US payment mechanisms, to increase processing efficiency, and to reduce payment system risks.
1.4 Payment Instruments
(a) Paper cheques
The paper cheque is the most frequently used non-cash payment instrument in the United States. Although the cheque remains the predominant type of non-cash payment instrument, the number of cheque payments and the number of cheque payments as a share of non-cash payments have declined over time
(b) ACH credits and debits
ACH transactions are a common form of electronic funds transfer used to make both recurring and non-recurring payments.. In an ACH credit transaction, funds flow from the originator to the receiver, and in a debit transaction, funds flow from the receiver to the originator. ACH credit payments include direct deposit of payrolls, government benefit payments and corporate payments to contractors and vendors. Debit payments include mortgage and loan payments, insurance premium payments, consumer bill payments and corporate cash concentration transactions. In addition, businesses and individuals may use the ACH to make payments to, or receive reimbursement from, the federal government related to federal tax obligations.
(c) Funds transfers over Fedwire and CHIPS
Fedwire and CHIPS are electronic credit transfer systems that are generally considered large-value payment systems. These systems are used by financial institutions for settling many financial market and a wide range of other types of transactions. With a few exceptions, non-deposit-taking financial institutions, as well as non-financial organisations and individuals, access these systems and originate payments through deposit-taking institutions.
(d) Card payments 1.5 Credit cards
Credit cards are the most frequently used electronic payment instrument in the United States. These cards combine a payment instrument with a credit arrangement. n. Bank credit cards are generally issued by a bank under a license from a national organisation, such as Visa or MasterCard, and typically involve a revolving credit agreement. There were 9.5 billion bank credit card transactions during 2000.
In addition to bank-issued cards, a number of other companies offer credit cards directly to businesses and consumers. These include Discover Card; national travel and entertainment cards, such as American Express; and limited-use proprietary cards, such as those issued by retail stores and oil and telephone companies.
1.6 Debit cards
Debit cards transfer funds from a cardholder’s transactions account (for instance, a chequing account) at an issuing bank. Cardholders authorise debit card transactions either by entering a personal identification number (PIN) directly into a merchant’s online terminal or by a written signature.
1.7 US Interbank exchange and settlement circuits
General overview
In the United States, interbank payments are processed and settled primarily through the following mechanisms: (1) cheque clearing, (2) ACH, (3) card networks, (4) same-day electronic funds transfer systems (Fedwire and CHIPS) and (5) the Federal Reserve’s National Settlement Service (NSS). Using these mechanisms, banks exchange and settle payments directly with each other, through private sector clearing houses, through correspondents, or through the Federal Reserve.
1.8 Cheque clearing systems
Typically, deposit-taking institutions located in the same geographical area exchange cheques directly or participate in local cheque clearing arrangements.
Cheques drawn on deposit-taking institutions located outside the geographical area of the collecting deposit-taking institution are frequently deposited by the collecting institution with correspondent banks or Federal Reserve Banks. Correspondent banks that have established relationships with other correspondent banks present cheques drawn on each other directly. Smaller institutions generally use the cheque collection services offered by correspondent banks or those offered by the Federal Reserve. Cheques cleared by the Federal Reserve Banks and correspondent banks are processed on high-speed equipment that itemises, records and sorts cheques based on information contained in the magnetic ink character recognition (MICR) line printed along the bottom of cheques.
Cheques are transported between collecting institutions in a variety of ways. Cheques cleared locally are usually transported by ground couriers, while cheques drawn in regions distant from the institution in which the cheque is first deposited are generally delivered via air transportation. The Federal Reserve manages an extensive air transportation network to exchange cheques among its 45 cheque clearing centres and uses local courier networks to present cheques to paying institutions.Correspondent banks settle for the cheques they collect for other institutions through accounts on their books. Paying banks generally settle with correspondent banks using the Federal Reserve’s Fedwire funds transfer system. Cheque clearing houses generally net payments. Settlement among cheque clearing house participants generally occurs through transactions directly between members, through designated settlement banks, or through NSS. The Federal Reserve settles for the cheques it collects by posting entries to the accounts that deposit- taking institutions maintain with the Federal Reserve. The account of the collecting institution is credited, and the account of the paying institution is debited, for the value of the deposited cheques in accordance with funds availability schedules maintained by the Federal Reserve, which reflect the time normally needed for the Federal Reserve to receive settlement from the institutions on which the cheques are drawn. Collecting institutions usually receive credit on the day of deposit or the next business day.
1.9 Automated Clearing House
Automated Clearing House (ACH) is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Debit transfers also include new applications such as the Point-of-Purchase (POP) check conversion pilot program sponsored by NACHA-The Electronic Payments Association. Both the government and the commercial sectors use ACH payments. Businesses are also increasingly using ACH to collect from customers online, rather than accepting credit or debit cards.
1.10 Operation of the ACH system
The Federal Reserve maintains centralised application software used to process ACH payments submitted to the Federal Reserve Banks. Deposit-taking institutions electronically deliver files to and receive files from the Federal Reserve Banks through a variety of electronic access options. Private sector operators and the Federal Reserve Banks rely on each other for the processing of some ACH transactions in which either the originating depository institution or the receiving depository institution is not their customer. These inter-operator transactions are settled by the Federal Reserve.
