Types of electronic payment system: The requirements from different actors‘

perspective (Part 1)

This research will map the costs, benefits and the requirements of the electrical
payments system based on every actor‘s perspective. We will do an actor analysis for
all the actors involved in the electronic payment systems. It has been found that there
are differences between the important requirements for different actors. Our research
also found that there are some conflict interests between these actors and therefore, the
designer of the electric payment systems needs to decide these trade-offs in order to
have a successful payment system

Introduction

Nowadays, the terms ―e-commerce‖ – which related to the buying and selling of
products or services via electronic systems such as the Internet and other computer
networks [20] - become very popular. Many companies see ―e-commerce‖ as one of
their strategy to develop in the future. The development of e-commerce can be
explained on the basic of the extensible use of the Internet which has openness, speed,
anonymity, and global accessibility characteristics.

In order to develop a completed ―e-commerce‖ system, the payment system also needs
to adapt to some forms of electronic payment. The slogan ―It's no e-commerce, if you
can't get paid!‖ led to the rise in different electronic payment systems [9]. Although the
demand for using the electronic payment systems is high, the fact that the number of
success stories is lower than the number of the failure one [1] gives rise to one question
– which factors do affect the success of the electric payments system?

It‘s impossible for us to give a concrete answer for the above question because every
payment system has its own dynamic environment in which different actors involved
and different segments of the payment system market. Many researchers (Lee, D.
Abrazhevich) have answered this question by suggesting the criteria for the electronic
payment system and based on these criteria to evaluate current electric payments
systems. This approach gives the basic requirements for an electric payment but can‘t
explain the failure of many systems to meet all these requirements (Sangio Oh, 2006)

The second approach is the approach base on the stakeholder perspective. According
to Sangio Oh [13]; we can identify 2 important conditions for the success of the electric
payment system: the stakeholder mutuality and the critical mass of users. In other
words, we need to take into account not only the basic requirements for the electric
payment system but also the costs, the benefits from each stakeholder‘s perspective
and the number of potential users of this system

This research will combine these two approaches by mapping the costs, benefits and
the requirements of the electrical payments system based on every actor‘s perspective.
We will do an actor analysis for all the actors involved in the electronic payment
systems. It has been found that there are differences between the important
requirements for different actors. Our research also found that there are some conflict
interests between these actors and therefore, the designer of the electric payment
systems needs to decide these trade-offs in order to have a successful payment system

2 An overview of the electric payments systems

Before proceeding to discuss the electric payments systems, let‘s have a look at the
conventional process of payment and settlement.

In the conventional process, after a buyer decides to buy goods and services from a
merchant, the merchant will transfer these goods and services to the buyer and the
buyer will transfer cash or payment information (such as check, and credit card
information…) back to the merchant

In the cash transaction: Cash moves from the buyer‘s account to the merchant‘s
account via face to face exchanges:

- The buyer withdraws a certain amount of money from his account

- He transfers the cash to the seller

- The seller deposits the cash into his account

In the non-cash transaction

- The buyer will transfer the payment information to the merchant

- Adjusting the appropriate accounts of the seller and buyer (via check or credit
card) (If the merchant uses different bank from the buyer, a payment clearing service
between 2 banks will be necessary in order to adjust appropriate accounts in different
bank Figure 2)
 Figure 1: A simplified model of transaction (Charalampos, 2004)

With the development of the Internet, it provides the buyer and merchant the ability to
do the online transaction instead of the above non-cash transaction process. In this type
of system (electronic check, online credit card…), the sensitive information is
transferred online along with the orders through the internet. In addition, because the
transaction is done online, the probability using different banks (or banks located in
different countries) between the merchant and buyer is high. Therefore, the payment
clearing services is added in order to adjust appropriate merchant and buyer bank‘s
accounts

Figure 2: Notational Funds Transfer System (Charalampos, 2004)

When we come to the e-commerce transaction, the lack of face to face interaction
makes some problems about the security of the sensitive information and identity. As a
result, we need an intermediary party (Paypal, google checkout…) to provide the
security, identification as well as payment support. In this process, the buyer don‘t need
to transfer his sensitive information to the merchant but to the intermediary and the
intermediary will confirm the identification of the buyer to the merchant (Noted that the
transaction between the intermediary and the banks can be performed in another type
of electronic payment or conventional process)

Figure 3: Non-sensitive Transfer system (Charalampos, 2004)

2.1 Different types of electronic payment systems

In order to have a completed overview of the electronic payment systems, a

categorization of different types of electronic payment systems is necessary. There are
many different researches ([4], [5], and [16]) about the types of electronic payment
systems, and different authors used different criteria to categorize these systems.

According to [16], in the basic classification of e-payment systems, 2 criteria was used
to categorize the electronic payment systems: pre-paid, pay-now or pay-later and online
or offline transaction

If we use the pre-paid, pay-now, or pay-later criterion, we will have following systems:

- Pre-paid: customer pays before the transaction (e.g. she buys electronic tokens,
tickets, coins, …and uses them to pay for her transactions )

- Pay-now: the customer‘s account is checked and debited at the same time when
the transaction takes place (ex: internet banking…)

- Pay-later (credit-based): customer pays after the transaction (ex: credit card...)

If we use the second criterion, we will have

- On-line: a third party (the bank) is involved in the transaction (e.g., it checks
solvency of the user, double spending of a coin, …) in real-time

- Off-line: the bank (or financial organization) is not involved in real-time in the
transactions

However, these above 2 criteria don‘t provide enough detail about the way of exchange
money (or payment information) between different actors which we want to clarify in this
research. Therefore, we will choose a criterion based on the form of money
presentation. According to [4], payment systems can be divided into 2 groups: electronic
cash systems and credit-debit card systems.

