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Chapter 5. Online Payment System. Types of Payment Systems. Cash Checking Transfer Credit Card Stored Value Accumulating Balance

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Chapter 5

Online Payment System

Copyright © 2007 Pearson Education, Inc. Slide 5-64

Types of Payment Systems

 Cash  Cash  Checking Transfer  Credit Card  Stored Value  Stored Value  Accumulating Balance

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Cash

 Legal tender defined by a national authority to represent value

represent value

 Most common form of payment in terms of number of transactions

number of transactions

 Instantly convertible into other forms of value

ith t i t di ti

without intermediation

 Portable, requires no authentication, and q provides instant purchasing power

 “Free” (no transaction fee), anonymous, low

 Free (no transaction fee), anonymous, low cognitive demands

 Limitations: easily stolen limited to smaller

Copyright © 2007 Pearson Education, Inc. Slide 5-66

 Limitations: easily stolen, limited to smaller transaction, does not provide any float

Checking Transfer

 Funds transferred directly via signed draft/check from a consumer’s checking account to merchant/ other

consumer s checking account to merchant/ other individual

 Most common form of payment in terms of amount spent

 Most common form of payment in terms of amount spent

 Can be used for small and large transactions

 Some “float” (can take many days for checks to clear)

 Not anonymous, requires third-party intervention (banks)y y ( )

 Introduces risks for merchants (forgeries, bounced

checks, stopped payments), so authentication typically , pp p y ), yp y required

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M

t C

P

t S

t

B

d

Most Common Payment Systems, Based on

Number Of Transactions

Number Of Transactions

Figure 6.1, Page 309

Copyright © 2007 Pearson Education, Inc. Slide 6-68

SOURCE: Based on data from U.S. Census Bureau, 2005.

M

t C

P

t S

t

B

d

Most Common Payment Systems, Based on

Dollar Amount

Dollar Amount

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Credit Card

 Represents account that extends credit to consumers permits consumers to purchase consumers, permits consumers to purchase items while deferring payment, and allows consumers to make payments to multiple consumers to make payments to multiple vendors at one time

 Credit card associations: Nonprofit

 Credit card associations: Nonprofit

associations (Visa, MasterCard) that set standards for issuing banks e g CitiBank standards for issuing banks, e.g., CitiBank

 Issuing banks: Issue cards and process

t ti

transactions

 Processing centers (clearinghouses): Handle

Copyright © 2007 Pearson Education, Inc. Slide 5-70

g ( g )

verification of accounts and balances

Credit Card

Credit Card

 Are widely accepted as a form of paymenty p p y  Reduce risk of theft related with carrying cash  Increase consumer convenience

Off id bl “fl t”

 Offer consumers considerable “float”

 Merchants benefit from increased consumer spending, but pay a hefty transaction fee of 3-5% to the issuing banks pay a hefty transaction fee of 3 5% to the issuing banks  Consumers are liable to $50 for unauthorized transactions

occurring before card issuer is notified

 Consumers can refute or repudiate purchases under certain circumstances

 Limit risk for consumers while raising it for merchants and  Limit risk for consumers while raising it for merchants and

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Stored Value

 Accounts created by depositing funds into an

t d f hi h f d id t

account and from which funds are paid out or withdrawn as needed

 Examples: Debit cards, gift certificates,

prepaid cards, smart cards

 Debit cards: Immediately debit a checking

or other demand-deposit account or other demand deposit account

 Peer-to-peer payment systems such as

PayPal a variation PayPal a variation

 PayPal requires an account with either a

h ki t dit d

Copyright © 2007 Pearson Education, Inc. Slide 5-72

checking account or a credit card

Accumulating Balance

 Accounts that accumulate expenditures and to which consumers make period payments

 Examples: Utility phone Internet access  Examples: Utility, phone, Internet access,