ACH transactions processed by the Federal Reserve are settled through deposit-taking institutions’ accounts held at the Federal Reserve. Since June 2001, settlement for ACH credit transactions processed by the Federal Reserve Banks is final when posted to deposit-taking institutions’ accounts, which is currently at 8.30 am eastern time (ET) on the settlement date. Credit for Federal Reserve ACH debit transfers is not final at settlement. Credit for debit items is available to the receiving deposit-taking institution at 11 am ET on settlement date, but is not final until the banking day following the settlement date. Federal Reserve ACH services are governed by Operating Circular 4, which incorporates the Operating Rules of the National Automated Clearing House Association. Transactions processed by EPN are settled on a net basis using NSS.
1.11 Card networks
Credit card, ATM and POS associations provide communications, transaction authorisation and interbank financial settlement for their member financial institutions. Bank card networks are typically owned by a group of financial institutions that provide initial capital and establish uniform operating policies, procedures and controls. Some major networks are owned by non-bank companies. The largest credit card and signature-based debit card networks in the United States are Visa and MasterCard. American Express and Discover Card are also major credit card networks.
1.12 Operation of card networks
Credit card, ATM and POS associations sort and route transaction data from acquiring banks to issuing banks over proprietary networks. The associations generally settle on a net basis with the acquiring and issuing banks daily, although typically with a one- or two-day lag between payment initiation and settlement. Generally, the associations use the acquiring and issuing banks’ aggregated transaction information to compile each bank’s net settlement position. Member banks may be required to maintain collateral with the associations’ settlement banks to manage default risks. Acquiring and issuing banks may settle directly with each other, through regional settlement banks or through the Federal Reserve, or by other net settlement arrangements. The settlement process can vary significantly, depending upon the member involved.
1.13 Federal Reserve National Settlement Service
The Federal Reserve allows participants in private clearing arrangements to settle transactions on a net basis using account balances held at the Federal Reserve. Users of the Federal Reserve’s National Settlement Service (NSS) include cheque clearing houses, ACH networks and some bank card processors. In 2002, more than 70 local and national private sector clearing and settlement arrangements used NSS to settle a netted value of about USD 15 billion daily. NSS provides operational efficiency and reduces settlement risk to participants by providing for intraday settlement finality within the limitations established in the Federal Reserve’s Operating Circular 12. NSS offers finality that is similar to that of the Fedwire funds transfer service and provides an automated mechanism for submitting settlement files to the Federal Reserve. It also enables Federal Reserve Banks to manage and limit risk by incorporating risk controls on extensions of daylight credit that are as robust as those used in the Fedwire funds transfer service.
1.14 Operation of the NSS
To use NSS, a settlement agent for a settlement arrangement transmits a settlement file electronically to the Federal Reserve using an electronic connection. The file contains a listing of the participants, the settlers (either the participant itself or the participant’s correspondent) and the dollar amount of the debit or credit to be posted to the settler’s account. If various validity checks are satisfied, the Federal Reserve accepts the file for processing and sends an acknowledgment to the agent. NSS files are accepted for processing and settlement between 8.30 am and 5.30 pm ET. Files submitted earlier than 8.30 am are queued for processing beginning at 8.30 am.
Each debit balance on the settlement file is checked against the account balance and intraday credit available to the settlers. In some instances, debit balances may be rejected if a settler does not have a sufficient balance, or sufficient intraday credit, to cover the debit. When all debit entries on the settlement file have been posted, NSS posts the credit balances. All postings are final and irrevocable when functioned. When all credits have been posted, the settlement for that file is complete and an acknowledgment message is sent to the settlement agent.
1.15 Alternate Payment Methods in US
Besides the more common methods of payment in the US, several other alternate payment methods are also popular in the US ecommerce landscape. The overall breakdown for payments by type across all ecommerce is summarized in the chart below with information from Javelin Research. The 29% labeled “other” consists of everything from bank transfers (ACH / ECP), PayPal, mobile SMS billing and additional alternative payment methods such as BillMeLater, google checkout etc
Paypal
–
PayPal is an e-commerce business allowing payments and money transfers to be made through the Internet. Online money transfers serve as electronic alternatives to traditional paper methods such as cheques and money orders.A PayPal account can be funded with an electronic debit from a bank account or by a credit card. The recipient of a PayPal transfer can either request a cheque from PayPal, establish their own PayPal deposit account or request a transfer to their bank account.
PayPal performs payment processing for online vendors, auction sites, and other commercial users, for which it charges a fee. It may also charge a fee for receiving money, proportional to the amount received. The fees depend on the currency used, the payment option used, the country of the sender, the country of the recipient, the amount sent and the recipient's account type.[2] In addition, eBay purchases made by credit card through PayPal may incur extra fees if the buyer and seller use different currencies.
Google Checkout
-
Google Checkout is an online payment processing service provided by Google aimed at simplifying the process of paying for online purchases. Users store their credit or debit card and shipping information in their Google Account, so that they can purchase at participating stores by clicking an on-screen button. Google Checkout provides fraud protection and a unified page for tracking purchases and their status.Google Checkout service became available in the United States on June 28, 2006, and in the UK on April 13, 2007.[1] It was free for merchants until February 1, 2008.[2] From then until May 5, 2009 Google charged US merchants 2.0% plus $0.20 per transaction, and UK merchants 1.4% + £0.20. Google since moved to a tiered cost structure, identical to that of PayPal
Search
Shop
Checkout
To find stores that accept Google Checkout, search Google and look for this shopping cart icon in sponsored links:
No need to sign up ahead of time. Do your shopping, find the items you want to buy, and add them to your cart.
