Electronic Payment Systems 20-763 Lecture 12 Peer-to-Peer Payments

1. Electronic Payment Systems20-763 Lecture 12Peer-to-Peer Payments

2. Peer-to-Peer Payments • Are banks necessary? • Peer-to-peer payments • PayPal • Elliptic Curve Cryptography • CHIPS, SWIFT

3. Peer-to-Peer (P2P) Concepts • P2P • payments not involving a bank • payments “directly” between payor and payee • classic example: cash • transfers between digital wallets • purchasing online content • micropayments • Distinguish between P2P payments and P2P technology • Napster, Gnutella • Someday we may use P2P technology for P2P payments

4. PayPal Structure PRIVATELY HELD COMPANY PUBLIC COMPANY eBay x.com BETWEEN TWO PAYPAL USERS, TRANSACTIONS ARE PURELY BOOK ENTRIES ONLY MAINTAINS LEDGERS NO MOVEMENT OF REAL MONEY WITHIN PAYPAL PayPal Private Bank IF REAL MONEY MUST MOVE, PAYPAL SENDS INSTRUCTIONS TO ITS BANK X.COM’s BANK INTERACTS WITH BANKING SYSTEM THROUGH ACH USER INTERACTS WITH PAYPAL THROUGH BROWSER User’s Bank User USER MAINTAINS NORMAL RELATIONS WITH HIS BANK

5. PAYPAL ACCOUNT A . . . ACCOUNT X PayPal 1. A PAYS X VIA PAYPAL (A HAS ENOUGH IN PAYPAL ACCOUNT) 6. PAYPAL NOTIFIES X OF PAYMENT. X CHOOSES PAYMENT METHOD ACCOUNT HOLDER A ACCOUNT HOLDER X INTERNET EMAIL 5. PAYPAL CREDITS X’S PAYPAL ACCOUNT ACCOUNT HOLDER A’S CREDIT CARD 2. OR: PAYPAL CHARGES X’S CREDIT CARD 3. OR: PAYPAL INITIATES ACH DEBIT ACCOUNT HOLDER A’S BANK ACCOUNT HOLDER X’S BANK 7. OR: PAYPAL INITIATES ACH CREDIT ACH PROCESSOR PAYPAL’S BANK 4. FUNDS ARE DEPOSITED IN PAYPAL’S BANK 8. OR: PAYPAL MAILS CHECK TO X

6. PayPal Concepts • Merchants pay low fees; individuals pay nothing • Interest paid on deposits • Mass (bulk) payments • Business model: fees + float • Relationship with eBay • Mobile payments possible • What would happen if PayPal could be used for everything?

7. PayPal Fees SOURCE: PAYPAL

8. PayPal Fees • No fees for individuals • Only merchants are charged • Must be a merchant to receive credit card payments • No fee for deposits or withdrawals from US banks SOURCE: PAYPAL

9. PayPal and Foreign Exchange eBay £ $ U.K. PayPal Bank U.K. PayPal $ Acct U.K. PayPal Bank U.S. PayPal £ Acct PayPal U.K. PayPal U.S. U.S. User’s Bank U.K. User’s Bank U.K. User U.S. User

10. PayPal IPO (Ticker: PYPL) • PayPal filed for $80.5M public offering Sept. 2001 • Number of depositors: 20M, >90% market share • No one else has more than 100,000 (less than 1%) • Bank of America (largest in U.S.) has 3.3M regular depositors • Search for “We accept PayPal” gave 36,000 hits • Year 2000 revenue: $14.5M, lost $170M • Year 2002 revenue: $200M, profit $5M • Daily volume: 165,000 payments • Annualized volume of payments handled: $3B • Total number of Silicon Valley IPOs in 2001: 5

11. PayPal v. NASDAQ

12. Email Payments Market SOURCE: CELENT.COM

13. Email Payments Growth SOURCE: CERTAPAY

14. eBanking B2B B2C Customers Banks Vendors payments balances AP AR Cash forecasts hedging Management investment/ debt 30 general ledger 20 40 10 50 $ $ $ $$ eTrading eCRM Production Mgmt Brokers Operations ERP Accounting eBanking as Integrated Activity SOURCE: SELKIRK

15. Government Outputs: Budget Sector Public Ledger and Central Agencies Departmental Accounting Revenue Expenditure • Human Services • Justice • Taxes • Tolls • Commonwlth • Educat, NRE • Parliam, AG • Salaries • Suppliers • Service Providers • Transfer Payments Cash Management E-Business E-Commerce Payments Bank Value Transfer Value Transfer Bank Service and Transaction Mgmt • internet • electronic • Maxi • teleph • mail • counter • EFT • cards • cheq • cash Single Acct for Govt OR Single Acct for Dept • EFT • cards • cheq • cash • internet • electronic • teleph • mail TCV Outer Budget Balances Information Flows Financial Markets Fund Flows Australia Integrated eBanking Framework Receipts SOURCE: VICTORIA DEPT OFTREASURY AND FINANCE (AU)

16. Treasury Workstation TWS SCOPE SOURCE: SELKIRK FINANCIAL TECHNOLOGIES

17. Mobile Aggregators WIRELESS BANKING: EDS SEE ALSO YODELEE2GO SOURCE: VERTICAL ONE

18. Mobile phone centric future Millions More handsets than PCs connected to the Internet by the end of 2003 ! Projected cellular subscribers (Nokia 2000) Projected Web handsets (Nokia 2000) Projected PCs connected to the Internet (Dataquest 02/2000) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

19. Consumer has goods in shoppingbasket and selects “paybox - pay with mobile phone“ on website 1 2 paybox connectstransaction partnersand rings consumer on mobile phone 4 ...entering the paybox-PIN on the mobile phone Consumer authorises the payment to the Internet shop by... 3 5 Clearing& settlement is done via electronic direct debit Paybox paybox SOURCE: PAYBOX NORDIC AB

20. Paybox Combines Networks Payment Space Banking Network Authorization Space GSM Network PAYMENT MADE THROUGH BANKING NETWORK AUTHENTICATION AND AUTHORIZATION MADEOVER GSM NETWORK Transaction Space Internet • works with any mobile phone • any network provider • supports WAP via GPRS or UMTS • high taxicab penetration • 4% of all B2C in Germany TRANSACTION TRIGGEREDOVER THE INTERNET SOURCE: PAYBOX NORDIC AB

21. 3. Call customers mobile phone 2. Send phone # + amount 4. Confirm recipient + amount (PIN) 5. Confirm payment 1. Send phone number 6. Ship goods paybox: Payment Procedure paybox Customer Vendor SOURCE: ANDREAS KUNZ

22. Paybox Features • Payment authentication by mobile phone, relies on SIM identification and GSM encryption • Started in May 2000 in Germany, now also operational in Austria, Spain and Sweden with more to come (e.g. Britain) • 50% owned by Deutsche Bank • Amounts: starting at about 1€ • Transfer to other mobile phone (1-2% or 25 cent fees) or bank account possible • Offline shopping possible

23. Major Ideas • P2P is cheap • P2P can be ubiquitous (email) • No certificates, but could generalize • B2B payments • Mobile services

24. Q A &