Electronic Payment Technology Issues

Electronic Payment Technology Issues


Online payment processing requires coordinating the flow of transactions among a complex network of financial institutions and processors. Fortunately, technology has simplified this process so that, with the right solution, payment processing is easy, secure, and seamless for both you and your customers. This chapter provides you with what you need to know about online payment processing issues:

• Online payment processing basics
• The payment processing network
• How payment processing works
• What you should know about fraud
  
• What to look for in a payment processing solution
  
• Getting started
  

After you’ve read this tutorial, you’ll understand the issues and essential elements of accepting payments online, the most important step in putting your Web site to work for you.

Purchasing online may seem to be quick and easy, but most consumers give little thought to the process that appears to work instantaneously. For it to work correctly, merchants must connect to a network of banks (both acquiring and issuing banks), processors, and other financial institutions so that payment information provided by the customer can be routed securely and reliably. The solution is a payment gateway that connects your online store to these institutions and processors. Because payment information is highly sensitive, trust and confidence are essential elements of any payment transaction. This means the gateway should be provided by a company with in-depth experience in payment processing and security.

The Payment Processing Network
Here’s a breakdown of the participants and elements involved in processing payments:

Acquiring bank: In the online payment processing world, an acquiring bank provides Internet merchant accounts. A merchant must open an Internet merchant account with an acquiring bank to enable online credit card authorization and payment processing. Examples of acquiring banks include Merchant eSolutions and most major banks.

Authorization: The process by which a customer’s credit card is verified as active and that they have the credit available to make a transaction. In the online payment processing world, an authorization also verifies that the billing information the customer has provided matches up with the information on record with their credit card company.

Credit card association: A financial institution that provides credit card services that are branded and distributed by customer issuing banks. Examples include Visa® and MasterCard®

Customer: The holder of the payment instrument—such as a credit card, debit card, or electronic check.

Customer issuing bank: A financial institution that provides a customer with a credit card or other payment instrument. Examples include Citibank and Suntrust. During a purchase, the customer issuing bank verifies that the payment information submitted to the merchant is valid and that the customer has the funds or credit limit to make the proposed purchase.

Internet merchant account: A special account with an acquiring bank that allows the merchant to accept credit cards over the Internet. The merchant typically pays a processing fee for each transaction processed, also known as the discount rate. A merchant applies for an Internet merchant account in a process similar to applying for a commercial loan. The fees charged by the acquiring bank will vary.

Merchant: Someone who owns a company that sells products or services.

Payment gateway: A service that provides connectivity among merchants, customers, and financial networks to process authorizations and payments. The service is usually operated by a third-party provider such as VeriSign.

Processor: A large data center that processes credit card transactions and settles funds to merchants. The processor is connected to a merchant’s site on behalf of an acquiring bank via a payment gateway.

Settlement: The process by which transactions with authorization codes are sent to the processor for payment to the merchant. Settlement is a sort of electronic bookkeeping procedure that causes all funds from captured transactions to be routed to the merchant’s acquiring bank for deposit

Visa and MasterCard Take Different Approaches to Authentication

Online merchants could face integration hassles as they deploy forthcoming and competing credit card payer authentication technologies from Visa USA and MasterCard International Inc. The technologies, Visa’s Verified by Visa and MasterCard’s Secure Payment Application service, take distinctly different approaches. Visa performs authentication on the merchant site, whereas MasterCard handles it on the customer’s PC automatically, using a previously downloaded applet.

As a result, merchants that accept credit cards will be required to support two authentication mechanisms. Furthermore, some observers speculate the companies’ respective systems may be no more successful in gaining market acceptance than the ill-fated Secure Electronic Transaction (SET) authentication protocol, a protocol spearheaded by Visa and MasterCard.