When you're ready to complete your purchase, click the Google Checkout button. Sign up or sign in, review your order, and you're done.
Amazon Payments - Amazon Payments is a way for customers to purchase goods and services at websites across the internet using the payment methods in their Amazon.com accounts, such as their Visa or MasterCard. (Currently Amazon.com and Amazon Payments will not accept payment methods such as PayPal or Google Checkout.) At participating vendors,
which include Patagonia and Jockey, users can check out using their Amazon account information without needing to re-enter credit card numbers or shipping addresses. Users can also check out with Amazon's 1 Click.
Ebillme
– eBillme is the secure cash payment option that extends the convenience of online
banking to the merchant’s checkout, and enables merchants to increase sales while reducing transaction costs. Using eBillme, consumers can shop securely and pay cash using their bank’s online bill payment service, without having to use credit cards.1.15.1.1.1
How does it work?
Billmelater
-
After customers open their accounts (including credit check), Bill Me Later asks customers at every purchase to fill out the last 4 digits of their SSN and their date of birth. The approved customer can then pay the bill by mail (check) or online (via bank account) at www.billmelater.com. The first time customers are emailed a link to register with billmelater.com - so that they can check their balances or pay their bill. Customers also get an email whenever they are declined. In cases when they are declined and they don't receive declined email/letter, they can contact Bill Me Later Customer Service to check if it was not a system issueMobile Payment Trends in the US – Commerce is the next major advancement in mobile technology. Through the use of NFC or near field communication chips, several companies are about to revolutionize the way we shop, replacing our wallets with smartphones. NFC allows a device, usually a mobile phone, to collect data from another device or NFC tag at close range. In many ways, it’s like a contactless payment card that is integrated into a phone. In other ways, it’s similar to Bluetooth, except that instead of programming two devices to work together, they can simply touch to establish a connection
Mobile Payment transactions total $240 annually but that’s just the tip of the iceberg. Juniper research estimates that the market will grow 2x to 3x in the next 5 years
By 2013
Sales of NFC enabled phones will exceed
$75 billion
1 in 5 cellphones worldwide will use NFC technology
By 2014
NFC transactions alone will approach
$50 billion
Google predicts that 50% of cellphones will use NFC technology
By 2015
The value of mobile money transactions is expected to reach
$670 billion.
Digital goods will make up nearly 40% of the market. Asia, Western Europe and North America will be responsible for 75% of all mobile payment transactions
Chapter - 2
E-Commerce
2.1 Introduction
1. In 1991, the Internet had less than 3 million users around the world and its application to e-commerce was non-existent. By 1999, an estimated 250 million users accessed the Internet and approximately one quarter of them made purchases online from electronic commerce sites, worth approximately $110 billion. Furthermore, it is perceived that the total value of e-commerce transactions around the world reached around $3.8 trillion in 2003, over $9 trillion in 2005, and around 18% of global sales in 2006.If the expansion in e-commerce continues at this rapid pace, as is expected, then in four to five years from now, e-commerce transactions between businesses (B2B) and between businesses and consumers (B2C) will account for about 5 per cent of inter-company transactions and retail sales respectively. Looking forward, the potential for e-commerce transactions to gain a sizeable share of consumer and business purchases appears to be large, although it is difficult to quantify.
2. The prospect that e-commerce transactions may gain a sizeable share of overall commerce is only one dimension of why the Internet is generating such interest. The open structure of the Internet and low cost of using it permit the interconnection of new and existing information and communication technologies, and offers businesses and consumers a new and powerful information system and a new form of communication. This makes it possible for buyers and sellers to come together in more efficient ways and is creating new marketplaces and opportunities for the reorganization of economic processes. It is also changing the way products are customized, distributed and exchanged and how businesses and consumers
search and consume products.
3. In the decades to come, exploiting the full potential of these developments could have profound impacts in individual sectors of the economy as well as for macroeconomic performance and economic policies. At the aggregate level, productivity and economic growth could rise, at least for some time, as a result of more efficient management of supply and distribution, lower transaction costs, low barriers to entry and improved access to information. Moreover, even if the impact of e-commerce on GDP is small and uncertain it could enhance welfare because, for example, of saved time, greater convenience and access to a wider selection of goods and services more finely tuned to individual needs. Nonetheless, to fully exploit the opportunities much remains to be done to ameliorate user and consumer trust, improve access to the Internet infrastructure and services, and to create a stable, predictable regulatory
2.2 What is Ecommerce?
Electronic commerce, commonly known as e-commerce or ecommerce, is the online transaction of business, which consisting of buying and selling products or services over electronic systems such as the Internet and other computer networks. The amount of trade conducted electronically has grown extraordinarily since the spread of the Internet.
