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Compiled: Er. Ayush Shrestha

Introduction to E-Commerce
PRINCIPLES OF MANAGEMENT :

Compiled By: Er. Ayush Shrestha [ 9841515311 ]

Lesson 9: Payments and Order Fulfillment

Compiled: Er. Ayush Shrestha

Topics 4
9. Payments and Order Fulfillment
1. Electronic payments: A critical element in EC support services
2. Security for e-payments
3. Electronic cards and smart cards
4. E-cash and innovative payment methods
5. E-checking
6. Order fulfillment and logistics
7. Problems in order fulfillment
8. Solutions to order fulfillment problems

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 9.1 Electronic payments: 5
A critical element in EC support services

 Paying with credit cards online

 Until recently consumers were extremely reluctant to use their credit card numbers on the
Web

 This is changing because:

 Many of people who will be on the Internet in 2004 have not even had their first Web experience
today

 85% of the transactions that occur on the Web are B2B rather than B2C (credit cards are rarely used
in B2B transactions)

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 Four parties involved in e-payments
 Issuer
 Customers must obtain e-payment accounts from an issuer
 Issuers are usually involved in authenticating a transaction and approving the amount involved
 Customer/payer/buyer
 Merchant/payee/seller
 Regulator

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Key issues of trust that must be addressed by any e-payment, known as “PAIN” 7
 Privacy
– Ensure customer’ privacy

 Authentication and authorization

– Is the ability of each party in a transaction to ascertain the identity of the
other party.
– Process to provide assurance for the claimed identity of a user

 Message Integrity
– Is the ability to ascertain that a transmitted message has not been copied or
altered
– Protect against improper modifications to message

 Non repudiation
– You can not deny a message you received from a certain person

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 Characteristics of successful e-payment methods
1. Independence
2. Interoperability and portability
3. Security
4. Anonymity
5. Divisibility
6. Ease of use
7. Transaction fees

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9.2 Security for e-payments 9

 Public key encryption (PKI)

Encryption (cryptography)—the process of scrambling (encrypting) a message in such

a way that it is difficult, expensive, or time consuming for an unauthorized person to
unscramble (decrypt) it
.

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 All encryption has four basic parts:

 Plaintext—an unencrypted message in human-readable form

 Ciphertext—a plaintext message after it has been encrypted into unreadable form

 Encryption algorithm—the mathematical formula used to encrypt the plaintext into

ciphertext and vice versa

 Key—the secret code used to encrypt and decrypt a message

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 Two major classes of encryption systems:

 Symmetric (private key)

 Used to encrypt and decrypt plain text

 Shared by sender and receiver of text

 Asymmetric (public key) : The most used method

Uses a pair of keys

 Public key to encrypt the message

 Private key to decrypt the message

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 Private key encryption

method of encryption that uses a pair of keys—a public key to encrypt a message and a
private key (kept only by its owner) to decrypt it, or vice versa

 Private key—secret encryption code held only by its owner

 Public key—secret encryption code that is publicly available to anyone

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Key Sizes & Time to Try All Possible Keys

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 Digital signatures

An identifying code that can be used to authenticate the identity of the sender of a
message or document

 Used to:

 Authenticate the identity of the sender of a message or document

 Ensure the original content of the electronic message or document is unchanged

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 Digital Signatures—how they work: 16
1. Create an e-mail message with the contract in it

2. Using special software, you “hash” the message, converting it into a string
of digits (message digest)

3. You use your private key to encrypt the hash (your digital signature

4. E-mail the original message along with the encrypted hash to the receiver

5. Receiver uses the same special software to hash the message they

received

6. Company uses your public key to decrypt the message hash that you

sent. If their hash matches the decrypted hash, then the message is valid

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How digital Signature works
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 Digital certificate
• Is an attachment to an electronic message to verify the identity of the sender and to
provide the receiver with the means to encode a reply
• The user identity is validated by a third party called “certificate authority” –CA

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 Digital certificate: How it is issued and used during transactions?
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 Secure socket layer (SSL)— 20
• protocol that utilizes standard certificates for authentication and data encryption to
ensure privacy or confidentiality

• Originally created by Netscape to secure transactions between

clients/ servers

• Become the standard for browsers and servers (Microsoft and

Netscape)

• Is a protocol that utilizes standard certificates for authentication

and data encryption to ensure privacy or confidentiality

• E.g. secure credit card sent from a customer to a merchant)

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 Transport Layer Security (TLS)—

• as of 1996, another name for the Secure Socket Layer protocol

• TLS was not designed to handle the following:

• The credit card number must be checked for validity
• The consumer’s bank must authorize the card
• The purchase must be proceed

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 Secure Electronic Transaction (SET)

• Is a protocol designed to provide secure online credit card transactions for both
consumers and merchants;

• developed jointly by Netscape, Visa, MasterCard, and others

• Is designed to handle a complete online transaction

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 9.3 Electronic cards and smart cards 23
 Definition
• Electronic cards that contain information that can be used for payment purposes
Three types
• Credit cards (e.g. Visa and MasterCard): provides holder with credit to make
purchases up to a limit fixed by the card issuer
• Charge cards (e.g. internet card, PetroNet)—balance on a charge card that can
refilled based on customer request
• Debit card (e.g. Knet)—cost of a purchase drawn directly from holder’s checking
account (demand-deposit account)

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 The Players

 Cardholder

 Merchant (seller)

 Issuer (your bank)

 Acquirer (merchant’s financial institution, acquires the sales slips)

 Card association (VISA, MasterCard)

 Third-party processors (outsourcers performing same duties formerly provided by issuers, etc.)

