Chapter 11: Online Payment Systems

Dr. Samim Al Azad (SAA2)

Assistant Professor, SB&E, NSU
 E-Business News Analysis

Six payment trends to watch out for in 2021(DailyStar, December 2020)

https://www.thedailystar.net/opinion/news/six-payment-trends-watch-out-2021-
2017289

Pandemic spurs digital payment

https://www.tbsnews.net/economy/banking/pandemic-spurs-digital-payment-
107380

NFC Based POS Terminal

https://www.ucb.com.bd/pos-acquiring-service/nfc-based-pos-terminal/

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 E-Business News Analysis

Hackers return nearly half of the $600 million they stole in one of the
biggest crypto heists (August 2021)
https://www.cnbc.com/2021/08/11/cryptocurrency-theft-hackers-steal-600-million-in-poly-
network-hack.html

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 Learning Objectives

In this chapter, you will learn about:

§ The basic functions of online payment systems
– The use of payment cards in electronic commerce
– The use of electronic cash
– How electronic wallets work
– The use of stored-value cards in electronic commerce

§ Criminal Activity and Payment Systems

– Phishing attack and identity theft

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 Online Payment Basics

§ Four common methods of payment-

– Cash, checks, credit cards, debit cards
(90% of all consumer payments)

§ For online purchase, majority of the

transactions-
– Debit C, and Credit C (85% of all total
transaction)
– Paypal

§ Electronic transfer: small but growing

segment
– Auto loans, insurance payment and
mortgage payments
FIGURE Forms of payment for consumer transactions

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Online Payment (Bangladesh Scenario)

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 Payment Methods

E-Wallets
Payment
Cards

Online Payment
Methods

E-cash E-Cheque

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 Payment Methods

§ Online Payment Methods (mainly 4 types)

§ Payment Card, Electronic Cash, Software Wallets, e-cheque

§ Payment card
– Any types of plastic cards used to make purchases

§ Credit card (Visa, MasterCard)

– Spending limit based on user’s credit history
– Pay off entire credit card balance
§ May pay a minimum amount
– Card issuers charge interest on unpaid balance
– Widely accepted
– Consumer protection: 30-day dispute period (15-45 days in BD)

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 Payment Cards (cont’d.)

§ Debit Card
– EFTPOS/ Electronic fund transfer at point of sales
§ Immediately removes sales amount from cardholder’s
bank account and transfers to seller’s bank account

– Card holder are allowed to spend up to the

account’s balance
– Issued by account holder’s bank
§ And usually carry the major credit card issuer name
(Visa and Master card)

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 Payment Cards (cont’d.)

§ Charge card
– No spending limit
– No line of credit or interest charges
– Entire amount due at end of billing period
– Retailers may offer their own charge cards
§ Examples: department store, oil company cards

§ Prepaid card
– Cards that are offered to use for future purchase
– Gift card: with the intention of giving as gift (Aarong gift card)

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 Payment Cards (cont’d.)

§ Single-use cards
– A unique card number that is valid for one transaction only (GP
flexi card)
§ Cards with disposable numbers
§ Designed to prevent dishonest vendor fraud

– Withdrawn from the market (develop country)

– Problem:
§ Required consumer to behave differently
§ No clear benefit from using the card

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 Advantages and Disadvantages of Payment Cards

§ Advantage for merchants • Disadvantage for

– Merchants can authenticate and merchants
authorize purchases (fraud protection) – Per-transaction fees, monthly
– Provide built-in security or assurance processing fees
of payments

§ Advantage consumers • Disadvantage for

– Worldwide acceptance
§ Currency conversion handled by card
issuer
– Card transaction steps
transparent to consumers
consumers
– Goods and services prices are
slightly higher compared to
environment free of payment
cards
– Annual fee to card providers
(Bank)

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 Payment Acceptance and Processing

§ Internet payment systems by card is now much easier due to the standards
– EMV standard: Single standard handling payment card transactions

Payment Processing Systems-

1. Closed loop systems

– Card issuer pays merchant directly
– Does not use intermediary
§ American Express, Discover Card

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 Payment Acceptance and Processing

2. Open loop systems (Visa, MasterCard)

– Third party (intermediary bank) processes transaction
– Whenever additional parties (intermediaries) are included in payment
process, the system is called Open Loop Systems (OLS)

Visa, MasterCard
– Owned by credit card associations, operated by member banks
– Only the member banks issue credit cards to individuals

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 Open Loop System

FIGURE Processing a payment card transaction (open loop system)

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 Electronic Cash/ Digital Cash

§ Electronic cash (e-cash, digital cash, easy

cash)
– Money kept in electronic form to pay for goods and
services on the internet
– Readily exchanged for physical cash on demand

§ Problems
– No standard among all electronic cash issuers
(need a common standard)
– Not universally accepted (Bkash is not accepted in
other country)

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 Electronic Cash (cont’d.)

