bsit 62 - ecommerce

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INFORMATION TECHNOLOGY PROGRAMMES

Bachelor of Science in Information Technology - B.Sc. (IT)Master of Science in Information Technology - M.Sc. (IT)

Incollaboration

with

KUVEMPU UNIVERSITY

B.Sc.(IT) - 6thSemester

BSIT - 61 Basics of .NET

BSIT - 62 E-Commerce

Directorate of Distrance Education

Kuvempu UniversityShankaraghatta, Shimoga District, Karnataka

Universal Education TrustBangalore


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Titles in this Volume :BSIT - 61 Basics of .NETBSIT - 62 E-Commerce

Prepared by UNIVERSAL EDUCATION TRUST (UET)Bangalore

First Edition : May 2005Second Edition : May 2012

Copyright by UNIVERSAL EDUCATION TRUST,BangaloreAll rights reserved

No Part of this Book may be reproducedin any form or by any means without the writtenpermission from Universal Education Trust, Bangalore.

All Product names and company names mentionedherein are the property of their respective owners.

NOT FOR SALEFor personal use of Kuvempu UniversityIT - Programme Students only.

Corrections & Suggestionsfor Improvement of Study materialare invited by Universal Education Trust, Bangalore.

E-mail : [email protected]

Printed at :Pragathi Print CommunicationsBangalore - 20Ph : 94480 - 42724


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E-COMMERCE(BSIT - 62)

: Contributing Authors :

Dr. G. Raghavendra RaoProfessor & Head, Department of Computer Science & Engineering

&Principal

National Institute of EngineeringMysore - 570 008


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Course Introduction

In this course on e-commerce, you get introduced to one of the latest and useful branches of computer

study. The concept of electronic commerce is about carrying on the sales/purchases of equipment,

articles, services or even information without the seller and buyer being face to face. The concept is to

make use of the computer networks with the associated communication lines for interaction, placing of

orders and even transfer of money. Only the shipment of the articles is to be done physically.

There are several issues involved in the transactions, which we will examine in some detail the

facility to know the availability of articles/services, placement of orders, transfer of money, the security

issues involved etc. The first chapter deals with the overall concept of commerce and e-commerce. We

look at the concept of commerce in brief and how the introduction of computers can revolutionize the

entire arrangement. The second chapter deals with the fundamentals of consumer oriented e-commerce.

What are the needs of such an environment? What are the main areas of its application? How can weuse e-commerce in areas like banking, home shopping, entertainment etc. are discussed briefly.

The third chapter gives an architectural frame work for e-commerce. It describes the various application

services needed in detail and also a very brief overview of the world wide web.

The fourth chapter once again details the desirable characteristics of a market place. We then proceed

to the mercantile process models from the consumers perspective as well as from the merchants

perspective. These models are extremely useful in the actual configuration of systems.

The fifth chapter describes on of the most important aspects of e-commerce the concept of electronic

payment. We discuss in some detail the token based electronic payment systems (e-cash), electronic

checks, smart cards and the various risk factors involved in each of these modes of payment.

The next chapter deals with the concept of EDI electronic data interchange we discuss the concept

of EDI, the various blocks in a typical EDI and again the various legal and privacy issues involved. We

also talk about standard and open EDIs.


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VI

The next chapter continues with the concept of EDI, discussing the various implementation aspects.

We also talk of VALUE-Added networks, the issues involved in them and the concept of internet based

EDI.

E-commerce need not be useful only in transactions between the seller and the buyer. It can be used

to smoothen the operations between the various departments of the same organization. The eighth chapter

deals with building of such interdepartmental information systems. It briefly touches upon aspects like the

different types of organizations, concept of work flow coordination and overview of supply chain

management.

In the next portion, discuss about the most important aspects of e-commerce namely security. In the

absence of any face to face interaction and since the dealings are mostly with total strangers, there is

always a threat of mismanagement, swindling and all other sorts of commercial crimes. To overcome this

several security measures are in place, even though there can e nothing like an absolutely secure

environment, several methods to provide a reasonable security to the activities have been developed. Theninth chapter describes the various types of threats to transaction both on communication lines in general

and internet in particular. The next chapter deals with the specific demands of e-commerce and also

describes several commercial protocols available. The last chapter gives the detailed literature of a

protocol called SET (Secure Electronic Transaction. This is expected to give the student an idea about

the various trade offs in a commercial environment and it is also advised that the student will try to

implement a part of this on a computer.

The students are strongly advised go through the reference books given at the end for more detailed

information on the subject.


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VII

Contents

Unit I

Introduction 1

Chapter 1

Web Commerce 2

1.1 Concept of Commerce and e-commerce1.2 Summary

1.3 Questions

1.3.1 Answers

CHAPTER 2

Fundamentals of consumer oriented e-commerce 6

2.0 Introduction

2.1 Basic tenets of e-commerce in a consumer oriented scenario

2.2 Basic Banking Services

2.3 Home Shopping

2.4 Home Entertainment

2.5 Microtransactions for information

2.6 Desirable characteristics of e-marketing

2.6.1 A minimal size of the place


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2.6.2 A scope for interactions

2.6.3 Scope for designing new products

2.6.4 A seamless connection to the marketplace2.6.5 Recourse for disgruntled users

2.7 Questions

2.7.1 Answers

Chapter 3

Electronic Commerce and the World Wide Web 12

3.0 Introduction

3.1 ARCHITECTURAL FRAMEWORK FOR ELECTRONIC COMMERCE

3.1.1 Electronic Commerce Application Services3.1.2. Information Brokerage and Management

3.1.3. Interface and Support Services

3.1.4. Secure Messaging and Structured Document Interchange Services

3.1.5 Middleware Services

3.1.6. Transparency

3.2 WORLD WIDE WEB (WWW) AS THE ARCHITECTURE

3.3 Summary

3.4 Questions

3.4.1 Answers

Chapter 4

Consumer-Oriented Electronic Commerce 19

4.0 Introduction

4.1 Desirable Characteristics of an Electronic Marketplace

4.2 MERCANTILE PROCESS MODELS

4.3 MERCANTILE MODELS FROM THE CONSUMERS PERSPECTIVE

4.3.1 Pre-purchase Preparation

4.3.2. Information Brokers and Brokerages

4.3.3. Purchase Consummation

4.3.4. Postpurchase Interaction

4.4 MERCANTILE MODELS FROM THE MERCHANTS PERSPECTIVE

4.4.1. Order Planning and Order Generation

4.4.2 Cost Estimation and Pricing

VIII


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4.4.3. Order Receipt and Entry

