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When a consumer makes an online purchase, they usually must pay the seller before receiving a product or gaining access to a service, and they must be able to do so remotely. A number of new technologies have arisen to fulfill this need, each of which has its own advantages and disadvantages. Determining which payment mechanism to offer to customers is a key step in developing an e-commerce business, so when advising e-commerce clients, you should develop an understanding of the following popular payment methods:
Each method presents different legal issues, particularly with respect to data transfer security and privacy, and with respect to the type of vendor with whom an e-commerce business will need to contract for services.
Credit and Debit Cards. The most widely used technology for online payment is the use of a traditional credit or debit card. A credit card allows cardholders to make purchases against a line of credit that they can pay off later, while a debit card is directly linked to a bank account and transactions are subtracted immediately from the account. Both types of cards are generally issued by financial institutions such as banks and credit unions.
Direct Operator Billing. Direct operator billing (also referred to as direct carrier billing) is a payment method where a consumer makes a purchase via a mobile device such as a smartphone, generally by using an app installed on the device. The payment is billed to their mobile network provider, who pays the seller and then bills the consumer for the purchase, usually as an additional line item on the consumer’s monthly phone bill. Depending on how direct operator billing is set up, the network provider may charge either the consumer or the seller, or both, an additional processing fee.
SMS/USSD-Based Transactional Payments. As with direct operator billing, SMS (short message service, also referred to as text messaging) and USSD (unstructured supplementary service data) are payment methods where the mobile network provider processes the payment. Both SMS and USSD are mobile device services where information is sent via text message. They differ mainly in that SMS only allows for one-way communication, where the device user can send messages to the mobile network provider but cannot receive replies, while USSD allows for two-way communication between the user and the network provider.
Near Field Communication Technology. Near field communication technology (NFC) uses short-range wireless transmission to exchange data between mobile devices when the devices are held in close physical proximity to each other. The mobile device must contain a specific type of chip to allow use of NFC. As with WAP, NFC is not a payment method itself, but is a way to allow information to be transmitted during the use of a payment method such as an online wallet (discussed below). For example, a user with an NFC-chipped smartphone can tap an NFC-chipped register in a store, whereupon the register will send a signal to the smartphone to deduct the purchase price from the online wallet stored on the smartphone.
Online/Digital Wallets and Cloud-Based Payments. An online or digital wallet (also referred to as a mobile wallet) is software that allows a user to store credit card, bank account, and other payment-related information in electronic form. The information may be stored locally, such as on a mobile device, or may be stored “in the cloud,” which allows the user to access the information from any Internet-enabled device.
For additional information on e-commerce payment mechanisms, and coverage of a host of transactional law topics, click here to visit Lexis Practice Advisor.