Comparative evaluation of electronic payment systems

INFOR, Feb 2002 by David Wright

A generic overview of the operation of an e-payment system starts when a customer uses the internet to make a purchase on a merchants web site, e.g. [4]. The customer completes an order form at the check out with his/her shipping address etc. and may be redirected over the internet to the web server of the electronic payment service provider for the input of his/her credit card number. In this case it is important that the redirection is transparent to the customer, which is achieved by the e-payment service provider customizing the page presented to the customer with the merchant's style. When the merchant's web site redirects the customer to the service provider's web site, it provides a "merchant ID" which the service provider uses to present the customer with web pages that have the same "look and feel" as the merchants web pages. If the customer is using a credit card, or an electronic check, the electronic payment system uses a gateway out of the internet into a secure financial network through which it contacts the customer's financial institution, in order to obtain authorization for the payment. If the customer is using digital cash, issued through an internet-based web site, that site is used directly to approve the payment without the need for a gateway. The payment system then informs the merchant whether the transaction has been approved. The order is confirmed to the customer via a web page and/or email. The value of the transaction is deposited into the merchant's bank account through the financial network or by the digital cash issuer.

We now review the operation of different e-payment systems including credit card systems, electronic check systems and digital cash. In this review, we include the use of an e-payment service provider. The corresponding step can be ignored if the merchant is processing payments on its own web server. Out of the many commercial e-payment systems in operation, we give references selectively to those that provide information on their mode of operation.

2.1 Credit Card Systems

Figure 1 illustrates the sequence of operations for a credit card transaction between a merchant and a consumer. Cybersource, [5], and Netbanx, [7], are examples of a commercial systems of this type.

* First the customer establishes a credit card account with a bank and the merchant establishes a bank account.

* Then the customer places an order with the merchant, and the merchant securely passes the order on to the e-payment service provider, which uses a gateway between the internet and the banking network.

* The gateway identifies the bank that issued the credit card according to the number on the card and a request to authorize the credit card is sent from the gateway, across the banking network to that bank.

* The authorization comes back from the bank through the gateway to the service provider and is passed on to the merchant and the customer. The above operations occur interactively while the customer is using his/her web browser.