Electronic Payment PDF

ELECTRONIC PAYMENT  In this chapter you will learn how money helps to make business, which payment methods are of interest for E - Commerce, which role is played by banks and payment service providers, how cyber money is an appropriate means for running an E-...

ELECTRONIC PAYMENT  In this chapter you will learn how money helps to make business, which payment methods are of interest for E - Commerce, which role is played by banks and payment service providers, how cyber money is an appropriate means for running an E-Commerce business.  Business and Money Money makes the world go round. It is the “lubricant” of powerful economic areas – we also need money to make business in the Web. We know economic areas without money, but they usually are restricted to small geographic areas – and if you look closely on them, you will find some kind of money, too. Why does money arise almost inevitably? The reason is that money is a means to buffer (the value of ) achievements over time.  Money plays a basic role in the economic cycle with the subsequently listed steps: Deliver a product or a service. Get money for it. Offer money to get a product or service. Get the product or service. Spend the money for the delivered product or service.  Notes and coins are a universal medium of exchange. The specific physical entities (notes, coins) are independent from the actual owner. They are long living and divisible into very small units. However, the owner has the problem of fraud and the problem of loss. The physical value of the medium (notes, coins) is much lower today than its business value. Thus it needs authorization by a central bank. The business value is commonly accepted and in some way guaranteed by the authorizing institution. However, the economic areas where specific notes and coins can be used are limited because of different currencies. The handling of notes and coins is very simple. Transaction costs (on farmer’s market) are extremely low. Business transactions with notes and coins allow complete anonymity of the participants. However, there are some restrictions due to laws. Real economic areas use money in cash and book money. Business with money in cash runs as follows: Customer and supplier come together physically (at the same location). The supplier has a product or service offering; the customer has notes and coins. Both partners exchange product or service and money synchronously. Prerequisites are: The customer assumes that the supplier is the legal owner of the goods. The supplier assumes that the customer is the legal owner of the money. The customer checks goods; the supplier checks notes and coins. Customer and supplier do not have to know each other. Problems are: Notes and coins must be accepted by both partners. Notes and coins must be authentic (no bad money). Notes and coins can be lost or stolen or disappear.  Today most business transactions are conducted without the use of notes and coins. We usually do business with book money. Business with book money runs as follows:  Customer and supplier need a banking account; this makes some kind of bank necessary (the bookkeeper). The bookkeeper guarantees that the account balance is given and he transfers the money if requested by the account owner. He guarantees that the account owner can exchange the amount of his account balance into notes and coins every time.  Book money is linked to the banking account and the account owner. Thus transactions cannot longer be conducted completely anonymously. The account owner has to pay the bookkeeper for his services (transaction costs). There is a higher protection against fraud and loss – but of course no perfect security.  Finally the following question must be answered: How can we transfer “real” money into the economic area “Web”?  1. THE PAYMENT CHALLENGE First we differentiate following categories of money: Money in cash, Book money, E-money. Primary payment methods are: Cash payment, Bank transfer, Debit note, Wallet payment.  1. ASSESSMENT OF PAYMENT METHODS The assessment of payment methods from a supplier’s point of view is conducted due to a magic triangle given by: Acceptance by customer, Protection of supplier against shortfall in payment, Costs. Technical parameters for the selection of appropriate payment methods are: Periodicity of payment (one time/periodic, e.g. subscriptions), Internationality of business, Anonymity of customers, Level of payment guarantee (protection against shortfalls in payment, protection against delays in payment), Distribution and acceptance of the method. Also payment amounts and cost structure determine the selection of payment methods: Invoiced amount, Payment dependent costs: customer, supplier (fix per transaction or variable per transaction, e.g. sales volume dependent),  Payment independent costs (for customer, for supplier): о one time costs: procurement costs, setup and adjustment costs (dealer, third parties, public fees), о periodic costs: basic charges for services and software, rental fees for hardware. Security requirements for selecting a payment method are: Transaction control & monitoring, Secure authentication, Liability scope. Finally the integration into the sales process has to fulfil requirements from the workflow as well as requirements from the technical implementation. PAYMENT PROCEDURES Let us now consider payment procedures in detail. PAYMENT PER INVOICE The course of action is: Order, Delivery, Sending an invoice (integrated into delivery, separated from delivery), Payment (after receipt of delivery, after receipt of invoice, per bank transfer), Confirmation of incoming payments. Potential problems are: Delivery without invoice, Invoice without delivery, Deviations between