A large percentage of electronic commerce is conducted entirely electronically including the virtual storefronts on web sites with online catalogs, Airline reservations, online book store, online banking including the electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. Electronic commerce that is conducted between businesses for buying and selling is referred to as business-to-business or B2B. Electronic commerce that is conducted between businesses and consumers is referred to as business-to-consumer or B2C.
To simply put, what E-Commerce is all about, just think of buying a book, or an airline ticket or an electronic instrument. It is as simple as going online in the internet and buying the goods what you want in the ecommerce way which is very simple and fast.
Pictorial representation of a typical ecommerce transaction
E-Commerce is about setting and doing your business on the Internet by enabling the customers to browse your website, go through your products and services. When the customer chooses to buy some product that he likes, he will add that product to his shopping cart. Once his selection is complete, he will check out by paying the amount with Credit Card, Debit card or any other acceptable payment method. These transactions should be made securely to protect the privacy of the customers.
2.3 Advantages of Ecommerce:
Helps Create New Relationship Opportunities:
Expanding or opening an eBusiness can create a world of opportunity and helps to establish new relationships with potential customers, potential business associates and new product manufacturers. Just by being in an easy to find location that is accessible to users all over the world, you will be available for others to find and approach you about new opportunities. Customers who don't know you exist will know about you, product suppliers will request you add their items and other businesses will approach you about partnership opportunities. Many of
these opportunities would not present themselves without an Online presence or site for them to discover you on their own.
Open for Business 24x7:
An eCommerce site basically gives you the ability to have unlimited store hours, giving your customers 24 hours a day, 7 days a week access to shop and buy items from you. Some merchants choose to limit their hours to 5 days a week, but orders can still be made over the weekend and customers can still make contact 24/7 via email, phone or fax. In addition, the costs associated with having your store open 24/7 are much less than maintaining a physical storefront or phone operator with 247 operation capability. You can literally take orders and let customers shop while you sleep, take vacations or from remote locations.
Increases Brand or Product Awareness:
Having an Online business means that you can literally reach out to millions of consumers looking for what you sell anywhere in the world. By reaching out to new markets and displaying your site prominently in front of them, you will be able to help increase your company/domain brand name and also increase awareness about your product line. By giving users 24/7 access in an easy to find location, you will help to create more word of mouth buzz for your eBusiness, in turn helping
to promote your brand name and products. Users who haven't heard of you will discover you exist and help spread the word about you.
Helps Establish Customer Loyalty:
An eCommerce storefront will help create an easier means for your customers to purchase the items you sell and offers a unique way to display and describe your products in a informative, visual and interactive way. The customers you have will become more loyal shoppers each time they visit, making eCommerce great for improved customer satisfaction and visitor loyalty. Now that you offer your products for sale Online, consumers will be able to shop from your catalog more easily, get updates on new items or product discounts and can shop or buy anytime they wish.
Potential to Increase Overall Business Sales:
An eCommerce store that is an extension of a physical storefront is a great way to boost overall business sales and potentially increase company profits across the board. Companies who already do business from a physical location are typically unaware of how much more they could be making if only they were to expand into their Online marketplaces. Selling Online opens up many opportunities for businesses both new and old. It's a great way to increase sales, especially if you already have a physical store.
Potential to Increase Company Profits:
As mentioned above, opening an Online extension of your store or moving your business solely Online are great ways to boost sales and potentially profits. Remember, just because SALES increase it does not necessarily mean that company PROFITS will increase also. Online businesses do have a greater chance of increasing sales and profits by opening up an eCommerce store to sell the items they offer. Sales and profits are the lifeblood of any company, so it makes sense to increase them where ever possible and whenever possible throughout the existence of your company. More sales, more profits, bigger budgets, etc.
Potential to Decrease Some Costs:
In addition to potentially increasing sales and profits, eBusiness owners can also typically reduce the costs of running their business by moving it or expanding it into the Online world. eCommerce stores can run with less employees including sales staff, customer service reps, order fulfillment staff and others. EBusinesses also do not need a physical location in order to stay operational, which can reduce costs related to building leases, phone bills, utility costs and other costs associated with running a brick-and-mortar storefront.
Expands Geographical or Customer Reach:
As mentioned, owning an eCommerce business typically means no limits as to who and where you can sell your products. Some countries outside the United States have additional regulations, licensing requirements or currency differences, but generally you will not be limited on the customers you can reach out to. Physical storefronts are limited to the city in which they are located, Online businesses aren't limited unless you put geographical limits in place. At the very least, you should consider targeting U.S. buyers, but also consider, Canada, UK, Australia and others. Sell to anyone, anywhere, anytime!
Allows for Smaller Market or Niche Targeting:
Although your customer reach may expand beyond your local area, you may only wish to target smaller consumer markets and buyer niches for your eCommerce products. Owning an Online store gives the merchant much control over who they target and reach out to notify about the items for sale in their store. Currently, you can target women, men, a generation of users, a
particular race and many more smaller niche markets. This is typically done by placing keywords that those niche markets use on a regular basis when shopping for the items you offer.