Visa sweetened the bait for its system recently when it announced that online merchants using Verified by Visa will have no liability for any transactions processed by the service. Verified by Visa, also known as Visa Payer Authentication, authenticates credit card users with a password and requires no client software. MasterCard’s Secure Payment Application service, which the Purchase, N.Y., company will pilot in April, also uses a password or PIN and requires an applet for authentication.

MasterCard and Visa, which formerly cooperated, now find fault with each other’s approaches. Visa’s service, for instance, will extend transaction processing times, take customers off the merchant sites for authentication, and require complex integration. MasterCard’s service, Visa countered, amounts to a digital wallet, which consumers have been loath to use.

About the only thing MasterCard and Visa seem to agree on is that SET, which was launched in December 1997, was a failure. SET required long download times for customers, used clumsy digital certificate technology, and created integration hassles for merchants and banks that issued the credit cards. It had all but faded away by late 1998.

But with Visa and MasterCard now going separate ways, some merchants see little reason to try authentication technology. You’re creating another layer of complication. After customers go through the trouble of giving you their credit card number, they now have the problem of remembering one more password.

Payment processing in the online world is similar to payment processing in the offline or “Brick and Mortar” world, with one significant exception. In the online world, the card is “not present” at the transaction. This means that the merchant must take additional steps to verify that the card information is being submitted by the actual owner of the card,Payment processing can be divided into two major phases or steps: authorization and settlement.

Authorization verifies that the card is active and that the customer has sufficient credit available to make the transaction. Settlement involves transferring money from the customer’s account to the merchant’s account.

Authorization: Online
A customer decides to make a purchase on a merchant’s Web site, proceeds to checkout, and inputs credit card information.

The merchant’s Web site receives customer information and sends transaction information to the payment gateway.

The payment gateway routes information to the processor.

The processor sends information to the issuing bank of the customer’s credit card.

The issuing bank sends the transaction result (authorization or decline) to the processor.

The processor routes the transaction result to the payment gateway.

The payment gateway passes result information to the merchant.

The merchant accepts or rejects the transaction and ships goods if necessary. Because this is a “card not present” transaction, the merchant should take additional precautions to ensure that the card has not been stolen and that the customer is the actual owner of the card. See the “What You Should Know About Fraud” section later in this chapter for more information on preventing fraudulent transaction.


Authorization: “Brick and Mortar”
A customer selects item(s) to purchase, brings them to a cashier, and hands the credit card to the merchant.

The merchant swipes the card and transfers transaction information to a point-of-sale terminal.

The point-of-sale terminal routes information to the processor via a dial-up connection, the point-of-sale terminal takes the place of the payment gateway in the offline world).

The processor sends information to the issuing bank of the customer’s credit card.

The issuing bank sends the transaction result (authorization or decline) to the processor.

The processor routes the transaction result to the point-of-sale terminal.

The point-of-sale terminal shows the merchant whether the transaction was approved or declined.

The merchant tells the customer the outcome of the transaction. If approved, the merchant has the customer sign the credit card receipt and gives the item(s) to the customer

Payment Processing—Settlement

The settlement process transfers authorized funds for a transaction from the customer’s bank account to the merchant’s bank account, The process is basically the same whether the transaction is conducted online or offline.

Credit card fraud can be a significant problem for customers, merchants, and credit card issuers[2]. Liability for fraudulent transactions belongs to the credit card issuer for a card-present, in-store transaction, but shifts to the merchant for “card not present” transactions, including transactions conducted online. This means that the merchant does not receive payment for a fraudulent online transaction. Fortunately, there are steps you can take to significantly limit your risk as an online merchant. The following important fraud prevention steps should be adhered to:

1. Choose a payment services provider that is well-established and credible. Your provider should also have in-depth experience in and a strong track record for transaction security.
   
2. Make sure your payment gateway provider offers real-time credit card authorization results. This ensures that the credit card has not been reported as lost or stolen and that it is a valid card number
   
3. One of the simplest ways to reduce the risk of a fraudulent transaction is to use Address Verification Service (AVS). This matches the card holder billing address on file with the billing address submitted to ensure that the card holder is the card owner.
   
