Topic 7

Topic X E-commerce
7 Payment
Systems
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the basic functions of payment systems that are used in
e-commerce;
2. Discuss the history and future of digital cash;
3. Identify how digital wallets work;
4. Explain the use of stored-value cards in e-commerce;
5. Examine the use of digital accumulating balance payment system
and digital checking; and
6. Explain the functionality of electronic billing presentment and
payment systems.
X INTRODUCTION
An important function of e-commerce sites is the handling of payments over the
Internet. Most e-commerce involves the exchange of some form of money for
goods or services. Today, three basic ways to pay for online purchases are
through credit cards, PayPal and debit cards which collectively account for more
than 90 percent of all online payments in the USA. A small but growing
percentage of consumer payments are made by electronic transfer. The most
popular consumer electronic transfers are automated payments of auto loans,
insurance payments and mortgage payments made from consumers checking
accounts.
208 X TOPIC 7 E-COMMERCE PAYMENT SYSTEMS
In this topic, we will discuss on six payments technologies and they are:
(a) Payment cards (i.e., credit card, debit card);
(b) Digital cash;
(c) Digital wallets;
(d) Online stored-value payment systems (i.e., PayPal, smart cards);
(e) Digital accumulating balance systems; and
(f) Digital checking systems.
Each of the payment technologies has their own unique properties, costs,
advantages, and disadvantages. Some methods are already popular and widely
accepted, while others are just beginning to be accepted and thus, have an unclear
future. All of these electronic payment methods can work well for B2C e-commerce
sites. In the United States, credit card payment is the primary form of online
payment system, accounted for about 60% of online transactions in 2008.
Finally, this topic ends with a discussion on the payment system for B2B e-commerce
sites as well as the electronic billing and presentment systems.
7.1 PAYMENT CARDS

Business people often use the term payment cards as a general term to describe
all types of plastic cards that consumers (and some businesses) use to make
purchases. The main categories of payment cards are as shown in Figure 7.1.
Figure 7.1: Categories of payment cards

TOPIC 7 E-COMMERCE PAYMENT SYSTEMS W 209
Let us look at the detailed explanation provided for each payment card:
(a) Credit Cards

Credit cards are by far the most popular form of online payments for
consumers. A credit card, such as a Visa or a MasterCard, has a spending
limit based on the users income level credit history; a user can pay off the
entire credit card balance or pay a minimum amount for each billing
period. For any unpaid balance, the credit card issuers will charge some
interest on the user. Many consumers already have credit cards, or are at
least familiar with how it works.
Credit cards are widely accepted by merchants around the world and
provide assurances for both the consumer and the merchant. A consumer is
protected by an automatic 30-day period in which he or she can dispute an
online credit card purchase. Paying for online purchases with a credit card
is just as easy as in a brick-and-mortar store.
Merchants that already accept credit cards in an offline store can accept
them immediately for online payment because they already have a
merchant credit card account. Online purchases require an extra degree of
security not required in offline purchases, because a card holder is not
present and cannot provide proof of identity as easily as he or she can
when standing at the cash register.
(b) Debit Cards

A debit card looks very much like a credit card, but it works quite
differently. Instead of charging purchases against a credit line, a debit card
deduces the amount of the sale from the cardholders bank account and
transfers it to the sellers bank account. Debit cards are issued by the
cardholders bank and usually carry the name of a major credit card issuer,
such as Visa or MasterCard, by agreement between the issuing bank and
the credit card issuer.
(c) Charge Cards

A charge card, such as one from American Express or Diners Club, carries
no spending limit, and the entire amount charged to the card is due at the
end of the billing period. Charge cards do not involve lines of credit and do
not accumulate interest charges.
7.1.1 Advantages and Disadvantages of Payment

Cards
Payment cards have several features that make them an attractive and popular
choice with both consumers and merchants in online and offline transactions. Let
us look at the advantages of using the payment cards as shown in Table 7.1.
Table 7.1: Advantages of Using Payment Cards
Advantages Descriptions
Fraud protection For merchants, payment cards provide fraud protection. When
a merchant accepts payments cards for online payment or for
orders placed over the telephone, the merchant can verify and
authorise purchases using a payment card processing network.
Worldwide Payment cards can be used anywhere in the world, and the
acceptance currency conversion, if needed, is handled by the card issuer.
Easier form of In online transactions, when a consumer reaches the electronic
payment checkout, he or she enters the payment card number as well as
the shipping and billing information in the appropriate fields
to complete the transactions.
No installation The consumer does not need any special hardware or software
to complete the transactions.
Built-in security Payment cards provide built-in security for merchants because
merchants have a higher assurance that they will be paid
through the companies that issue payment cards than through
the sometimes slow-direct invoicing process.
We have looked at the advantages; now let us move on to the disadvantages of

using payment cards as shown in Table 7.2.
Table 7.2: Disadvantages of Using Payment Cards
Disadvantages Descriptions
Transaction and Payment card service companies charge merchants per-
monthly processing transaction fees and monthly processing fees (about 1% - 4%).
fees These fees can add up, but merchants view them as a cost of
doing business. Any merchant who does not accept payment
cards for purchases, risks losing a significant portion of sales to
other merchants who do accept payment cards.
High prices of goods The consumer pays no direct transaction-based fees for using
and services payment cards, but the prices of goods and services are slightly
higher than they would be in an environment free of payment
cards.
Annual fee Most consumers also pay an annual fee for credit cards and
charge cards. This annual fee is much less common on debit
cards.
7.1.2 Payment Acceptance and Processing