Allows for Easier Delivery of Information:
An Online store and Web brochure are great ways to deliver and display information about your company and the products you sell. With an Online presence your customers will have direct access to product information, company information, specials, promotions, real time data and much more information that they can easily find just by visiting your site day or night. Not only does it benefit your customers, but it's also generally easier for merchants to update their site rather than break down an in store display and put up another for the next event. It saves both your customers and you precious time and can help you to plan more updates or better sales as it will be much easier for you to update and take down
Ecommerce and broader internet applications
Government
Business
Consumer
2.4 Business Applications:
Some common applications related to electronic commerce are the following: Document automation in supply chain and logistics
Domestic and international payment systems Enterprise content management
Group buying
Automated online assistants Instant messaging
Government
Business
Consumer
G2G eg: Coordination G2B eg: Information G2C eg: Information B2G eg: Procurement B2B eg: Commerce B2C eg: Ecommerce C2G eg : Tax Compliance C2B eg : Price Comparison C2C
Newsgroups
Online shopping and order tracking Online banking
Online office suites Shopping cart software Teleconferencing Electronic tickets
2.5 Forms of ecommerce:
Contemporary electronic commerce involves everything from ordering "digital" content for immediate online consumption, to ordering conventional goods and services, to "meta" services to facilitate other types of electronic commerce.
On the consumer level, electronic commerce is mostly conducted on the World Wide Web. An individual can go online to purchase anything from books or groceries, to expensive items like real estate. Another example would be online banking, i.e. online bill payments, buying stocks, transferring funds from one account to another, and initiating wire payment to another country. All of these activities can be done with a few strokes of the keyboard.
On the institutional level, big corporations and financial institutions use the internet to exchange financial data to facilitate domestic and international business. Data integrity and security are very hot and pressing issues for electronic commerce.
2.6 Human Skills Required for ecommerce :
It's not just about E-commerce; t's about redefining business models, reinventing business processes, changing corporate cultures, and raising relationships with customers and suppliers to unprecedented levels of intimacy.
Internet-enabled Electronic Commerce: Web site development
Web Server technologies Security
Integration with existing applications and processes
Developing Electronic Commerce solutions successfully across the Organization means building reliable, scalable systems for
1) Security,
2) E- commerce payments 3) Supply- chain management
4) Sales force, data warehousing, customer relations 5) Integrating all of this existing back-end operation
2.7 Global Trends in E-Retailing and Shopping :
Business models across the world also continue to change drastically with the advent of eCommerce and this change is not just restricted to USA. Other countries are also contributing to the growth of eCommerce. For example, the United Kingdom has the biggest e-commerce market in the world when measured by the amount spent per capita, even higher than the USA. The internet economy in UK is likely to grow by 10% between 2010 to 2015. This has led to changing dynamics for the advertising industry
Amongst emerging economies, China's eCommerce presence continues to expand. With 384 million internet users,China's online shopping sales rose to $36.6 billion in 2009 and one of the reasons behind the huge growth has been the improved trust level for shoppers
2.8 Distribution Channels :
E-commerce has grown in importance as companies have adopted Pure-Click and Brick and Click channel systems. We can distinguish between pure-click and brick and click channel system adopted by companies.
Pure-Click companies are those that have launched a website without any previous existence as a firm. It is imperative that such companies must set up and operate their e-commerce websites very carefully. Customer service is of paramount importance.
Brick and Click companies are those existing companies that have added an online site for e-commerce. Initially, Brick and Click companies were skeptical whether or not to add an online e-commerce channel for fear that selling their products might produce channel conflict with their off-line retailers, agents, or their own stores. However, they eventually added internet to their distribution channel portfolio after seeing how much business their online competitors were generating.
2.9 Forecast for Global Ecommerce Growth :
Although the US and Canada lead the world in ecommerce spending, other countries are increasingly shopping online. By 2014, global ecommerce spending is projected to increase more than 90 percent. A sizable portion of that growth is expected to come from Latin America, where the amount spent online is projected to more than double.
If these projections are accurate, annual ecommerce spending, in billions for 2014 will be: North America $202.8
Western Europe $166.5 Asia-Pacific $93.2 Latin America $27.1
Eastern Europe & Russia $27.0 Australia $4.9
Africa & The Middle East $3.0
2.10 Emerging Trends in Global Ecommerce :
As social media, app stores and global availability become standard, many companies are looking to enhance the online customer experience. And while retail and other transactions via Internet are customary, more than ever companies are simplifying the ways in which customers interact with their website and ultimately make online purchases. Here are eight trends happening right now in global e-commerce that seek to enhance the user experience
1. Micropayments : Among the most revolutionary changes in the coming months—not years—is the use of micro-payment systems from a variety of financial firms, e.g., Paypal, Visa, WesternUnion, among others, including banks. This trend is facilitated by the W3C working group that approved these protocols and technical standards for the interworking. These systems will change not only how we carry money but how we value money and think about purchases. (Consider how a purchase of $4.99 feels in a mobile app store vs. at Dunkin' Donuts.) Payment systems that make it easier to buy online, coupled with mobile technologies will accelerate the usage of global e-commerce applications.
2. Mobile Technologies : More people access the Internet on their mobile devices than on any other device. We are rapidly approaching the time (if we are not already there) where designs must be created for the mobile Web first, and for the desktop second. Mobile technologies facilitate comparison shopping; with the advent of barcode reader apps and
price-comparison databases, a consumer could snap a bar code in Walmart and quickly reference product reviews and prices on walmart.com (or compare prices with Walmart competitors). Mobile technologies also facilitate impulse buys – especially with the advent of micro-payments tied to the mobile device. Just recently, Starbucks customers can not only place an order with their Smartphone, but also make a purchase.