4.4.4 Order Selection and Prioritization

4.4.5 Order Scheduling4.4.6 Order Fulfillment and Delivery

4.4.7. Order Billing and Account / Payment Management

4.4.8. Post-sales Service

4.5 Summary

4.6 Questions

4.6.1 Answers

Chapter 5

Electronic Payment Systems 305.0 Introduction

5.1 DIGITAL TOKEN-BASED ELECTRONIC PAYMENT SYSTEMS

5.2 Electronic Cash (e-cash)

5.2.1. Properties of Electronic Cash

5.2.2 Electronic Cash in Action

5.2.3 Business Issues and Electronic Cash

5.2.4. Operational Risk and Electronic Cash

5.2.5. Legal Issues and Electronic Cash

5.3 Electronic Checks

5.4 Smart Cards and Electronic Payment Systems

5.4.1 Relationship-Based Smart Cards

5.4.2. Electronic Purses and Debit Cards

5.5 Credit Card-Based Electronic Payment Systems

5.6 Risk and Electronic Payment Systems

5.6.1 Risks from Mistake and Disputes

5.6.2. Managing Information Privacy

5.6.3. Managing Credit Risk

5.7 Designing Electronic Payment Systems

5.8 Summary

5.9 Self Study

5.9.1 Answers

IX


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X

Unit II

Introduction 41

Chapter 6

Inter-organizational Commerce and EDI (Electronic Data Interchange) 42

6.0 Introduction

6.1 ELECTRONIC DATA INTERCHANGE

6.2 EDI Layered Architecture

6.3 EDI in Action

6.3.1 Tangible Benefits of EDI

6.4 EDI: LEGAL, SECURITY, AND PRIVACY ISSUES

6.4.1 Legal Status of EDI Messages:6.4.2 Digital Signatures and EDI:

6.5 EDI and Electronic Commerce

6.5.1 Traditional EDI

6.5.2 Open EDI

6.6 Summary

6.7 Questions

6.7.1 Answer

Chapter 7

EDI Implementation, Value-Added Networks

7.1 Structure of EDI Transactions

7.2 EDI Software Implementation

7.2.1 EDI Business Application Layer

7.1.1 EDI Translator Layer

7.3 EDI Communication Layer

7.4 How much will an EDI implementation Cost

7.5 Value-Added Netowrks (VANs)

7.5.1 VAN Pricing Structures

7.6 Internet-based EDI

7.7 Summary

7.8 Questions

7.8.1 Answers


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Chapter 8

Intra organizational Electronic Commerce 60

8.0 Introduction8.1 Work-Flow Management

8.2 Product or Service Customization

8.3 Supply Chain Management

8.4 Internal Information Systems

8.4.1 A new paradigm: Information Architecture

8.5 Organizational Structure: Vertical Versus Horizontal

8.5.1 The vertical organization

8.5.2 The Horizontal Organization

8.5.3 Virtual or Network Organizational Structure8.5.3.1 Understanding the structure of virtual enterprises

8.5.4. Electronic Organizations and Brokerages

8.6 Work-Flow Automation and Coordination

8.6.1. Work-Flow Coordination

8.6.2. Work-Flow-Related Technology

8.7 Supply Chain Management (SCM)

8.8 Summary

8.9 Questions

8.9.1 Answers

Chapter 9

The Need for Computer Security 72

9.0 Introduction

9.1 Reasons for Information security

9.2 Protecting Resources

9.3 Type of Risks

9.4 Security threats

9.4.1 Bulletin boards

9.4.2 Electronic mail

9.4.3 File transfer

9.4.4 IP Spoofing

9.4.5 Password guessing

9.4.6 Password sniffing


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9.4.7 Telnet

9.4.8 Viruses

9.5 Security Strategies9.6 Security Tools

9.7 Kerberos

9.8 UNIX Security

9.9 Password security system

9.10 Approaches for enterprise level security

9.11 Viruses and worms

9.11.1 The nature of viruses

9.11.2 Countering the threat of viruses

9.12 Summary9.13 Questions

9.13.1 Answers

Chapter 10

Approaches to Safe Electronic Commerce 93

10.0 Introduction

10.1 Overview

10.2 Secure Transport Protocol

10.3 S-HTTP

10.4 Secure socket layer (SSL)

10.5 Secure transactions

10.6 Secure electronic payment protocol (SEPP)

10.7 SEPP Process

10.8 Secure electronic transaction

10.9 Summary

10.10 Self Study

10.10.1 Answers

Unit III

Unit Introduction 104


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Chapter 11

Secure Electronic Transaction 105

11.0 Introduction11.1 Background

11.2 Objectives

11.3 Business Requirements

11.3.1 Requirements

11.3.2 Features

11.3.3 Scope

11.4 CONCEPTS

11.4.1 Payment System Participants

11.5 Cryptography11.6 Certificate Issuance

11.7 Kinds of shopping

11.8 Payment processing

11.9 Cardholder Registration

11.10 Merchant Registration

11.11 Purchase request

Reference Books 139


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1

Unit I

Introduction

This unit is expected to serve as an eye opener to the basic tenets of e-commerce. We getourselves introduced to the basic concepts of e-commerce and introduced to the various issuesinvolved. We begin with a brief description of the various activities that can be categorized as

e-commerce. Then we move on to the various mercantile process models. There are two perspectivesfor such models from the consumers point of view and from the merchants point of view. These viewshelp us to appreciate the concepts betters.

Then we move on to the concept of electronic payment systems. These are probably the most trickypart of e-commerce. While cash or something equivalent to cash could be most welcome, we see thatthere are lots of issues to be looked into before such a decision is made. Especially since the seller andbuyer do not meet face to face, it becomes essential to safeguard the interest of the seller on one hand and

the anonymity of the buyer on the other. There are also alternatives like electronic checks, smart cardsetc., but no single solution appears perfect.

Unit I - Introduction 1


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BSIT 62 E-Commerce2

Chapter 1

Web Commerce

In this introductory chapter, you will be introduced to the fundamental concepts of commerce, webcommerce, e-commerce, its scope and limitations. This is supposed to work as a basis for thefurther building up of the course. The course does not presuppose any major background of either

mathematics or computers, though it expects the student to be familiar with the day to day practices andterminologies of the market. These are normally known to every student at this level of training, butwherever some extra explanation is deemed fit, the same has been made available. Of course, a preliminaryidea about computers is also essential.

1.1 CONCEPT OF COMMERCE AND E-COMMERCE

Commerce is normally associated with the buying and selling of items. Traditionally, commerce is oneof the oldest activities of human beings and the concept of traders selling and buying items is a part ofhistory. Normally the activity of commerce/trade presupposes that the buyer and seller as well as theitems of trade are available at one place. The is brings us to the concept of markets which is a commonplace where the buyers and sellers meet along with their products. Money is also an essential part of themarket place. Though commerce started and to some extent continues even today with the barter system,where both the seller and the buyer exchange their respective items, to make the entire activity flexible,the concept of money is an essential component. Originally money, in a mutually acceptable from is alsoa part of market place with the advent of time, the concept also changed the term commerce extended tobeyond the concept of items and today includes buying and selling of products, information as well asinformation and knowledge. The concept of single merchants and traders has extended to the concept of

organizations, business houses, service providers and several levels of consumers. Though the scope ofcommerce has broadened, it is still possible to apply the basic concepts of commerces and trading to thetransactions of these days. Further, to take care of the concept of money, we have several concepts ofbanking, various methods of representing and transferring money like cheques, MOUs, Drafts etc. asalso the concept of different currencies, their equalities, trade restrictions, concept of taxes etc. However,over the years there is a continued effort to improve the efficiency of trading, cut costs, speed up theoperations and also to make the entire operation trouble free.

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3Chapter 1 - Web Commerce

The advent of computers brought in another dimension to the situation, originally computers were usedmainly for calculations and scientific applications. At that time, they were mainly calculators to speed upand well as make error free calculations. Subsequently, when the cost of the memories started goingdown drastically, computers were being used to store information in terms of files. An easier and fasterway of storing large amounts of information. Reentering of large amounts of data for each and everycalculation was avoided. This resulted not only in faster calculation, but also made it error free. Further,with floppy disks and magnetic tapes being available, it was possible to transfer the data and files fromone computer to another Say from one office of the company to the other office or from the sellerscomputers to the buyers computer etc.

The growth of computer networks, however, transformed the entire scenario to a different magnitudeall together, with the concept of connecting computers through transmission media, the need for physicallytransferring data through floppy disks etc. was avoided. Thus, people sitting in different cities and evencountries, could transmit and share data. This meant that the entire information about buying, selling,

costs, taxes and all such associated details are available and also can be transmitted across to the variouspersons involved at almost zero costs. This revolutionized the scenario of trading and commerce and canbe called the beginning of e-commerce.

The matters improved further, with the concept of the world wide web and the internet, the number ofusers on the web increased manifold and the cost of getting connected crashed. This, coupled withseveral changes in banking and other systems, made the entire set of e-commerce operations availableeven to the individual and small time users, apart from the large companies and organizations.

Definitely, the key element of e-commerce is information processing. Given a suitable scenario andinfrastructure, every stage of commerce, except of course production of goods and their physical deliverycan be automated. The tasks that can be automated include information gathering, processing, manipulationand information distribution. Broadly speaking the following categories of operations came under e-commerce:

i. Transactions between a supplier/a shopkeeper and a buyer or between two companies overa public network like the service provider network (like ISP). With suitable encryption ofdata and security for transaction, entire operation of selling/buying and settlement of accountscan be automated.

ii. Transactions with the trading partners or between the officer of the company located atdifferent locations.

iii. Information gathering needed for market research.

iv. Information processing for decision making at different levels of management.

v. Information manipulation for operations and supply chain management.

vi. Maintenance of records needed for legal purposes, including taxation, legal suits etc.


