CHAPTER 3

Consumer Oriented E-Commerce Applications.

The convergence of money, commerce, computing and networks is laying the
foundation for a global consumer market place. Some fundamental business issues
must be addressed before consumer- oriented e-commerce can become widespread,
including:
1. Establishment of standard business processes for buying and selling products
and services in electronic markets.
2. Development of widespread and easy-to-use implementations of mercantile protocols
for order-taking, online payment, and service delivery similar to those found in retail/
credit card based transactions.
3. Development of transport and privacy methods that will allow parties that have no
reason to trust one another to carry on secure commercial exchanges.

In other words, to make consumer-oriented e-commerce more effective, we need a better

understanding of the components of the business process from the initial search and
discovery of the product/services via on-line catalogs to the management of the
order-to-delivery cycle, including the all – important payment/settlement component.

Consumer Oriented Applications:

The wide range of applications visualize from the consumer market place can be broadly
classified into.

 Consumer Life style needs : Complementary multimedia services.

 Entertainment : Movies on demand, video cataloging, interactive ads, multi user
games, on- line discussions.
 Financial services and information: Home banking, financial services, financial
news.
 Essential services: Home shopping, electronic catalogs, telemedicine, remote
diagnostics
 Education and training : Interactive education, multi user games, video
conferencing, on-line databases.

E-commerce Payment System

Generic Payment systems
 Five main types of payment systems: cash, checking transfer, credit cards, stored
value, and accumulating balance.
 Cash: legal tender defined by a national authority to represent value. It is the most
common in terms number of transactions
 It is portable, no authentication, instant purchasing power
 No float: time between purchase and payment

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 Checking Transfer: funds transferred directly via a signed draft or check from a
consumer’s checking account to a merchant or other individual
 It is the second most common in terms of number of transaction, but most common
in terms of total amount
 Money orders, cashier checks, and travelers checks are ensured checks, as they
address limitations of personal checks, and involve trusted third parties
 Have some float

 Credit Card: represent an account that extends credit to consumers, permits

consumers to purchase items while deferring / postponing payment, and allows consumers
to make payments to multiple vendors at one time
 It is not as common as cash and checks: repudiate purchases and more risk to
merchants and banks
 Involve credit card associations, issuing banks and processing centers or
clearinghouses
 Reduce the risk of theft, and increase convenience
 It has a considerable float, but know to increase consumer spending for merchants
 Stored value: accounts created by depositing funds into an account and from which
funds are paid out or withdrawn as needed
 Debit cards, gift certificates, smart cards etc
 Other variations = P2P payment systems - (Paypal.com)
 Do not provide any float
 Accumulating Balance: accounts that accumulate expenditures and to which
consumers make periodic payments - bills

Current E-commerce Payment Systems

 Emergence of e-commerce created new financial needs that cannot be effective by the
traditional payment system
 Offering new payment systems replacing or enhancing the existing ones
 A study in 2000 shows, 95% of online transactions in US use credit card, compared
to only 50% outside US
 Cash and checks in Europe (Cash on Delivery – COD)
 Bank transfers, COD, and accumulated balance in Japan

Online Credit Card Transaction

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 Differ from traditional credit card system in that, online merchants never see the
actual card being used, - no card impression is taken and no signature is available
 Five parties are involved: consumer, merchant, clearinghouse, merchant bank, and
consumer’s card issuing bank

 Merchant account: a bank account that allows companies to process credit card
payments and receive funds from those transactions. Merchants need one
 There are also credit card e-commerce enablers: Internet payment service providers,
which provide both a merchant account and the software tools needed to process credit
card purchases online
 Online credit card payment is challenged by a number of new form of electronic
payment systems which are expected to grow fast

Limitations of Online Credit Card

 Security: neither the merchant nor the consumer can be fully authenticated, SSL
does not provide any authentication
 Merchant Risk: Consumers can repudiate charges
 Cost: Roughly 3.5% of purchase + transaction & setup fees
 Social Equity – not democratic
 Young adults do not have credit cards
 Almost 100 million adult Americans cannot afford cards or are considered poor risks
SET: Protocol
 Secure Electronic Transaction Protocol: An open standard for the e-commerce
industry developed and offered by MasterCard and Visa as a way to facilitate and
encourage improved security for credit card transactions

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 Uses a digital certificate which is an attachment to a message to verify a sender’s
identity
 Credit card companies issue digital certificate to their cardholders just as they issue
plastic cards, which can be stored in a digital wallet for use during transaction.
 Merchants are issued similar certificate by the bank providing merchant account
status.
 Improves payment security by ensuring integrity, authentication and non repudiation
 The transaction is similar to the ordinary online credit card transaction except that it
involves more identity verification
How SET Transaction Work