American Express accounts

A l t b l ifi d

 Accumulate balances over a specified

period and are paid in full at the end of the period

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f

S

Dimensions of Payment Systems

Table 5.6, Page 305

Copyright © 2007 Pearson Education, Inc. Slide 5-74

E-commerce Payment Systems

 Credit cards are dominant form of online payment, accounting for around 70% of online payments in accounting for around 70% of online payments in 2007

 Other e-commerce payment systems:

 Other e-commerce payment systems:

 Digital cash – private form of currency that can be spent at e-commerce sites

 Online stored value systems – prepayments, debit cards, checking accounts to create value in online accounts  Digital accumulating balance payment systems

 Digital accumulating balance payment systems –

accumulate small charges and bill consumers periodically  Digital credit accounts – “virtual” or online versions of g

traditional credit cards

 Digital checking – digital checks for e-commerce remittances and extend functionality of existing bank checking systems and extend functionality of existing bank checking systems

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Online Payment Methods in the United

States

States

Copyright © 2007 Pearson Education, Inc. Slide 5-76

Online Payment Methods in Other Parts

f th W

ld

of the World

 Europe: mostly bank debit cards and some

 Europe: mostly bank debit cards and some credit cards

 China: paid by check or cash and pick up at local store

 Japan: postal and bank transfers and CODs, using local convenience stores as pickup and using local convenience stores as pickup and payment point; also use accumulated balance

t ith t l f h d f

accounts with telco for purchases made from home PCs

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How an Online Credit Card Transaction

Works

P d i h th th t i

 Processed in much the same way that in-store purchases are

 Major difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions)

 Thus are major reasons that charges can beThus are major reasons that charges can be disputed later by consumers

 Participants include consumer merchant

 Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bank

Copyright © 2007 Pearson Education, Inc. Slide 6-78

bank) and consumer s card issuing bank

How an Online Credit Transaction Works

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Limitations of Online Credit Card

P

t S

t

Payment Systems

 Security: neither merchant nor consumer can

 Security: neither merchant nor consumer can be fully authenticated

 Cost: for merchants, around 3.5% of

purchase price plus transaction fee of 20 – 30 purchase price plus transaction fee of 20 30 cents per transaction + other setup fees

Social eq it man people do not ha e

 Social equity: many people do not have access to credit cards (young adults, plus

almost 100 million other adult Americans who cannot afford cards or who have low

Copyright © 2007 Pearson Education, Inc. Slide 5-80

incomes)

Digital Wallets

 Concept relevant to many of the new digital

 Concept relevant to many of the new digital payment systems

 Seeks to emulate the functionality of

 Seeks to emulate the functionality of traditional wallet

 Most important functions:

 Most important functions:

a) Authenticate consumer through use of digital

certificates or other encryption methods certificates or other encryption methods

b) Store and transfer value

c) Secure payment process from consumer to c) Secure payment process from consumer to

merchant

 Advantages: convenience for consumers, lower g transaction costs for merchants (no need to fill out forms manually), expanded marketing, easier

consumer retention conversion of visitors into consumer retention, conversion of visitors into

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Digital Wallets

Digital Wallets

 Good concept various forms have existed

 Good concept, various forms have existed since late 1990s, but have not been widely adopted

adopted

 Several reasons: under-publicized, offered by small unknown companies and not deemed small, unknown companies and not deemed trustworthy enough by consumers, or

proprietary solutions proprietary solutions

 Microsoft’s server-side Passport and later

MSN W ll t l fi ll j d hi i F b

MSN Wallet also finally jumped ship in Feb 2005

 Newest effort: Google Checkout

Copyright © 2007 Pearson Education, Inc. Slide 5-82

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Digital Cash (“e-cash”)

 One of the first forms of alternative payment systems

 Not really “cash”: rather form of value

 Not really cash : rather, form of value

storage and value exchange that has limited convertibility into other forms of value and convertibility into other forms of value, and requires intermediaries to convert

 Most early examples have disappeared; concepts survive as part of P2P payment p p p y systems

