electronic payment systems

20-751 ECOMMERCE TECHNOLOGY

SUMMER 2002

COPYRIGHT © 2002 MICHAEL I. SHAMOS

Electronic Payment Systems


SUMMER 2002


Outline

• Types of money– Fiduciary v. scriptural– Token v. notational

• Types of payment systems• Cash• Credit cards

– SSL (TLS) protocol

• Intermediaries– PayPal

• Smart cards• Electronic Bill Presentment


SUMMER 2002


Types of Money:Fiduciary vs. Scriptural

• Fiduciary money (fiat money, legal tender) – Issued by a central (government) bank– Has real “discharging power” (to discharge debts)– Cannot be refused

• Scriptural money (not legal tender)– Money not issued by central bank– Examples: bank accounts, travelers checks, gift certificates,

scrips– Discharging power based on trust in issuer– Can be refused


SUMMER 2002


Types of Money:Token vs. Notational

• Token money (value represented by physical article)– Represented by a physical article (e.g. cash, gift certificate,

traveler’s check)– Can be lost

• Notational money (value held in account balance)– Examples: bank accounts, frequent flyer miles– Transferred by order– Requires clearance (determining net effect of multiple orders)– Requires settlement (payment in fiduciary money)

• Hybrid money– Check, telephone card (carries promise of future service)


SUMMER 2002


Cash Transaction

1. BUYER PHYSICALLY GIVES CASH TO SELLER

BUYER SELLER

THE VISIBLE TRANSACTION

-2. CENTRAL BANK ISSUES FIDUCIARY MONEY (ANTI-FORGERY) + (SERIAL NUMBERS)

-1. CENTRAL BANK SELLS CASH TO BUYER’S BANK

0. BUYER’S BANK ALLOWS BUYER TO DRAW CASH FROM BUYER’S ACCOUNT

2. SELLER DEPOSITS CASH IN SELLER’S BANK ACCOUNT

3. SELLER’S BANK CREDITS SELLER’S BANK ACCOUNT

4. SELLER’S BANK SENDS CASH TO CENTRAL BANK

CENTRALBANK

BUYER’SBANK

SELLER’SBANK


SUMMER 2002


Ecommerce Payment Ranges

Maximum Maximum TransactionTransaction

ValueValue

TypicalTypicalTransactionTransaction

ValueValue

MinimumMinimumTransactionTransaction

ValueValue

Mini $10.00$0.10 $1.00

Macro $5.00 $50.00

Micro $0.001 $1.00$0.01

SOURCE: COMPAQ CORP.


SUMMER 2002


Types of Payment Systems

• Credit card– SSL, SET protocols

• Payment orders, direct transfers, checks– Automated Clearing House (ACH)

• Online Banking– Wingspan

• Intermediaries– PayPal

• Stored-Value Cards, Smart Cards, Wallets– Mondex– Octopus


SUMMER 2002


Types of Payment Systems

• Micropayment (usually below $0.10)– Millicent

• Aggregation– Centralized account for merchants + customers (Qpass)

• Digital Scrip– Flooz, Beenz (both now bankrupt)

• Electronic Cash– eCash


SUMMER 2002


Credit Cards

• The most expensive ePayment mechanism• MasterCard: $0.29 + 2% of transaction value• A $100 charge costs the merchant $2.29• Currently the most convenient method• Advantage: allows credit• People can buy more than they can afford• Disadvantages:

– doesn’t work for small amounts (too expensive)– doesn’t work for large amounts (too expensive)


SUMMER 2002


Parties to a Credit Card Transaction

BUYER’SBANK

SELLER’SBANK

BUYER SELLER

CARDASSOCIATION

CARD,TELEPHONE,

INTERNET

DIALUP ORLEASED LINEU.S. MAIL!

PROPRIETARY NETWORK


SUMMER 2002


Secure Sockets Layer (SSL)

if it has one

SOURCE: WEB SECURITY


SUMMER 2002


PayPal

• Pay anyone, anywhere via email• Draws funds from user’s bank account, places credit

hold on credit card for guarantee• 16 million users

– Bank of America has 3.3. million

• Accounts insured up to $100,000• Based on automated clearinghouse• Withdraw funds anytime, or send to someone else• Mobile payments (WAP)


SUMMER 2002


PayPal

ACCOUNTHOLDER A

ACCOUNTHOLDER A’S

BANK

ACCOUNTHOLDER X

PAYPAL

ACCOUNT A

. . .