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BSIT 62 E-Commerce4

vii. Transactions for information distributions to different retailers, customers etc. includingadvertising, sales and marketing.

You can also note that, these transactions, apart from being important in themselves also affect othertransactions. For example data gathering affects information management, advertising affects marketresearch etc. The use of computers in these areas not only make the operations quicker, but also errorfree and provides for consolidated approach towards the problem.

It is not that the concept of e-commerce is totally without side effects. The very nature of the concept,that is revolutionary makes it difficult for the users to understand fully the various issues involved. Thereare several areas of security, safety against fraud etc., the concept of legal acceptance that are yet to besolved. Also since the internet knows no national boundaries, the concepts become more complex, sincewhat is legal in one country may not be so in another. There is also the concepts of taxation and statecontrols that needs to be solved. All these issues will be taken up in some detail during the course of this

topic.

In spite of all this, the growth of e-commerce and web-commerce has been phenomenal in all countriesacross the globe and is likely to only increase in coming years.

1.2 SUMMARY

In this chapter, we got ourselves introduced to the basic components of e-commerce and web commerce.The essentials of trading, commerce and market place were discussed briefly. The effect of computerson each of these was discussed. It was noted that it is the concept of networking of computers that has

actually revolutionized the entire process.It was also indicated that e-commerce is not entirely without side effects. Several problems associated

with it were indicated. All these provide us with a background for further enlargement of the subject inthe coming chapters.

1.3 QUESTIONS

1. Define commerce

2. Before the advent of networks, how was data being transferred between computers?

3. Name two stages of commerce that cannot be automated.

4. What is the role of encryption in data transfer.

5. Name two areas which are reasons of worry in e-commerce.

6. List the categories of operations comes under e-commerce


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5Chapter 1 - Web Commerce

1.3.1 ANSWERS

1. Commerce is buying and selling of items.

2. With secondary memories like floppies.

3. Production of goods and delivery of goods.

4. To ensure security of data.

5. Security and legal acceptance.


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BSIT 62 E-Commerce6

CHAPTER 2

Fundamentals of consumer orientede-commerce

2.0 INTRODUCTION

In this chapter, we look at the basic concepts regarding e-commerce. We have fitted this asconsumer oriented because all that we are dealing is how to supply the items needed by theconsumer at his doorsteps. Though we have talked of computer being the essential component of

e-commerce, we also describe one/two instances wherein the computer may not be central to the operationsconcerned. We briefly look at basic banking services, teleshopping and its variations, home entertainment

and the different mercantile models.

2.1 BASIC TENETS OF E-COMMERCE IN A CONSUMER

ORIENTED SCENARIO

It has been said that the convergence of money, commerce, computing and networks form the globalconsumer market place. Though it is true in most cases, the earliest (or rudimentary) systems hadcomputers being replaced by other electronic devices like the television or even telephone. It is to benoted that there are several other, related areas that need to be address while setting up an e-commercesystem. These include facilities for negotiations, bargaining, order processing, payment and customerservice. Though it is desirable that the entire system is automated, it may be possible that one/more ofthese activities may be transacted in a traditional manner. For example, while the order is placed overphone, further negotiations may be made with the sales representative calling on the buyer, the paymentmay be made through a cheque etc. To begin with, we include systems where in only a part of theoperations are done through electronic means also as e-commerce systems.

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Some of the fundamental issues that need to be addressed before consumer oriented e-commerce canbe made broad based are listed below.

i. Standard business practices and processes for buying and selling of products as well asservices need to be established.

ii. Easy to use and well accepted software and hardware implementations of the various stagesof e-commerce like order taking, payment, delivery, after sales interactions etc. need to beestablished.

iii. Secure commercial and transport practices that make the parties believe that they are not atthe mercy of any body else for the safety of their information and goods need to be in place.

It may be noted that each one of the above requirements can be established only over a period of timewith several trial and error methods. Ironically, e-commerce can grow in a very big way only when these

requirements are fully available and are within the grasp of the average user.

We next look at a few of the applications of e-commerce in some detail, to understand the implicationsof e-commerce in a full scale.

We look at the following concepts in some detail

1. Basic banking services

2. Home shopping

3. Home entertainment

4. Microtransaction for information

2.2 BASIC BANKING SERVICES

The concepts under basic banking services are what a normal customer would be transacting with hisbank most of the time. They are mainly related to personal finances. It can safely be presumed that mostof normal transactions that a customer has with his bank can be classified into the following

i. Checking his accounts statements

ii. Round the clock banking (ATM)

iii. Payment of bills etc.

iv. Fund transfer and

v. Updating of his pass books etc.

Indeed most of these can be done through telephone with suitable passwords etc, except round the

Chapter 2 - Fundamentals of consumer oriented e-commerce


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clock banking. The concept of Automated Teller Machines is to allow the customer to draw money fromhis account at any part of the day (or night). In fact, ATMs are to day thought to be one single conceptthat changes the way banks functioned. The customer need not go to the bank at all for his mostimportant service. In other words, both the bank and the customer became faceless to each other. Butit helped the customer by ensuring that he need not modify his working schedule to visit the bank. At thesame time, the banks need not resort to concept like split hours, opening on holidays etc. to projectthemselves as customer friendly.

ATM Bank Switching centre




Association

switching

centre

Association

switching

centre

InterAssociation

switching

centre

It can be noted that the individual ATMs are connected to a Bank Switching Centre. The Switching

Centres of several banks are interconnected to an association switching centre (May be all banks of aparticular region, for example) All such centre are globally connected to a main switching centre. Whilethe actual operations are not important here, it is important to note that the PC are any such computers arenot employed at the customer level. It is also argued that an average customer is more comfortable withthe process of simple insertion of a card rather than complicated operations on PCs. However, weinclude the ATMs also under e-commerce.

2.3 HOME SHOPPING

Our next example is home shopping. For simplicity, we presume it is television based shopping. It may

be noted that this concept is picking up now in India in a small way, wherein the channels set apart only avery small portion of their broadcasting time to teleshopping.

In the simplest case, the channels describe the various aspects of their product and the customer canorder the items over phone. The goods are delivered to his home and payment can be made in the normalmodes.


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In a more sophisticated version, orders can be placed online (through computers) and payment alsocan be made through credit /debit cards. It may be noted that several concepts of traditional marketinglike negotiations, trial testing etc. are missing from this scheme and it is most suitable for those customerswho are almost sure of what they need to buy but who are to busy to go to the shops. Otherwise, thereis hardly any concept of interaction and there is little scope to ensure the quality of product, after salesservice etc.

2.4 HOME ENTERTAINMENT

The next example of this type of commerce is home entertainment. Dubbed on line movies, it ispossible for the user to select a movie/CD online and make his cable operator play the movie exclusivelyfor him (movie on demand) cause against payment. Payment can be either online/ billed to his account.

It is also possible to play interactive games online/download them to your computer to play. The conceptof downloading games/news etc. at a cost to the mobiles is also a similar concept. It may be noted thatin all these cases, the physical movement of the customer/trader is avoided, of course, the computer neednot always be a part of the deal.

2.5 MICROTRANSACTIONS FOR INFORMATION

The telephone directories provide a basic type of microtransaction. If you want by one particular typeof item say books they list the addresses and phone numbers of the various book dealers whom youmay contact. Similar facilities are available on the internet may be for more number of items and also

with more details. IT may include detailed catalogues, other related information etc. of course, thecustomer has to pay a small charge for visiting the site each time he visits the site. This can be thoughof as an extension of the earlier described television based ordering. You dont have to order only thoseitems that are shown in the computer, but search for an item that you need. Also ordering is on line. Somepreliminary two way interactions are also possible.

Several modifications and value additions to the above mentioned preliminary scheme are possible.Ofcourse, each value addition also adds cost.

2.6 DESIRABLE CHARACTERISTICS OF E-MARKETING

Before we embark on the detailed study of e-commerce, we shall discuss some of related issues.Commonsense tells us that few transactions are more congenial for e-marketing than others. We list outthe desirable features of a hypothetical market pace let us call it e-market.