 SET has not yet been used widely as it is costly for merchants, and consumers don
not understand digital wallet or digital certificates, and do not want to download these
systems onto their computers
B2C Digital Payment Systems
 Different types of online payment systems have been created as an option to enable
online transactions, which promise to better meet the needs of both consumers and
merchants
 Digital cash, Online stored value systems, Digital accumulating balance payment
systems, Digital credit accounts and Digital checking
 Many of these digital payment systems require a concept referred to as Digital
wallets

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Digital Wallets
 A regular wallet typically contains your Ids, cash, phone cards, credit/debit cards,
receipts, photos...
 Digital wallet tries to emulate the wallet in your pocket but has important
functionalities
 Authenticates the consumer through the use of digital certificates or other encryption
methods,
 Stores and transfers value, and
 Secures the payment process from the consumer to the merchant
 The Ideal case of digital wallet is: a consumer goes online, and use its digital wallet to
get authenticated and pay for any purchase using any of the digital payment systems,
including regular credit card, digital cash, digital credit card, or digital check
 Also keeps record of transaction for consumers which is available for review instantly
 Same digital wallet is also used in e-commerce
 Convenient: you do not need to fill out forms to purchase online. The digital wallet
software will do it for you.
 Functionalities: Authentication, processing of payments, privacy/password
management, Micro-payments, coupon delivery/discount, Spending allowance, Loyalty
programs, Bill presentment, receipt management and integration with other software: ---
Types of Digital Wallets

Client-based digital wallets

 Are software applications that consumers install on their computer, and that offer
consumer convenience by automatically filling out forms at online stores
 Merchants will need to install software to receive the information from the client-
based wallet.
 The merchant server queries the client browser for consumer information.
 The business model of client-based wallet vendors is to sell millions of wallets

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  Revenue model: from sale of software and transaction fees. The vendors also try to
promote merchant products and sell personal transaction info to merchants and rent
their systems to financial institutions

Server-based digital wallets

 Are software-based authentication and payment services and products sold to
financial institutions that market the systems to merchants either directly or as a part of
their financial service package
 Vendors may provide both the technology and the wallet service
 Merchants use the service to provide easy, secure shopping using the different
payment systems the customer chooses
 More successful than client based
 Lower acquisition and transaction cost for merchants, No need to install software at
the consumer side, easily be updated

Digital Cash (e-cash)

 Systems that generate a private form of currency that can be spent at e-commerce
sites
 Digital forms of value storage or value exchange that have limited convertibility into
other forms of value and require intermediaries to convert
 Not a single regulatory body created an electronic form of cash
 Most of the digital cash systems fail except for some p2p form of them
 The ideal of digital cash is to provide consumers with the ability to conveniently and
safely pay other consumers or institutions for smaller purchases.

Digicash: How First Generation Digital Cash Worked

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Online stored valued systems
 Smart Card Stored Value Systems: that rely on prepayments, debit cards, or
checking accounts to create value in an account that can be used for e-commerce shopping
 Permit consumers to make instant, online payments to merchants and other
individuals based on value stored in an online account
 Some of them require the consumer to install digital wallet
 Others require a sign up and transfer money from credit card account to stored value
account
 Rely on the value stored in consumer’s bank, checking, or credit card account.

How Ecount.com Works: A Stored Value System

Digital Accumulating Balance Payment Systems

 Systems that accumulate small charges and bill the consumer periodically
 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 telephone bill
 Bills settled by other means of payment
 Ideal for purchasing intellectual property on the web such as music tracks, chapters
of books, research and newspaper articles etc
Digital Credit Card Payment Systems

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 Seek to extend the functionality of existing credit cards for use as online shopping
payment tools
 Tries to address several limitations of online credit cared payment for merchants
including lack of authentication, repudiation, security and credit card fraud.
 It also tries to address consumer fears about using credit cards
 Also lower transaction cost by enabling automatic form completion.
How a Digital Credit Card Payment System Works

Digital Checking Payment Systems

 Seek to extend the functionality of existing checking accounts for use as online
shopping payment tools
 Extension to the existing checking and banking infrastructure

 Advantage:
 Do not require the consumers to reveal account information to other individuals
 Do not require consumers to continually send sensitive financial information
 Less expensive than credit card for merchants
 Much faster than paper-based checking systems
How Digital Checking Works: E-check

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B2B Payment Systems
 Much more complex than B2C payment systems
 Because of the complexity involved in business purchasing -
 A number of documents involved such as purchase orders, invoices, bill of
lading, letter of credit...
 Must link to Enterprise Resource Planning (ERP) systems that integrate Inventory,
production, shipping, and other corporate data in to Electronic Data Interchange (EDI)

