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1.1 Online Payment System

1.1.1 PAYMENT
1.1.2 Online Payment Basics 495
1.1.3 Types of payment system
1.1.4 Cash
1.1.5 Checking transfer
1.1.6 Credit card
1.1.7 Stored value
1.1.8Accumulating balance
1.1.1 Payment
Payment is the voluntary transfer of money,
equivalent, or other valuable items from one person
to another in exchange for goods or services
received or to meet a legal obligation. The person
who gives the money is often called the payer,
while the person who gets the money is called the
payee
Key Takeways
•Payment is the transfer of money or goods and
services in exchange for a product or service.
•Payments are typically made after the terms have
been agreed upon by all parties involved.
1.1.2 Online Payment Basics
Some Terminologies:
Individuals
•Merchant-seller of goods
•Customer-buyer of goods
Institutions
•Customer’s Issuing Bank – provides customer’s
credit card information and verification
•Merchant’s Acquiring Bank–provides internet
merchant account
•Processor – authorizes credit card transactions
and settles funds for merchants
Basic Elements Interactions:
Processes
•Authorization-the process of verifying a
customer’s credit card
•Settlement- the process of collecting funds from
the customer’s account
Services
•Payment Processing Service-connects
merchants, customers, and banks through
secure online transactions.
•Gateway – the secure pipe between the banks
and the processor
1.1.3 Types of payment system
•Cash
• Checking Transfer
•Credit Card
•Stored Value
•Accumulating Balance
1.1.4 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
•Portable, requires no authentication
•“Free” (no transaction fee), anonymous, low
Cognitive demands
Limitations:
easily stolen, limited to smaller transaction, does
not provide any float (period of time between
purchase and actual payment),Purchases tend to be
final and irreversible unless otherwise agreed by the
seller
1.1.5 Checking transfer
•Funds transferred directly via signed draft/check
from a consumer’s checking account to merchant/
other individual
•Most common form of payment in terms of
amount spent
•Second most common payment form in the United
States terms of number of transactions
•Can be used for small and large transactions
•Some float (can take up to 10 days for out-of-state
checks to clear)
•Not anonymous, requires third-party intervention
(banks)
•Introduces security risks for merchants (forgeries-
so authentication is required – bounced checks,
stopped payments).
1.1.6 Credit card
•Are widely accepted as a form of payment reduce
risk of theft related with carrying cash
•Increase consumer convenience
•Offer consumers considerable “float”
•Consumers are liable to $50 for unauthorized
transactions occurring before card issuer is notified
•Consumers can refute or repudiate purchases
under certain circumstances
•Limit risk for consumers while raising it for
merchants and banks
1.1.7 Stored value
•Accounts created by depositing funds into an
account, 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 (P2P) payment systems
•Variation on stored value systems
Eg. PayPal requires an account with stored
value,either a checking account or a credit card
1.1.8Accumulating balance
Accounts that accumulate expenditures and to
which consumers make period payments
•Examples: Utility, phone, American Express
accounts
•Accumulate balances over a specified period and

are paid in full at the end of the period
Evaluating payment systems:
•Different stakeholders (consumers, merchants,
financial intermediaries, government regulator have
different priorities in payment system dimensions
(cost, convenience, refutability, risk, anonymity,
etc.)

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1.1 Online Payment System

•Accumulate balances over a specified period and

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