§ Though EC has problems, becoming popular day by day-

§ 3 Reasons-
i. Stores accepting credit cards may require minimum purchase amount of $10
or $15

ii. Potentially significant for small payments (below $10)

iii. Most of world’s population does not have credit cards

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 Class Discussion

Paypall Vs Bkash (E-Cash)

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 Advantages and Disadvantages of Electronic Cash

§ Advantages of electronic cash transactions

– More efficient and easy to pay remotely
§ Efficiency fosters more business
§ Less costly than processing credit card transaction

– Occurs on existing infrastructure (internet/ mobile network)

§ No human resources or distribution oversight is required

– Does not require one party to obtain authorization

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 Advantages and Disadvantages of Electronic Cash

§ Disadvantages of electronic cash transactions

– No audit trail (works as real cash and can’t be easily traced)
– Money laundering
§ Criminals use to convert money (that they obtained illegally) into spendable
cash
§ Purchase goods and services with ill-gotten electronic cash, and then, these
goods are sold for physical cash

– Electronic cash has not yet become a global success (no standard)

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 Electronic Wallets

§ Electronic wallet (e-wallet): is an electronic device or software that

holds-
– credit card numbers
– electronic cash
– owner identification,
– owner contact information, and
– provides information at check out counter available

§ Benefit:
– Consumers enter information once instead of having Figure: Electronic wallet
to enter their information at every site
– More efficient shopping

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 Electronic Wallets

1. Server-side electronic wallet

– Stores customer’s information on remote server of merchant or
wallet publisher (amazon /google wallet)

– Advantage
§ No download time or installation on user’s computer

– Main weakness
§ Security breach can reveal thousands of users’ personal
information (credit card numbers)

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 Electronic Wallets

2. Client-side electronic wallet

– Stores own information on consumer’s computer (PC)/ mobile phone
– Advantage
§ Sensitive information stored on user’s computer (more secured)

– Disadvantages
§ Must download wallet software onto every computer
§ Not portable

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 Stored Value Card

§ Most of the cards store information

electronically in 2 ways-
§ either a microchip or magnetic strip plastic card

1. Magnetic strip cards

– Card strip stores the cash value that can be recharged
(washing machine card)
– Magnetic strip cards are passive. Because they can’t
§ send or receive information
§ increment or decrement cash value stored
– Processing done on device (terminal) into which card
inserted

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 Stored Value Card

2. Smart cards (Microchip)

– Plastic card with embedded microchip
– Storage capacity in smart card is higher, 100 times more than
magnetic strip card
– Holds private user data
§ Financial facts, encryption keys, account information, credit card numbers,
health insurance information, medical records

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 Criminal Activity and Payment Systems:
“Phishing and Identity Theft”

§ Online payment systems offer criminals an attractive arena

– to operate their illegal activity

§ Phishing
– setting up fake Web sites or sending e-mail
messages that look like legitimate businesses to
ask users for confidential personal data
Example: An email message instructs receiver to update his/her
details by providing information either by responding to the email
address, by entering information at a bogus website

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 Criminal Activity and Payment Systems:
Phishing and Identity Theft

§ E-mail link disguises and tricks

1. Web server ignores all characters preceding “@”:
– https://www.paypal.com@218.36.41.188/fl/login.html

2. Link appears different in e-mail

– Bogus site invisible due to JavaScript code

§ Identity theft
§ Theft of personal Information (social security id, driver’s license or credit card numbers)
using sniffing/ spying software
• Criminals gather personal information about a victim and then use that
information to obtain credits
§ Others
Ø Pharming
Ø Evil twins

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Criminal Activity and Payment Systems:
Phishing

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Criminal Activity and Payment Systems:
Phishing

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