Most people are familiar with the use of payment cards: When a purchase is
made, the clerk runs the card through the online payment card terminal and the
card account is charged immediately. The process is slightly different on the
Internet, although the purchase and charge processes follow the same rules.
Payment card processing has been made easier over the past two decades
because Visa and MasterCard, along with MasterCards European affiliate,
MasterCard Europe (formerly known as Europay), have implemented a single
standard for the handling of payment card transactions called as the EMV
standard (EMV is derived from the names of the companies: Europay,
MasterCard and Visa).
To process payment card transactions, a merchant must first set up a merchant

account. The series of steps in a payment card transaction is usually transparent to
the consumer. Several groups and individuals are involved in the transactions such
as:
(a) The merchant;
(b) The merchants bank;
(c) The customer;
(d) The customers bank; and
(e) The company that issued the customers payment card.
All of these entities must work together for customer charges to be credited to
merchant accounts (and vice versa when a customer receives a payment card
credit for returned goods).
Payment card transactions follow these general steps once the merchant receives
a consumers payment card information, which is usually sent using SSL:
(a) The merchant authenticates the payment card to ensure it is valid and not
stolen;
(b) The merchant checks with the payment card issuer to ensure that credit or
funds are available and puts a hold on the credit line or the funds needed
to cover the charge; and
(c) Settlement occurs, usually a few days after the purchase, which means that
funds travel between banks through the automated clearinghouse system
(refer below) into the merchants account.
The Automated Clearing House (ACH) system is a secure, private network

that connects banks to one another. This network enables electronic
payments, such as automatic payroll deposits and debit card purchases, to
be handled and processed.
Even though the ACH is privately configured, the Internet is making it

possible to apply ACH in e-commerce. As dealing with payments using
ACH is cheaper and faster than processing paper cheques, both B2B and
B2C e-commerce activities are becoming ever more dependent on the ACH
system.
Source:
http://www.computerworld.com/s/article/59309/Automated_Clearing_
House
Let us look at the explanation provided for payment card processing.
(a) Open Loop System

Open loop systems involve three or more parties. Suppose an Internet
shopper uses his or her Visa Card issued by the First Bank of Woodland to
purchase an item from Web Wonders, whose bank account is at the
Hackensack Commerce Bank. Whenever a third party, such as the
intermediary banks in this example, processes a transaction, the system is
called as an open loop system.
Systems using Visa or MasterCard are the most visible examples of the
open loop systems. Many banks issue both cards. Unlike American Express
or Discover, neither Visa nor MasterCard issues cards directly to
customers. Members banks are responsible for establishing customer credit
limits.
(b) Closed Loop System

In some payment card systems, the card issuer pays the merchants who
accept the card directly and does not use an intermediary, such as a bank or
the automated clearinghouse system. These types of arrangements are

called as closed loop systems because no other institution is involved in the
transaction. American Express and Discover are examples of closed loop
systems.
(c) Merchant Account

In order to process payment cards for Internet transactions, an online
merchant must set up a merchant account. When the merchants bank
(refer below) collects credit card receipts on behalf of the merchant from
the payment card issuer, it credits their value to the merchants account.
A merchant bank (or acquiring bank) is a bank that does business with
sellers (both traditional commerce and e-commerce) who want to accept
payments cards.
The bank will assess the level of the risk in the business based on the
following criteria:
(i) Business Information

A merchant must provide business information before the bank
provides an account through which the merchant can process
payment card transactions. Typically, a new merchant must supply a
business plan, details about existing bank accounts, and a business
and personal credit history.
The merchant bank wants to have confidence that the merchant has a
good prospect of staying in business and wants to minimise its risk.
An online merchant that appears disorganised is attractive to a
merchant bank than a well-organised online merchant.
(ii) Type of Business

The type of business also influences a banks likelihood of granting
the account. In some industries, merchant banks will be reluctant to
offer a merchant account because of the type of business; some
businesses have a higher likelihood of customers repudiating the
payment card charges than others.
For example, let us look at a business that sells a guaranteed weight-

loss scheme. Many merchant banks will be unwilling to provide an
account to this type of business in which many customers might want
their money back.
Merchant banks must estimate what percentage of sales is likely to be

contested by cardholders. When a cardholder successfully contests a
charge, the merchant bank must retrieve the money it placed in the
merchant account in a process called as a chargeback. To ensure that
sufficient funds are available to cover a chargeback, a merchant bank
might require a company to maintain funds on deposit in the
merchant account.
(d) Processing Payment Cards Online

There are two ways involved in processing of payment cards:
(i) Merchants have Contract with a Third Party

There are several companies which provide payment processing
services such as InternetSecure. InternetSecure allows merchants to
concentrate on business while it provides secure payment card
services. The company provides risk management and fraud
detection and handles transactions from online merchants using
existing, bank-approved payment card processing infrastructure,
secure links and firewall technology to ensure complete security.
InternetSecure notifies the merchant of all approved orders and

supplies authorisation codes to customers who purchase soft goods
that are downloaded upon payment card approval. InternetSecure is
responsible for ensuring that all transactions that it processes for
payment card companies are credited to the merchants account.
(ii) Software Packaged with the Electronic Commerce Software

In terms of software, a provider of payment software for all types of
merchant is FirstData Payment Software (formerly known as
ICVERIFY). FirstData Payment Software is one of the most
comprehensive payment processing products available for retail and
mail/telephone order merchant. It processes all major credit cards,
debit/ATM cards, cheques, stored value cards, etc.
FirstData Payment Software also includes the customer database for

mail/telephone order merchants, recurring billing functions, the ability to
process Internet and e-mail transactions, and the ability to support
advanced configuration options including split-dual and Internet
transaction processing. FirstData Payment Software can be used as a stand-
alone software solution or integrated with another application to help users
handle their transactions quickly and efficiently, regardless of their origin.
ACTIVITY 7.1
How does requiring a credit card for payments discriminate against

some consumers?
EXERCISE 7.1
1. How does debit card differ from credit card?