- Electronic cash system based on the ideal of conventional cash, when parties want to
pay for something, they exchange electronic tokens that represent value, just as
banknotes determine the normal value of conventional money.

In this system, in order to have the electronic cash (or tokens) to pay for the merchant, a
customer will request the bank (or the intermediary) who has the ability to create tokens.
Of course, the customer needs to pay this bank (or this intermediary) the equivalent
value compare to these tokens
Figure 4: Electronic cash system (Charalampos, 2004)

Then the customer will send these tokens to the merchant to pay for her buying goods
or services. The merchant, in turn, can store these tokens and use it for later payment
or send to the merchant‘s bank to adjust his bank account

A deeper distinction amongst electronic cash systems is between those that use smart
cards for the storage of tokens (ex Chipper) and those where tokens reside only on
user‘s accounts and computer networks.

Systems that used smart cards (ex Chipper, Chipknip...) stored the tokens on the
card. When buyer wants to buy some things, she needs first to charge the money to her
card (through some machines). Then, the token (money) on the card will be reduced
when the buyer uses it to pay

In systems that used the tokens reside on computer networks, (ex CAFE project)
tokens travel in the computer environment from the server to the customers‘ hard disk,
and can transfer between customers or comeback to the server.

.- The credit-debit system was developed based on the ideal of credit card and bank
account. When a buyer wants to buy some things, she doesn‘t need to exchange any
kind of money or the tokens to the merchant but the information about the payment.
Money is represented by records in bank accounts, and this information is electronically
transferred between parties over computer networks.
Figure 5: Credit-debit system (Charalampos, 2004)

In this type of systems, buyer and seller can‘t have anonymity (which they can get from
some token based systems) with the payment service provider because their account is
maintain by the payment service provider and the payment service provider will record
all the transactions in order to adjust it‘s customer‘s account

A deeper distinction amongst account-based systems is between credit and debit cards
system, the specialized systems and the generic systems

Nowadays, the credit and debit cards systems are widely used for electronic
payment. With the debit approach, the buyer needs to have the positive balance
of the account before she pays for some things and money is subtracted to her
account after the payment (iDeal, Visa Debit card…). With the credit approach,
charges are posted against the buyer‘s account and billed to the buyer later (Visa
Credit card, Master card…)

Here is an example of business process for credit card from Visa (Figure 5)

1. The buyer makes the purchase and provides her card information

2. The merchants needs to get the authorization about the credit card information from
the acquirer of the Merchant

Because nowadays, the shop can accept different types of electronic payment;
therefore, the Merchants need a PSP - A payment service provider (PSP*) offers
merchants online services for accepting electronic payments by a variety of payment
methods including credit card, credit debit, bank transfer, and real-time bank transfer
based on online banking – as the intermediate between the merchant and the payment
system.

In other words, the PSP will forward the message between the Merchant and the
Acquirer in process diagram. Although the PSP has some certain role in the payment
system, it doesn‘t have large impact on the success of the electronic payment system
because the Merchant can have different choices for a PSP or event doesn‘t use it at
all. Therefore, we don‘t put the PSP in our actors list

3. The acquirer in its turn sends the requests to the particular credit card company

4. The credit card company then forwards the request to the Issuer

5. The issuer sends his response back to the credit card company.

6. The credit card company then forwards the response back to the acquirer.

7. The acquirer indicates to the merchant if the transaction is authorized correctly.

8. Once the authorization is successfully obtained, the transaction is completed

After an authorization the merchant has not yet received his money. This is
subsequently done by a clearing and settlement process.

9. To start this process, the merchant sends a request to acquirer bank for payment

10. The acquirer, in its turn, transmits the transaction amount through the card
companies.

11. At this time, the credit card company will debit the issuer bank and credit the
acquirer bank

12. The acquirer bank credits the merchant bank account

13. The issuer bank will bill the transaction amount to the buyer
Figure 6: Credit card Transaction[1] (Visa)

The other 2 types of account-based systems are

 The generic systems (Paypal, NetBill) use simple account-based model for
serving internet payment
Specialized payment systems that are the systems used for some specific
purposes, such as: the one designed for trading content online music

After these types of electronic payment system are classified, there are 2 additional
criteria which we need to take into account for the electronic payment systems. They
are the micro payment and the mobile payment.

- The micro payment system is the system which is designed for the small amount
of money (<2 Euro). Different researches show that there is small market for this kind of
system (K. Böhle 2001). In addition, these above types of electronic payments (Credit
card, Paypal…) can also be used for micro payment.

- The same thing happens for mobile payment. That means these above types of
electronic payments can adapted to some form of mobile payment (such as Paypal
mobile). Besides, many mobile now can access to the internet like a computer, so we
can use the mobile to access these above payment system without changing the
technology

Therefore, we don‘t consider micro payment and mobile payment are 2 distinguish
systems in our category.