delivery and invoice, No payment by the customer, Delayed payment by the customer. This payment method should be assessed as follows: This payment procedure is not an integral part of E-Commerce. The risk is totally carried by the supplier. PAYMENT PER CASH IN ADVANCE The course of action is as follows: Order, Invoicing and sending an invoice, Payment, Delivery after receipt of payment. Let us consider in more detail the payment method GiroPay, which since 2000 is provided by GiroPay GmbH. The firm was founded by a group of German banks. The course of action is:  Initiation of a payment via GiroPay; statement of a Bank identifier code (BIC) by the customer himself or by the supplier, Re-direction to the Web-banking portal of the customer’s bank by the supplier (on his Web portal), Log-in with account number and pass word by the customer at his bank,  Order confirmation of a pre-filled money transfer form by the customer at his bank, Transfer of a confirmation of payment and re-direction to the Web shop by the customer’s bank, Credit entry of the payment amount on the bank account of the supplier by the customer’s bank. The first surrounding condition is that the customer account must have allowance for online banking and customer’s bank must attend the GiroPay – method. The second is that the supplier must have a bank account, must have a contract with a GiroPay supplier bank, and must be linked technically to the GiroPay service provider. Potential problems are: Duration from payment to delivery, Deviations between payment amount and delivery volume, Confirmation of payment receipt. This payment method should be assessed as follows: The payment is not an integral part of E-Commerce. The risk is completely assigned to the customer.  1. PAYMENT PER CASH ON DELIVERY The course of action is: The customer orders with C.O.D. He has to specify a delivery address. The delivery is done with an invoice. The supplier forwards the parcel or letter together with the invoice to his delivery service provider. The delivery service provider forwards the parcel or letter to the customer.  The cashing is done on delivery. The customer forwards money to the delivery service provider. Delivery is confirmed by the customer and receipt of cash is noticed. The delivery service provider transfers the money to merchant’s bank. Confirmation of payment by the supplier. Surrounding conditions are: The customer must provide delivery and payment data. The delivery service provider has to take over the cashing function. There are several potential problems: Delivery is not possible because the customer is not present at the delivery address, Deviation between delivery and invoice, Availability of cash at the customer, Problem of change money. This payment method should be assessed as follows: This payment method is not an integral part of E-Commerce. The method is risk neutral.  1. PAYMENT PER DEBIT NOTE The course of action is: Order: together with the allowance for bank collection to take money from the customer’s bank account, Clearance: submission of the debit note by the supplier at his bank/collection of the requested amount from the customer’s account by the supplier’s bank, Delivery to the customer, Forwarding the invoice (if not handled via the Web). Surrounding conditions are: 1. Customer has a giro contract with his bank. 2.Supplier has a cashing contract with his bank. 3.Customer’s bank and supplier’s bank have a debit-note-handling contract. Potential problems are: 1. Money collection “bursts” (Customer’s account balance is bad), 2.No delivery, 3.Deviation between delivery and invoice. 1. This payment method should be assessed as follows: 2.Simple application, 3.Trustee function of the bank, 4.Risk more on the customer’s side, 5.Security issues (Account data in the Web). The course of action is: 1. Order, 2.Invoicing, 3.Payment acceptance by credit card, 4.Delivery, 5.Forwarding of invoice (if not done via the Web). Surrounding conditions are: 1. The customer must have a credit card contract with a bank. 2.The merchant must have a credit card acceptance contract with a bank and must be technically linked to a Payment Service Provider. Potential problems are: 1. No delivery, 2.Deviation between delivery and invoice, 3.Payment dysfunctions. This payment method should be assessed as follows: 1. Payment is guaranteed by the credit card company.  1. E-PAYMENT E-Payment methods have been developed especially for E-Commerce and supplement the traditional payment methods. Payment functions are adopted by specific E-Payment providers to unburden the supplier. E-Payment uses for the most part well known traditional payment methods and combines or bundles them to new services. 1. Course of action: 2.Customer initiates a payment at the supplier, 3.Supplier transfers payment request to an E -Payment provider, 4.E-Payment provider leads customer to his payment site, 5.Customer confirms payment, 6.E-Payment provider transfers payment confirmation to supplier, 7.E-Payment provider charges bank account of customer, 8.E-Payment provider creates credit note for bank account of supplier. Selected E-payment methods are presented subsequently. 1. E-Mail based methods like PayPal 2.PayPal members are able to send money to any person in the covered countries, if they have been registered with personal and account data and if receiver has an E-Mail-address. If the payment receiver does not have a PayPal account he will be informed via E-Mail, that he has received an amount of money. To be able to use the money and transfer it to his banking account he must register himself as a PayPal member. PayPal can be used also via smartphone or other Web enabled devices Transferred data are protected with SSL encryption. Finance data of the sender (e.g. credit card number or banking account number) are not communicated to the receiver of the money. This shall avoid misuse of the data by the receiver of money. Smart Card based methods The course of action is: 1. Go to the bank and fill your wallet/purse, 2.Pay with the content of your wallet/purse (is used typically at POS (Point of Sales), 3.e.g. ticket machine, car park pay desk). 