Key features of B2B Payment Systems

Feature Description
Credit Verification and guarantee Provides an assessment of creditworthiness and payment guarantee
Escrow Service Helps assure that both parties will perform their obligations
Non-repudiation Ensures that purchases are not reversible; allows unknown parties to
trade with one another more confidently
Funds collection for seller Handles funds transfer, transmittal, and storage
Financing Provides "float" or variable payment delay to buyers in return for a fee
Integration with other business Integrates purchase orders, invoices, shipping documents, and
documents payments
fraud detection Helps seller trade more securely
Accounting Provides accounts summary and invoice details
Dispute handling Provides a method for judging disputes
Integration to back-end corporate Links payment system with shipping, accounting, and other corporate
systems systems
Online bill presentment has a ability to generate and present electronic bills
Multiple payment options Ensures that buyers may pay with credit care, debit card, ACH check,
electronic funds transfer, or other means
 Two forms of payment system has risen even if any of them provide all of the features
listed above;
 Systems that replace traditional banks and existing banking system extending to the
B2B marketplace

Electronic Billing Presentment and Payment (EBPP)

 A form of online payment system for monthly bills
 Allows consumers to view bills electronically and pay them through electronic funds
transfer from bank or credit card accounts

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  More than 90% of all EBPP takes place in B2C and are rapidly spreading to B2B
commerce
 Expected to grow rapidly as EBPP saves a lot in postage and processing and
payments can be received more quickly there by improving cash flow
 The key deriver is a growth in Internet usage, which pushes many companies to
explore online billing and payments
Types of EBPP Systems
 Biller-Direct System: Created by large utilities that send millions of bills each
month
 Telephone, utility, and credit card companies...
 Purpose: to make it easier for their customers to pay their utility and other bills
routinely online
 Usually uses a service bureau to provide the infrastructure necessary to implement
the system
 BillServ.com, Priceton ecom, Digicash
 Consolidator Model: Aggregate all bills from consumers and ideally permit one-stop
bill payments
 CheckFree, PayTrust
 Portals: similar to consolidators but offer a variety of other financial management
services as well
 Yahoo, AOL, Excite, Cyberbills.com, PayMyBills.com
 Companies can use EBPP to present bills to individuals consumers electronically, or
contract with a service to handle all the billing and payment collection
 Customers can choose to pay the bill directly, use a bill consolidator to collect bills
from them, or hire a payment service to collect and pay bills as directed by the customer
 The bill payment process involved the customer, the bank and potentially a third
party processor, where customers can e-mail an e-check drawn on their bank account, and
the funds will be transferred via e-mail to the vendor's bank account --- similar to e-
checking system
Risks (Issues and Challenges )Regarding Electronic Payment System
4.1 Lack of Usability
Electronic payment system requires large amount of information from end users or make
transactions more difficult by using complex elaborated websites interfaces. For example credit
card payments through a website are not easiest way to pay as this system requires large amount
of personal data and contact details in web form.

4.2 Lack of Security

Online payment systems for the internet are an easy target for stealing money and personal
information. Customers have to provide credit card and payment account details and other
personal information online. This data is sometimes transmitted in an un-secured way, (Kolkata
and Whinston, 1997). Providing these details by mail or over the telephone also entails security
risks (Guttman, 2003, Laudon and Traver, 2002)

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4.3 Issues with e-Cash
The main problem of e-cash is that it is not universally accepted because it is necessary that the
commercial establishment accept it as payment method. Another problem is that when we
makes payment by using e-cash, the client and the salesman have accounts in the same bank
which issue e-cash. The payment is not valid in other banks.

4.4 Lack of Trust

Electronic payments have a long history of fraud, misuse and low reliability as well as it is new
system without established positive reputation. Potential customers often mention this risk as the
key reason why they do not trust a payment services and therefore do not make internet
purchases (Lietaer, 2002)

4.5 Users Perception Regarding Acceptance of Electronic Payment Systems

User’s acceptance is a pivotal factor determining the success or failure of any information system
project. (Davis, 1993), Many studies on information technology report that users attitudes and
human factors are important aspects affecting the success of any information system (Davis,
1989, Burkhardt, 1994, Rice&Adyn , 1991). According to Dillion and Morris (1996) users
acceptance is “the demonstrable willingness within a user group to employ information
technology for the tasks it is designed to support”. exception of it. It means these are not successful without
acceptance of users. Electronic payment system is an innovative way for online payments. Issues are not
accepting easily because of lack of security in changing business-environment. Online payment system requires
improvement of information technology. The failure of electronic payment system is depend on the factor that it
neglects the needs of users and the market.

4.6 Lack of Awareness

Making online payment is not an easy task. Even educated people also face problems in making
online payments. Therefore, they always prefer traditional way of shopping instead of online
shopping. Sometimes there is a technical problem in server customers tried to do online
payments but they fails to do. As a result they avoid it.

4.7 Online Payments are not Feasible in Rural Areas

The population of rural areas is not very literate and they are also not able to operate computers.
As they are unaware about technological innovations, they are not interested in online payments.
So the online payment systems are not feasible for villagers.

4.8 Highly Expensive and Time Consuming

Electronic payment system are highly expensive because it includes set up cost, machine cost,
management cost etc and this mode of payment will take more time than the physical mode of
payment.

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