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2.6.1 A minimal size of the place

Obviously for any such place to thrive there is a critical size, below which it is not profitable to operate.This minimal number of buyers and sellers characterises the profitability of the place.

2.6.2 A scope for interactions

Interactions include trial runs of the products, classifications of doubts on the part of the customers,details of after sales services, ability to compare different products and of course scope for negotiationsand bargaining. Negotiations can be in terms of cost, value additions, terms and conditions, delivery datesetc.

2.6.3 Scope for designing new products

The customer need not buy only what is available. He can ask for modifications, upgradations etc.The supplier must be able to accept these and produce made to order items.

2.6.4 A seamless connection to the marketplace

It is obvious that each customer will be operating with a different type of computer, software, connectivityetc. There should be available standards sot that any of these costumers will be able to attach himself to

any of the markets without changing his hardware/software/interfaces etc..

2.6.5 Recourse for disgruntled users

It is nave to believe that transaction of such a place end up in complete satisfaction to all partiesconcerned. Especially because of the facelessness of the customer and the supplier, there should be astandard recourse to settle such disputes.


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2.7 QUESTIONS

1. List any three basic needs of consumer oriented e-commerce.

2. List any three basic banking activities.

3. What does ATM stand for

4. Why does an ATM does not involve a computer at customers level?

5. What is the simples type of home shopping?

6. What is movie on demand?

7. Name any two concepts of TV based home entertainment?

8. What is the need for seamless connections?

9. What is the need for market place interacts?

10. What is the need for settling disputes?

11. List and explain the desirable characterstics of e-marketing.

12. Explain basic tenets of e-commerce.

2.7.1 ANSWERS

1. Standard processes for buying and selling; well accepted hardware and software and securecommercial and transport practices.

2. Account checking, ATM, payment of bills, fund transfer etc.

3. Automated Teller machine.

4. Because any average customer is more comfortable with simply inserting an ATM card.

5. The channels describe the product, orders are placed over phone, delivery is made at homeand payment in the standard mode.

6. The viewer selects the movie to view an the TV against payment.

7. Movie an demand and on line games.

8. So that persons with different types of hardware and software can interact easily.

9. To facilitate comparisons, negotiations, bargaining etc.

10. To ensure that disgruntled customers / traders can have a standard recourse for settlement.



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Chapter 3

Electronic Commerce and the WorldWide Web

3.0 INTRODUCTION

In this chapter, we get a view of the frame work for e-commerce. The framework defines andcreates tools for integrations of information. We look at the six layers of software in a conceptualframework that can provide a suitable e-commerce mechanism. Also we note that these frameworks

help us to define three types of transactions business to business, consumer to business and intraorganizational. We also get a brief concept of World Wide Web and a basic e-commerce architecture on

the web.

We have broadly defined electronic commerce as a modern business methodology that addresses thedesire of firms, consumers, and management to cut costs while improving the quality of goods and increasingthe speed of services. The need for electronic commerce stems from the demand within business andgovernment to make better use of computing, that is, to better apply computer technology to improvebusiness processes and information exchange both within an enterprise and across organizations.

Electronic commerce applications are quite varied. In its most common form, e-commerce is alsoused to denote the paperless exchange of business information using EDI, electronic mail (e-mail), electronicbulletin boards, electronic funds transfer (EFT), and other similar technologies.

The term electronic commerce is used to describe a new on-line approach to performing traditionalfunctions such as payment and funds transfer, order entry and processing, invoicing, inventory management,car go tracking, electronic catalogs, and point-of-sale data gathering.

These business functions act as initiators to the entire order management cycle that incorporates themore established notions of electronic commerce. In short, what we are witnessing is the use of the termelectronic commerce as an umbrella concept to integrate a wide range of new and old applications.



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13Chapter 3 - Electronic Commerce and the World Wide Web

3.1 ARCHITECTURAL FRAMEWORK FOR ELECTRONIC

COMMERCE

In general a frame work is intended to define and create tools that integrate the information found intodays closed systems and allow the development of e-commerce applications. The architecture shouldfocus on synthesizing the diverse resources already in place in corporations to facilitate the integration ofdata and software for better applications. The electronic commerce application architecture consists ofsix layers of functionality, or functionality, or services: (1) applications; (2) brokerage services, data ortransaction management; (3) interface and support layers; (4) secure messaging, security, and electronicdocument interchange; (5) middleware and structured document interchange; and (6) network infrastructureand basic communications services.

3.1.1 ELECTRONIC COMMERCE APPLICATION SERVICES

The application services layer of e-commerce will be comprised of existing and future applicationsbuilt on the innate architecture. Three district classes of electronic commerce applications can bedistinguished; customer-to-business, business-to-business, and intra-organization.


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Consumer-to-business Transactions

Here customers learn about products differently through electronic publishing, buy them differently using

electronic cash and secure payment systems, and have them delivered differently.

Business-to-Business Transactions

Here, businesses, governments, and other organizations depend on computer-to-computer communication

as a fast, an economical, and a dependable way to conduct business transactions. Small companies are

also beginning to see the benefits of adopting the same methods. business-to-business transactions

include the use of EDI and electronic mail for purchasing goods and services, buying information and

consulting services, submitting requests for proposals, and receiving proposals.

Intra-organizational transactions

A Company becomes market driven by dispersing throughout the firm information about its customers

and competitors; by spreading strategic and tactical decision making so that all units can participate; and

by continuously monitoring their customers commitment by making improved customer sat isfaction an

ongoing objective. To maintain the relationships that are critical to delivering superior customer value,

management must pay close attention to service, both before and after sales.

3.1.2. Information Brokerage and Management

The information brokerage and management layer provides service integration through the notion of

information brokerages, the development of which is necessitated by the increasing information resourcefragmentation. We use the notion of information brokerage to represent an intermediary who provides

service integration between customers and information providers, given some constraint such as a low

price, fast service, or profit maximization for a client.

Information brokerage does more than just searching. It addresses the issue of adding value to the

information that is retrieved. For instance, in foreign exchange trading, information is retrieved about the

latest currency exchange rates in order to hedge currency holdings to minimize risk and maximize profit.

With multiple transactions being the norm in the real world, service integration becomes critical.

Another aspect of the brokerage function is the support for data management and traditional transaction

services. Brokerages may provide tools to accomplish more sophisticated, time-delayed updates or

future-compensating transactions. These tools include software agents, distributed query generator, the

distributed transaction generator, and the declarative resource constraint base-which describes a businesss

rules and environment information. At the heart of this layer lies the work-flow scripting environment

built on a software agent model that coordinates work and data flow among support services.


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Software agents are used to implement information brokerages. Agents are encapsulations of users

instructions that perform all kinds of tasks in electronic marketplaces spread across networks. Information

brokerages dispatch agents capable of information resource gathering, negotiating deals and performingtransactions.

Although the notion of software agents sounds very seductive, it will take a while to solve the problems

of inter-agent communication, interoperable agents, and other headaches that come with distributed

computing and networking.

3.1.3. Interface and Support Services

Interface and support services, will provide interfaces for electronic commerce applications such as

interactive catalogs and will support directory services functions necessary for information search andaccess. Interactive catalogs are the customized interface to consumer applications such as home shopping.

An interactive catalog is an extension of the paper-based catalog and incorporates additional features

such as sophisticated graphics and video to make the advertising more attractive.

Directories, on the other hand, operate behind the scenes and attempt to organize the enormous amount

of information and transactions generated to facilitate electronic commerce. The primary difference

between the two is that unlike interactive catalogs, which deal with people, directory support services

interact directly with software applications. For this reason, they need not have the multimedia glitter

and jazz generally associated with interactive catalogs.

3.1.4. Secure Messaging and Structured Document Interchange

Services

The importance of the fourth layer, secured messaging, is clear. Broadly defined, messaging is the

software that sits between the network infrastructure and the clients or electronic commerce applications,

masking the peculiarities of the environment. In general, messaging products are not applications that

solve problems; they are more enablers of the applications that solve problems.

Messaging services offer solutions for communicating non-formatted (unstructured) data-letters, memos,

reports as well as formatted (structured) data such as purchase orders, shipping notices, and invoices.

It supports both synchronous (immediate) and asynchronous (delayed) message delivery and processing.

