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Electronic Commerce

Session 7: Processing Payments On-line and the Fulfilment Phase

Session Objectives The objectives of this session are:

To analyse the properties of cash, cheques and credit cards

To describe the requirements for Internet-based payment System Models

To discuss the following electronic payment systems: Payment cards Paypal And E-Wallets

To discuss the order fulfilment phase

Payment Systems After creating a Web

site that allows a customer to choose an item for purchase, a payment must be made before the item is shipped

http://www.amig.com/cservice/images/payment.jpg

Payment Systems Cont’d When we walk into a “real world” store we

basically have three ways to pay for an item. These are: Cash (most common form of payment) Cheques Payment card (i.e. debit cards, credit cards, smart

cards or automated teller machine (ATM) cards) These account for more than 85% of consumer transactions

worldwide

Payment Systems Cont’d Cash has some important properties:

It is convenient since it is easy to use, to carry and easy to handle in small quantities

It is widely accepted It provides anonymity It does not have associated processing fees It has no audit trail (maintains privacy)

Payment Systems Cont’d There are several problems associated with

the use of cash, however which include: It is easy to lose It is difficult to trace (e.g. when used in

criminal activities) It introduces a security risk when being

transported It is time-consuming to count, organise and

manage

Payment Systems Cont’d A Cheque, on the other hand is “… a

written order by an account holder to his banker to pay a specified sum of money to the bearer or named recipient.”3

The process of clearing a cheque takes three days in the UK 3 and is completed as follows:

Payment Systems Cont’d Day 1: Any cheque collected during the first day will

be processed by the collecting bank that evening This information is passed electronically through the Inter

Bank Data Exchange (a secure network) to the paying bank clearing centre.

Day 2: Cheques are delivered to an Exchange centre Day 3: Cheques are reviewed by the paying bank and

a decision is made whether to pay or return them

Clearly one of the problems associated with cheques is the clearing time

Payment Systems Cont’d A payment system which is increasing in

popularity in the US is electronic transfer There are two tests that should be

considered when transferring money. These are: The ACID Test The ICES Test

Payment Systems Cont’dThe Acid Test The ACID test has four properties:

Atomicity: The complete transaction must occur (e.g. a payment of $50 means that the intended recipient(s) will receive the $50)

Consistency: All parties in the transaction must agree to the exchange

Isolation: The given transaction must be independent of all other transactions

Durability: The exchange must be reversible

Payment Systems Cont’dThe ICES Test The ICES test also has four properties:

Interoperability: Money from a given system must be able to move back and forth between other systems (e.g. moving money from system X to cash)

Conservation: Does the money hold its value over time (temporal consistency); how easy is it to store and access (temporal durability)

Economy: Transaction processing should be cheap Scalability: How many users can be handled at the

same time?

Payment Systems Cont’dAtomicity Consistency Isolation Durability

Cash Yes Yes Yes Yes

Cheque Yes Yes No Yes

Credit Card No Yes No Yes

Inter-operability

Conservation Economy Scalability

Cash Yes No Yes Yes

Cheque No Yes No Yes

Credit Card No N/A No Yes

Payment Systems Cont’d Cash satisfies all the ACID and ICES properties

except conservation since it is not easy to store and access large amounts (temporal durability)

Cheques are: not isolated since during the clearing of a cheque

someone can withdraw money from the account, or even stop the cheque.

not interoperable (since it is difficult for them to move between different systems)

Not economical since processing them is expensive

Payment Systems Cont’d Credit cards are:

Not isolated since another transaction might be processed before a given transaction although the actual date/time of the transaction was afterwards

Not interoperable (since it is difficult for them to move between different systems)

Not atomic since although the seller is guaranteed payment the credit card issuer may lose out if the card is stolen or used fraudulently

Not economic since credit card processing is expensive especially for transactions of small value

Payment Systems Cont’dElectronic Payments An e-commerce payment environment requires a

more complex design which includes: Payment security Transaction privacy System integrity Customer authentication The purchaser’s promise to pay