Here is the diagram of classification of electronic payment systems

Figure 7: Classification of electronic payment systems (adapted by D. Abrazhevich)

In short, after we categorized the electronic payment systems, we identified that

although they used different models and different technologies, the number of actors
involved in these systems is almost the same. They are Buyer, Insurer, intermediary (or
the system itself, such as: Paypal, credit card company, Chipknip company…),
Merchant, Acquirer and the Network provider (internet or mobile network)

In the following part, we will identify the basis requirements for an electronic payment
system, and then evaluate which elements are more important for these actors

2.2 List of requirements to evaluate the electronic payment systems

In the electronic payment field, ―security‖ is the criterion which is concerned by many
actors. Besides, other requirements need to be taken into account. The requirements of
the electronic payment systems found in the literature are: identification, confidentiality,
authentication, data integrity, non reputation, convertibility, anonymity, privacy, easy to
use, user friendly, mobility…

According to Zon-Yan Lee (Lee [15]), these criteria can be seen as technological,
economic, social and regulatory aspects.
2.2.1 Technological Aspect:

In the technological aspect, security in business transaction and payment is the most
important aspect. They must satisfy these requirements

2.2.1.1 Security

2.2.1.1.1 Authentication (also referred to as Identification or Validity):

The purpose is to verify the parties in the transaction: a buyer, who is obliged to pay,
and a merchant, who is obliged to provide a product or service. In the network
environment where lacking face to face meeting, buyer can‘t observe the merchant‘s
behavior and vice versa. Therefore, there is a risk of misrepresentation, so the
identification can prevent this problem, making unauthorized transfers and increase
trust between parties

2.2.1.1.2 Privacy (also referred to as Confidentiality):

Only necessary transaction information is revealed to the parties, other data remains
unknown. The purpose is to protect the anonymity of the buyer and prevent
unauthorized personnel from accessing information from the transactions. For instance,
the merchant should not know a customer's card number when an intermediary
provides him with a payment certification. The intermediary, in turn, is not supposed to
be informed of purchase details.

2.2.1.1.3 Data integrity (also referred to as Accuracy):

The purpose is to prevent tampering with any data in the transaction, to make mistakes
when sending information, and to avoid accidentally sending a transaction twice, as well
as to avoid transmission errors

2.2.1.1.4 Non-repudiation:

The purpose is to prevent the buyer or the merchant from denying the commitments
they made in a transaction. Therefore, information about details of transaction should be
recorded somewhere (in the merchant‘s database or in the intermediary‘s database)

2.2.1.1.5 Durability:
Users (merchant and buyers) want to be sure that their data or transaction details can
be verified and are not going to be misused after a certain period of time. Therefore, the
system needs to have some kinds of back-up mechanism

2.2.1.2 Authorization type:

This is the ability of a system to perform payments with or without connecting to a

central authority. Authorization type can be offline or online. Offline authorization type
means that users of the system can exchange money not being connected to a network,
without a third party as a mediator.

2.2.1.3 Process speed

All parties (users, banks...) expect the payment system to work fast without any hassles.
They do not want to waste their time on complex payment procedures or the slow
response because of hardware reason from the electronic payment system.

2.2.1.4 Flexibility:

This criterion is the degree to which a system can adapt to a variety of user needs and
adapt to changing conditions. For example: The fact that there are different channels to
use Paypal such as: Internet, Mobile Phone will increase its flexibility

2.2.2 Economic aspect

Cost is one of the most important criteria of user choice both the buyer and the
merchant; besides, the convertibility and atomic exchange by the consumers are other
deciding factors for the development of an electronic payment system

2.2.2.1 Cost

Beside the application, set up fee, cost of the user in an electronic payment system
often divides into the fixed fee and the fee per transaction. The fee per transaction is
very important especially for the payment where the small amount of money is
exchanged

2.2.2.1.1 Buyer cost

Depending on business models, it can include installation, subscription and using costs.
2.2.2.1.2 Merchant cost

Merchants can cover the installation or subscription costs. They can also be charged
recurrent transaction fees (for example: With Visa credit card, Merchant pays
$0.25/transaction + 1.99% of money), but then later, Merchants will add these fees to
the products and then forward the money to the Buyer

2.2.2.2 Liquidity (also referred to as Convertibility or Multi currency):

Nowadays, it‘s quite normal when a European customer uses the electronic payment
system to pay for some things which she buys in the American web site. As the result,
she needs to exchange from Euro to US dollars. This ability is called Liquidity.
Transferred money can be withdrawn or converted to another currency immediately
without any additional procedures.

2.2.2.3 Atomic Exchange:

This means that an electronic payment system must involve consumers paying money
or something equivalent in value in a transaction.

2.2.2.4 User Reach (also referred to as Applicability or Acceptability):

This refers to environment in which the electronic payment system is accessible. This
attribute characterizes whether a system is accessible in all countries of the world, or
the population of all ages.

2.2.2.5 Value Mobility:

This criterion refers to the ability to exchange value between the electronic payments
system with other electronic payment systems or with cash. For example, we still have
money in a pre-paid mobile phone, but these money can use only for the phone call, not
to pay other things. Therefore, it doesn‘t have value mobility

2.2.2.6 Financial Risk:

All the parties are concerned about the level of security involved in online transactions.
If there are financial losses, who is the one incurs these losses.

2.2.2.7 Trust:
Trust refers to the degree of customers‘ confidence that their money and personal
information will be safe. That means all parties involved will not act against users‘
interests.

2.2.3 Social aspect

2.2.3.1 Anonymity/ Traceability:

Anonymity suggests that it‘s not possible to discover someone‘s identity or to monitor an
individual‘s spending patterns

Anonymity has a close relation with traceability which indicates how easy to trace
money flows, sources of finds to a customer via payment activities

2.2.3.2 Convenience (also referred to as Easy-to-use):

An electronic payment system should be simple and easy to use. It means that parties
don‘t need to learn a complex process before using the system. In addition, the process
should be transparent and don‘t need to install additional software or hardware

2.2.3.3 Mobility:

With the development of different electronic devices which can connect to the network.
Users do not always use only one PC to access the Internet and make online
purchases. Therefore, it is inconvenient if a payment system is tied up with the
hardware of a PC. Electronic payment systems should provide mobility, i.e. can be used
with different PCs or if possible with different type of devices.

