Turban- Electronic Commerce 2010

Instructors Manual
Chapter 11
E-Commerce Payment Systems
Learning Objectives
Upon completion of this chapter, you ill be able to!
1. Understand the shifts that are occurring with regard to online payments.
2. Discuss the players and processes inoled in using credit cards online.
!. Discuss the different categories and potential uses of smart cards.
". Discuss arious online alternaties to credit card payments and identify under what
circumstances they are best used.
#. Describe the processes and parties inoled in e-chec$ing.
%. Describe payment methods in &2& '() including payments for global trade.
Content
Opening Case! Pay-per-"ie Pages!
#he $e%t i#unes
11&1 #he Payment 'evolution
11&( Using Payment Car)s Online
11&* Smart Car)s
11&+ Store)-"alue Car)s
11&, E--icropayments
11&. E-Chec/ing
11&0 1(1 Electronic Payments
-anagerial 2ssues
Closing Case! #he Chec/ 2s in the $etor/
Copyright 2010 Pearson Education, Inc., Publishing as Prentice Hall
(hapter 11
3nsers to Pause41rea/ Section 'evie 5uestions
Section 11&1 'evie 5uestions
1. Describe the trends that are occurring in cash and non-cash payments in the
United States.
Today) we are in the midst of a payment reolution) with cards and electronic payments
ta$ing the place of cash and chec$s. In 2**!) the combined use of credit and debit cards
for in-store payments for the first time e+ceeded the combined use of cash and chec$s
,-ederal .esere /ystem 2**"0.
2. What types of e-payments should 2C merchants support!
-or online &2( merchants) the implications of these trends are straightforward. In the
United /tates and 1estern 'urope it is hard to run an online business without supporting
credit card payments) despite the costs. It also is becoming increasingly important to
support payments by debit card. Under current growth patterns) the olume of debit card
payments will soon surpass credit card payments both online and off-line.
". What is the #chic$en-and-egg% problem in e-payments!
2 crucial element in the success of any e-payment method is the 3chic$en-and-egg4
problem5 6ow do you get sellers to adopt a method when there are few buyers using it7
&. Describe the factors that are critical for an e-payment method to achie'e critical
mass.
Independence
Interoperability and 8ortability
/ecurity
2nonymity
Diisibility
'ase of Use
Transaction -ees
.egulations
Section 11&( 'evie 5uestions
1. Describe the three types of payment cards.
The three common types of payment cards include credit cards) charge cards) and debit
cards.
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(hapter 11
2. What options does a merchant ha'e in setting up an e-payment system!
2 merchant can choose to5
9wn the payment software.
Use a point of sale system ,89/0 operated by an ac:uirer.
Use a 89/ operated by a payment serice proider.
". (ist the ma)or participants in processing credit cards online.
-or a gien type of payment card and processing system) the processes and participants
are essentially the same for off-line ,card present0 and online ,card not present0
purchases. '+hibit 12.1 compares) for instance) the steps inoled in ma$ing a credit
card purchase both online and off-line.
&. What costs does an online merchant incur if it submits a fraudulent credit card
transaction!
In the online world) merchants are held liable for fraudulent transactions. In addition to
the lost merchandise and shipping charges) merchants who accept fraudulent transactions
can incur additional fees and penalties imposed by the credit card associations.
*. Describe the ma)or trends in fraudulent orders perpetrated against online
merchants.

9nline fraud continues online) but the number of fraudulent orders ahs decreased.
This is in part due to new safeguards adopted by merchants. These safeguards hae
increased the costs of merchants.
+. What steps are often ta$en by online merchants to combat fraudulent orders!
Merchants can ta$e seeral steps to attempt to aoid fraud. These include5
2ddress erification
Manual reiew
-raud screens and automated decision models
(ard erification number ,(;<0
(ard association payer authentication serices
<egatie lists
Copyright 2010 Pearson Education, Inc., Publishing as Prentice Hall
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(hapter 11
Section 11&* 'evie 5uestions
1. What is a smart card! Contact card! Contactless card!
2 smart card loo$s li$e a plastic payment card) but it is distinguished by the presence of
an embedded microchip ,see '+hibit 12.20. 2 contact card is a smart card that re:uires
contact with the card reader in order to function. 2 contactless card needs to be close to a
reader to wor$) but does not re:uire contact.