Copyright © 2007 Pearson Education, Inc. Slide 5-84

Digicash: How First Generation Digital

Cash Worked

Cash Worked

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Online Stored Value Systems

 Permit consumers to make instant, online

t t h t d th i di id l

payments to merchants and other individuals based on value stored in an online account

 Rely on value stored in a consumer’s bank, checking, or credit card account

 PayPal most successful system with $45 billion transferred in 2007, available in 190 billion transferred in 2007, available in 190 countries, 165 million account holders

 Good sides: no personal info shared among

 Good sides: no personal info shared among the users; service can be used by individuals to pay one another even in small amounts

Copyright © 2007 Pearson Education, Inc. Slide 5-86

to pay one another even in small amounts

How PayPal Works

How PayPal Works

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Online Stored Value Systems

Online Stored Value Systems

 Down sides: high cost and lack consumer

 Down sides: high cost and lack consumer protections when fraud occurs or charge is repudiated

repudiated

 Smart cards: plastic cards with embedded chips storing personal data (e g multiple chips storing personal data (e.g., multiple credit card no’s and info about health

insurance transportation personal ID bank insurance, transportation, personal ID, bank accounts, and frequent fryer accounts)

C t t t t i l t il t ift

 Contact type: certain-value retail store gift cards

 Contactless type: EZPass, MRT tokens

Copyright © 2007 Pearson Education, Inc. Slide 5-88

Digital Accumulating Balance Payment

S

t

Systems

All t k i t d

 Allows users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the month

t e o t

 Ideal for buying intellectual property, e.g., music tracks book chapters or newspapers music tracks, book chapters, or newspapers articles

 Examples: Valista’s PaymentsPlus, Clickshare

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Cli k h E bl Bill bl H t t Li k Clickshare Enables Billable Hypertext Links

Service Provider A can sell its users information from Content Provider B; B sets its royalty (wholesale); A charges retail to user

Copyright © 2007 Pearson Education, Inc. Slide 5-90

Digital Checking Payment Systems

 Extends functionality of existing checking

 Extends functionality of existing checking

accounts for use as online shopping payment tool

tool

 Advantages: do not require consumers to g q send sensitive info over the Web, cheaper than credit cards for merchants, much faster than credit cards for merchants, much faster than paper checks

E l P B Ch k

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PayByCheck Sample Screen

Copyright © 2007 Pearson Education, Inc. Slide 5-92

Wireless Payment Systems

 Use of mobile handsets as payment devices

well- Use of mobile handsets as payment devices well established in Europe, Japan, South Korea

 Three types of mobile payments systems in

 Three types of mobile payments systems in Japan: e-money (tied to credit cards or bank accounts), mobile debit cards (tied to bank accounts), mobile debit cards (tied to bank accounts), and mobile credit cards

 Japan’s NTT DoCoMo launched wireless RFID

 Japan s NTT DoCoMo launched wireless RFID cell phones and related payment system (FeliCa) in 2004

 Not very well established yet in U.S, but with growth in Wi-Fi and 3G cellular phone systems, growth in Wi Fi and 3G cellular phone systems,

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FeliCa System Demo YouTube

FeliCa System Demo YouTube

Copyright © 2007 Pearson Education, Inc. Slide 5-94

Electronic Billing Presentment and

P

t (EBPP)

Payment (EBPP)

 Online delivery and payment of monthly bills

 Online delivery and payment of monthly bills

 EBPP expected to grow rapidly, to an estimated 50% of all households by 2007 estimated 50% of all households by 2007

 Main business models in EBPP market include:

include:

 Biller-direct – used by utility, phone, and credit card companies and individual stores

card companies, and individual stores

 Consolidator – third party (financial institution or portal) aggregates all bills for consumers and p ) gg g

permits one-stop bill payment

 Above are supported by EBPP infrastructure providers

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Growth of the EBPP Market

Copyright © 2007 Pearson Education, Inc. Slide 5-97

References

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