2.2.3.4 Interoperability:

A payment system is interoperable if it is not dependent on one organization, but is

open and allows as many as necessary interested parties to join

2.2.4 Regulatory Aspects

Because of the difference in the regulatory in many countries, the electronic payment
system needs to take into account to the respective regulations of the countries in which
it plans to operate. It must abide by all government regulations with respect to on-line
business transactions. Some of the concerns of regulatory aspects are digital
signatures, digital fund transfers, electronic commerce contracts, customs and taxation,
and international agreements, etc.

2.2.5 Summary:

In short, here is the list of the important requirements for the electronic payment system:

Technological Aspect: - Liquidity (also referred to as convertibility or

Multi currency)
- Security
- Atomic Exchange
Authentication (also referred to as
Identification or Validity) - User Reach (also referred to as
Privacy (also referred to as Applicability or Acceptability)
Confidentiality)
Data integrity (also referred to as - Value Mobility
Accuracy)
Non-repudiation:
Durability - Financial Risk

- Authorization type Social aspect

- Process speed - Anonymity/ traceability

- Flexibility - Convenience (also referred to as Easy-to-

use)
- Mobility
- Trust
- Interoperability
Economic aspect
Regulatory Aspects
- Cost

Buyer cost
Merchant cost

Table 1: List of requirement for the electronic payment system

After identifying all the requirements, many researchers used them to evaluate the
electronic payment systems. Some defined the same weight for all the criteria [Lee et
all], others put different weights on each criterion [Jean Michel Sahut, 2005] (Appendix
A). Although these assessments can evaluate the electronic payment system as the
whole, they don‘t really take the stakeholder‘s perspective into account.

In the following part, we will do the actor analysis and then re-assess these above
requirements in the actor‘s view

3 Actor analysis and the requirements in actor’s perspective:

According to (Sangjo Oh, 2006), the stakeholder mutuality is one of two conditions for
the success of an electronic payment system (the other is the critical mass of users).
Mutuality of stakeholder means that this stakeholder‘s benefits must exceed its costs
when she uses the electronic payment system.

The benefits and costs from a stakeholder will be identified based on its objectives and
their resources - what they can expect and can give to the electronic payment system.
The comparison between the benefits and the costs will give the direction for the
requirements of the electronic payment system and also identify which criteria are more
important

3.1 Buyer:

Buyers represent the major target of all electronic payment system. They decide if they
want to use an electronic payment system to buy a certain thing.

Interest[2]:

They want to by goods and services with an acceptable cost in a convenient way

Objectives[3]:

Their main expectation in the electronic payment system is that

- They can use the electronic payment system to buy their chosen goods, services
or transfer money to the people they want

- Low cost

- Fast, easy to use, and keep their privacy

Important resources[4]:

- The willingness to use the system is their most important resource

- Consumers can probably influence the other actors since the electronic payment
service is offered to them.

- The number of buyer uses the electronic payment system contribute to one of 2
important conditions for the successful of the whole system – a critical mass of
customers

- Buyer fee to use the system can be a part of system revenue

Degree of replace ability:

Can replace as the individual buyer but the whole buyer can‘t be replaced

Important criteria to the Buyer:

We can extract intermediately 2 criteria which are very important to the buyer are user
reach and cost. These 2 criteria will affect the user‘s decision whether to use an
electronic payment system. If she can‘t buy the goods she wants or the cost (of the
payment service) to buy it is very high, she will choose other payment systems (maybe
cash, check…) which can help her to buy that goods.

- The very important factor can affect the user reach is the number of merchants;
the more merchants accept the payment from the system, the more goods and services
they sell, and as the result, the user reach is high

- Low cost criteria can attract the buyer to choose the system. These are the
reasons why there are many systems now provide the service for the buyer with a low
cost or even for free (Paypal, Chipknip…)

- Convenience is the next factor important to the Buyer. According to [4] in his
survey, the buyers prefer debit cards (75.2%) to other system because they find them
easy to use. Google checkout or Amazon's 1-Click are two recent examples about the
important of the convenience to the users. For instance, google checkout helps increase
user‘s convenience by not to fill in a lengthy form every time they buy instead google will
manage your credit information and then use it to pay things for buyer
Combining with the result of the survey from [4], we have here the list of the important
characteristic of electronic payment system:

Applicability

Buyer cost

Convenience

Convertibility

Privacy

Security

Trust

Less important criteria to the Buyer:

- According to [4], anonymity is not very important for the buyers. Although many
researches think that anonymity is very important character of the electronic payment
system. 72.8% of the respondents are never stopped by the fact that they are revealing
their identity. The fact that the credit card companies have the ability to trace the
expense of the buyer (low anonymity) but credit card is still wide acceptable is another
example of the lest important of the anonymity

- Although every body knows that regulatory aspect is important. It is quite difficult
for a buyer to evaluate the regulatory aspect of an electronic payment system. In
addition, before using the service of an electronic payment company, the user needs to
agree with a lot of different terms in the user agreement (for example: Paypal provides
14 A4 pages for the user agreement). It‘s impossible for the users to clarify all these
terms, and therefore, they just think that there is nothing wrong with the regulatory
aspect of this electronic aspect of this system, and start using it

3.2 Merchant:

Merchants are the shop owners who are selling goods or services to the buyers and
receiving the money back from the buyers. They can choose the electronic payment
systems to set up in their shop (or website) and hope that these electronic payments
system can help them to have more convenient to get payment from the buyers. In
some special cases, the user who receives money from other users in an electronic
payment system is also seen as the Merchant

Interest:

Profit is the main interest of the merchant actor. In order to have high profit, he needs to
have more payment from the customers, it means more transactions for their goods and
services and lower cost for their business activities

Objectives:

Their main expectation in the electronic payment system is that

- They can use the electronic payment system to attract more customers, sell more
goods and services and get their payment on time

- Low cost

- Fast, easy to use, easy to set up

Important resources:

- Merchant‘s cost is the most important part contributing to the revenue of the
electronic payment companies.