2. What is a smart card operating system!
The primary purpose of the smart card reader is to act as a mediator between the card and
the host system that stores application data and processes transactions.
". Describe the use of smart cards in metropolitan transportation systems.
In ma=or U./. cities) commuters often hae to drie to a par$ing lot) board a train) and
then change to one or more subways or buses to arrie at wor$.
Section 11&+ 'evie 5uestions
1. What is a closed-loop stored-'alue card! What is an open-loop card!
2 stored-alue card allows users to ma$e purchases from the alue associated with the
card. 2 closed-loop card can only be spent for its initial alue) while an open-loop card
can hae additional alue added in at any time.
2. What are the ma)or mar$ets for stored-'alue cards!
The stored-alue card mar$et is growing rapidly. Mar$et analysts estimate that there are
oer 2)*** stored alue programs with oer > million branded cards in use today ,/u and
.hine 2**"0. &y 2**%) stored-alue transactions are e+pected to e+ceed ?>* billion. &y
2**@) the number of users is e+pected to be around #* million) more than doubling the
current figure. /tored alue cards wor$ well as gifts) and are also used for smaller.
consistent purchases.
Section 11&, 'evie 5uestions
1. What is a micropayment!
2 small online payment) typically under ?1*.
2. (ist some of the situations ,here e-micropayments can be used.
Copyright 2010 Pearson Education, Inc., Publishing as Prentice Hall
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(hapter 11
'-micropayments) which are small online payments) can usually be used for purchases
under ?1* ,U./.0. These are often used for routine) repetitie purchases ,li$e bus fare0 or
for purchasing small amounts of a product or serice ,articles0.
". -utside of using credit or debit cards. ,hat are some of the alternati'e ,ays that
an online merchant can handle micropayments.
Merchants can use other serices to process the transaction. 9ne e+ample would be to
use 8ay8al.
Section 11&. 'evie 5uestions
1. What is an e-chec$!
2n e-chec$ is the electronic ersion or representation of a paper chec$. '-chec$s contain
the same information as a paper chec$) can be used whereer paper chec$s are used) and
are based on the same legal framewor$.
2. riefly describe ho, third-party e-chec$ payment systems ,or$.
Most businesses rely on third-party software to handle e-chec$ payments. (hec$-ree)
Telechec$) 2meri<et) 8aymentech) and 2uthoriAe.<et are some of the ma=or endors of
software and systems that enable an online merchant to accept and process electronic
chec$s directly from a 1eb site.
". What is the /C0!
The 2(6 <etwor$ is a nationwide batch-oriented electronic funds transfer system that
proides for the interban$ clearing of electronic payments for participating financial
institutions.
&. (ist the benefits of e-chec$ing.
It reduces the merchants administratie costs by proiding faster and less paper-
intensie collection of funds.
It improes the efficiency of the deposit process for merchants and financial
institutions.
It speeds the chec$out process for consumers.
It proides consumers with more information about their purchases on their
account statements.
It reduces the float period and the number of chec$s that bounce because of
insufficient funds ,</-s0.
Section 11&0 'evie 5uestions
1. Describe the financial supply chain.
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(hapter 11
&2& payments are part of a much larger financial supply chain that includes procurement)
contract administration) fulfillment) financing) insurance) credit ratings) shipment
alidation) order matching) payment authoriAation) remittance matching) and general
ledger accounting.
2. Describe the current state of 2 e-payments.
Twenty-eight percent indicated that their organiAations plan to conert the ma=ority of
their &2& payments from chec$ to electronic payments oer the ne+t three years.
". What is electronic in'oice presentment and payment 1E2334!
The process by which companies present inoices and ma$e payments to one another
through the Internet is $nown as enterprise inoice presentment and payment ,'I880.
&. Describe the three models of E233.
&uyer) /eller) and (onsolidator
*. Describe the basic E233 options.
2 ariety of online options are aailable for ma$ing payments in an 'I88 system. 'ach
differs in terms of cost) speed) auditability) accessibility) and control. /ome options
include5
2(6 <etwor$
8urchasing (ards
-edwire or 1ire Transfer
Betters of (redit for Clobal 8ayments
+. What is a purchasing card!
8urchasing cards ,p-cards0 are special-purpose payment cards issued to a companys
employees.
3nsers to EC 3pplication Case 5uestions
EC 3pplication Case 11&1! #aian-oney Car)
1. What is the 5ai,an6oney Card!
2 payment card that wor$s for both purchases and transportation.