3. Social Media : As Facebook has become the most visited site on the Web, the role of social media, including Facebook and its local clones such as Twitter, is increasingly important. Social media sites increasingly act as points of entry to e-commerce sites, and vice versa, as e-commerce sites build rating, loyalty and referral systems tied to social media. Group buying (e.g., Groupon) is also gaining mainstream ground, with many "deal of the day" sites competing for an increasingly savvy consumer base, but improvements lie ahead as the social aspects and user experience are refined.
4. Fulfillment Options : Users will want to have multiple fulfillments and return options when interacting with a vendor: ship to address, courier, pick-up in store, return to store, etc. Having many fulfillment options is how customers view their overall customer experience. Some companies have made a business proposition online by being exceptional in service to the online channel (e.g., Zappos).
5. Global Availability : Increasingly, consumers want the availability to buy products from foreign sites and have them delivered locally. Thus, currency and customs will be of growing concern to many online retailers. Along with this, there will be concerns with local privacy laws and restrictions on related data collection and storage
6. Localization: While the trend is to globalize, what’s often more important is to localize. Research clearly shows that sites that ‘feel’ local – with proper imagery, language, time/date, weights/measures, currency, etc. – resonate far more than sites that seem culturally distant or sterile
7. Customizability : Consumers want control, and want to be able to design the details of the items they purchase
8. Time based Availability : Some of the hottest and most successful sites are those that have a time-critical response component. Sites like Groupon, Gilt and others capitalize on the perception of limited-time availability. Creating a sense of urgency drives traffic and purchase behavior.
2.11 Challenges Facing Global Ecommerce :
The issues concerning global ecommerce can be categorized along four major diomensions – economic, technological, social and legal. Economic considerations regarding ecommerce include the cost justification of projects, the number of buyers and sellers and their access to the internet, the issues connected with infrastructure upgrade and the question of skill shortage.
Economic Cost Justification Internet Access Telecom Infrastructure Skill Shortage Social Privacy/Security Cultural Diversity Trust Absence of ‘touch/feel’ Technical
Security, reliability and protocols Bandwidth
Integration
Legal
Intellectual property rights’ Legal validity of transactions Taxation issues
Policing/Regulation
The technical considerations concerning ecommerce are security, reliability, communication protocols, bandwidth availability and integration with existing applications. There are a number of social and cultural issues that need to be addressed when considering global ecommerce. Some of them are concerns with privacy and security on the internet, the challenges of global diversity, the questions raised by user resistance and inadequate trust and the absence of a tactile medium for online sales. Security and privacy issues are major stumbling blocks for the growth of ecommerce as consumers hesitate to disclose confidential information on the internet.
The issue of intellectual property rights is a major factor in the development of global ecommerce. One of the most important concerns is the legal validity of electronic transactions, the taxation of electronic transactions and the enforcement of regulations. The open nature of the medium requires the enactment of new laws that will make electronic transactions valid and legally enforceable
2.12 Ecommerce in India: An Overview
India’s eCommerce industry is on the growth curve and experiencing a spurt in growth. The Online Travel Industry is very well developed and is booming largely due to the Internet-savvy urban population. The rest of the segments, categorized under online non-travel industry, include e-Tailing (online retail), online classifieds and Digital Downloads (still in a nascent stage).
Though eCommerce took a beating in the dotcom bust, it seems set to grow globally. The global revival of eCommerce is having a ripple effect in India too where the B2B (Business to Business), B2C (Business to Consumer), C2C (Consumer to Consumer), G2B (Government to Business) and G2C (Government to Citizens) segments are showing rapidly increasing activity over the past few years.
India has its share of success stories in the B2C segment in the form of Indiatimes.com, Rediff.com, Shaadi.com, Indiamatrimony.com, ebay.com, MagicBricks.com, Monster.com and Makemytrip.com etc. These and such other portals are generating a lot of interest and increasing transaction traffic. Smaller businesses have jumped onto the bandwagon by offering products and services online and have successfully carved out niches for themselves. The online community is growing by leaps and bounds as an increasing number of consumers have started transacting online because the initial fears and apprehensions are being laid to rest.
Research studies have indicated several factors responsible for the sudden spurt in growth of eCommerce in India such as:
Rapidly increasing Internet user base
Technology advancements such as VOIP (Voice-over-IP) have bridged the gap between buyers and sellers online
The emergence of blogs as an avenue for information dissemination and two-way communication for online retailers and eCommerce vendors
Improved fraud prevention technologies that offer a safe and secure business environment and help prevent credit card frauds, identity thefts and phishing Bigger web presence of SME’s and Corporates because of lower marketing and
infrastructure costs.
Longer reach – Consumers in the Tier II & Tier III cities are fast realizing the potential of the Internet as a transacting medium
The young population find online transactions much easier
Net commerce on India has evolved over the past decade in terms of magnitude. Total net commerce market of India is estimated to be INR 19,688 crores in year 2009 and is expected to grow to INR 31,598 crores by year 2010. It has come a long way since 2007 when the market size was just INR 8,146 Crores (Source: IAMAI)
Chapter - 3
Payments Terminologies with Definition
and Meanings
3.1
Acquirers
An acquirer (or acquiring bank) is a member of a card association, for example MasterCard and/or Visa, which maintains merchant relationships and receives all bankcard transactions from the merchant.
