Comparative evaluation of electronic payment systems

INFOR, Feb 2002 by David Wright

ABSTRACT

This paper evaluates 3 types of credit card payment system, an e-check system and 2 digital cash systems, from the viewpoints of: privacy, traceability, transaction cost, and the ability to build up the customers purchasing pattern. It also evaluates their advantages and disadvantages to the customer, the merchant, the e-payment service provider and the financial institution. These systems employ cryptography to provide security, however many consumers are still reluctant to purchase over the Internet because they are concerned about hackers accessing their financial information. The paper concludes with a description of a new system, which is designed to relieve that concern by allowing payments over the telephone network for purchases made over the Internet.

Keywords: Electronic Payments; Digital Cash; Credit Card; Security; Comparative Evaluation.

RESUME

Cet article evalue trois systemes de paiement par carte de credit, un systeme de cheques electroniques et deux systemes d'argent electronique. Il en analyse la confidentialite, la tracabilite, les couts de transaction et la capacite de developper les habitudes d'achat des clients. Il examine egalement les avantages et les desavantages que presentent ces systemes pour le client, le marchand, le fournisseur de services de paiement electronique et l'etablissement financier. Bien que ces systemes aient recours a la cryptographic pour assurer la securite des transactions, beaucoup de clients hesitent encore a faire des achats en ligne parce qu'ils craignent que des pirates informatiques n'aient acces a leurs donnees financieres. En conclusion, l'article decrit un nouveau systeme qui vise a vaincre ces reticences en permettant aux consommateurs de regler par telephone leurs achats effectues sur Internet.

Mots-cles : paiement electronique; argent electronique; carte de credit; securite; evaluation comparative.

1. INTRODUCTION

In Business to Consumer, B2C, electronic commerce, it is necessary for the merchant to reduce the risk of non-payment by the customer by processing the payment interactively while processing the customer's order. In Business to Business, B2B, e-commerce there is also a rapidly growing interest in processing payments online. Depending on the customer's choice of payment method, this can be done by validating the customer's credit card number or bank checking account number or by clearing digital cash through the issuer of the cash.

Electronic payment systems securely process such payments and can be implemented by merchants themselves on their own web servers or alternatively, they can be provided to merchants by third party e-payment service providers. This paper describes the mode of operation of a broad range of e-payment systems available today in order to provide a comparative evaluation of their advantages and disadvantages. The analysis is presented in terms of the features of each system and discusses the advantages and disadvantages to the customer, the merchant, the e-- payment service provider and the financial institution. This paper updates earlier work on this topic, e.g. [1], [2], [3].

2. ELECTRONIC PAYMENT SYSTEMS

In this section we analyse how payments are processed when a customer visits a merchant's web site and needs to make an electronic payment. Some merchants process the payment on their own web servers, whereas other merchants outsource this function to an electronic payment service provider in order to avoid the security concerns and the additional software, which is necessary in order to process the payments themselves. Outsourcing of information systems functions is part of the trend towards increased use of Application Service Providers, ASPs. Payment processing is an application that an ASP can provide to its customers, which can include both large and small companies. E-payment service providers charge a cost to the merchant, which depends on the number of transactions and is typically a few tens of dollars for a few thousand transactions per month.

There are four advantages to the merchants in outsourcing this function to an electronic payment service provider.

* The merchant does not need to obtain "merchant status" with credit card companies, which can be a costly procedure for small merchants. Instead credit card companies accept the service provider's "merchant status".

* The service provider typically has redundant web servers, redundant power supplies and redundant internet access so that if one unit fails, the backup comes into operation automatically.

* An e-payment service provider can handle focused loads on its web site caused by the merchant running promotional campaigns. The merchants own web server may not be able to handle a large sudden load of customers, whereas an e-payment service provider has a more powerful server, which is capable of handling many customers, from many merchants.

* The cryptography can be handled by hardware acceleration on these large servers, whereas on a regular web server, using software consumes significant processor power.