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(hapter 11
2. Why did 7C8 decide to use a smart money card for their transportation system
rather than a speciali9ed transportation card!
They were able to bypass many of the difficulties of issuing the cards directly.
". Why can:t the 5ai,an6oney Card be used ,ith 7C8:s metro system!
The transaction time needs to be increased to ." seconds ,from .> seconds0
EC 3pplication 11&(! #o POP or 1OC! 6igital Chec/s in the Offline 7orl)
1. What does 3-3 stand for and ho, does it ,or$!
898 stands for 8urchase 9rder 8rocessing and it eliminates the handling of paper chec$s
by conerting a chec$ into an e-chec$ at the point of sale.
2. What does -C stand for and ho, does it ,or$!
&9( stands for &ac$-9ffice 9rder (onersion and it eliminates the handling of paper
chec$s by conerting a chec$ into an e-chec$ after the point of sale in a batch process.
!. What are the ad'antages and disad'antages of 3-C!
2dantages include5
.eduction of handling costs
-aster payments
&etter funds aailability
-aster notification of insufficient funds
Disadantages include5
.e:uired readers
/pecial training
(ustomer confusion
Increased purchase process time
3nsers to 6iscussion 5uestions
1. 3ay6o recently introduced a system enabling buyers to charge their purchases to
their cell phone accounts. Do you thin$ 3ay6o:s system ,ill succeed! What factors
,ill play a ma)or role in its success or failure!
/tudent opinions will ary) but success may be based on conenience and ease of use.
Copyright 2010 Pearson Education, Inc., Publishing as Prentice Hall
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(hapter 11
2. / te;tboo$ publisher is interested in selling indi'idual boo$ chapters on the Web.
What types of e-payment methods ,ould you recommend to the publisher! What sorts
of problems ,ill the publisher encounter ,ith the recommended methods!
/tudent answers will ary.
". <ecently. a merchant ,ho accepts online credit card payments has e;perienced a
,a'e of fraudulent orders. What steps should the merchant ta$e to combat the
fraud!
/tudent answers will ary.
&. / retail clothing manufacturer is considering e-payments for both its suppliers
and its buyers. What sort of e-payment method should it use to pay for office
supplies! 0o, should it pay suppliers of ra, materials! 0o, should its
customers=both domestic and international clothing retailers=pay!
/tudent answers will ary) will focus on the perceied appropriateness of different e-
payment options to specific sta$eholders.
*. / metropolitan area ,ants to pro'ide riders of its public transportation system
,ith the ability to pay transit fares. as ,ell as ma$e retail purchases. using a
single contactless smart card. What sorts of problems ,ill they encounter in
setting up the system. and ,hat types of problems ,ill the riders encounter in
using the cards!
The issues that the transit group will hae to deploy standard e:uipment oer the area and
ensure that different transportation options all wor$ together. Users may face problems
with loading or using the cards ,such as transmission problems0.
2nternet E%ercises
8$ote! U'Ls may change over time9 please chec/ the 2nternet E%ercises on the
#urban 7eb site for possible up)ates! &prenhall&com4turban&:
1. Use 'arious online sources to research the dispute in'ol'ing the /uthors: 8uild.
'arious boo$ publishers 1e.g.. 3enguin4. and 8oogle o'er 8oogle:s oo$ Search
(ibrary 3ro)ect. Describe some of the details of the settlement that ,as reached
among these parties.
/tudent reports will ary.
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(hapter 11
2. / number of years ago. eay offered a payment system called illpoint. 2t ,as a
head-to-head competitor ,ith 3ay3al. Use online sources to research ,hy
3ay3al succeeded and illpoint failed. Write a report based on your findings.
/tudent reports will ary.
". Select a ma)or retail 2C merchant in the United States and one outside of >orth
/merica. Detail the similarities and differences in the e-payment systems they
offer. /ccording to CyberSource:s #2nsider:s 8uide to e3ayment 6anagement%
1cybersource.com?cgi-bin?pages?prep.cgi!
page@?promo?2nsiders8uide200A?inde;.html4. ,hat other payment systems could
the sites offer!
/tudent reports will ary.
&. 8o to cybersource.com. 2dentify the ser'ices it pro'ides for 2 e-payments.
Describe the features of CyberSource:s ma)or products that pro'ide these
merchant ser'ices.