ACCOUNT X

ACCOUNTHOLDER X’S

BANK

ACHPROCESSOR

ACCOUNTHOLDER A’S

CREDIT CARD

INTERNET EMAIL

PAYPAL’SBANK

1. A PAYS X VIA PAYPAL (A HAS ENOUGH IN PAYPAL ACCOUNT)

6. PAYPAL NOTIFIES X OF PAYMENT. X CHOOSES PAYMENT METHOD

2. OR: PAYPAL CHARGES X’S CREDIT CARD

3. OR: PAYPAL INITIATES ACH DEBIT

4. FUNDS ARE DEPOSITED IN PAYPAL’S BANK

7. OR: PAYPAL INITIATES ACH CREDIT

5. PAYPAL CREDITS X’S PAYPAL ACCOUNT

8. OR: PAYPAL MAILS CHECK TO X


SUMMER 2002


Smart Cards

• Magnetic stripe– 140 bytes, cost $0.20-0.75

• Memory cards– 1-4 KB memory, no processor, cost $1.00-2.50

• Optical memory cards– 4 megabytes read-only (CD-like), cost $7.00-12.00

• Microprocessor cards– Imbedded microprocessor

• (OLD) 8-bit processor, 16 KB ROM, 512 bytes RAM• Equivalent power to IBM XT PC, cost $7.00-15.00• 32-bit processors now available

– Intelligent, active devices with defenses


SUMMER 2002


Smart Card Applications

• Ticketless travel: Seoul bus system– 4M cards, 1B transactions since 1996

• Authentication, ID• Medical records• Ecash• Store loyalty programs• Personal profiles• Government

– Licenses

• Mall parking . . .


SUMMER 2002


Smart Card Structure

Contacts (8)SOURCE: SMART CARD FORUM

Epoxy

Microprocessor

Contacts

Card(Upside-down)

Contacts:


SUMMER 2002


Mondex

• Smart-card-based, stored-value card (SVC)• Subsidiary of MasterCard• NatWest (National Westminister Bank, UK) et al.• Secret chip-to-chip transfer protocol• Value is not in strings alone; must be on Mondex card• Loaded through ATM

– ATM does not know transfer protocol; connects with secure device at bank

• Spending at merchants having a Mondex value transfer terminal


SUMMER 2002


Mondex Overview

SOURCES: OKI, MONDEX USA


SUMMER 2002


Mondex Components (Hitachi)

Cashless ATM Electronic Cash RegisterPCMCIA Reader/Writer

ElectronicWallet

Key FobBalanceReader

SOURCE: HITACHI


SUMMER 2002


Octopus

SOURCE: SONY

SONY RC-S833CONTACTLESS SMART CARD

I/O SPEED: 211 Kbps

SONY READER/WRITER


SUMMER 2002


Financial Aggregation

• Idea: allow access to all assets through a single portal • Citigroup• Electronic bill presentment

– CheckFree demo, EIPP – Paytrust

• Mobile– Vodaphone demo


SUMMER 2002


EBPP Participants

DATA PARSINGBILL FORMATTING

BILLER HOSTING

PERSONAL FINANCE SYSTEM,AGGREGATOR,BANK

PAYMENT AND REMITTANCEPROCESSING SOURCE: EBILLING.ORG

DATA FLOW

MONEY FLOW

BILLINFO

PAYMENTORDERS


SUMMER 2002


Key Takeaways

• epayment security accomplished with PKI• PayPal is the fastest-growing technology in history• Rising use of smart cards

– Face-to-face minipayments

• Little movement toward electronic cash• Online banking retains customers• Electronic bill presentment/payment add value• Profound changes in money flow are afoot


SUMMER 2002


QA&

electronic payment systems

Documents

x of payment

paypal initiates

paypal account6

payment method2

refusedscriptural money

refusedtypes of money

lostnotational money

notationaltoken money