2. Briefly explain the disadvantages of credit cards as the
standard for online payments.
To get more information on payment cards, you can visit these websites:
(a) Credit card:

http://www.visa-asia.com
http://www.mastercard.com/sea/gateway.html
https://personal.paypal.com/us/cgi-bin/?&cmd=_render-
content&content_ID=marketing_us/paypal_credit_card
http://www.citibank.com.my
(b) Debit card:
www.pirg.org/consumer/banks/debit/fact.htm
https://personal.paypal.com/us/cgi-bin/?cmd=_render-
content&content_ID=marketing_us/debit_card
(c) Charge card:
http://www.dinersclub.com.my/en/index.asp
http://www.americanexpress.com/malaysia/homepage.shtml
(d) Security:
http://www.cerias.purdue.edu/
7.2 DIGITAL CASH

Although credit cards dominate online payments today, digital cash shows
promise for the future. Gartner Research estimates that digital cash will be used
in more than 60 percent of all online transactions by 2009.
What is a digital cash? Read below in order to find out its meaning.
Digital cash (also called as electronic cash or e-cash) is an alternative

payment system developed for e-commerce. Payment using digital cash is
transmitted through the Internet in the form of unique, authenticated
tokens which represent cash value from consumers to merchants.
A significant difference between digital cash and credit cards is that digital cash
can be readily exchanged for physical cash on demand. Since digital cash is
issued by private entities, there is a need for common standards among all digital
cash issuers so that one issuers digital cash can be accepted by another issuer.
This need has not been met yet due to the following reasons:
(a) Each issuer has its own standards; and
(b) Digital cash is not universally accepted unlike the government-issued
physical currency.
As mentioned earlier, banks that issue credit cards make money by charging
merchants a processing fee on each transaction. This fee ranges from one percent
to four percent of the value of the transaction. Often, banks impose a minimum
fee of 20 cents or more per transaction. Many banks charge electronic commerce
sites more than similar brick-and-mortar stores of up to $1 more per credit card
transaction. The cost of an online transaction can be 50 percent higher than the
cost to process the same transaction for a brick-and mortar retailer.
Internet payments for items costing from a few cents to approximately a dollar
are called as micropayments. Micropayments champions see many applications
for such small transactions, such as paying five cents for an article reprint or 35
cents for a complicated literature search.
However, micropayments have not been implemented very well on the web yet.
The payments that are between $1 and $10 do not have a generally accepted
name; some industry observers use the term micropayment to describe any
payment of less than $10. However, in this module, the term small payments will
be used to include all payments of less than $10.
All electronic payment schemes have issues that must be resolved satisfactorily
to allay consumers fears and give them confidence in the technology. Concerns
about electronic payment methods include:
(a) Privacy and security;
(b) Independence;
(c) portability; and
(d) Convenience.
Privacy and security questions are probably the most important issues that have
to be addressed with any payment system to be used by consumers. Consumers
want to know whether transactions are vulnerable and whether the electronic
currency can be copied, reused, or forged.
Digital cash brings with it some unique security problems. Digital cash have the
following two important characteristics; which is commonly found in physical
currency:
(a) Used once

It must be possible to spend digital cash online once, just as with traditional
currency.
(b) Anonymous
Digital cash ought to be anonymous, just as hard currency is. That is,
security procedures should be in place to guarantee that the entire digital
cash transaction occurs only between two parties and that the recipient
knows that the electronic currency being received is not counterfeit or
being used in two different transactions. Ideally, consumers should be able
to use digital cash without revealing their identities as this prevents sellers
from collecting information about individual or group spending habits.
7.2.1 Advantages and Disadvantages of Digital Cash

Billing for goods and services that customers purchase is part of any business.
Traditional billing methods in the brick-and-mortar paradigm are costly and
involve many tedious tasks such as generating invoices, stuffing envelopes,
buying and affixing postage to the envelopes and sending the invoices to the
customers. Meanwhile, the accounting department must keep track of incoming
payments, post accounts in the database, and ensure that the customer data is
current.
Online stores have many of the same payment collection inefficiencies as their
brick-and-mortar cousins. Most online customers use credit cards to pay for their
purchases. Online auction customers also use conventional payment methods,
including cheques and money orders. Digital cash systems, though less popular
than other payment methods, provide advantages and disadvantages that are
unique to digital cash as shown in Table 7.3.
Table 7.3: Advantages of Digital Cash
Advantages Description
Efficiency Digital cash transactions are more efficient; which fosters more
businesses and lowers the prices for consumers
Less costly Transferring digital cash on the Internet costs less than processing
credit card transactions. Conventional money exchange systems are
expensive as it requires banks, bank branches, clerks, automated teller
machines, and an electronic transaction system to manage, transfer
and dispense cash.
Digital cash transfers occur on the Internet and through existing