- The willingness to use the system is also their important resource

- The varieties of the goods and services provided by merchants can attract the
buyer to use the electronic payment system

Degree of replace ability:

Can replace as the individual but the whole Merchants can‘t be replaced

Important criteria to the Merchants:

Like the buyer, we can extract intermediately 2 criteria which are important to the
Merchant are user reach and Merchant cost.
- Merchants through an electronic payment system want to have more users for
their own business. A high user reach electronic payment system will attract the
merchants because they think that the users of the electronic payment system can
become their customers.

- Merchants’ cost includes the installation or subscription and cost per transaction.
Although we already stated that merchants can pass the full cost (or part of the cost) to
consumers, low cost is still very important to them because it can decrease the amount
of goods and services the merchants can sell. Let me explain by the flowing examples:

Figure 8: Compare the quantity with and without transaction cost

Assume that a price of an item in a shop is 200 Euro/ item. With this price, the buyer
will buy 100 items (Left Figure: Supply and demand without transaction cost).

When this merchant uses a certain kind of electronic payment which costs him 6 Euro
for this transaction (0.06 Euro/1 item), he then passes this amount of money to the
buyer. In this case, the buyer pays 200.06 Euro/ item, the number of items he will buy
reduces 95 items (Right Figure: Supply and demand with 6 Euro transaction cost). In
the Merchant side, he still receives 200Euro/item (after minus the transaction cost) but
he can sell only 95 items compare to 100 as normal way (-5 item). In order words, the
more cost for the transaction fee, the fewer items the buyer sells and therefore his
revenue will decrease
- Financial Risk is the next important factor to the merchant because in many
current electronic payment system, merchant is the one who takes the significant lost
when there is any lost, as state in [8] ―in distance selling contracts, the payment is not
guaranteed in respect of fraudulent transactions. It is therefore the merchant who bears
a significant share of the cost of fraud either through the chargeback process or through
the banking fees which tend to compensate for the extra processing costs of handling
the high number of chargeback‖.

For example, in case of credit card: After any transaction, consumers have a certain
number of days to dispute a credit card transaction if she has any problem with credit
card payment such as an unresolved dispute with the merchant or because there is a
fraudulent claim (i.e., the card was used without the card holder‘s consent).

In these cases, the transaction will be reversed through a chargeback. The chargeback
amount is deducted from the merchant‘s account by the acquirer while the dispute is
under review. Merchants have a limited number of days to provide the information in
their defense. Thus, Financial Risk is very important factor to the merchant because if
there is any financial problem with the transaction, it can charge the Merchant for the
process and also risk losing the transaction funds.

We have here the list of the important characteristic of electronic payment system for
the Merchants:

Applicability

Financial risk

Merchant cost

Convertibility

Security

Trust

Non-reputation

Less important criteria to the Merchant:

- From the fact that, many shops now can accept different type of electronic payment
both online and offline, we can argue that authorization type is not very important for the
Merchant perspective.

- Atomic exchange is also less important to the Merchant. As we can see, the
transaction between the buyer and the merchant are done through the electronic
payment system. Therefore, the electronic payment system not the merchants has the
responsibility to get consumers paying money or something equivalent in value of a
transaction

3.3 The electronic payment systems:

Both the buyers and the merchants have the demand to make transactions between
each other. However, in the electronic environment (internet), they can‘t meet each
other, and thus can‘t have enough trust and means to make a transaction. Therefore,
the electronic payments systems were created in order to meet these demands

Interest:

Profit and the stable development are the main interests of the electronic payment
companies. In order to reach their interests, they needs to have more customers (both
buyer and merchants) used their services

Objectives:

Their main expectation in the electronic payment system is that

- The large number of customers using their electronic payment services

- The increase of fee they can charge their customers

- The development of market share in the electronic payment market (the ability of
competition between electronic payment companies)

- Low developing and operating cost

Important resources:

Also every companies has their own resources, here are something we can mention:
- The knowledge and the ability to implement a certain type of electronic payment
system

- The demand of using electronic payment from the customers

- Experts in the security area

Degree of replace ability:

This actor is the main part of every electronic payment system, so it can‘t be replaced
although we can change some services from it.

Important criteria:

Although all criteria in part 2 are important to every electronic payment system, there
are some of them are more important than the others

- User reach is the most important criterion for an electronic payment system; this
criterion shows the number of users using this system or the market segment of this
electronic payment system. Therefore, every electronic company needs to have a
strength marketing strategy in order to increase its user reach

In addition, the number of users has used the system also affect the future user reach of
that system. The electronic payment market is a "two-sided market" [21] where two
groups of agents (i.e. merchants and buyer) interact with each other and the value of
participating in the network for agents in one group depends on the number of
participants from the other group.

- Cost (both buyer and merchant) is the next important factor because this is the
main revenue source of the electronic payment system. However, if the cost is two high,
the number of users using this electronic payment system will decrease.

- Security is the factor which we can forget when we discuss about electronic
payment system. As the organization, who will exchange the value between parties, it‘s
very important for the system that the right value is exchange to the right parties. In this
concept, there is differences concerns between electronic cash and account based
systems:

In the electronic cash system, there are 2 kinds of problems:

1. The first one is the problem of double spending - If someone tries to spend the copied
electronic money repeatedly. Like the conventional cash, one of the desirable characteristics of
the electronic cash is anonymity; it makes more difficult to trace the source of money. When the
electronic cash is passed from one person to another person anonymously, he can still keep the
copy of this cash to spend it in another place

2. The second security problem is forgery of electronic money. Electronic cash is still an
electronic form of data (or in detail, a number of bytes) which satisfies some properties. It is
possible to generate some new forms of data which also satisfies these properties and we will
have new electronic money without issued by the bank

In the account based system, because there is no token exchange between

parties as in the electronic cash system, these 2 above problems has low risk. However,
there is a higher risk about stealing payment information (such as credit card number,
bank account), and using this information for fraud

We have here the list of the important characteristics of electronic payment system:

Applicability

Cost

Security

Regulatory Aspects

Trust

Convenient.