Primarily, these are security issues which will be covered in Session 10, “Securing a Web site”

Payment Systems Cont’dElectronic Payments Cont’d Electronic payments are financial transactions that

do not require paper Electronic payments are far cheaper than mailing

paper checks Cost of billing a person by mail ranges from US$1

to US$1.50 Billing a person electronically cost about US$0.50 Replacing paper bills also saves on trees

Payment Systems Cont’dElectronic Payments Cont’d Four properties (in addition to the ACID

and ICES Tests) should also be considered: Acceptability: Must be widely accepted, by

customers and merchants alike Ease of Integration: Effective Web interface Customer base: It should be financially viable Ease of use and access

Payment Systems Cont’dPayment Cards

Payment cards include: Credit Cards Debit Cards Charge Cards

www.paylessbills.com/ credit_cards.htm

Payment Systems Cont’dPayment Cards Cont’d The main categories of payment cards are:

Credit cards (e.g. Visa) Debit cards Charge Cards

Payment Systems Cont’dPayment Cards Cont’d If a merchant wants to sell merchandise on

the Web they must accept credit cards because: It is the most widely accepted form of

payment It is the most popular

Payment Systems Cont’dPayment Cards Cont’dTo be able to accept payments via credit cards: The seller must open a merchant account

A search can be made online for a list of credit and merchant services (some US banks include Bank of America and National Data Corporation)

With this account the seller can accept and process credit cards During processing only the card numbers and

transactions are known (normally authorisation is provided through a customer signing a payment slip).

Payment Systems Cont’dPayment Cards Cont’dTo be able to accept payments via credit cards: A secure and encrypted line is required to accept

payments The most popular solution used is Secure Socket Layer

(SSL) which is built into Netscape Navigator and Microsoft’s Internet Explore browser

A shopping cart is also required to allow users to collect their purchase The shopping cart connects to a payment processing

system, calculates costs and taxes and generates a bill

Payment Systems Cont’dPayment Cards Cont’d The processing of credit cards is

complicated, however the following diagram highlights the important steps

Payment Systems Cont’dPayment Cards Cont’d

Payment Systems Cont’dPayment Cards Cont’d1. The customer places the order on the merchant’s Web

site (shipping and payment information is included)2. The customer verifies the order3. The encrypted order is sent to the payment server by

the merchant4. The payment server receives the payment

information, takes it behind a firewall, reformats it and forwards to to the merchant bank over a secure, dedicated line

Payment Systems Cont’dPayment Cards Cont’d5. The merchant bank forwards an

authorisation request to the issuing bank for approval or denial and the decision is sent back to the payment server

6. The approval or denial is communicated back to the merchant and delivered to the customer

Payment Systems Cont’dPayment Cards Cont’dSome of the characteristics of credit cards include: Interest is charged on outstanding balances not paid

off within a given time The merchant’s account is credited immediately Cardholders are only liable for $50 (by law) if their

card is stolen or lost Cardholders can dispute charges or purchases for the

30-day period after the purchase The spending limit is based on credit history

Payment Systems Cont’dPayment Cards Cont’d Several charges are associated with credit card

processing Firstly, a set-up fee that might cost a few hundred

dollars (US$) A fee of 2-4% of the value of each transaction

processed Statement fees And a minimum monthly charge of US$20-$50

Payment Systems Cont’dPayment Cards Cont’d Some of the issues associated with credit cards

are: They leave a complete audit trail They are insecure

A signature does not get verified which makes it difficult to assure the identity of a person

Merchant accounts are difficulty to get from banks The banks review financial records and business history

Credit card are not economical for small payments

Payment Systems Cont’dPayment Cards Cont’d The difficult of securing a merchant

account may be overcome through the use of third parties who are willing to process credit cards e.g. iBill (http://ibill.com)

iBill charges 15% of the company’s total revenue for a two week period (this charge will not exceed US$10,000)