Acquirers charge the merchants fees which include: a monthly rent for the EFTPOS terminal (if it is not owned by the merchant) which is usually equivalent to around 10 to 30 USD monthly, a percentage fee on their transactions (which varies from country to country, for example in Poland it ranges from 1.8% to 2.5%, regardless of whether the card is debit or credit, in USA and many Western Europe countries the fee is often much lower for debit card transactions, than for those with credit cards), and sometimes--especially in the countries where fees for debit card transactions are much lower--an additional fixed fee per transaction, which ranges from 10 to 20 cents).
In the USA, Visa/MasterCard acquirers, and therefore merchants, usually pay much less for a transaction in which the magnetic stripe on the reverse of the card has been successfully swiped through the magnetic stripe reader found in a credit card terminal. This is due to the inclusion of the information encoded into the stripe, which includes anti-fraud features. The fees for card transactions that are hand-keyed into the keypad of a card terminal or computer keyboard are higher, since this security information is absent from the transaction data.
Debit transaction costs are usually just a flat rate (usually $.60 to $1.10 USD each) when the Personal Identitification Number (PIN) is entered by the cardholder. This type of transaction is referred to as "PIN debit." The merchant's terminal requires a PIN pad for this PIN entry. Often the PIN pad is a separate device connected to the terminal, other times the PIN pad is integrated in the machine.
When a debit card is swiped through the magnetic stripe reader of a credit card terminal, but the PIN is not entered, the acquirer usually charges a rate comparable to the swiped credit card rate or less. Since Visa/MC charges acquires less for non-PIN debit cards, many acquirers charge less to the merchant. Typical rates are usually around 1.3% to 1.9% for non-PIN debits (offline Debit rate) and often 1.6% to 1.9% for credit card swipes. This type of debit transactions is referred to as "signature debit."
When properly handled by the merchant, these swiped transactions will qualify for the lowest available Interchange program from the card associations. This indicates all of the required criteria have been satisfied by the transaction to "qualify" for that program rate. For this reason, they are often referred to as "Qualified" transactions.
"Rewards" cards from the Associations--cards that provide the cardholder some premium for its use, such as air miles--even when swiped, often fall into the more expensive "Mid-Qualified" or even the most expensive "Non-Qualified" category.
Handkeyed transactions usually have a much higher rate, often 2.3% to 2.8% for these transactions. Many processors will charge the lower rate on all transactions on their monthly merchant statements, then show the "add on" for the handkeyed and other more costly transactions. Often this 'add on' is 1-1.3%. These transactions are often referred to as Mid-Qualified.
The highest rate (Non-Qualified transactions) is for corporate cards, foreign cards, downgraded transactions (when the merchant does not meet all of the requirements), and higher-level Rewards-type cards. This Non-Qual rate is typically at least 3.0%, and sometimes as high as 5.0%
In a credit card transaction, the acquirer is the entity that receives an authorization request from its merchant accepting the card as a form of payment and forwards it through various
"authorization networks" to the Issuing Bank ("Issuer"). The Issuer determines whether to approve or decline the sale, since they are the entity actually extending credit to its cardholder. 3.2
Independent Sales Organizations
The payment card industry defines an Independent sales organization (ISO) as an organization or individual that is not a member of Card Associations like Visa or MasterCard, but that has a bank card relationship with an Association member that involves acquiring or issuing functions such as the ISO soliciting merchant accounts, arranging for terminal purchases or leases, providing customer service, and soliciting cardholders.
For good reason, acquiring banks are selective about the businesses to which they provide merchant accounts. Some kinds of businesses—such as online wagering or adult entertainment sites and those that are small, home-based, or not yet established—are more prone to risk and credit-card fraud than others. For these kinds of businesses, obtaining merchant accounts directly from acquiring banks can be difficult. Independent sales organizations (ISOs) are third-party organizations that partner with acquiring banks to find, open, and manage merchant accounts on behalf of such businesses in exchange for a higher fee, or for a percentage of the merchant's sales.
An ISO is sometimes referred to as a Member Service Provider (MSP), although their definitions are not always synonymous. MasterCard refers to its ISOs as MSPs, defining a Member Service Provider as “a non-member that is registered by the Corporation [MasterCard] as an MSP to provide Program Services to a member, or any member that is required to register, in the Corporation’s sole discretion, and has been registered as an MSP to provide Third Party Processor Program Services to another member.” The acquirer must register all ISO / MSPs with the applicable Association.
It is important to understand that ISOs and MSPs are not banks and the actual handling of the merchants’ money is done by the processing bank that has contracted with the ISO. Each ISO / MSP must be sponsored by such a processing bank, member of Visa and / or MasterCard, in order to be registered by either Credit Card Association. Typically, processing banks are members of both Associations and the registration process for each Association is done simultaneously. An ISO / MSP can be sponsored by multiple member banks, and as mentioned above processing banks can also perform the job of their ISOs / MSPs, but they rarely do so and prefer to concentrate on issuing credit cards and acquiring payment transactions instead.