It is not associated with any particular communication protocol. No preprocessing is necessary, although

there is an increasing need for programs to interpret the message. Messaging is well suited for both

client-server and peer-to-peer computing models.

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The main disadvantages of messaging are the new types of applications it enables which appear to be

more complex, especially to traditional programmers and the jungle of standards it involves. Also,

security, privacy, and confidentiality through data encryption and authentication techniques are importantissues that need to be resolved.

3.1.5 Middleware Services

Middleware is a relatively new concept that emerged only recently. With the growth of networks, client-

server technology, and all other forms of communicating between / among unlike platforms, the problems

of getting all the pieces to work together grew. In simple terms, middleware is the ultimate mediator

between diverse software programs that enables them talk to one another.

Another reason for middleware is the computing shift from application centric to data centric. To achievedata centric computing, middleware services focus on three elements: transparency, transaction security

and management, and distributed object management and services.

3.1.6. Transparency

Transparency implies that users should be unaware that they are accessing multiple systems. Transparency

is essential for dealing with higher-level issues than physical media and interconnection that the underlying

network infrastructure is in charge of. The ideal picture is one of a virtual{ network: a collection of

work-group, departmental, enterprises, and interenterprise LANs that appears to the end user o r clientapplication to be a seamless and easily accessed whole.

Transparency is accomplished using middleware that facilitates a distributed computing environment.

The goal is for m the applications to send a request to the middleware layer, which then satisfies the

request any way it can, using remote information.

3.2 WORLD WIDE WEB (WWW) AS THE ARCHITECTURE

Electronic commerce depends on the unspoken assumption that computers cooperate efficiently for

seamless information sharing. Unfortunately, this assumption of interoperability has not been supported

by the realities of practical computing. Computing is still a world make up of many technical directions,

product implementations, and competing vendors.

The Web community of developers and users is tackling these complex problems.


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Figure shows a block diagram depicting the numerous pieces that constitute a Web architecture. The

architecture is made up of three primary entities: client browser, Web server, and third-party services.

The client browser usually interacts with the WWW server, which acts as an intermediary in the interactionwith third-party services.

Client browser WWW Server Functions Third-party Services

Local orcompany-specific data

Mosaic /WWWbrowser

BrowserExtensions

Informationretrieval

Data andtransactionmanagement

Secure massaging

Digital library ofdocument / dataservers

Third partyinformationprocessing tools /services

Electronic

payment servers

Fig. 3.2 Block diagram depicting an electronic commerce architecture.

The client browser resides on the users PC or workstation and provides an interface to the varioustypes of content. The browser has to be smart enough to understand what file it is downloading and whatbrowser extension it needs to activate to display the file. Browsers are also capable of manipulating localfiles.

Web server functions can be categorized into information retrieval, data and transaction management,and security. The third-party services could be other Web servers that make up the digital library, informationprocessing tools, and electronic payment systems.

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3.3 SUMMARY

We discussed the framework for e-commerce, that defines and creates tools for integration of

information. We identified six layers of software namely application services, brokerage and datamanagement, interface layer, secure messaging, middleware services and network infrastructure. Wealso saw the concept of World Wide Web and also an e-commerce architecture suitable for WWW.

3.4 QUESTIONS

1. Define EDI.

2. Define EFT.

3. Name a few operations performed by e-commerce.

4. Define a framework.

5. List the six layers of e-commerce architecture.

6. Name the three classes of e-commerce applications based on transactions.

7. Define a information Brokerage.

8. Define a software agent.

9. Define middleware.

10. Name the three stages of e-commerce architecture on web.

11. With the help of an example give the meaning of secure messaging.

12. With the help of a diagram explain e-commerce architecture.

13. Give the architecture framework for e-commerce.

3.4.1 Answers

1. Electronic Data Interchange.

2. Electronic Fund Transfer.

3. Payment, fund transfer, order entry, invoicing et.

4. Framework is intended to define and create tools that integrate information.

5. Applications, brokerage services, interface, secure messaging, middleware and networkinfrastructure.

6. Consumer to business, Business to business, intra organization.

7. An intermediary who provides integration between customers and information providers.

8. Agent is an encapsulation of users instructions.

9. It is a mediator between diverse application programs that talk to each other.

10. Client browser, WWW server functions and third party services.


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Chapter 4

Consumer-Oriented ElectronicCommerce

4.0 INTRODUCTION

This chapter mainly deals with the actual process of e-commerce - The process as viewedfrom the consumers point of view as well as from the merchants point of view. We begin thediscussions from where we left in chapter 2. We review the various characteristics that are

desirable in a market place. This forms a background for the two mercantile models. The model from theconsumers point of view has about 7 stages and as we can see, concentrates only on the product

searching to post-sales as well as the consumers and how this affects the model. The model from themerchants point of view can be called a order management cycle and has about 8 stages.

4.1 DESIRABLE CHARACTERISTICS OF AN ELECTRONIC

MARKETPLACE

The following criteria are essential for consumer-oriented electronic commerce:

Critical mass of buyers and sellers. The trick is getting a critical mass of corporations andconsumers to use electronic mechanisms. In other words, the electronic marketplace should

be the first place customers go to find the products and services they need.

Opportunity for independent evaluations and for customer dialogue and discussion. In themarketplace, not only do users buy and sell products or services, they also compare notes onwho has the best products and whose prices are outrageous. The ability to openly evaluatethe wares offered is a fundamental principle of a viable marketplace.

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Negotiation and bargaining. No market place is complete if it does not support negotiation.Buyers and sellers need to be able to haggle over conditions of mutual satisfaction, includingmoney, terms and conditions, delivery dates, and evaluation criteria.

New products and services. In a viable marketplace, consumers can make requests forproducts and services not currently offered and have a reasonable expectations that someonewill turn up with a proposed offering to meet that request.

Seamless interface. The biggest barrier to electronic trade is having all the pieces worktogether so that information can flow seamlessly from one source to another. This requiresstandardization. On the corporate side, companies need compatible EDI software and networkservices in order to send electronic purchase orders, invoices, and payments back and forth.

Recourse for disgruntled buyers. A viable marketplace must have a recognized mechanismfor resolving disputes among buyers and sellers. Markets typically include a provision forresolving disagreements by returning the product or through arbitrage in other cases.

4.2 MERCANTILE PROCESS MODELS

Mercantile processes define interaction models between consumers and merchants for on-linecommerce. This is necessary because to buy and sell goods, a buyer, seller, and other parties mustinteract in ways that represent some standard business processes.

The establishment of a common mercantile process (or set of processes) is expected to increaseconvenience for consumers who wont have to figure out a new business process for every single vendor.

4.3 MERCANTILE MODELS FROM THE CONSUMERS

PERSPECTIVE

The business process model from a consumers perspective consist of seven activities that can begrouped into three phases: pre-purchase phase, purchase consummation, and post-purchase interaction.

1. The pre-purchase preparation phase includes search and discovery for a set of products inthe larger information space capable of meeting customer requirements and products selectionfrom the smaller set of products based on attribute comparison.


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21Chapter 4 - Consumer-oriented Electronic Commerce

Product / service search and discovery in

the information space

Comparison shopping andproduct

selection based on various attributes

Negotiation of terms, e.g., price, delivery

times

Placement of order

Authorization of payment

Receipt of product

Customer service and support (if not

satisfied in X days, return product)

Pre-purchasedetermination

Purchaseconsummation

Post-purchase interaction

Fig. 4.1

2. The purchase consummation phase includes mercantile protocols that specify the flow ofinformation and documents associated with purchasing and negotiation with purchasing andnegotiation with merchants for suitable terms, such as price, availability, and delivery dates;and electronic payment mechanisms that integrate payment into the purchasing process.

3. The postpurchase interaction phase includes customer service and support to address customercomplaints, product returns, and product defects.

Lets consider each of the consumer purchasing phases in detail.

4.3.1 Pre-purchase Preparation

From the consumers perspective, any major purchase can be assumed to involve so me amount ofpre-purchase deliberation, the extent of which is likely to vary across individuals, products, and purchase


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situations. Purchase deliberation is defined as the elapsed time between a consumers first thinking aboutbuying and the actual purchase itself. Information search should constitute the major part of the duration,but comparison of alternatives and price negotiation would be included in the continually evolving informationsearch and deliberation process.

