ebay pay system

1. E-commerce Payment
Systems
Instructor: Wei Ding
Copyright © 2004 Pearson Education, Inc. Slide 6-1
PayPal: The Money’s in the E-mail
The first “peer-to-peer”
payment system, which
allows individuals to
send money to one
another via e-mail.
PayPal emphasizes
ease of use for both
senders and receivers
of cash.
Copyright © 2004 Pearson Education, Inc. Slide 6-2
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2. PayPal: The Money’s in the E-mail
One of e-commerce’s major success stories:
Went public in 2002; acquired by eBay October
2002 for $1.5 billion
An example of a “peer-to-peer” payment system
Fills a niche that credit card companies avoided –
individuals and small merchants
Piggybacks on existing credit card and checking
payment systems
Weakness: suffers from relatively high levels of fraud
Competitors include Western Union (MoneyZap),
AOL (AOLQuickcash) and Citibank (C2it)
Copyright © 2004 Pearson Education, Inc. Slide 6-3
How PayPal works?
1. Create a PayPal account at the PayPal Web site by filling out a one-
page application form and providing credit card or bank account
information. Only PayPal is privy to this information, not the receiving
party.
2. When using PayPal to pay for a purchase, money is drawn from the
credit card or bank account and transmitted to the
AutomatedClearingHouse (ACH) Network, a privately operated
financial intermediary that tracks and transfers funds between
financial institutions.
3. The party who is to receive the payment is notified via e-mail that
money is waiting. If the receiving party has a PayPal account, the
funds are automatically deposited into the account; If the person does
not have a PayPal account, he or she must set one up, and then the
money is credited to his or her account.
4. Once the funds are in the PayPal account, the recipient can then
transfer them electronically to a checking account, request a paper
check, or use PayPal to send the funds to someone else.
Copyright © 2004 Pearson Education, Inc. Slide 6-4
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3. Why PayPal has grown so fast?
The more people who accept and use PayPal, the
greater the benefit to the consumer.
It works for a company such as eBay, providing
purchasers and sellers with a way to short-cut the
time-consuming and cumbersome process of mailing
checks and money orders and waiting for checks to
clear before shipping items.
For small merchants selling items on the Web, it is
difficult and expensive to obtain the capability to
accept credits cards. Moreover, credit companies
usually require a physical place of business as a
requirement.
Copyright © 2004 Pearson Education, Inc. Slide 6-5
PayPal earns money in two
ways.
Online sellers pay a transaction fee for the
service, about the same that a merchant
typically pays for a credit card transaction.
PayPal earns revenue by collecting the
interest earned on consumer funds not yet
transferred out of the PayPal system.
Copyright © 2004 Pearson Education, Inc. Slide 6-6
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4. Types of Payment Systems
Cash
Checking Transfer
Credit Card
Stored Value
Accumulating Balance
Copyright © 2004 Pearson Education, Inc. Slide 6-7
Most Common Payment Systems, Based on Number
Of Transactions
Copyright © 2004 Pearson Education, Inc. Slide 6-8
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5. Cash
Legal tender defined by a national authority to
represent value
Most common form of payment in terms of number of
transactions
Instantly convertible into other forms of value without
intermediation of any kind
Portable, requires no authentication, and provides
instant purchasing power
“Free” (no transaction fee), anonymous, low cognitive
demands
Limitations: easily stolen, limited to smaller
transaction, does not provide any float (the period of
time between a purchase and actual payment for the
purchase).
Copyright © 2004 Pearson Education, Inc. Slide 6-9
Checking Transfer
Funds transferred directly via a signed draft or check
from a consumer’s checking account to a merchant
or other individual
Most common form of payment in terms of amount
spend
Can be used for both small and large transactions
Some float
Not anonymous, require third-party intervention
(banks)
Introduce security risks for merchants (forgeries,
stopped payments), so authentication typically
required
Copyright © 2004 Pearson Education, Inc. Slide 6-10
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6. Credit Card
Represents an account that extends credit to
consumers, permitting consumers to purchase items
while deferring payment, and allows consumers to
make payments to multiple vendors at one time
Credit card associations – Nonprofit associations
(Visa, MasterCard) that set standards for issuing
banks
Issuing banks – Issue cards and process transactions
Processing centers (clearinghouses) – Handle
verification of accounts and balances
Copyright © 2004 Pearson Education, Inc. Slide 6-11
Stored Value
Accounts created by depositing funds into an
account and from which funds are paid out or
withdrawn as needed
Examples: Debit cards, gift certificates,
prepaid cards, smart cards
Debit cards: Immediately debit a checking or
other demand-deposit account
Peer-to-peer payment systems such as
PayPal a variation
Copyright © 2004 Pearson Education, Inc. Slide 6-12
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7. Accumulating Balance
Accounts that accumulate expenditures and
to which consumers make period payments
Examples: utility, phone, American Express
accounts
Copyright © 2004 Pearson Education, Inc. Slide 6-13
Current Online Payment Systems
Credit cards are dominant form of online payment,
accounting for around 80% of online payments in
2002
New forms of electronic payment include:
Digital cash
Online stored value systems
Digital accumulating balance payment systems
Digital credit accounts
Digital checking
Copyright © 2004 Pearson Education, Inc. Slide 6-14
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8. Online Merchants’ Actual and
Preferred Online Payments
Copyright © 2004 Pearson Education, Inc. Slide 6-15
How an Online Credit Card
Transaction Works
Processed in much the same way that in-
store purchases are
Major difference is that online merchants do
not see or take impression of card, and no
signature is available (CNP transactions)
Participants include consumer, merchant,
clearinghouse, merchant bank (acquiring
bank) and consumer’s card issuing bank
Copyright © 2004 Pearson Education, Inc. Slide 6-16
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9. How an Online Credit Transaction
Works
Copyright © 2004 Pearson Education, Inc. Slide 6-17
An online credit card transaction
1. It begins with a purchase (1).
2. A SSL (secure sockets layer) tunnel is used to send credit cared
information to the merchant (2). SSL does not authenticate either
the merchant or the consumer. The transacting parties have to
trust one another.
3. Once the consumer credit card information is received by the
merchant, the merchant software contacts a clearing house (3).
4. A clearing house is a financial intermediary that authenticates
credit cards and verifies account balance. The clearinghouse
contacts the issuing bank to verify the account information (4).
5. Once verified, the issuing bank credits the account of the merchant
at the merchant’s bank (usually this occurs at night in a batch
process). (5).
6. The debit to the consumer account is transmitted to the consumer
in a monthly statement.
Copyright © 2004 Pearson Education, Inc. Slide 6-18
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10. Limitations of Online Credit
Card Payment Systems
Security – neither merchant nor consumer
can be fully authenticated
Cost – for merchants, around 3.5% of
purchase price plus transaction fee of 20-30
cents per transaction
Social equity – many people do not have
access to credit cards (young adults, plus
almost 100 million other adult Americans who
cannot afford cards or are considered poor
risk)
Copyright © 2004 Pearson Education, Inc. Slide 6-19
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