computer systems. Thus, the additional costs that users of digital cash
must incur are nearly zero. Because the Internet spans the globe, the
distance that an electronic transaction must travel does not affect cost.
When considering moving physical cash and cheques, distance and
cost are proportional. The greater the distance of the currency, the
more it costs to move it.
Authorisation Digital cash does not require that one party obtain an authorisation,
as is required with credit card transactions.
Preferred Most of the worlds populations do not have credit cards. Many
choice by adults cannot obtain credit cards due to minimum income
most requirements or past debt problems. Children and teenagers (eager
purchasers who represent a significant percentage of online buyers)
are ineligible, simply because they are too young. For all of these
people, digital cash provides the solution to paying for online
purchases.
Independent Digital cash is independent; it is unrelated to any network or storage
device. That is, digital cash is really not free-floating currency, if its
existence depends on a particular proprietary storage mechanism
that is specially designed to hold one type of digital cash. Digital
cash able to pass transparently across international borders and be
converted automatically to the recipient countrys currency.
Portability Digital cash i s freely transferable between any two parties. Credit
and debit cards do not possess this property of portability or
transferability between every combination of two parties. In a credit
card transaction, the credit card payment recipient must already have
a merchant account established with a bank; a condition that is not
required with digital cash.
Convenience Digital cash d o es n o t require any special hardware or software;
making it convenient for people to use it.
We have looked at the advantages of digital cash, now let us concentrate on the
disadvantages of digital cash as portrayed in Table 7.4.
Table 7.4: Disadvantages of Digital Cash
Disadvantages Description
Audit trail Digital cash is just like real cash as it cannot be easily traced.
Not widely Digital cash has been successful in some parts of the world, but it has
accepted not yet become a global commercial success. Making digital cash a
popular alternative payment system requires wide acceptance.
Multiple A solution need to be figured out to the problem of multiple digital
standards cash standards. Customers do not want to carry a dozen different
brands of digital cash to be able to purchase goods from a majority of
the merchants that accept digital cash.
Thus, a standard need to be developed for digital cash disbursement.

Individual vendors then need to implement this standard for their
individual digital cash systems. Digital cash from different vendors
must be easily interchangeable so that customers can exchange one
cash type for another when needed.
As digital cash is not traceable, money laundering (refer below) arises.
Money laundering is a technique used by criminals to convert money that

they have obtained illegally into cash that they can spend without having it
identified as the proceeds of an illegal activity. Money laundering can be
accomplished by purchasing goods or services with ill-gotten digital cash.
The goods are then sold for physical cash in the open market.
7.2.2 Digital Cash Systems

How does a digital cash system work? Figure 7.2 will show you the steps
involved in the system.
Figure 7.2: Digital cash system
The customer can store the digital cash in a digital wallet (will be described in the
coming section) on his or her computer, or on a stored-value card (also will be
described later in this topic). In addition, the consumer can authorise the issuer to
make payments to third parties from the digital cash account. Since cash does not
work well for online transactions, digital cash fills an important need in countries
which conduct B2C e-commerce.
SELF-CHECK 7.1
What is a micro payment? When is micro payment likely to be used?
EXERCISE 7.2
1. Define digital cash.

2. Briefly explain the advantages of digital cash.
You can visit the following websites to get a clear view on digital cash:
(e) Companies that provide digital cash services:

x http://www.paypal.com
x http://myecash.com.my/myind.jsp
x http://www.internetcash.com
(f) Micro payment systems:
x http://www.ecoin.net/
x http://www.amdocs.com
7.3 DIGITAL WALLETS

Do you realise that as consumers are becoming more enthusiastic about online
shopping, they are actually encountering a common issue in online purchasing?
They have begun to tire themselves out of repeatedly entering detailed shipping
and payment information each time that they make online purchases. Research
repeatedly has shown that filling out forms ranks high on online customers lists
of gripes about online shipping.
Thus, digital wallet (also called as electronic wallet or e-wallet) is created to solve
the above mentioned problem and to provide a secure storage place for credit
card data and digital cash. Serving a function similar to a physical wallet, digital
wallet holds credit card numbers, digital cash, owner identification, and owner
contact information (this information is provided at an electronic commerce sites
checkout counter). Some digital wallets contain an address book as well.
Let us look at a portable digital wallet as illustrated in Figure 7.3.
Figure 7.3: A portable digital wallet

Source: http://www.luminous-landscape.com/reviews/digital_wallet.shtml
Digital wallets make shopping more efficient. When consumers select items to
purchase, they can then click on their digital wallet to order the items quickly. In
the future, digital wallets could serve well their owners by tracking purchases
and maintaining receipts for those purchases. Maintaining records of a
consumers purchasing habits is something that online giants such as
Amazon.com have mastered, but an enhanced digital wallet could reverse that
process and use a web robot to suggest where the consumer might find a lower
price on an item that he or she purchases regularly.
Let us look at the two categories that digital wallets fall into based on where they
are stored:
(a) Server-side Digital Wallet

This wallet stores a customers information on a remote server belonging to
a particular merchant or wallet publisher. The main weakness of server-
side digital wallets is that a security breach could reveal thousands of
users personal information (including credit card numbers) to
unauthorised parties. Typically, server-side digital wallets employ strong

security measures that minimise or eliminate the possibility of
unauthorised disclosure.
Server-side wallets remain on a server and require no download time or

installation on a users computer. Before a consumer can use a server-side
wallet on a particular merchants site, the merchant must enable that
specific wallet. Each wallet vendor must convince a large number of
merchants to enable its wallet before it will be accepted by the consumers.
Thus, only a few server-side wallet vendors will be able to succeed in the
market.
(b) Client-side Digital Wallet

This wallet stores a consumers information on his or her own computer.
Storing a digital wallet on the users computer shifts the responsibility for
maintaining the security to the user. As no user information is stored on a
central server, there is no chance that an attack on a digital wallet vendor
will yield consumer information such as credit card numbers.
Many of the early digital wallets were client-side wallets that required
users to download the wallet software. This need to download software
onto every computer used to be a main disadvantage of client-side wallets.
Another disadvantage of client-side wallets is that they are not portable.
For example, a client-side wallet is not available when a purchase is

madefrom a computer other that the computer on which the wallet resides.
For a wallet to be useful at many online sites, it should be able to populate
the data fields in any merchants forms at any site that the consumer visits.
This accessibility means that the digital wallet manufacturer and merchants
from many sites must coordinate their efforts so that a wallet can recognise
what consumer information goes into each field of a given merchants
forms.
What does a digital wallet store? Digital wallets store shipping and billing
information, including a consumers first and last names, street address, city,
state, country, and ZIP or postal code. Most digital wallets also can hold many
credit card names and numbers, affording the consumer a choice of credit cards
at the online checkout. Some digital wallets also hold digital cash from various
providers, such as eCash.
Digital wallets can save shoppers time. When shoppers have filled their
shopping carts, they proceed to the electronic checkout counter to confirm their
choices. At the checkout counter, they are confronted with a form (or series of
forms) in which they must enter their name, address, credit card number, and
other personal information. All these information would be easily filled in by
using the digital wallet.
Previously, a number of companies entered the digital wallet business, including

major firms such as MasterCard. However, most of these companies have
abandoned their efforts because current versions of all major browsers now
include a feature that remembers names, addresses and other commonly
requested information and provides an one-click completion of fields on web
forms that request the particular information.
7.3.1 Survivor in the Digital Wallet Arena