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Online Credit Card Processing 25

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 Credit card gateway
• An online connection that ties a merchant’s systems to the back-end processing
systems of the credit card issuer (a a customer)
• Objective speed-up the online transaction

 Virtual credit card

• An e-payment system in which a credit card issuer gives a special transaction number
that can be used online in place of regular credit card numbers
• E.g. CashU

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 Electronic wallets (e-wallets)
• A software component in which a user stores credit card numbers and other personal
information
• When shopping online the user simply clicks the ewallet to automatically fill in information
needed to make a purchase
Benefits of e-wallets
• One-click shopping—saving your order information on
retailer’s Web server
• Speed up the transaction process s

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 Security risks with credit cards
 Stolen cards
 Reneging by the customer—authorizes a payment and later
denies it
 Theft of card details stored on merchant’s computer—isolate
computer storing information so it cannot be accessed
directly from the Web

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Smart Cards
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an electronic card containing an embedded microchip that enables predefined

operations or the addition, deletion, or manipulation of information on the card

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 Categories of smart cards

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 Contact card
– A smart card containing a small gold plate on the face that when inserted in
a smart-card reader makes contact and so passes data to and from the
embedded microchip

 Contactless (proximity) card

– A smart card with an embedded antenna, by means of which data and
applications are passed to and from a card reader unit or other device

 Securing smart cards

– Theoretically, it is possible to “hack” into a smart card
• Most cards can now store the information in encrypted form
• Same cards can also encrypt and decrypt data that is downloaded or
read from the card
– Cost to the attacker of doing so far exceeds the benefits

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 Important applications of smart card use:
 Loyalty
 Financial
 Information technology
 Health and social welfare
 Transportation
 Identification

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9.4 E-cash and innovative payment methods 32

 E-cash

the digital equivalent of paper currency and coins, which enables secure and anonymous
purchase of low-priced items

 Micropayments

small payments, usually under $10

 Wireless payments

Vodafone “m-pay bill” system that enables wireless subscribers to use their mobile phones
to make micro-payments

 Qpass (qpass.com)

Charges to qpass account, are charged toa specified credit card on a monthly basis

Avoid some of e-cash problem (see more in www.qpass.com)

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Stored-Value Cards

 Stores cash downloaded from bank or credit card account

 Visa cash—a stored-value card designed to handle small purchases or

micropayments; sponsored by Visa

 Mondex—a stored-value card designed to handle small purchases or

micropayments; sponsored by Mondex, a subsidiary of MasterCard

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E-Loyalty and Reward Programs 34

 Loyalty programs online

 B2C sites spend hundreds of dollars acquiring new customers

 Payback only comes from repeat customers who are likely to refer other
customers to a site

 Electronic script—a form of electronic money (or points), issued by a third party as
part of a loyalty program; can be used by consumers to make purchases at
participating stores

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 Beenz—a form of electronic script offered by beenz.com that consumers earn at participating sites and redeem for
products or services

 Consumer earns beenz by visiting, registering, or purchasing at 300 participating sites

 Beenz are stored and used for later purchases

 Partnered with MasterCard to offer rewardzcard—stored-value card used in U.S. and Canada for purchases where
MasterCard is accepted

 Transfer beenz into money to spend on Web, by phone, mail order, physical stores

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 MyPoints-CyberGold

 Customers earn cash for viewing ads

 Cash used for later purchases or applied to credit card account

 Prepaid stored value cards—used online and off-line

 RocketCash

 Combines online cash account with rewards program

 User opens account and adds funds

 Used to make purchases at participating merchants

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Internetcash

 Teenage market—primary reason for going online

 Communicating with friends via email and chat rooms
 homework
 Researching information
 Playing games
 Downloading music or videos

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 Why they do not shop online

 Parents will not let them (children) their (the parents) credit cards online

 They cannot touch the products

 It is difficult to return items purchased on the Web

 They do not have the money

 Transaction may be insecure

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 InternetCash offers prepaid stored-value cards sold in amounts of $10, $20, $50, 39
and $100

 Must be activated to work

 Gives the user shopping privileges at online stores that carry an InternetCash icon

 Purchases are automatically deducted from the value of the card

 InternetCash’s transactions are anonymous

 InternetCash is facing obstacles

 First, they have to find retailers willing to sell the cards

 Must persuade merchants to accept the card for online

purchases

 Legal issues

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Person-to-Person Payments 40