ISOs / MSPs must display the name of their sponsor bank on their website and marketing materials. Most disclosures are located in the footer of the ISO / MSP website.
3.3
Point of Sale
Point of sale (POS) or checkout is the location where a transaction occurs. A "checkout" refers to a POS terminal or more generally to the hardware and software used for checkouts, the equivalent of an electronic cash register.
A POS terminal manages the selling process by a salesperson accessible interface. The same system allows the creation and printing of the receipt.
A checkout system generally involves the following components – General computer hardware
General computer software Checkout hardware
Checkout software
Because of the expense involved with a POS system, the eBay guide recommends that if annual revenue exceeds the threshold of $700,000, investment in a POS system will be advantageous. POS systems are manufactured and serviced by such firms as Fujitsu, IBM, MICROS Systems, Panasonic, Radiant Systems, Sharp, Squirrel Systems, and Vectron POS among others.
3.4
Electronic Bill Presentment & Payment
Electronic Bill Presentment & Payment (EBPP) is a form of electronic billing in which a company presents or sends its bills and customers pay these electronically over the Internet. The service has applications for many industries, from financial service providers to telecommunications companies and utilities.
This method of billing and collecting can take two distinct forms – Biller direct and Bank Aggregator. Biller Direct refers to an approach in which consumers make payments directly to one biller that issues bills that they receive at the website of the firm that issued the bill. An example would be of a public utility company offering this payment service to its consumers. On the other hand, the approach under the Bank-aggregator model is to make payment at an aggregator or consolidator site, usually from a consumer's bank’s website. This model allows the consumer to make payments to multiple billers that are pre-registered to receive payments. The focus is on the many-to-one relationship, with transactions conducted via a website.
An excellent example of the consolidated form of EBPP is online bill payment. Many of the larger financial institutions offer online bill payment for their customers. A user can, with several clicks of a mouse and a few keystrokes, pay a large variety of bills, such as the phone bill, the electric bill, the car payment, the rent, the medical bills, and the ISP bill.
A good example of the direct form of EBPP is a credit card company's website, which offers online payment for debtors' accounts. A user can log on to the website and schedule a credit card payment via banking information already entered. This is a one-to-one relationship.
Many websites that offer online bill payments also offer email reminders of payments. This is the presentment part of EBPP. Such email reminders can also be used for traditional paper payments.
Many websites that offer online bill payments also offer information download options, so that users can keep copies of their online transactions on their own PCs. Common download formats
include Quicken, Quickbooks, Excel, and CSV. EBPP is also convenient for financial institutions in that it allows for computerized tracking and assimilation of transaction data at lightning-quick speeds. Electronic bill-keeping can eliminate the need for paper records, which saves a financial institution both time and money.
Billers, bankers, aggregators and consolidators implementing EBPP can play various roles in the overall EBPP process. Once roles are defined, it is easier to identify which model is most appropriate for the client's EBPP strategy. Billers may also implement more than one model in order to best serve their clients. Because the industry is continuously changing and redefining, the options and opportunities for EBPP will continue to expand.
Biller payment provider (BPP) - An agent of the biller that accepts remittance information on behalf of the Biller.
Biller service provider (BSP) - An agent of the biller that provides an EBPP service for the Biller.
Consolidator - A biller service provider that consolidates bills from multiple Billers or other bill service providers (BSPs) and delivers them for presentment to the customer service provider (CSP).
Customer service provider (CSP) – An agent of the customer that provides an interface directly to customers, businesses or others for bill presentment. CSP enrolls customers, enables presentment and provides customer care, among other functions.
3.5
Issuer
An issuing bank or Issuer is a bank that offers card association branded payment cards directly to consumers. The issuing bank assumes primary liability for the consumer's capacity to pay off debts they incur with their card. The issuing bank extends a line of credit to the consumer. Liability for non-payment is then shared by the issuing bank and the acquiring bank, according to rules established by the card association brand.
3.6
EMV
EMV stands for Europay, MasterCard and VISA, a global standard for inter-operation of integrated circuit cards (IC cards or "chip cards") and IC card capable point of sale (POS) terminals and automated teller machines (ATMs), for authenticating credit and debit card transactions.
It is a joint effort between Europay, MasterCard and Visa to ensure security and global interoperability so that Visa and MasterCard cards can continue to be accepted everywhere. Europay International SA was absorbed into MasterCard in 2002. JCB (formerly Japan Credit Bureau) joined the organization in December 2004, and American Express joined in February 2009. IC card systems based on EMV are being phased in across the world, under names such as "IC Credit" and "Chip and PIN".
The EMV standards define the interaction at the physical, electrical, data and application levels between IC cards and IC card processing devices for financial transactions. There are standards based on ISO/IEC 7816 for contact cards, and standards based on ISO/IEC 14443 for contactless cards.
The most widely known chip card implementations of EMV standard are – VSDC – VISA
MChip – MasterCard AEIPS - American Express J Smart - JCB
Visa and MasterCard have also developed standards for using EMV cards in devices to support card-not-present transactions over the telephone and Internet. MasterCard has the Chip Authentication Program (CAP) for secure e-commerce. Its implementation is known as EMV-CAP and supports a number of modes. Visa has the Dynamic Password Authentication (DPA) scheme, which is their implementation of CAP using different default values.