/tudent reports will ary.
#. Do,nload 5ransit and Contactless Binancial 3ayments 1-ctober 200+4 from
smartcardalliance.org??pages?publications-transit-financial. ased on the report.
,hat type of payment system is >e, Cor$ City 5ransit 1>CC54 piloting! Who are
>CC5:s partners in the pilot! What factors helped determine the type of system to
be piloted! 0o, does the pilot ,or$!
/tudent reports will ary.
%. 7ohl:s utili9es Solutran:s S32> for its -C system. So does Walgreens. ased on
information pro'ided at Solutran:s Web site 1solutran.com4 and information found
in online articles about the system. ,hat sorts of capabilities and benefits does
the system pro'ide! What is uniDue about the system!
/tudent reports will ary.
>. 8o to nacha.org. What is >/C0/! What is its role! What is the /C0! Who are
the $ey participants in an /C0 e-payment! Describe the #pilot% pro)ects
currently under,ay at /C0.
/tudent reports will ary.
@. 8o to 6asterCard:s <3SS site 1mastercardintl.com?rpps4 What type of system is
<3SS. E3 or E233! 0o, does it ,or$! What are the benefits of a system li$e
<3SS!
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(hapter 11
/tudent reports will ary.
#eam 3ssignments an) 'ole Playing
1. Select some 2C sites that cater to teens and some that cater to older consumers.
0a'e team members 'isit these sites. What types of e-payment methods do they
pro'ide! /re there any differences among the methods used on different types of
sites! What other types of e-payment ,ould you recommend for the 'arious sites
and ,hy!
/tudent reports will ary.
2. Write a report comparing smart card applications in t,o or more European
and?or /sian countries. 2n the report. discuss ,hether those applications ,ould
succeed in >orth /merica.
/tudent reports will ary.
". 0a'e one team represent 6asterCard 3ay3ass and another represent /merican
E;press3ay. 5he tas$ of each team is to con'ince a company that its product is
superior.
/tudent reports will ary.
&. 0a'e each team member inter'ie, three to fi'e people ,ho ha'e made a purchase
or sold an item at auction o'er the 2nternet. Bind out ho, they paid. What
security and pri'acy concerns did they ha'e regarding the payment! 2s there an
ideal payment method!
/tudent reports will ary.
&. 8o to the >/C0/ Web site for the Council on Electronic illing and 3ayment
1ebilling.org? E233?eipp.htm4. 5he site pro'ides information on 'arious forms of
E233. Compare and contrast t,o of the forms detailed on the site.
/tudent reports will ary.
&. /ddress the follo,ing topics in a class discussionE
a. /pple:s i5unes clearly dominates the online music business. 2n the long run.
,hich company has the best chance of dominating the e-boo$ business. 8oogle or
/ma9on.com! E;plain.
b. 2f you ,ere running an online retail store ,ould you permit purchases ,ith e-
chec$s!
/tudent responses and opinions will ary.
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8age 1*
(hapter 11
Closing Case! #;E C;EC< 2S 2$ #;E $E#7O'<
1. Enter the Fign site 1)pmorgan.com?;ign4. Describe the fi'e best practices
embodied in the Fign net,or$. 2n addition to >ational 8rid 1i.e.. 7eySpan4. Fign also
pro'ides case study information on a number of other companies. <ead t,o of these
other case studies and summari9e the basic benefits these companies ha'e reali9ed from
their use of the net,or$.
/tudent reports on the cases will ary.
2. -ne of the benefits of the Fign net,or$ for suppliers is the ability to perform
electronic payment reconciliation 1E3<4. Enter the CyberSource Web site and do,nload
its document on E3<
1cybersource.com?resources?collateral?<esourceGCenter?productGbriefs?CybsG<econcilia
tion.pdf4. ased on this document. ,hat is E3<! Compare and contrast manual and
automated reconciliation. What are the ma)or benefits of electronic reconciliation!
/tudent impressions and opinions will ary.
". /riba 1ariba.com4 and 0arbor 3ayments 1harborpayments.com4 both offer E233
solutions that compete ,ith Fign. Using information from their Web sites. in ,hat ,ays
are these offerings similar to or different from the Fign solution! Do you thin$ one of
these other offerings ,ould ha'e pro'ided greater benefits to >ational 8rid!
/tudent opinions will ary.
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8age 11