 Person-to-person (P2P) payments—e-payment schemes (such

as paypal.com) that enable the transfer of funds between two
individuals

 Repaying money borrowed

 Paying for an item purchased at online auction

 Sending money to students at college

 Sending a gift to a family member

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Global B2B Payments 41

 Letters of credit (LC)—a written agreement by a bank to pay the

seller, on account of the buyer, a sum of money upon presentation of
certain documents

 TradeCard (tradecard.com)—innovative e-payment method that

uses a payment card

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Electronic Letters of Credit (LC)
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 Benefits to sellers  Benefits to the buyer

 Credit risk is reduced
 Allows buyer to negotiate for a lower purchase
 Payment is highly assured price

 Political/country risk is reduced  Buyer can expand its source of supply

 Funds withdrawn from buyer’s account only

after the documents have been inspected by
the issuing bank

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TradeCard Payments 43

 TradeCard allows businesses to effectively and efficiently complete B2B

transactions whether large or small, domestic or cross-border, or in
multiple currencies
 Buyers and sellers interact with each other via the TradeCard
system
 System
 Checks purchase orders for both parties
 Awaits confirmation from a logistics company that deliveries have been
made and received
 Authorizes payment completing financial transaction between the
buyer and seller

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9.5 E-checking 44

 E-check—the electronic version or representation of a paper check

 Eliminate need for expensive process reengineering and takes advantage of the competency
of the banking industry

 eCheck Secure (from vantaguard.com) and checkfree.com provide software that enables the
purchase of goods and services with e-checks

 Used mainly in B2B

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9.6 Order fulfillment and logistics 45

 Order fulfillment—all the activities needed to provide customers with

ordered goods and services, including related customer services

 Back-office operations—the activities that support fulfillment of sales,

such as accounting and logistics

 Front-office operations—the business processes, such as sales and

advertising, that are visible to customers

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Overview of Logistics
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 Logistics—the operations involved in the efficient and

effective flow and storage of goods, services, and related
information from point of origin to point of consumption
 Delivery of materials or services
 Right time
 Right place
 Right cost

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Order Fulfillment and Logistics Systems 47

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EC Order Fulfillment Process 48

Steps in the process of order fulfillment

1. Payment clearance 8. Customer contacts

2. In-stock availability 9. Returns (Reverse logistics—
3. Arranging shipments movement of returns from customers to vendors)
4. Insurance 10. Demand forecast
5. Production (planning, execution) 11. Accounting, billing
6. Plant services
7. Purchasing and warehousing

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Order Fulfillment and the Supply Chain 49

 Order fulfillment and order taking are integral parts of the supply chain.

 Flows of orders, payments, and materials and parts need to be

coordinated among

 Company’s internal participants

 External partners

 The principles of supply chain management must be considered in

planning and managing the order fulfillment process

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9.7 Problems in order fulfillment 50

 Manufacturers, warehouses, and distribution channels were not in sync with the e-tailers

 High inventory costs

 Quality problems exist due to misunderstandings

 Shipments of wrong products, materials, and parts

 High cost to expedite operations or shipments

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 Uncertainties 51
 Major source of uncertainty is demand forecast
 Demand is influenced by
 Consumer behavior
 Economic conditions
 Competition
 Prices
 Weather conditions
 Technological developments
 Customers’ confidence

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 Demand forecast should be conducted frequently with collaborating business partners 52
along the supply chain in order to correctly gauge demand and make plans to meet it

 Delivery times depend on factors ranging from machine failures to road conditions

 Quality problems of materials and parts (may create production time delays)

 Labor troubles (such as strikes) can interfere with shipments

 Order fulfillment problems are created due by lack of coordination and inability or
refusal to share information

 Bullwhip effect—large fluctuations in inventories along the supply chain, resulting from
small fluctuations in demand for finished products

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9.8 Solutions to order fulfillment problems 53
 Improvements to order taking process

 Order taking can be done on EDI, EDI/Internet, or an extranet, and it may

be fully automated.

 In B2B, orders are generated and transmitted automatically to suppliers

when inventory levels fall below certain levels.

 Result is a fast, inexpensive, and a more accurate process

 Web-based ordering using electronic forms expedites the process

 Makes it more accurate
 Reduces the processing cost for sellers

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 Implementing linkages between order-taking and payment systems can
also be helpful in improving order fulfillment

 Electronic payments can expedite order fulfillment cycle and payment

delivery period

 Payment processing significantly less expensive

 Fraud can be controlled better

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Managerial Issues

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1. What B2C payment methods should we use?

2. What B2B payment methods should we use?

3. Should we use an in-house payment mechanism or outsource it?

4. How secure are e-payments?

5. Have we planned for order fulfillment?

6. How should we handle returns?

7. Do we want alliances in order fulfillment?

8. What EC logistics applications would be useful?

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Assignment
Deadline:

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• What are the most common forms of online payment?

• How do credit card purchases online differ from credit card purchases face-to-face?

• What is a smart card?

• What is meant by e-micropayment?

• What is an e-check?

• What are the steps in the order fulfillment process?

• What is meant by supply chain? What are some typical problems that can arise in the supply chain?

• How do e-logistics differ from traditional logistics in regard to e-commerce?

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Thank You

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Any Question?

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