Less important criteria:

- Form the electronic payment system perspective, anonymity (traceability) is not

necessary because traceability makes it harder to find the source of problem (in case of
fraud). In the other sides, this criteria maybe have a certain meaning to the user of the
system

3.4 Insurer and Acquirer Bank:

These banks are where the buyers and the merchants store their money before and
after the transaction. Nowadays, there are many banks which also provide the
electronic payment system by themselves (such as internet banking from ABN Ambro )

Interest:

Profit and the stable development are the main interests of the Banks.

Objectives:

Their main expectation in the electronic payment system is that

- Provide their own customers more options for payment

- The more transactions between their customers through the electronic payment
system, the more interchange fee banks can get

- With the electronic payment system, the bank can increase its ability to make
transaction in different countries

- Increase their credit customer (through credit card…)

Important resources:

- The large number of customers (both buyer and merchant) have already used
Banks

- Experts in the financial and security area

- Have relationship with different banks and financial organizations in different

countries

Degree of replace ability:

Some systems (such as Paypal) in their normal transactions, they don‘t need the bank
but when users want to withdraw from (or transfer to) the money from the system, they
will need the banks

Important criteria:
- Like the electronic payment system, Insurer and Acquirer bank also put a lot of
effort to increase their security level. When a bank joins into an electronic payment
Network, it also opens some connections with the electronic payment companies (such
as Paypal, Chipknip) which allows the users can transfer their money from the bank to
the electronic payment system and vice versa.

For example: In case we want to have 10 Euro in our Paypal account, we request
Paypal to withdraw it from our bank account in ABN Ambro. Then Paypal can withdraw
the money from our bank account and put it into our Paypal account. If we look at this
situation in the view of relationship between companies, it means that Paypal can
request to change our bank account in ABN Ambro. We call it as a connection between
Paypal and ABN Ambro.

These connections increase the risk for the bank (if there are some frauds in the
electronic payment, they can affect the security of the bank). Therefore, the bank
requires the high security level from the electronic payment

- For the same reason that there are some connections between the electronic
payment system and the banks, financial risk is an important criterion for the bank to
decide weather to support an electronic payment system. If the financial risk is too high,
the bank will be afraid to join into the system

- In the technical side, when opening some connections for an electronic payment
system, the bank also needs to invest some money to be sure that they have a secure
and good connection. Therefore interoperability – the ability for the other parties to join
into the system – is necessary. If interoperability is high, the effort for the bank to join
the electronic payment system is low and therefore attractive for the bank

We have here the list of the important characteristic of electronic payment system:

Security

Financial risk

Interoperability

Regulatory aspects

Less important criteria:

- Like the electronic payment system perspective, anonymity (traceability) is not
necessary for the bank because it makes harder to find the source of problem (in case
of frauds).

- Cost between the electronic payment systems with its customers is not relevant
to the bank.

3.5 Network provider (internet or mobile network):

Network provider manages the infrastructure used for communication between

different parties including a wired network for electronic payment transactions between
banks‘ financial systems.

Interest:

Profit and the wide development of the infrastructure are their main interest.

Objectives:

Their main expectation in the electronic payment system is that

- By using a particular electronic payment system, increase the number of people

and organizations using their network

Important resources:

- The large infrastructures for communication

- It has a large number of user‘s already used its services

Degree of replace ability:

Can‘t replace

Important criteria:

- The objective of the network provider is to increase the number of people using
their service. Therefore, it wants a large number of User reach and an online
authorization type. If an electronic payment system has 2 above condition, the number
of people using the network provider‘s services will increase since these services are
necessary to access the electronic payment system

- Like the bank, the network provider wants different parties can connect to the
electronic payment system. Therefore interoperability is important to them.

We have here the list of the important characteristic of electronic payment system:

User reach

Authorization type

Interoperability

Less important criteria:

- The network provider doesn‘t like the flexibility of an electronic payment system.
For example, the Internet provider doesn‘t want the electronic payment system which
allow user can transfer money through telephone because it will reduce the number of
internet users

As a summary, we will summary the above actor analysis in the following table

Actors Objectives Resources Important criteria Less

important
criteria

Buyers - Convenient way -Willingness to - Applicability: Wide - Anonymity

to buy goods, use the system
services or transfer - Buyer cost: Low - Regulatory
money - Buyer‘s cost aspect
- Convertibility: High
- Low cost - Influence other
actors - Privacy: High
- Fast, easy to use,
and protect their - The main users - Security: High
privacy of the system
- Trust: High

- Convenient: High
Merchants - Attract more -Merchants‘ cost - Applicability: Wide -Authorization
customers is system‘s type
revenue - Financial risk: Low
- Low cost - Atomic
- Willingness to - Merchant cost: Low exchange
- Fast, easy to use, use the system
easy to set up - Convertibility: High
- Influence other
actors - Security: High

- Trust: High

- Non-reputation: High

Electronic - The large number - The ability to - Applicability: Wide - Anonymity

payment of customers implement
system electronic - Cost(source of
- The increase of payment system revenue): High
fee
- The demand - Security: High
- The development from customers
of its market share - Regulatory Aspects:
- Experts in the Obligatory
security area
- Trust: High