Payment Systems Cont’dPayment Cards Cont’d Debit cards

The sale amount is removed from user’s account and transferred to the sellers account

Limited by funds in account plus overdraft (if present) Charge cards (e.g. American Express)

Has no spending limit The amount due on the card is due at the end of the

billing period They do not accumulate interest payments

Payment Systems Cont’dPayment Cards Cont’d Some vendors provide single-use-cards

which are valid for a single transaction A unique card number is issued This helps with card details security

Payment Systems Cont’dPayment Cards Cont’d Some advantages of Payment Cards

In the US card holder’s liability is limited to US$50 when used fraudulently

Accepted worldwide Currency conversion handled by card issuer

Ease of use, no special hardware required

Payment Systems Cont’dPayment Cards Cont’d Some disadvantages of Payment Cards

Service companies charge merchants per-transaction and monthly processing fees

Price of goods for the consumer might be slightly higher as a result A limit is placed on the minimum amount allowed

to spend (e.g. 5 pounds in the UK)

Other Payment Methods For other payment methods read the following

presentations: PayPal

http://scitec.uwichill.edu.bb/cmp/online/comp3210/presentations/DanaBabb.ppt

Metered Payments http://scitec.uwichill.edu.bb/cmp/online/comp3210/presentations/LeeHarvey.ppt

E-Wallets http://scitec.uwichill.edu.bb/cmp/online/comp3210/presentations/ShawnHolder.ppt

The Fulfilment Phase2

After the customer has paid for the product(s) then it is the merchant’s responsibility to deliver it

The customer generally expects that the product(s) will be delivered in a quick and timely fashion

The Fulfilment Phase Cont’d The fulfilment process includes:

Sourcing items from a warehouse Packing these items Shipping Answering questions about the order

This might be done online through order management software where the customer is able to track their order

The Fulfilment Phase Cont’d The fulfilment process includes (cont’d):

Giving the customer a bill or verifying an online payment

Determining whether the customer is satisfied with the delivery

The Fulfilment Phase Cont’d From the customer’s point of view

fulfilment is the most critical part of the shopping experience

If the customer is dissatisfied with the fulfilment process, it can really damage the merchant’s reputation E.g. Toys R Us during Christmas 1999 failed

to deliver items; a costly mistake

The Fulfilment Phase Cont’d Recognising the importance of fulfilment,

Amazom.com in 1999 spent US$300 million on 3 million square feet of warehouse space

The Fulfilment Phase Cont’d Tax is also a part of the fulfilment phase Different countries and even different

States in the USA have different tax rules E.g. in New Jersey there is no tax on clothing,

while in California there is In some cases (e.g. in the US), state, city

and county tax must be considered

The Fulfilment Phase Cont’d To alleviate the tax calculation burden it is

recommended that tax software be used E.g. include Taxware and Cybersource

The Fulfilment Phase Cont’d One further issue that must be considered is

inventory fulfilment Some of the questions that must be asked are:

Are the required products available? Are the products offered for sale (on the Web site)

linked to the inventory? Should customers be notified of out-of-stock items?

The Fulfilment Phase Cont’d In conclusion, credit cards are the most widely

used method of payment on the Internet There are some alternatives for niche markets, such

as Paypal whose focus is primarily C2C e-commerce and small businesses

It should also be clear that the order fulfilment phase is an extremely important part of the shopping experience

If a merchant fails to deliver, or fails to deliver on time then it can badly damage their reputation

References[1] Schneider, Gary, P., “Electronic Commerce: The second wave”, Thomson

Course Technology, Fifth Annual Edition, 2004

[2] Awad, Elias, M., “Electronic Commerce: From Vision to Fulfillment”, Second Edition, Prentice Hall, 2004

[3] APACS, “Cheque and Credit Clearing Company”, 2000. Online document available at www.apacs.org.uk/about_apacs/htm_files/chequecred.htm