Do you know that earlier efforts by companies such as Microsoft have failed to
popularise the idea of digital wallet? Microsoft Passport and the MSN Wallet
have been abandoned as well in February 2005.
However, there are some companies who are brave enough to venture in this
area and finally succeeded in making an impact:
(a) Google Checkout

Google Checkout is designed to make online shopping more convenient and
easy. It communicates a shoppers credit card and personal information
necessary for a transaction to the merchant. The merchant, who received the
transaction, is guaranteed that the user has been authenticated by Google.
However, Google Checkout has yet to match PayPals popularity.
(b) Yahoo! Wallet

Yahoo! Wallet is a digital wallet offered by Yahoo!, the commonly used
web portal site. Yahoo! Wallet functions in the same way as most other
digital wallets by completing order forms automatically by identifying
information and credit card payment information. Yahoo! Wallet lets users
to store information about Visa, MasterCard, Discover and American
Express payment credit and charge cards and Visa and MasterCard debit
cards.
Basically, Yahoo! Wallet is used for the following purposes:

(a) Shopping at more than 10,000 Yahoo! Store merchants (these are
merchants on the Yahoo! Shopping);
(b) Paying for airplane tickets and hotel reservations booked through the
Yahoo! Travel;
(c) Paying for premium services at Yahoo! such as extra mail storage or
web hosting fees on the Yahoo! GeoCities Plus or Website Services;
and
(d) Paying for auction fees on Yahoo! Auctions.
Yahoo! has the advantage of hosting a number of services and shops that it
can be certain to accommodate its own wallet. Thus, it is certain to have a
large number of merchants (including itself) that accept its wallet. Yahoo!
also offers a PayDirect service (similar to PayPal) that works with Yahoo!
Wallet.
ACTIVITY 7.2
Do you think that a digital wallet can save shoppers time? State your
reasons.
EXERCISE 7.3
1. How are client-side digital wallets and server-side digital

wallets different?
2. What are the major disadvantages of each category of digital
wallet?
You can visit the following websites to get a clearer view on digital wallets:
(a) Yahoo! Wallet:

x http://www.wallet.yahoo.com
(b) Google Checkout:
x http://checkout.google.com
7.4 STORED VALUED PAYMENT SYSTEMS

Today, most people carry a number of plastic cards in the forms of credit cards,
debit cards, charge cards, drivers license, health insurance card, employee or
student identification card, and other cards. One solution that could reduce all
those cards is to own an online account which has stored value. An online stored
value payment system permits consumers to make instant, online payments to
merchants and other individuals. Common stored-value cards include prepaid
phone, photocopy, subway, and bus cards.
Let us look at the explanations provided for the following stored value cards in
the coming sections:
(a) PayPal;
(b) Magnetic strip cards; and
(c) Smart cards.
7.4.1 PayPal
How does PayPal operate in terms of the online stored value payment system? It
helps to make and receive payments for individuals and businesses with email
accounts. PayPal, which is available in many countries around the world, builds
on the existing financial infrastructure of the countries in which it operates. A
PayPal account is established by a user by specifying a credit, debit, or checking
account that want to be charged or paid during online transactions.
The procedures involved during an online transaction are:

(a) The users payment will be e-mailed to the merchants PayPal account; and
(b) PayPal transfers the specified amount from the users account to the
merchants bank account.
Although no personal credit information revealed among the users, payments by

PayPal involve high cost and lack of consumer protection.
7.4.2 Magnetic Strip Cards

Let us find out the meaning of magnetic strip card.
A stored-value magnetic strip card (refer to Figure 7.4) is a plastic card

with a magnetic strip that records the currency balance.
Most magnetic strip cards hold value that can be recharged by inserting them
into the appropriate machines, inserting currency into the machine, and
withdrawing the card; the cards strip stores the increased cash value. Magnetic
strip cards are passive; they cannot send or receive information and increment or
decrement the value of cash stored on the card. The processing must be done on
a device into which the card is inserted.
Figure 7.4: Magnetic strip card

Source: http://www.clfcard.com/
7.4.3 Smart Cards

Do you know the meaning of the term smart card? If you do not, refer below to
find out its meaning.
A smart card is a stored-value plastic card with an embedded microchip