- Convenient: High

Insurer and - More convenient - The large - Applicability: Wide - Anonymity

Acquirer for their customers number of (traceability)
Bank customers - Financial risk: Low
- More interchange - Cost
fee - Experts in the - Interoperability: High
 financial and
- Increase their security area - Regulatory aspects:
credit customers Obligatory
- Have
relationship with
different banks

Network - Increase the - The large - Applicability: Wide - Flexibility

provider number of people infrastructures
using their network - Authorization type:
- It has a large Online
number of users
- Interoperability: High

Table 2: Objectives, resources and important criteria of actors

3.6 Trade off between these criteria:

In the above table, we summarized the important criteria based on the stakeholders‘
perspective. As we can see, with different stakeholders, the order of these criteria is
different. In addition, in some criteria, different stakeholders have different directions for
it. We will map out these varieties in the following part

3.6.1 Wide applicability:

As we can see here, all actors want to have a wide applicability criterion. It means that if
the number of users of an electronic payment system increase, every party in this
payment system will get more benefits. So, the question is why an electronic payment
system can‘t automatically have wide applicability when all parties get benefits from it?

Firstly, electronic payment system is a ―network externalities‖ [22] where a new user
that joins an existing network or group of users will confer additional benefits on the
existing users in the network. It means that the more buyers that use the same
electronic payment system, the more merchants will accept that instrument and vice
versa. However, at the beginning of the development, the electronic payment system
needs to deal with the ―chicken and egg‖ problem. With a new payment product, there
are not enough merchants in order to attract the buyers to join the system. Conversely,
merchants will incur the initial investments required to accept that product only if they
think it has or will have critical mass. Therefore, it‘s very difficult for an electronic
payment system to achieve a critical mass point of users where it becomes attractive to
the buyers and merchants

The second problem is the problem of switching costs. It means that before using an
electronic payment system, a user has already used different types of payment system.
Therefore, when she decides to change to a new one, she needs to spend switching
costs including: transaction costs, learning costs, and contractual costs [22]. For
example: when a credit card user wants to change to use Paypal with her bank account
as her main electronic payment system, her switching costs are

- Transaction costs: In the verified bank account steps, Paypal will charge a little
money from the user bank account in order to validate her bank account

- Learning costs: She needs to learn how to open and use Paypal to transfer
money and where she can buy the goods and services she wants in the Paypal
network. It‘s especially difficult when she isn‘t an experience internet user

- Contractual costs: When she doesn‘t use credit card any more, her credit card
bonus which she may have in the credit card system maybe disappeared.

When switching costs exist, users have strong incentive to continue with her current
payment system. It‘s another reason for the electronic payment system can reach it
critical mass point of users

In short, like the conclusion from (Sangjo Oh, 2006), critical mass is the important
condition for the success of an electronic payment system. Before reaching this critical
mass of users point, the system looks unattractive to users. Therefore, a strategy to
increase the number of users at the beginning is very important. When a system
reaches it critical mass point of users, the system becomes more promising to all parties
and therefore the system will become wide applicability

3.6.2 The convenience of user vs online authorization type:

3.6.2.1 The convenience of user vs online authorization type of the network

provider
Imaging that there is an electronic payment system using mobile network as the means
of the communication, this system wants to increase the convenience for its users by
providing different ways of doing payments, such as: an offline payment service or
users can use internet for payment instead of mobile network

- In the first case, the convenience increases because the transaction can perform
offline, just like normal cash. It does not require a third party at the time of the
transaction. As a result, this type of payment is faster and avoids any problems from
the third party

- In the second case, the users have more options to perform her payment: with a
mobile or with a PC

However, Network provider (mobile network in this case) doesn‘t like these solutions
because it reduces the number of users using their services. Therefore, the network
provider doesn‘t have enough motivation to support this payment system, and therefore
can affect the application of this system

3.6.2.2 The convenience of user vs the security of the system through online
authorization type aspect

As we said above, offline transaction can increase the convenience for the users. It
provides the ability to trust a transaction without the presence at that time of the third
party. It is also cheaper because of the reduced bandwidth and the absence of
bottleneck problems.

On the other hand, online transaction can increase the security level of the electronic
payment system. Having a transaction processed on-line has advantages to financial
institutions and the system itself. This is the easiest manner to solve the double
spending problem: a transaction is approved and cleared on the spot. Furthermore, it
provides the ability to trace the transactions.

3.6.3 The convenience of user vs security:

The online and offline aspect is one of things can affect the user‘s convenience. Other
things can contribute to the easy-to-use problems are: hardware vs software and
complex procedure or not

3.6.3.1 Hardware versus software:

A dedicated hardware solution (chipknip, identifier…) might look to be the ideal
technical solution in many senses, but it raises some economical and convenient
issues.

On the one hand, the smart card and the identifier which contains a security system
with tamper-resistant properties [23] can help to increase the security level of the
electronic payment system.

- Firstly, smart card can help to increase the authentication of the users. In an
internet payment solution, user name and password are often used to identify a certain
persons. The fact that the more usernames and passwords were used, the more difficult
to remember it. Therefore, users often write down password or select easy-to-remember
passwords such as the name of their child or pet. This increases the risk of stolen
password.

Smart card can help to solve this problem. The user passwords are now stored on a
smart card where it is able to perform complex encryption algorithms and secure the
passwords against third-party access. In advance, we can develop an authentication
solution where there is a combination between the smart card itself and the PIN. For
example: The internet banking from ABN Ambro is such solution, in order to log in to our
account, we need both the card and the PIN code

Therefore, the authentication level of the system can increase. Another advantage of
using smart card is that users notice very quickly that their smart card is lost or stolen—
in contrast to compromised or hacked passwords.