4. Use Card Security Codes, known as CVV2 for Visa, CVVC for MasterCard, and CID for American Express®. For American Express, the code is a four-digit number that appears on the front of the card above the account number. For Visa and MasterCard, the code is a three-digit number that appears at the end of the account number on the back of the card. The code is not printed on any receipts and provides additional assurance that the actual card is in possession of the person submitting the transaction. As a merchant, you can ask for this code on your online order form. Even if you do not use this for processing, simply asking for it acts as a strong deterrent against fraud.
   
5. Watch for multiple orders for easily resold items such as electronic goods purchased on the same credit card.
   
6. Develop a negative card and shipping address list and cross-check transactions against it. Many perpetrators will go back to the same merchant again and again to make fraudulent transactions
   

Finding a reliable, secure, and flexible payment processing solution for your business is critical, so it’s important to take the time to investigate and assess the options available to you. A payment processing solution should:

1. Reliably and cost-effectively accept and process a variety of payment types, including credit cards and electronic checks. Not only does this reduce lost sales, but it also enhances the quality of your site by allowing your customers the freedom and flexibility to pay you quickly and conveniently.
   
2. Provide real-time credit card authorization results allowing you to accept or reject orders immediately and reduce the risk of fraudulent transactions.
   
3. Easily track and manage payments from multiple payment types or processors so you can spend more time on your business, not on managing transactions
   
4. Provide recurring billing payment services, allowing you to set up scheduled payment charges to your customers. For example, you can set up automatically recurring charges for items such as membership dues or for installment payments. Recurring billing is an important feature that provides added convenience for both you and your customer.
   
5. Be able to act as a virtual terminal to allow for processing offline transactions. This gives you the flexibility to process orders received via telephone, fax, e-mail, or in person.
   
6. Provide and store transaction records allowing you to easily search for transactions and create transaction reports.
   
7. Scale rapidly and seamlessly to accommodate increased transaction volumes so your systems grow as your business grows.
   
8. Provide flexible, easy integration with the merchant’s Web site. The sooner you can start accepting payments, the sooner you start generating revenue from your site.
   
9. Be able to work with all the leading Internet merchant accounts, which allows you to switch your banking relationship and not have to worry about installing new software or performing new integrations.
   
10. Be provided by a well-established and trustworthy company. This ensures that your payment service provider will continue to provide reliable payment services as well as new features
    

You can start accepting payments online in three easy steps:

• Choose and purchase a payment solution that fits your needs.
  
• Set up the payment solution on your Web site.
  
• Set up your Internet merchant account
  

Accepting payments online is an important step in growing your business.



Summary

Over 80 percent of U.S. households are online, and more than half of these households shop from home on a weekly basis. In fact, according to Ipsos-Reid, a leading research company, of the 120 million Americans who use the Internet, half of them will spend at least $700 shopping online in 2004. This means that if you’re not selling online, you’re missing a significant revenue opportunity. And, with advances in technology, selling online has never been easier or more cost-effective.

An online store allows you to be open for business 24 hours a day, 7 days a week. Not only is this an important convenience for your customers, it also means more revenue for you. An online store also helps you to reduce your overhead costs because you don’t need to hire reception staff and people to take orders. With the right payment processing tools, these functions are all done automatically for you. And lastly, an online store helps you to reach new markets—across the country or even outside the United States. An online store is no longer an option for a successful business, it’s a critical step in managing and growing your business.

The most important part of selling online is accepting payments from your customers ranging from a single transaction (the purchase of an item from your Web site), to a series of transactions from a customer (the payment of membership fees or installment payments via your Web site). Online payment processing offers a customer the convenience of submitting their credit card or other forms of payment on your Web site, and for you to actually receive the money from this transaction. Recurring payment processing allows you to set up regularly scheduled payments for your customers for a series of transactions.

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