that can store information. A smart card can hold private user data such as
financial facts, encryption keys, account information, credit card numbers,
health insurance information, medical records and so on.
There are many differences between a magnetic strip card and a smart card:
(a) A smart card can store larger amounts of information and includes a
processor chip on the card.
(b) Although both magnetic strip cards and smart cards can store digital cash,
a smart card is better suited for Internet payment transactions because it
has some processing capability.
(c) Credit, debit, and charge cards currently store limited information on a
magnetic strip. A smart card can store about 100 times the amount of
information that a magnetic strip plastic card can store.
Smart cards (refer to Figure 7.5) are safer than conventional credit cards
because the information stored on a smart card is encrypted. For example,
conventional credit cards show your account number on the face of the card and
your signature on the back. The card number and a forged signature are all that a
thief needs to purchase items and change them against your card.
However, with a smart card, credit theft is much more difficult because the key
to unlock the encrypted information is a PIN. There is no visible number on the
card that a thief can identify, nor is there a physical signature on the card that a
thief can see and use as an example for signature forgery.
Smart cards have been in use for more than a decade. Popular in Europe and
parts of Asia, smart cards, however, so far have not been successful in the United
States. In Europe and Japan, smart cards are being used for telephone calls at
public phones and for television programmes delivered by cable to peoples
homes. The cards are very popular in Hong Kong too; where many retail
counters and restaurant cash registers sport smart card readers. Hong Kongs
transportation network, including subways, buses, railways, trams and ferries
joined together and created a smart card called the Octopus that lets the
commuters to use one card for all of their public transportation needs.
Visa recently introduced its smart card, the smart Visa Card. In late 2002, retailer
Target introduced its Target Visa smart card, one of the first promotions of the
new smart Visa Card, for use in Targets website. The Target Visa includes digital
wallet and automated login information for the Target.com website, but it also
functions as a normal Visa Card at other merchants. American Express has also
released its smart card called as Blue.
Figure 7.5: Smart cards

Source: http://www.hasintech.com
Let us take a look at the detailed explanation given for the smart card called as
Mondex.
Mondex is a smart card that holds and dispenses digital cash (refer to
Figure 7.6). As it gains acceptance on the Internet and in the general
marketplace, the Mondex smart card allows other applications to reside on
its microchip. Introduced in 1990, the card is now part of the MasterCard
International.
Mondexs Hong Kong pilot programme took place in 1996 and was the
main force behind the general acceptance of smart cards in Hong Kong.
The Mondex card gave people in Hong Kong, who traditionally used cash,
a new and appealing way to make payments on the Internet and in the
physical world. However, in the United States and Canada, Mondex smart
cards are less successful because consumers there already have payment
methods that work for them, such as credit card, debit cards and paper
cheques.
Mondex smart cards can accept digital cash directly from a users bank
account. Cardholders can spend their digital cash with any merchant who
has a Mondex card reader. Two cardholders can even transfer cash
between their cards over a telephone line. A single Mondex card can work
in both worlds: the online world of the Internet and the offline world of
ordinary merchant stores. The Mondex card is less susceptible than credit
cards to threats of theft as the card provides anonymous digital cash.
Mondex digital cash also supports micropayments as small as three cents.
Figure 7.6: The Mondex smart card
There are some disadvantages of using Mondex as shown in Table 7.5.
Table 7.5: Disadvantages of Mondex
Disadvantages Descriptions
Not able to carry huge The card carries real cash in electronic form, and the risk of
amount of money theft of the card may deter users from loading it with a
huge amount of money.
Not able to defer the Mondex does not allow the deferred payment you can
payment obtain with a credit card. You can defer paying your charge
or credit card bill for almost a month without incurring any
interest charges.
Not provided with Transactions completed using a Mondex card do not
receipt provide receipts.
A Mondex transaction (from buyer to seller) has several steps that ensure the
transferred cash safely reaches the correct destination:
(a) The consumer inserts the Mondex card into a reader. The merchant and the
consumer are both validated to ensure that both of them are authorised to
make transactions.
(b) The merchants terminal requests payment while simultaneously transmits
the merchants digital signature.
(c) The consumers card checks the merchants digital signature. If the
signature is valid, then the transaction amount is deducted from the
consumers card.
(d) The merchants terminal checks the consumers digital signature for
authenticity. If the consumers signature is validated, the merchants
terminal acknowledges the consumer s signature by again sending the

merchants signature back to the consumer s card.
(e) Once the digital cash is deducted from the consumers card, the same amount is
transferred into the merchants digital cash account.
Waiting until after the transaction amount is deducted from the cardholders card
ensures that digital cash is neither created nor lost. Serialising the deduction and
crediting events before signifying a complete transaction eliminates the creation or loss of
cash if the system malfunctions in the middle of the process.
SELF-CHECK 7.2
What are the differences between magnetic strip cards, smart cards
and Mondex? Which among these is the most secure?
EXERCISE 7.4
1. Compare and contrast smart cards and traditional credit cards.

2. Briefly discuss of what Mondex is. Then, discuss on the
advantages and disadvantages of the Mondex smart card.
Visit the following websites to get more information on smart cards:
http://www.smartcard.co.uk/
http://www.mondex.com/
http://www.smartcardalliance.org/
7.5 OTHER E-COMMERCE PAYMENT SYSTEMS

Beside those described above, there are other digital payment systems widely
used in the e-commerce arena.
Let us take a look at these following systems in the coming sections:

(a) Digital Accumulating Balance Payment Systems;
(b) Digital Checking Payment Systems; and

(c) Electronic Billing Presentment and Payment.
7.5.1 Digital Accumulating Balance Payment Systems

Digital accumulating balance payment systems allow users to make micro-
payments and purchases on the web, accumulating a debit balance for which
they are billed at the end of the month. Like a utility or phone bill, consumers are
expected to pay the entire balance at the end of the month using a checking or
credit card account. Digital accumulating balance systems are ideal for
purchasing intellectual property on the web such as music tracks, chapters of
books, articles from a newspaper, ringtones or games.
For example, Valistas PaymentsPlus, a digital accumulating balance payment

system for small transaction used by AOL, NTT DoCoMo, and Wanadoo.
Clickshare receives the greatest acceptance with online newspapers and
publishing industry such as Chicago Sun-Times, Asian Banker and Daily
Hampshire Gazette.
7.5.2 Digital Checking Payment Systems

