LECTURE 7 REF: CHAPTER 11 ELECTRONIC COMMERCE PAYMENT SYSTEMS PREPARED BY : L. Nouf Almujally...

Copyright © 2010 Pearson Education, Inc. 1

LECTURE 7REF: CHAPTER 11

ELECTRONIC COMMERCE PAYMENT SYSTEMS

PREPARED BY : L. Nouf Almujally

Learning Objectives

1. Understand the shifts that are occurring with regard to online payments.

2. Discuss the players and processes involved in using credit cards online.

3. Discuss the different categories and potential uses of smart cards.

4. Discuss stored-value cards and identify under what circumstances they are best used.

5. Describe the situations where e-micropayments are used and the alternative ways for handling these situations.

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11.1 The Payment Revolution

• Today, we are in the midst of a worldwide payment revolution, with cards and electronic payments taking the place of cash and checks


Critical factors that come into play in determining whether a particular method of e-payment achieves critical mass:

– Independence( need sw and HW)– Interoperability and Portability (linked with other system)– Security – Anonymity– Divisibility– Ease of Use– Transaction Fees– International Support– Regulations


11.1 The Payment Revolution

11.2 Using Payment Cards Online

• payment cardElectronic card that contains information that can be used

for payment purposes. Two forms of payment cards:

1. Credit cards • Provides the holder with credit to make purchases up to a limit

fixed by card issuer. E.g., Visa, MasterCard

2. Debit cards

• The money for a purchased item comes directly out of the holder’s checking account. E.g., Visa and MasterCard

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• PROCESSING CARDS ONLINE

Two phases:1. authorization

Determines whether a buyer’s card is active and whether the customer has sufficient funds

2. settlement

Transferring money from the buyer’s to the merchant’s account



There are three basic configurations for processing online payments used by merchants:• Own the payment software• Use a point of sale system (POS) operated by an

acquirer• Use a POS operated by a payment service provider

• payment service provider (PSP)

A third-party service connecting a merchant’s EC system to the appropriate acquiring bank or financial institution. PSPs must be registered with the various card associations they support


11-7Copyright © 2010 Pearson Education, Inc.


• The key participants in processing card payments online include the following:– Acquiring bank: offer special account called “internet Merchant Account” that

enable card authorization and payment processing

– Credit card association : financial institution providing card services to banks (e.g., Visa and master card )

– Customer: the individual owning the card

– Issuing bank: financial institution that provide the customer with card

– Merchant: the company that sell product and services

– Payment processing service : the service provided connectivity among merchants, customers, and financial networks that enable authorization and payment.

– Processor : the data center that processes card transactions to merchants


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1.Cardholder presents an account as payment for a purchase.2.The transaction information is submitted to the merchant’s acquiring bank for processing.3.The acquiring bank sends transaction information through Interchange, a credit card network of financial entities.4.Interchange routes the transaction to the cardholder’s issuing bank.5.The issuing bank determines if there are available funds in the cardholder’s account to approve the transaction.6.Interchange relays authorized or declined results to the merchant’s acquiring bank.7.The merchant’s acquiring bank relays this information back to the merchant.8.The merchant completes their transaction with the cardholder according to the information provided.


• FRAUDULENT CARD TRANSACTIONS

- The key tools used in combating fraud:• Address Verification System (AVS)

Detects fraud by comparing the address entered on a Web page with the address information on file with the cardholder’s issuing bank

• Manual review

The staff manually review suspicious orders

• card verification number (CVN)

Detects fraud by comparing the verification number printed on the signature strip on the back of the card with the information on file with the cardholder’s issuing bank

• Negative lists file the include customer’s information(IP Add, name, shipping add. Contact #). Customer transaction is matched against this file and flagged if has problem


11.3 Smart Cards

smart card• An electronic card containing an embedded microchip that enables

predefined operations or the addition, deletion, or manipulation of information on the card


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11.3 Smart Cards

• TYPES OF SMART CARDS– contact card

A smart card containing a small gold plate on the face that when inserted in a smart card reader makes contact and passes data to and from the embedded microchip

– contactless (proximity) card

A smart card with an embedded antenna, by means of which data and applications are passed to and from a card reader unit or other device without contact between the card and the card reader



• smart card reader

Activates and reads the contents of the chip on a smart card, usually passing the information on to a host system

• smart card operating system

Special system that handles file management, security, input/output (I/O), and command execution, and provides an application programming interface (API) for a smart card


11.3 Smart Cards

• APPLICATIONS OF SMART CARDS• Retail Purchases• Transit Fares


11.3 Smart Cards

11.4 Stored-Value Cards

• stored-value card

A card that has monetary value loaded onto it and that is usually rechargeable

• Stored-value cards come in two varieties: • Closed loop : are single-purpose cards issued by a specific

merchant or merchant group to allow users to make purchases from the value associated with the card. A closed-loop card can only be spent for its initial value

• Open loop : are multipurpose cards that can be used to make debit transactions at a variety of retailers and can have additional value added in at any time. Copyright © 2010 Pearson Education, Inc.

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11.5 E-Micropayments

• E-micropaymentsSmall online payments, typically under $10

• Five basic micropayment models that do not depend specially or directly

on credit or debit cards:1. Aggregation: payment are batched and processed after a certain time

has expired ( ex. 20 business days) or reached certain amount ( ex. 20$). E.g., Apple’s iTunes)

2. Direct payment: micropayments are added to monthly bill . E.g., phone bill

3. Subscriptions: single payment covers access to content for defined period of time. E.g., gaming company, newspapers

4. À la carte: process purchases as they occur and relay on the volume of purchases. E.g., McDonald’s


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Electronic Cash Systems

• PayPal• is a global e-commerce business allowing payments

and money transfers to be made through the Internet

LECTURE 7 REF: CHAPTER 11 ELECTRONIC COMMERCE PAYMENT SYSTEMS PREPARED BY : L. Nouf Almujally...

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