- Secondly, if we want to develop an off-line electronic payment system, smart card

can help to solve the double spending problem because mart card can store the detail
of the transactions in a high secure level. It is very flexible at a very low cost per
transaction since we don‘t need to maintain a large database for every transaction.

On the negative side, it requires the spread of specific pieces of hardware (smart card,
card readers…) and its acceptance by consumers. In the multi environment of the
electronic payment system, it therefore requires a broad agreement among participants
about the standard of this hardware. Consequently, it creates new cost for every party
and also decreases user‘s convenience

- Besides, in case of using smart card for authentication, it reduces the level of
convenience for the user. We always need to have a smart card (and the identifier) in
our hand in order to log in to the system. Imaging that when we travel to a new city for a
few days and we forgot to bring the smart card (and the identifier or other types of
hardware…), it will become impossible for us to use the electronic payment system to
pay for the goods and services we want

- Also, in case of using smart card for off-line electronic payment system, this kind
of card can be loaded with unidentifiable tokens (ideal anonymous cash system) and
used without password. This implies that, if a customer declares the card lost, stolen or
destroyed, the cash is lost. This property makes the smartcard a non-durable system,
and therefore not adapted to large transactions.

3.6.3.2 Anonymity vs security (Privacy versus traceability):

Some designers want to develop electronic payment systems which allow the payers to
be autonomous during a transaction. However, this privacy protection could be misused
by criminals. The more anonymous the system, the more difficult regulators and
intermediaries can be able to trace any transaction in the economy.

In order to have both characteristics: security and anonymity in the same system. Many
complex protocols are introduced [24, 25]. Although they showed (theoretically) that
they can reach certain level of anonymity, these complex protocols cost more money
and afford to develop in practice because they need to have the agreements between
different parties for using these protocol.

As conclusion for the above parts, here is the figure about the trade-offs between the
security of the system and other criteria:
Figure 9: Trade-offs between security and other criteria

3.6.4 Security vs Regulatory aspects:

In the security aspect of an electronic payment system, the cryptographic techniques

are used to protect against the attacks on the communication between two parties. The
purpose of the cryptographic techniques is to keep the communication secret and as a
result, increases the security of the system.

However, the government doesn‘t want any one send ―secret message‖ outside the
countries because they think that cryptography is a dangerous tool in the hands of
lawbreaker [27]. From this fact, regulation of many countries for example US did not
allow the development of a payment solution really more secure than SSL (Secure
Socket Layer) which is a communication protocol, not a payment protocol.

3.6.5 Cost of users vs Revenue of system:

As we saw in the objectives, resources and important criteria of actors table, the users
(both the merchants and the buyers) want to have a low cost while the electronic
payment system wants to have high cost (high charge its customers) because the
income of the system comes from its price.

Depend on the demand and supply in the electronic payment market, the price for using
an electronic payment system can be determined. Besides, as we discussed in the wide
applicability, the critical mass of user is one of the successful condition for the system.
Therefore, the price of electronic payment services should attract the users (at least at
the beginning of the system)

In addition, the cost between buyers and merchants should be different. In the
electronic commerce environment, the flow of revenue is changed compared to the
traditional commerce [26]. In the electronic commerce environment, the content
provides or the merchants don‘t need to pay for the retail and the whole sales.
Therefore, the merchants have more benefit than the buyers when using the electronic
payment system. This fact needs to take into account when we decide the cost for the
buyers and merchants, or in other words, the merchants can accept the higher cost than
the users

Figure 10: Changing value chain from traditional commerce to electronic commerce [26]

3.6.6 Financial risk between buyer and merchant:

It‘s quite important to decide who takes the risk in case of fraud in an electronic
payment system. As we saw in the value chain figure (figure 9), merchants are the ones
who get more benefit in an electronic payment system (sell more products, and they can
pass the payment cost to the buyer). Therefore, in order to have the mutual benefits of
stakeholders, merchants should take more risk than the customers.

Let take the successful of SSL and the failure of SET as an example:
 - SET was a data encryption solution: ―SET makes use of cryptographic
techniques such as digital certificates and public key cryptography to allow parties to
identify themselves to each other and exchange information securely‖ [28]. It
authenticated all parties, allowed confidential data exchange, checked message
integrity, and passed information between parties on a need-to-know basis.

- SSL in its usually implemented form (where the consumer is not required to have
a public key certificate) is less perfect since, although a confidential data exchange is
still achieved, the consumer is not authenticated.

The consequence of this difference is that the change in who takes the financial risk. In
SET transaction, because the buyers are authenticated in a transaction, she will be
responsible for the financial lost in case of someone stole her credit card number. In
contrast, the merchant is the one who is responsible in SSL transaction, in case of fraud
since they are not electronically signed by the customer.

Combining with the value chain figure, the merchant who has more benefit should
takes the risk of fraud as an acceptable business risk, and this is the SSL mechanism.
In order words, SSL has stakeholder mutuality which SET does not.

As the result SSL is more successful than SET

Part 2 >>

[1] PSP: Help to forward the request between the Merchant and the Acquirer

[2] Interest: describe the issues that matters most to actors. Usually, interests have a
certain direction for a long period

[3] Objectives express interests in more specific terms, defining them in terms of
‗desired situations‘ or in our case what actor expects from the electronic payment
system

[4] These are the resources which can contribute to the electronic payment system in
general

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Deepa K V

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Excellent write up! Thanks for puttin this on Knol.

Last edited Aug 11, 2010 8:20 PM

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Anonymous

Well written!

Awesome analysis! It's so great that I can sell to anyone in the world now that my
business can sell online through http://www.payvision.com. Their ecommerce solutions
are so easy and secure.

Last edited Jul 16, 2010 11:24 AM

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