In general, consumers can be categorized into three types:

1. Impulsive buyers, who purchase products quickly.

2. Patient buyers, who purchase products after making some comparisons.

3. Analytical buyers, who do substantial research before making the decision to purchase productsor services.

In fact, marketing researchers have isolated several types of purchasing:

Specifically planned purchases. The need was recognized on entering the store and theshopper bought the exact item planned.

Generally planned purchases. The need was recognized, but the shopper decided in-store onthe actual manufacturer of the item to satisfy the need.

Reminder purchases. The shopper was reminded of the need by some store influence. Thisshopper is influenced by in-store advertisements and can substitute products readily.

Entirely unplanned purchases. The need was not recognized entering the store.

While the technology for supporting search is important, we still need to understand the actual process

that consumers and organizations employ in gathering information.

4.3.2. Information Brokers and Brokerages

To facilitate better consumer and organizational search, intermediaries called information brokers orbrokerages are coming into existence. Information brokerages are needed for three reasons: comparisonshopping, reduced search costs, and integration.

Today, many on-line information providers are moving to a consumer services model, where theyprovide not only inexpensive access but lots of free information.

4.3.3. Purchase Consummation

After identifying the products to be purchased, the buyer and seller must interact in some way toactually carry out the mercantile transaction. A mercantile transaction is defined as the exchange ofinformation between the buyer and seller followed by the necessary payment.


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A single mercantile model will not be sufficient to meet the needs of every one. In very general terms,a simple mercantile protocol would require the following transactions. Although there may be manyvariants of this protocol, the basic flow remains the same.

1. Buyer contacts vendor to purchase product or service. This dialogue might be interactiveon-line- through World Wide Web (WWW), e-mail, off-line through an electronic catalogand telephone.

2. Vendor states price.

3. Buyer and vendor may or may not engage in negotiation.

4. If satisfied, buyer authorizes payment to the vendor with an encrypted transaction containinga digital signature for the agreed price.

5. Vendor contacts his or her billing service to verify the encrypted authorization forauthentication.

6. Billing service decrypts authorization and checks buyers account balance or credit and putsa hold on the amount of transfer.

7. Billing service gives the vendor the green light to deliver product and sends a standardizedmessage giving details of transaction.

8. On notification of adequate funds to cover financial transaction, vendor delivers the goods tobuyer or in the case of information purchase provides a cryptokey to unlock the file.

9. On receiving the goods, the buyer signs and delivers receipt. Vendor then tells billing service

to complete the transaction.

10. At the end of the billing cycle, buyer receives a list of transactions. Buyer can then eitherdeny certain transactions or complain about over billing. Suitable audit or customer serviceactions are then initiated depending on the payment scheme.

4.3.4. Postpurchase Interaction

As long as there is payment for services, there will be refunds, disputes, and other customer serviceissues that need to be considered. Returns and claims are an important part of the purchasing process

that impact administrative costs, scrap and transportation expenses, and customer relations.

Other complex customer service challenges arise in customized retailing that we have not fully understoodor resolved:

Inventory issues. To serve the customer properly, a company should inform a customer rightaway when an item ordered is sold out-not with a rain check or back-order notice several

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days later. On the other hand, if the item is in stock, a company must be able to assign thatpiece to the customer immediately and remove it from available inventory.

Database access and compatibility issues. Unless the customer can instantly access all thecomputers of all the direct-response vendors likely to advertise on the InformationSuperhighway on a real-time basis, with compatible software he or she is not likely to getthe kind of service that customers normally get.

Customer service issues. Customers often have questions about the product (color, size,shipment), want expedited delivery, or have one of a myriad of other things in mind that canbe resolved only by talking to an order entry operator.

4.4 MERCANTILE MODELS FROM THE MERCHANTS

PERSPECTIVE

The order-to-delivery cycle from the merchants perspective has been managed with an eye towardstandardization and cost.

To achieve a better understanding, it is necessary to examine the order management cycle (OMC)that encapsulates the more traditional order-to-delivery cycle. OMC has the following generic steps.

4.4.1. Order Planning and Order Generation

The business process begins long before an actual order is placed by the customer.

The first step is order planning. Order planning leads into order generation. Orders are generated innumber of ways in the e-commerce environment. The sales force broadcasts ads (direct marketing),sends personalized e-mail to customers (cold calls), or creates a WWW page.

4.4.2 Cost Estimation and Pricing

Pricing is the bridge between customer needs and company capabilities. Pricing at the individual orderlevel depends on understanding, the value to the customer that is generated bye ach order, evaluating the

cost of filling each order; and instituting a system that enables the company to price each order based onits valued and cost. Although order-based pricing is difficult work that requires meticulous thinking anddeliberate execution, the potential for greater profits is simply worth the effort.


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Cost estimation and pricing of productservices

Order receipt and entry

Order Selection and Prioritization

Customer inquiry and order planning

generation

Fig. 4.2

4.4.3. Order Receipt and Entry

After an acceptable price quote, the customer enters the order receipt and entry phase of OMC.Traditionally, this was under the purview of departments variously titled customer service, order entry, theinside sales desk, or customer liaison. These departments are staffed by customer service representatives,usually either very experienced, long-term employees or totally inexperienced trainees. In either case,these representatives are in constant contact with customers.



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4.4.4 Order Selection and Prioritization

Customer service representatives are also often responsible for choosing which orders to accept and

which to decline. In fact, not all customer orders are created equal; some are simply better for thebusiness than others.

Another completely ignored issue concerns the importance of order selection and prioritization.Companies that put effort into order selection and link it to their business strategy stand to make moremoney.

4.4.5 Order Scheduling

During the ordering scheduling phase the prioritized orders get slotted into an actual production or

operational sequence. This task is difficult because the different functional departments sales, marketing,customer service, operations, or production-may have conflicting goals.

Communication between the functions is often nonexistent, with customer service reporting to salesand physically separated from production scheduling, which reports to manufacturing or operations. Theresult is lack of interdepartmental coordination.

4.4.6 Order Fulfillment and Delivery

During the order fulfillment and delivery phase the actual provision of the product or service is made.While the details vary from industry to industry, in almost every company this step has become increasinglycomplex. Often, order fulfillment involves multiple functions and locations. The more complicated thetask the more coordination required across the organization.

4.4.7. Order Billing and Account / Payment Management

After the order has been fulfilled and delivered, billing is typically handled by the finance staff, whoview their job as getting the bill out efficiently and collecting quickly.

4.4.8. Post-sales ServiceThis phase plays an increasingly important role in all elements of a companys profit equation: customer

value, price, and cost. Depending on the specifics of the business, it can include such elements asphysical installation of a product, repair and maintenance, customer training, equipment upgrading anddisposal. Because of the information conveyed and intimacy involved, post sales service can affectcustomer satisfaction and company profitability for years.


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4.5 SUMMARY

In this chapter, we come across the process of purchase / sale of goods. The entire process can beviewed either from the buyers point of view or the merchants point of view. Accordingly, the consumersperspective can be considered to be made up of 3 stages purchase determination, purchase consummationand post purchase interaction. We also learnt that consumers can be categorized as impulsive, patient andanalytical buyers. The purchases themselves can be specifically planned, generally planned, reminderpurchases or unplanned purchases. We went through the details of each of these phases. Similarly fromthe merchants point of view, the stages can be presales interaction, product service production andpostsales interaction.

4.6 QUESTIONS

1. Name the three broad phases of consumers perspective.

2. What are the categories of consumers?

3. What are the four types of purchases?

4. Why are information brokerages needed?

5. What issues are included in post purchase interaction?

6. Name the phases from the merchants point of view?

7. What is order selection?

8. Why is a critical mass necessary for market?

9. What is the need for standardization?

10. On what factors can negotiations take place?

11. List the desirable characterstics of e-commerce market place?

12. Explain mercantile model from consumers perspective?

13. Explain mercantile model from merchants perspective?

4.6.1 Answers

1. Pre-purchase determination, purchase consummation, post purchase interaction.

2. Impulsive buyers, patient buyers and analytical buyers.



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3. Specifically planned, Generally planned, reminder purchases and unplanned purchases.

