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By Mohammed A. Saleh

The Payment RevolutionUsing Payment Cards Online Smart Cards Store-Value CardsE-MicropaymentsE-CheckingE-Bill Presentment and Payment B2B E-PaymentsThe Sales Tax IssuePKI Infrastructure

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FlyLady adopts PayPalThe ProblemMarley started an email group created to

provide one to one coaching to help subscribers with their organization skills.

Group grew to 60,000 members.Organization was put online to offer products

and the company was called flylady.netPayments were processed through mail-order

and fulfill order and a merchant account.Problem was the processing fees.

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In the real world credit card payment are ubiquitous.

Unfortunately for small startups like FlyLady, the cost incurred in accepting credit card payments can make a difference between profit and loss.

The task of setting up a full-blown , secure B2C site that accepts credit card payments can be daunting.

Fortunately, FlyLady's customers suggested a viable alternative - PayPal

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The SolutionAnyone who has used eBay is familiar with

PayPal.- It acquired PayPal in Oct. 2002.- PayPal has a use base of over 50 million

members- Member accounts are linked with bank

accounts/ credit cards and can be used to transfer funds to and from an individual or businesses.

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In 2003, PayPal processed $12.2 billion in payments, 70% involved buying and selling on online auctions.

For a small medium-sized business, PayPal is easy to set up and integrate into an existing site.

PayPal handles credit card payments but it is not a credit card gateway.

Businesses that offer PayPal as a payment alternative do not need to pass a credit check, install a special software or deal with complex banking agreements.

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No need to gather credit card numbers from buyers or collect sensitive financial information.

Online merchants get started by setting up a PayPal business account, logging into the account and create a payment button.

It takes minutes to do that.PayPal charges merchants a fee of 30 cents,

plus 1.9% to 2.9% of each transaction.

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The ResultsFlyLady was able to implement a “Buy Now”

payment button.Its fulfillment process is based on PayPal’s

reporting tools.Each day the company logs onto PayPal and

downloads the transaction file, which are then imported into a desktop software for for sorting the data and creating shipping labels, which are then handed over to the warehouse for fulfillment.

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Lessons Learnt …B2C purchases are paid for by credit card.For merchants the costs of servicing card

payments are high.Steep transaction costs, potential chargeback

fees for fraudulent transactions and costs of creating and administering a secure EC site.

PayPal is the most successful e-payment alternative there is.

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Sapsford (2004) “ A currency can be anything that all members of a society agree it should be.”

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Shells 10th Century B.C

Shells 10th Century B.C Mal coins 10th

– 16th Century B.C

Mal coins 10th – 16th Century

B.C

Checks Introduced

(Middle Ages)

Checks Introduced

(Middle Ages)

In 1960, Paper Money

Introduced

In 1960, Paper Money

Introduced

In 1950 Credit Cards

Introduced

In 1950 Credit Cards

Introduced

et

Still in the midst of the revolution with cards and e-payments taking the place of cash and checks.

In 2003, the combined use of credit and debit cards for in-store payments exceeded the combined use of cash and checks.

Facts from Federal Reserve System 2004- In 1999, debit card payment went from 21% to

31% while cash dropped from 39% to 32%.- E- payments in the US exceeded check

payments for the first time in 2003. 11

Implications of these trends make online businesses have the support for credit card payment.

Soon, debit card payments will surpass credit card payment.

Merchants having international markets need to support a variety of e- payment methods e.g. bank transfers, e-checks, gift cards, instant credit and so on.

CyberSource (2004) – merchants supporting multiple payment types have higher order conversions resulting in increased revenue. 12

Despite the early introduction of a payment system, it take years for it to gain a widespread acceptance.- credit cards were introduced in the 1950’s but did not reach widespread use until the 1980’s

A crucial element in the success of any e- payment method is the “chicken-and-egg” problem.

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Factors come into to play in determining whether a particular e-payment method achieves a critical mass.

Crucial factors: Independence- Some forms require specialized H/W and S/W

to make the payment.- Requires a seller to install specialized S/W to

receive and authorize payment.- Less likely to succeed.

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Interoperability and Portability- All forms of EC run on specialized systems

that are linked with enterprise systems and applications.

- An e-payment method must mesh with the existing systems and be supported by standard computing platforms.

Security- How safe is the transfer?- What are the consequences of the transfer

being compromised? 15

- If the risk for the payer is higher than the risk of the payee, then the method is less likely to be accepted.

Anonymity- A payment method should make the identities

and purchase patterns of buyers anonymous. Divisibility- Credit cards are accepted for minimum and

maximum range.- A method that can address the extremes of the

two has a chance of being widely accepted.16

Ease of Use- In B2C credit cards offer the ease of use.- In B2B payments, the question is whether e-

payment methods can replace the existing off-line methods of procurement.

Transaction Fees- A merchant pays a fee of up to 3% of the

items purchase price.- It prohibits the support for smaller purchases.

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Regulations - All methods are governed by international,

federal and state regulations.

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Electronic cards that contain information that can be used for payment purposes.

Come in three forms: Credit cards- Provides the holder with credit to make up to a

limit fixed by the card issuer- Rarely have an annual fee.- Charged with high interests on their unpaid

balances.- Predominant cards are Visa, MasterCard and

EuroPay. 19

Credit Card

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Charge cards- Balance on a charge card is supposed to be

paid in full upon receipt of the monthly payment.

- Holders receive a loan for 30 to 45 days equal to the balance of their statement.

- They have an annual fee.- Such cards include, American Express’s Green

Card and the Diner’s Club card

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Debit cards- Money for a purchased item comes directly

out of the holder’s checking account.- Actual transfer takes place within 1 to 2 days.- Predominant types are MasterCard, Visa and

EuroPay.

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Involves two major phases: authorization and settlement.

Authorization: determines whether a buyer’scard is active and whether the customer hassufficient funds.Settlement: involves transfer of money from the buyer’s to the merchant’s account.Performance of these phases varies depending

on:

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type of payment card system configuration used by the merchant to

process payment.Three basic configuration for processing

online payments. Merchant may:i.Own the payment software - Purchase and integrate a payment-processing

module with its EC software.- Module communicates with a payment

gateway run by an acquiring bank or 3rd party.

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i. Use a POS operated by an acquirer- Merchants can redirect card holders to a

POS run by an acquirer- The POS handles the complete payment

process and directs cardholders back to the merchant site once payment is complete.

- Merchant only deals with order information.- Find an acquirer that handles multiple cards

and payment instruments.

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i. Use a POS operated by a payment service provider

- Merchants can rely on servers operated by third parties known as payment service providers (PSPs)

- PSPs connect to appropriate acquirers and must be registered with various card associations they support.

PSP is Payment Service Providers and NOT Portable Sony PlayStation

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Payment cards and processing system for both offline (card present) and online (car not present) have similar processes and participants.

Based on the comparison, the key participants in processing credit card payments online include:

Acquiring bank – offers a special a/c called Internet Merchant Account for card authorization and payment processing

Credit card association – financial institution providing the credit and debit card 27

Customer – the individual processing the card

Issuing bank – financial institution providing the customer with the card

Merchant – company selling products and services

Payment processing service – service providing connectivity among merchants, customers and financial networks

Processor – data centre that processes credit card transactions and settles funds.

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