1. Bank only needed to fill the card, 2.The bank is not involved in the business transaction, 3.Physical medium (see also notes and coins), 4.For Web transactions connect card reader to computer, 5.Use independently from owner is possible, 1. In fact the money card is a wearable account which is with the customer offline, 2.Variation: Throwaway money card – smart card is loaded one-time, the stored amount can only be paid at once; after this transaction the card becomes valueless. 1. Problems: 1. For every transaction you need specific equipment to read the money card. 2.Is the amount shown identical to the amount, which is stored on the card? 3.Does the supplier only take the money, which he is allowed to take? 4.Are third parties able to steal money from the card? Examples are paysafecard and T-Pay MicroMoney. 1. Mobile phone based methods like mpass 2.mpass is a payment method, which integrates online shopping in the Web with mobile phone technology. In combination with the personal mpass- PIN and a SMS to authorize a payment this method is considered to be very secure. You need a German mobile phone number and a German bank account. There may be similar variant in other countries. This depends on the market position of the mobile phone company. After an initial (and free) registration the customer can use the method as he wants and needs it. The course of action is: 1. Select mpass as your payment method in the shop, 2.Enter mobile phone number and mpass-PIN, 3.Receive a SMS with a request to confirm purchase, 4.Answer “YES” to SMS; payment is released, 5.Invoiced amount is collected from your banking account. Cashing and billing methods like ClickandBuy ClickandBuy provides a customer account where banking account and credit card data of customer are stored on a ClickandBuy server. In an online shop the customer has to enter only his ClickandBuy user name (E - Mail address) and his password. He does not show his banking account or credit card data; these data are not transferred via the Web. Some well-known online shops, which accept payments by ClickandBuy are: Apple iTunes Store, T-Online Musicload, Steam, bwin, Test.de, FAZ.NET, iStockphoto. RECEIVABLES MANAGEMENT Delay of payment can be caused by: Chargeback of credit card payment, Chargeback of a debit note, Delayed payment of invoice. Cashing methods are: Dunning letters, Dunning by phone, Visits, Identification of debtors. If your own cashing activities have not been successful (customer did not pay or did not pay the correct amount of money), then you can forward this case to a lawyer. He will conduct the following activities:  Announcing legal activities, Reference to judgements, Copy of statement of case. If the activities of the lawyer are not successful, then he will forward the case to the court. Court procedure will be:  1. CYBER MONEY 2.PRELIMINARY REMARKS Cyber money (or digital currency) is a category of money represented in electronic form for the purpose of financial transactions over the Internet. It is a form of currency or medium of exchange that is electronically created and stored (i.e., distinct from physical media, such as banknotes and coins). A virtual currency has been defined in 2012 by the European Central Bank as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”. The US Department of Treasury in 2013 defined it more tersely as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency”. The key attribute, which a virtual currency does not have according to these definitions, is the status as a legal tender.  1. VIRTUAL MONEY Strong definition: Virtual money consists of value units, which are stored on electronic media and can be generally used to conduct payments. Neither the supplier nor the customer has to be the issuer of these value units. Comprehensive definition: Virtual money are all means of payment and clearing methods which are based on technical innovations and potentially can lead to a substitution of notes and coins and bank reserves as well as to the creation of new types of currencies. Implementation of virtual money: If you draw money in a bank you get a mix of notes and coins (the famous household mixture). As an analogy the bank could send you money documents which you could store on your computer or a smartcard. These money documents would be interchangeable like real cash. Requirements: The money documents must be authentic (signature). Is there a counter- entry on the banking account? The money documents must be protected against copying or duplicating them. Handling: The money documents can be transmitted via E-Mail (encrypted, electronic envelope). They can be processed at a virtual counter or virtual cash register, where the customer forwards a money document (upload) and gets change money (download). Protection against theft can be ensured via a virtual safe on the disc (encrypted disc area) or money storage on a separate medium. Problems are: There must a currency unit be defined. Who is authorized to print money documents? Global currency: Who guarantees for the value (takes over the central bank function)? Private currency: Value must be guaranteed by the issuer. Private currency: Currency exchange rate with public money has to be fixed. No Web transaction is really anonymous. Examples are: debit cards, stored-value cards, E-Cash, and electronic checks.