4. To help in comparison shopping, reduce search costs and integration.

5. Inventory issues, database access issues and customer service issues.

6. Presales interaction, product service, production and delivery and post sales interaction.

7. Prioritize orders based on same factors.

8. Otherwise the cost per unit goes up.

9. To move seamlessly across various hardware and software.

10. Over money, terms and conditions, delivery dates and evaluation criteria.


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Chapter 5

Electronic Payment Systems

5.0 INTRODUCTION

In this chapter we discuss some very important issues of a market place regarding the payment

procedures. In a purely long distance purchase scenario, payment also is to be made without thecustomer and the seller coming face to face. Hence traditional concept of buying with cash does

not work. However, one can think of concepts like electronic tokens (e-cash), checks, and credit anddebit cards. We also see that each of these present their own problems, unlike regular cash, which isguaranteed by the respective governments. We note that there are two major, conflicting issues anonymityof the buyer and the legality of the tender. Also, there are disputes regarding double payments, taxation

laws and exchange rates. Hence, we see a very interesting combination of several issues to be solvedsimultaneously.

Electronic payment systems and e-commerce are intricately linked given that on-line consumers mustpay for products and services.

We will examine the following issues

What form and characteristics of payment instruments for example, electronic cash,electronic checks, credit / debit cards will consumers use?

In on-line markets, how can we manage the financial risk associated with various paymentinstruments privacy, fraud, mistakes, as well as other risks like bank failures? What securityfeatures (authentication, privacy, anonymity) need to be designed to reduce these risks?

What are the step-by-step procedures and institutional arrangements that form the fabric ofthe electronic payment business processes that link consumers and organizations?

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5.1 DIGITAL TOKEN-BASED ELECTRONIC PAYMENT

SYSTEMS

None of the banking or retailing payment methods are completely adequate in their present form forthe consumer-oriented e-commerce environment. Their deficiency is their assumption that the partieswill at some time or other be in each others physical presence or that there will be a sufficient delay in thepayment process for frauds, overdrafts, and other undesirables to be identified and corrected. Theseassumptions may not hold for e-commerce.

Entirely new forms of financial instruments are also being developed. One such new financial instrumentis electronic tokens in the for m of electronic cash / money or checks. Electronic tokens are designedas electronic analogs of various forms of payment backed by a bank or financial institution. Simply stated,electronic tokens are equivalent to cash that is backed by a bank.

Electronic tokens are of three types:

1. Cash or real-time. Transactions are settled with the exchange of electronic currency. Anexample of on-line currency exchange is electronic cash (e-cash)

2. Debit or prepaid. Users pay in advance for the privilege of getting information. Examples ofprepaid payment mechanisms are stored in smart cards and electronic purses that storeelectronic money.

3. Credit or postpaid. The server authenticates the customers and verifies with the bank thatfunds are adequate before purchase. Examples of postpaid mechanisms are credit / debitcards and electronic checks.

Here are four dimensions that are useful for analyzing the different initiatives

1. The nature of the transaction for which the instrument is designed. Some tokens are specificallydesigned to handle micro-payments, that is, payments for small snippets of information. Othersare designed for more traditional products. Some systems target specific niche transactions;other seek more general transactions. The key is to identify the parties involved, the averageamounts, and the purchase interaction.

2. The means of settlement used. Token must be backed by cash, credit, electronic bill payments(prearranged and spontaneous), cashiers checks, IOUs letters and line of credit, and wiretransfers, to name a few. Each option incurs trade-offs among transaction speed, risk, and

cost. Most transaction settlement methods use credit cards, while others use other proxiesfor value.

3. Approach to security, anonymity, and authentication. Electronic tokens vary in the protectionof privacy and confidentiality of the transactions. Encryption can help with authentication,non-repudiability, and asset management.


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4. The question of risk Who assumes what kind of risk at what time? The tokens might suddenlybecome worthless and the customers might have the currency that nobody will accept. Ifthe system stores value in a smart card, consumers may be exposed to risk as they holdstatic assets. Also electronic tokens might be subject to discounting or arbitrage. Risk alsoarises if the transaction has long lag times between product delivery and payments tomerchants. This exposes merchants to the risk that buyers dont pay-or vice-versa that thevendor doesnt deliver.

5.2 ELECTRONIC CASH (E-CASH)

Electronic cash (e-cash) is a new concept in on-line payment systems because it combines computerizedconvenience with security and privacy that improve on paper cash. Its versatility opens up a host of new

markets and applications. E-cash presents some interesting characteristics that should make it an attractivealternative for payment over the Internet.

E-cash focuses on replacing cash as the principal payment vehicle in consumer-oriented electronicpayments.

The predominance of cash indicates an opportunity for innovative business practice that revamps thepurchasing process where consumers are heavy users of cash. To really displace cash, the electronicpayment systems need to have some qualities of cash that current credit and debit cards lack. Forexample, cash is negotiable, meaning it can be given or traded to some one else. Cash is legal tender,meaning the payee is obligated to take it. Cash is a bearer instrument, meaning that possession is primafacie proof of ownership. Also, cash can be held and used by anyone even those who dont have a bank

account, and cash places no risk on the part of the acceptor that the medium of exchange may not begood.

Now compare cash to credit and debit cards. First, they cant be given away because, technically,they are identification cards owned by the issuer and restricted to one user. Credit and debit cards are notlegal tender, given that merchants have the right to refuse to accept them. Nor are credit and debit cardsbearer instruments; their usage requires an account relationship and authorization system. Similarly,checks require either personal knowledge of the payer or a check guarantee system. Hence, to reallycreate a novel electronic payment method, we need to do more than recreate the convenience that isoffered by credit and debit cards. We need to develop e-cash that has some of the properties of cash.

5.2.1. Properties of Electronic Cash

Specifically, e-cash must have the following four properties: monetary value, interoperability, retrievability,and security.

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E-cash must have a monetary value; it must be backed by either cash (currency), bank-authorizedcredit, or a bank-certified cashiers check. When e-cash created by one bank is accepted by others,reconciliation must occur without any problems. Stated another way, e-cash without proper bank certificationcarries the risk that when deposited, it might be returned for insufficient funds.

E-cash must be interoperable that is, exchangeable as payment for other e-cash, paper cash, goodsor services, lines of credit, deposits in banking accounts, bank notes or obligations, electronic benefitstransfers, and the like. E-cash must be storable and retrievable. The cash could be stored on a remotecomputers memory, in smart cards, or in other easily transported standard or special-purpose devices.Because it might be easy to create counterfeit cash that is stored in a computer, it might be preferable tostore cash on a dedicated device that cannot be altered. This device should have a suitable interface tofacilitate personal authentication using passwords or other means and a display so that the user can viewthe cards contents.

E-cash should not be easy to copy or tamper with while being exchanged; this includes preventing ordetecting duplication and double-spending. Counterfeiting poses a particular problem, since a counterfeitermay, in the Internet environment, be anywhere in the world and consequently be difficult to catch withoutappropriate international agreements. Detection is essential in order to audit whether prevention is working.Then there is the tricky issue of double spending (DFN88). For instance, you could use your e-cashsimultaneously to buy something in Japan, India, and England. Preventing double-spending from occurringis extremely difficult if multiple banks are involved in the transaction. For this reason, most systems relyon post-fact detection and punishment.

5.2.2 Electronic Cash in Action

Electronic cash is based on cryptographic systems called digital signatures. This method involves apair of numeric keys (very large integers or numbers) that work in tandem: one for locking (or encoding)and the other for unlocking (or decoding). Messages encoded with one numeric key can only be decodedwith the other numeric key and none other. The encoding key is kept private and the decoding key ismade public.