We have looked at Digital Accumulating Balance payment systems; now, let us
shift our attention on Digital Checking payment systems. These systems seek to
extend the functionality of existing checking accounts for use as online shopping
payment tools. You can think of them as extensions to the existing checking and
banking infrastructure.
Some of the simpler systems are used to electronically pay individuals and to
settle accounts at online auction sites. More sophisticated systems are used by the
Treasury Department to transfer billions of dollars electronically. Two commonly
used digital checking payment systems in the US are PayByCheck and eBillme.
Digital checking payment systems have many advantages:

(a) They do not require consumers to reveal account information to other
individuals when settling an auction;
(b) They do not require consumers to continually send sensitive financial
information over the web;
(c) They are less expensive than credit cards for merchants; and
(d) They are much faster than paper-based traditional checking.
Let us learn more on one of the most widely used digital checking payments
systems, eCheck.
In 1996, a consortium of banks, government agencies, and technology

companies began to develop a plan for electronic checking that would use
public key encryption and would not require a third party to move the
funds. The goal was to replace paper cheques altogether and to extend
electronic fund transfers that already exist among large institutions to all
businesses and even consumers.
This is how eCheck comes into existence. ECheck requires users to obtain a
hardware-based electronic chequebook from traditional banks. The
hardware could be a PCMCIA card, a standard PC card, or a specialised
smart card reader external to the consumers computer.
The electronic chequebook contains the consumers digital signature in the

form of a private key. The electronic chequebook also contains the issuing
banks public key. Using software provided with the chequebook, the
consumer fills out an electronic cheques form and sends it to a merchant
over the Internet. The communication is encrypted and contains the
consumers digital signature, public key and the issuing banks digital
signature.
Upon receipt, the merchant authenticates the digital signatures of both the
sender and the issuing bank using their respective public keys and
deposits the cheque at its bank. A higher level certificate authority, such as
the Federal Reserve Bank, certifies the issuing banks public key. EChecks
can also contain invoice, remittance and other information.
ECheck is interesting because the electronic chequebook is a physical

device. A physical device was chosen because it was thought to be more
secure than creating accounts over the Internet. The device is portable and
difficult to be reversed. Although intended to fit into the existing
infrastructure of the checking system developed by the Federal Reserve
and commercial banks, eCheck itself requires significant investment in
new infrastructure.
ACTIVITY 7.3
Visit NetBuilder at www.netbuilder.com.my. Identify the online

payment services offered by the company.
SELF-CHECK 7.3
What are the advantages of digital checking payment systems

compared to digital accumulating balance payment systems? Discuss.
EXERCISE 7.5
1. Define digital accumulating balance systems.

2. What are the advantages of digital checking payment
systems over traditional checking accounts?
Visit the following websites to get more ideas on how digital accumulating
balance payment systems and digital checking payment systems work:
http://www.paybycheck.com/demo.html
http://www.ebillme.com/about/
7.5.3 Electronic Billing Presentment and Payment

For a number of years, banks and companies have made it possible for customers
to pay their bills online. However, the vast majority of all bills are still paid the
traditional way. On a regular basis, a billing company calculates, prints and mails
the customer a paper bill. In turn, the customer sends back a paper cheque that is
processed by the billing company in order to receive funds. It can take a week or
more to complete the whole process.
As consumers increasingly go online, it is reasonable to believe that customers

want to use the Internet as a means of efficiently paying their bills. In the US, the
number of bill payments made online exceeded the number of physical cheques
written for the first time in 2007.
What does EBPP stand for? Refer below to find the answer.
Electronic billing presentment and payment (EBPP) systems are new forms
of online payment systems for monthly bills. EBPP services allow
consumers to view bills electronically and pay them through electronic
funds transfer from bank or credit card accounts.
More and more companies are choosing to issue statements and bills
electronically, rather than mailing out paper versions. But even those businesses
that do mail paper bills are increasingly offering online bill payment as an option
to customers, allowing them to immediately transfer funds from a bank account
to pay a bill somewhere else.
Although more than 90% of all EBPP takes place in B2C relationships, such
payment systems are rapidly spreading to B2B commerce. The challenges
involved in requesting and receiving electronic payment from customers are
essentially the same for both consumers and businesses, except that business
transactions generally involve larger amounts.
One major reason for the surge in EBPP usage is that companies are starting to
realise how much money they can save through online billing. Not only there is
saving in postage and processing, but also payments can be received more
quickly, thereby improving the cash flow. Ferris Research estimates that
companies can save anywhere from 10 cents to $1.50 per invoice by sending it
using EBPP.
Growth in Internet usage, however, is the key driver, pushing many companies
to explore online billing and payments. The more the online users are, the larger
the market for EBPP is.
7.5.4 Types of EBPP Systems

Although the concept of online billing and payment is simple, there is a number
of competing business models in the market space:
(a) Biller-direct System

Biller-direct system is originally created by large utilities that send millions
of bills each month. Their purpose is to make it easier for their customers to
pay their utility, and increasingly, other bills routinely online. Telephone,
utility, and credit card companies often offer this service, as well as a
number of individual stores.
Biller-direct systems often use a service bureau such as Billserv.com to

provide the infrastructure necessary to implement the system. The
examples for this model are TMOnline, TNB e-Services.
(b) Consolidator Model

The second major type of EBPP is the consolidator model. A consolidator is
the third party, such as bank and portal, who aggregates all bills for
consumers and ideally permits one-stop bill payment. Financial institutions
attract more customers to make online bill payment (98%) than portals
(2%). Infrastructure providers such as Harbour Payments and Online
Resources provide the software to create and support this model.
The examples for this model are as follows:

