E-Commerce Payment Systems

Chapter 11: Payment Systems for E-Commerce

Objectives

  • Overview of e-commerce payment systems
  • Understanding how e-commerce payment systems function
  • Advantages and benefits of using e-commerce payment systems
  • Important features of an electronic payment system
  • Electronic payment options available to consumers

E-commerce Payment System - Overview

  • An e-commerce payment system, also known as an electronic payment system, facilitates the acceptance of electronic payments for online transactions.
  • Credit cards are the most common payment method for e-commerce transactions. In 2008, 90% of retail transactions were made with payment cards.
  • It is difficult for online retailers to operate without supporting credit and debit cards due to their widespread use.
  • Online merchants must adhere to stringent rules set by credit and debit card issuers like Visa and Mastercard, compliant with banking and financial regulations in the countries where the debit/credit service operates.
  • E-PAYMENT Methods: E-wallets, QR codes, credit cards, digital money, online banking, NFC, and Blockchain.

How E-commerce Payment System Works

  • Requires a payment ecosystem comprising acquiring and issuing banks, card networks, payment gateways, organizations, technologies, processors, cardholders, and merchants.
  • This ecosystem facilitates the transfer of money from a customer’s credit or debit card to the merchant.
  • The easier it is for customers to pay, the more revenue a business can generate.
  • Customers dislike friction, such as slow or difficult payment processes and may switch to competitors if payment is problematic.
General Processes Involved:
  1. Setup: Install shopping cart and payment software on the e-commerce website.
  2. Selection: The customer selects the products and services they want to purchase.
  3. Payment Details: The customer chooses a payment method and enters their details.
  4. Payment Stack: The back-office payment stack sends payment information to various processors, gateways, banks, and third parties.
  5. Validation: The payment is validated, authorized, and approved, and the information is sent back to the payment software.
  6. Order Completion: The order is completed, and the products or services are provided.
  7. Payment Clearing: The payment clears and is credited to the merchant account.
Detailed Processes Involved:
  1. Step 1: Customer Obtains a Credit or Debit Card:
    • The customer needs a credit or debit card to make online payments (though alternative methods and digital wallets exist).
    • The customer’s bank, known as an issuing bank (e.g., Maybank), contracts with card networks (Visa, Mastercard, AMEX, etc.) and issues a card to the customer.
  2. Step 2: Merchant Obtains a Merchant Account:
    • The merchant needs a merchant account with an acquiring bank.
    • The acquiring bank holds the merchant's funds and performs cash management and FX services.
    • The acquiring bank also works with card networks to accept customer payments.
  3. Step 3: Customer Makes a Purchase:
    • The customer decides to make a purchase from the online store.
  4. Step 4: Customer Enters Payment Details:
    • The customer submits payment details to initiate the payment process.
    • eCommerce stores integrate payment gateways (e.g., Stripe, PayPal), payment processors, or shopping cart integrations to handle card details.
  5. Step 5: Authorization:
    • Banks work with the payment gateway and card network to authorize the card payment.
    • Transactions are checked for fraud and available funds using AI, machine learning, algorithms, and advanced tech in under three seconds.
    • The payment processor/gateway sends card details to the acquiring bank.
    • The acquiring bank sends details to the relevant card network (Visa, Mastercard, etc.).
    • The card network authorizes and validates the card.
    • The card network sends a request to the issuing bank.
    • The issuing bank runs security and validation checks and ensures the customer has sufficient funds.
    • If everything is approved, the transaction is authorized.
  6. Step 6: Money is Exchanged for Goods/Services:
    • Clearing and settlement occur.
    • The transaction is recorded on the customer’s account, and the credit card network forwards details to the issuing and acquiring banks.
    • The issuing bank transfers the payment amount (minus fees) to the merchant account.

Figure 14 visually represents all the steps.

Advantages and Benefits of E-commerce Payment Systems

  • Payment Choice: Customers can choose their preferred payment method.
    • Consumers are shifting from traditional cards to ePayment options like mobile wallets (Google Pay, Apple Pay).
    • Payment preferences vary by region (e.g., cryptocurrency, cash on delivery, bank drafts).
  • Fraud Reduction: Merchants can reduce fraud and chargebacks.
    • eCommerce payment fraud results in billions in losses annually.
    • Specialized fraud detection software, using machine learning and AI, reduces the risk of fraudulent transactions.
  • Fast Processing: Fast payment processing enhances customer experience.
    • A good payment stack enables rapid payments.
    • Ideally, payment authorization should take five seconds or less.
  • Simplicity and Convenience: ePayment systems are simple and convenient.
    • Modern systems offer user-friendly interfaces, enhanced security, saved details, and quick payment options.
    • Reducing friction in the payment process boosts revenue.

Important Features of an Electronic Payment System

  • Integrations: Integration with supplementary services like fraud detection, order management, inventory management, and point of sale systems.
  • Cross-Border Payments: Support for cross-border payments and interoperability, allowing customers to pay in multiple currencies from various countries.
  • Security: Robust payment security to protect transactions and payment information from hackers.
  • Login Options: Multiple login options for customers to use existing accounts to pay.
  • Implementation: Simple implementation on the e-commerce website for a seamless payment experience.
  • Device Compatibility: Flawless experience across all devices and channels (smartphones, tablets, social media).
  • Billing Options: Recurring and subscription billing support for regular products and services.
  • Multiple ePayment Options

Electronic Payment Options for Consumers

  • Credit and Debit Cards:
    • Still popular, especially among older consumers.
    • Offer speed and ease of use, but credit cards incur interest, and debit cards are limited by available funds.
  • Prepaid and Smart Cards:
    • Similar to debit cards but require pre-funding.
    • Customers load funds onto these cards for online payments.
  • eWallets and Mobile Wallets:
    • Store multiple credit cards, debit cards, bank accounts, and payment details in one secure place.
    • Users sign in and choose a payment type.
    • Examples: Apple Pay, Samsung Pay, Amazon Pay, Google Pay, PayPal.
  • Bank Accounts, Bank Drafts, eChecks:
    • Allow consumers to pay directly from their bank account.
    • Useful for ongoing payments.
  • Cash:
    • Cash on delivery remains a preferred method in some countries.
  • Cryptocurrency:
    • Accepting Bitcoin, Ripple, Litecoin, or other cryptocurrencies can offer a competitive advantage.
  • Select an e-commerce and ePayment system with the necessary features for seamless integration and mutual advantages for both the business and its customers.