By supplying all customers (buyers and sellers) with its public key, a bank enables customers todecode any message (or currency) encoded with the banks private key. If decoding by a customeryields a recognizable message, the customer can be fairly confident that only the bank could have encodedit. These digital signatures are as secure as the mathematics involved and have proved over the past two

decades to be more resistant to forgery than hand written signatures.Electronic cash can be completely anonymous. Anonymity allows freedom of usage to buy illegal

products such as drugs or pornographic material or to buy legal product and services. This is accomplishedin the following manner. When the e-cash software generates a note, it masks the original number ofblinds the note using a random number and transmits it to a bank. The Blinding carried out by thecustomers software makes it impossible for anyone to link payment to payer. Even the bank cant


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connect the signing with the payment, since the customers original note number was blinded when it wassigned. In other words, it is a way of creating anonymous, untraceable currency. What makes it evenmore interesting is that users can prove unequivocally that they did or did not make a particular payment.This allows the bank to sign the note without every actually knowing how the issued currency will beused.

The protocol behind blind signatures is as follows:

1. The customers software chooses a blinding factor, R, independently and uniformly at randomand presents the bank with (XR)E (mod PQ), where X is the note number to be signed and Eis the banks public key.

2. The bank signs it: (XRE)D= RXD(mod PQ). D is the banks private key.

3. On receiving the currency, the customer divides out the blinding factor: (RXD) / R = XD(mod

PQ)

4. The customer stores XD, the signed note that is used to pay for the purchase of products orservices. Since R is random, the bank cannot determine X and thus cannot connect thesigning with the subsequent payment.

To uncover double spending, banks must compare the note passed to it by the merchant against adatabase of spent notes. Just as paper currency is identified with a unique serial number, digital cash canalso be protected. The ability to detect double spending has to involve some form of registration so that allnotes issued globally can be uniquely identified. However, this method of matching notes with a centralregistry has problems in the online world. For most systems, which handle high volumes of micro payments,this method would simply be too expensive. In addition, the problem of double spending means that banks

have to carry added overhead because of the constant checking and auditing logs.

Double spending would not be a major problem if the need for anonymity were relaxed. In suchsituations, when the consumer is issued a bank note, it is transferred specifically to that other personslicense. Each time the money changes hands, the old owner adds a tiny bit of information to the banknote based on the bank notes serial number and his or her license. If somebody attempts to spend moneytwice, the bank will now be able to use the two bank notes to determine who the cheater is. Even if thebank notes pass through many different peoples hands, whoever cheated will get caught, and none of theother people will ever have to know.

One draw back of e-cash is its inability to be easily divided into smaller amounts. It is often necessary

go get small denomination change in business transactions. A number of variations have been developedfor dealing with the change problem. For the bank to issue users with enough separate electroniccoins of various denominations would be cumbersome in communication and storage. So would amethod that required payees to return extra change. To sidestep such costs, customers are issued a singlenumber called an open check that contains multiple denomination values sufficient for transactions upto a prescribed limit.



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5.2.3 Business Issues and Electronic Cash

Electronic cash fulfills two main functions: as a medium of exchange and as a store of value. Digitalmoney is a perfect medium of exchange. By moving monetary claims quickly and by effecting instantsettlement of transactions, e-cash may help simplify the complex interlocking credit and liabilities thatcharacterize todays commerce.

The controversial aspects of e-cash are those that relate to the other role, as a store of value. Humanneeds tend to require that money take a tangible form and be widely accepted, or legal tender. If e-cash had to be convertible into legal tender on demand, then for every unit there would have to be a unitof cash reserved in the real economy. This creates problems, because in an efficient system, if each e-cash unit represents a unit of real cash, then positive balances of e-cash will earn no interest; for theinterest they might earn would be offset by the interest foregone on the real cash that is backing them.

The enormous currency fluctuations in international finance pose another problem. Unless, we haveone central bank offering one type of electronic currency, it is very difficult to see e-cash being veryprominent except in narrow application domains.

5.2.4. Operational Risk and Electronic Cash

Operational risk associated with e-cash can be mitigated by imposing constraints, such as limits on (1)the time over which a given electronic money is valid, (2) how much can be stored on and transferred byelectronic money, (3) the number of exchanges that can take place before a money needs to be re-deposited with a bank or financial institution, and (4) the number of such transactions that can be made

during a given period of time.

The objective of imposing constraints is to limit the issuers liability. A maximum upper limit could beimposed on the value that could be assigned to any single transaction or that could be transferred to thesame vendor within a given period of time. Since the users computer could be programmed to executesmall transactions continuously at a high rate over the network, a strategy of reporting transactions overa certain amount would be ineffective for law enforcement.

Finally, exchanges could also be restricted to a class of services or goods. The exchange processshould allow payment to be withheld from the seller upon the buyers instructions until the goods, orservices are delivered within a specified time.

5.2.5. Legal Issues and Electronic Cash

Anonymous and virtually untraceable, cash transactions today occupy a place in a kind of undergroundeconomy. This underground economy is generally confined to relatively small-scale transactions becausepaper money in large quantities is cumbersome to use and manipulate. But if e-cash really is made to


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function the way that paper money does, payments we would never think of making in cash to buy anew car, say, or as the down payment on a house could be made in this new form of currency becausethere would be no problem of bulk and no risk of robbery. The threat to the governments revenue flowis a very real one. The question e-cash poses is not, Should the law take notice of this development? butrather, How can it not? By impacting Revenue raising capabilities e-cash cannot escape governmentscrutiny and regulation: but it is going to take some serious thinking to design a regulatory scheme thatbalances personal privacy speed of execution and ease of use.

5.3 ELECTRONIC CHECKS

Electronic checks are another form of electronic tokens. They are designed to accommodate themany individuals and entities that might prefer to pay on credit or through some mechanism other than

cash. These checks may be sent using e-mail or other transport methods. When deposited, the checkauthorizes the transfer of account balances from the account against which the check was drawn to theaccount to which the check was deposited.

The specifics of the technology work in the following manner: On receiving the check, the sellerpresents it to the accounting server for verification and payment. The accounting server verifies thedigital signature on the check. Subsequent endorsers add successive layers of information onto thetickets, precisely as a large number of banks may wind up stamping the back of a check along its journeythrough the system.

Electronic checks have the following advantages:

They work in the same way as traditional checks, thus simplifying customer education. Electronic checks are well suited for clearing micropayments.

Electronic checks create float and the availability of float is an important requirement forcommerce.

Financial risk is assumed by the accounting server and may result in easier acceptance.Reliability and scalability are provided by using multiple accounting servers. There can be aninteraccount server protocol to allow buyer and seller to belong to different domains, regions,or countries.

5.4 SMART CARDS AND ELECTRONIC PAYMENT SYSTEMS

Smart cards have been in existence since the early 1980s and hold promise for secure transactionsusing existing infrastructure. Smart cards are credit and debit cards and other card products enhancedwith microprocessors capable of holding more information than the traditional magnetic stripe. The chip,



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at its current state of development, can store significantly greater amounts of data, estimated to be 80times more than a magnetic stripe.

Smart cards are basically of two types: relationship-based smart credit cards and electronic purses.Electronic purses, which replace money, are also known as debit cards and electronic money.

5.4.1 Relationship-Based Smart Cards

Relationship-based products are expected to offer consumers far greater options, including the following:

Access to multiple accounts, such as debit, credit, Investments or stored value for e-cash, onone card or an electronic device.

A variety of functions, such as cash access, bill payment, balance inquiry, or funds transferfor selected accounts.

Multiple access options at multiple locations using multiple device types, such as an automatedteller machine, a screen phone, a personal computer, a personal digital assistant (PDA), orinteractive TVs

5.4.2. Electronic Purses and Debit Cards

Despite their increasing flexibility, relationship-based cards are credit based and settlement occurs atthe end of the billing cycle. There remains a need for a financial instrument to replace cash. To meet thisneed; banks, credit card companies, and even government institutions are racing to introduce electronicpurses, wallet-sized smart cards embedded with programmable microchips that store sums of money forpeople to use instead of cash.

The electronic purse works in the following manner. After the purse is loaded with money, at an ATMor through the use of an inexpensive special telephone, it can be used to pay for, say, candy in a vendingmachine equipped with a card reader. The vending machine need only verify that a card is authentic andthere is enough money available for a chocolate bar. In one second, the value of the purchase is deductedfrom the balance on the card and added to an e-cash box in the vending machine. The remaining balanceon the card is displayed by the vending machine or can be checked at an ATM or with a balance-readingdevice.

When the balance on an electronic purse is depleted, the purse can be recharged with more mo

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