(i) Portals
Yahoo! Bill Pay, Bills.com, Rilek e-Services, MyEG.com.my
(ii) Banks
Maybank2u.com.my, CIMB Clicks.
Companies can use EBPP to present bills to individual customers

electronically, or contract with a service to handle all the billing and
payment collection. Customers can then choose to pay the bill directly, use
a bill consolidator to collect bills for them, or hire a payment service to
collect and pay bills as directed by the customer.
BlueGill Technologies is a direct billing company that allows customers to

visit their website to review and pay a bill. Fiserv (formerly CheckFree) is a
consolidator that will collect and present bills from multiple sources, so that
the customer only has to log into one site to pay several bills at once.
The bill payment process involves the customers, the bank and potentially a
third party processor. Customers can e-mail an e-cheque drawn on their
bank account, and the funds will be transferred via e-mail to the vendors
bank account (this is similar to the e-checking systems). In the competition
for market dominance in the consumer EBPP market, some institutions are
clearly advantaged. Utility companies, web portals and traditional banks
already have parts of the infrastructure required to build powerful EBPP
systems. The strong web portals players are AOLs Billing and Yahoo! Bill
Pay.
SELF-CHECK 7.4
Discuss why EBPP systems are becoming increasingly popular?
EXERCISE 7.6
1. What are the two types of B2B payments systems?

2. Discuss the two types of EBPP systems.
Visit the following websites to get more ideas on how EBPP payment
system works:
http://www.tmonline.com.my
http://bills.yahoo.com/reg.html
Online stores can accept a variety of forms of payments. Credit cards, debit
cards, and charge cards (payment cards) are the most popular forms of
payment on the Internet. They are ubiquitous, convenient and easy to use.
Digital cash, one form of online payment, is very useful for making
micropayments because the cost of processing payment cards for small
transactions is greater than the profit on such transactions.
Digital cash shares several benefits with real cash as it is portable, anonymous,
and usable for international transactions. Digital cash can also be stored online
or offline.
Digital wallets provide convenience to online shoppers because they hold
payment card information, digital cash, and personal consumer identification.
Digital wallet eliminates the need for consumers to re-enter payment card and
shipping information at a sites electronic checkout counter. One problem of
digital wallets is the lack of an internationally accepted standard.
Stored-value cards, including smart cards and magnetic strip cards, are
physical devices that hold information, including cash value, for the
cardholder.
While magnetic strip cards can contain only cash value, smart cards contain
data on an embedded microchip and are intended to replace the collection of
plastic cards people now carry, including identity card (IC), drivers license,
and insurance card. Unlike digital cash or payment cards, smart cards require
merchants to install new hardware that can read the smart cards.
Digital accumulating balance systems allow users to make purchase on the
Web, accumulating a debit balance for which they are billed at the end of the
month; consumers are then expected to pay the entire balance using a
checking or credit card account.
Digital checking payment systems on the other hand, are extensions to the
existing checking and banking infrastructure.
Electronic billing presentment and payment (EBPP) systems are a new form of
online payment systems for monthly bills. EBPP services allow consumers to
view bills electronically and pay them through electronic funds transfer from
bank or credit card accounts.
Biller-direct system Magnetic strip cards

Consolidator model Merchant account
Digital accumulating balance systems Payment cards
Digital cash PayPal
Digital checking systems Smart cards
Digital wallets

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Topic X E-commerce

7.1 PAYMENT CARDS

Figure 7.1: Categories of payment cards

(a) Credit Cards

(b) Debit Cards

(c) Charge Cards

7.1.1 Advantages and Disadvantages of Payment

Table 7.1: Advantages of Using Payment Cards

We have looked at the advantages; now let us move on to the disadvantages of

Table 7.2: Disadvantages of Using Payment Cards

7.1.2 Payment Acceptance and Processing

To process payment card transactions, a merchant must first set up a merchant

The Automated Clearing House (ACH) system is a secure, private network

Even though the ACH is privately configured, the Internet is making it

Let us look at the explanation provided for payment card processing.

(a) Open Loop System

(b) Closed Loop System

the automated clearinghouse system. These types of arrangements are

(c) Merchant Account

(i) Business Information

(ii) Type of Business

For example, let us look at a business that sells a guaranteed weight-

Merchant banks must estimate what percentage of sales is likely to be

(d) Processing Payment Cards Online

(i) Merchants have Contract with a Third Party

InternetSecure notifies the merchant of all approved orders and

(ii) Software Packaged with the Electronic Commerce Software

FirstData Payment Software also includes the customer database for

How does requiring a credit card for payments discriminate against

1. How does debit card differ from credit card?

(a) Credit card:

7.2 DIGITAL CASH

Digital cash (also called as electronic cash or e-cash) is an alternative

(a) Used once

7.2.1 Advantages and Disadvantages of Digital Cash

Table 7.3: Advantages of Digital Cash

Digital cash transfers occur on the Internet and through existing

Table 7.4: Disadvantages of Digital Cash

Thus, a standard need to be developed for digital cash disbursement.

As digital cash is not traceable, money laundering (refer below) arises.

Money laundering is a technique used by criminals to convert money that

7.2.2 Digital Cash Systems

Figure 7.2: Digital cash system

What is a micro payment? When is micro payment likely to be used?

1. Define digital cash.

(e) Companies that provide digital cash services:

7.3 DIGITAL WALLETS

Let us look at a portable digital wallet as illustrated in Figure 7.3.

Figure 7.3: A portable digital wallet

(a) Server-side Digital Wallet

unauthorised parties. Typically, server-side digital wallets employ strong

Server-side wallets remain on a server and require no download time or

(b) Client-side Digital Wallet

For example, a client-side wallet is not available when a purchase is

Previously, a number of companies entered the digital wallet business, including

7.3.1 Survivor in the Digital Wallet Arena

(a) Google Checkout

(b) Yahoo! Wallet

Basically, Yahoo! Wallet is used for the following purposes:

1. How are client-side digital wallets and server-side digital

(a) Yahoo! Wallet:

7.4 STORED VALUED PAYMENT SYSTEMS

The procedures involved during an online transaction are:

Although no personal credit information revealed among the users, payments by