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Traditional and Electronic Payment Methods Chapter 3
Money and Banking Money serves as a measure of value, a medium of exchange Money exists in a number of forms Cash Coin, paper money Near Cash Checks, drafts, money orders, credit cards
Check Processing
Encryption/Decryption of Transactions
Check A written order on a bank or other financial institution to pay money belonging to the signer to the presenter of the check The most popular offline settlement method Not efficient for e-commerce
Money Order An order for the payment of a specified amount of money Usually issued by the post office or a bank or other financial institution Popular with people who do not have bank accounts or where checks are not acceptable
Credit Card Used to settle charges for goods or services Card holders pay their bills monthly and pay interest on unpaid account balances Issued by banks or financial institutions Visa and MasterCard are clearing houses for member institutions
Charge Cards Similar to credit cards Customer pays bill in full each month AMEX card is a popular example
Debit Cards Similar to credit card in operation from merchant’s perspective  Similar to a check from customer’s perspective
Payment Processing A merchant must have A merchant account Payment processing software Procedures to protect customers and guard against fraud
Merchant Account An account with a financial institution to accept charges Must apply for account and be accepted Supply bank with financial information about anticipated transaction volume and type of business The bank charges for this service
Merchant Account Charge-backs result from customer refusal to pay a charge for a number of reasons, including returned goods, billing errors, and fraudulent charges. Charge-backs can be expensive and the bank may charge higher fees for higher risk enterprises and “situations.”
High Risk Factors Customer not present (telephone and Internet sales_ High risk products or services (gambling, “politically incorrect,” or non-traditional products)
Payment Processing Software Software to facilitate authorization of customer charges to credit or debit charge account. Alternative is to outsource to 3 rd  party for a fee.
Verification Software
Security for Charge Settlement Security must be provided for customer transaction. Secure Sockets Layer (SSL) technology provides encrypted transmission of data between customer and a secure server.
Authentication SSL requires a digital certificate that verifies a sender’s identity.  An e-business obtains its certificate from a certificate authority such as VeriSign.
A Digital Certificate
Fraud Credit card fraud is a major problem As high as 1.15 percent of transactions were found to be fraudulent Security: how much do you want?  Too much will cost sales but reduce fraud to nearly nothing, and too little will result in higher losses.
Security Measures Verify validity of charge. Ship via currier and require receipt signature. Require and verify the complete address and telephone number of customer. Reject orders from anonymous email addresses.
Electronic Payment Forms Various alternative payment forms include: Electronic Cash Electronic checks Smart cards Person-to-person payment systems
Electronic Cash Variety of products available Allow for online purchases without a credit account Allow customer to avoid sharing account data while guaranteeing payment to vendor
Smart Cards A store value card Popular in Europe; not yet common in North America Needs special equipment to work with a PC
Electronic Checks An electronic version of a paper check Essentially a form of Electronic Funds Transfer (EFT)
Person to Person Systems A way to send money, a funds transfer
Person to Person Payment
Person to Person (P2P) System

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Online Payment Transactions

  • 1. Traditional and Electronic Payment Methods Chapter 3
  • 2. Money and Banking Money serves as a measure of value, a medium of exchange Money exists in a number of forms Cash Coin, paper money Near Cash Checks, drafts, money orders, credit cards
  • 5. Check A written order on a bank or other financial institution to pay money belonging to the signer to the presenter of the check The most popular offline settlement method Not efficient for e-commerce
  • 6. Money Order An order for the payment of a specified amount of money Usually issued by the post office or a bank or other financial institution Popular with people who do not have bank accounts or where checks are not acceptable
  • 7. Credit Card Used to settle charges for goods or services Card holders pay their bills monthly and pay interest on unpaid account balances Issued by banks or financial institutions Visa and MasterCard are clearing houses for member institutions
  • 8. Charge Cards Similar to credit cards Customer pays bill in full each month AMEX card is a popular example
  • 9. Debit Cards Similar to credit card in operation from merchant’s perspective Similar to a check from customer’s perspective
  • 10. Payment Processing A merchant must have A merchant account Payment processing software Procedures to protect customers and guard against fraud
  • 11. Merchant Account An account with a financial institution to accept charges Must apply for account and be accepted Supply bank with financial information about anticipated transaction volume and type of business The bank charges for this service
  • 12. Merchant Account Charge-backs result from customer refusal to pay a charge for a number of reasons, including returned goods, billing errors, and fraudulent charges. Charge-backs can be expensive and the bank may charge higher fees for higher risk enterprises and “situations.”
  • 13. High Risk Factors Customer not present (telephone and Internet sales_ High risk products or services (gambling, “politically incorrect,” or non-traditional products)
  • 14. Payment Processing Software Software to facilitate authorization of customer charges to credit or debit charge account. Alternative is to outsource to 3 rd party for a fee.
  • 16. Security for Charge Settlement Security must be provided for customer transaction. Secure Sockets Layer (SSL) technology provides encrypted transmission of data between customer and a secure server.
  • 17. Authentication SSL requires a digital certificate that verifies a sender’s identity. An e-business obtains its certificate from a certificate authority such as VeriSign.
  • 19. Fraud Credit card fraud is a major problem As high as 1.15 percent of transactions were found to be fraudulent Security: how much do you want? Too much will cost sales but reduce fraud to nearly nothing, and too little will result in higher losses.
  • 20. Security Measures Verify validity of charge. Ship via currier and require receipt signature. Require and verify the complete address and telephone number of customer. Reject orders from anonymous email addresses.
  • 21. Electronic Payment Forms Various alternative payment forms include: Electronic Cash Electronic checks Smart cards Person-to-person payment systems
  • 22. Electronic Cash Variety of products available Allow for online purchases without a credit account Allow customer to avoid sharing account data while guaranteeing payment to vendor
  • 23. Smart Cards A store value card Popular in Europe; not yet common in North America Needs special equipment to work with a PC
  • 24. Electronic Checks An electronic version of a paper check Essentially a form of Electronic Funds Transfer (EFT)
  • 25. Person to Person Systems A way to send money, a funds transfer
  • 26. Person to Person Payment
  • 27. Person to Person (P2P) System