Payment Systems

1. Payment Systems

2. To understand Internet-based monetary transaction models and issues such as: digital currency; e-wallets; smart cards; e-billing; micropayments. Outcomes

3. Traditional commerce involves different payment methods and transactions: cash or cheque; postal order; credit cards; business payments; banking and bill paying. For e-commerce the question is: How can we support payments electronically? Motivation

4. Conventional Checking Consumers write checks to pay third-parties: • consumer holds an account with a bank; • consumer writes a check to a merchant authenticated by consumer’s signature; • merchant may endorse it with a signature before presenting to the bank for payment; • if consumer and merchant use the same bank, then simple transfer of funds between accounts.

5. Conventional Checking (cntd) If payer & payee use different banks, then: • the payee bank presents the check for settlement to the payer’s bank; • the payee bank receives the funds through a settlement system; • when checks are sent for deposit, merchants do not know if consumers have sufficient funds; • similarly, consumers receive statements from banks showing the amount paid. Discrepancies -> forged checks.

6. Conventional Checking (cntd) Model works with negative balance -> overdrawn

7. Traditionally, in order to accept a credit card payment : a merchant must have a merchant account with a bank; a merchant account accepts only point-of-sale transactions. What is the typical procedure? Credit Card Transactions

8. Credit Card Transactions (cntd) • consumer presents card; • merchant seeks and receives authorisation; • merchant transmits transaction for settlement; • settlement between merchant and consumer banks.

9. Online Credit Card Transactions This is indeed how money is usually spent online (>80%) However, some problems: • security - merchants never see the actual card (no impression, no signature), and consumers cannot fully identify merchants; • cost - cards have high transaction fees; • simplicity - consumers have concerns about the speed and convenience of the transactions.

10. Issues for e-Payments Security issues for electronic payments, detail: • naming - there must be an unambiguous way of identifying both the payer’s and payee’s bank accounts; • signatures - it must be possible for the payer’s banks to verify that the payment instructions were generated by authorised account holders;

11. Issues for e-Payments (cntd) • confirmation - payees must have confirmation that transfers took place & payers must have notification of transfers out of their accounts; • confidentiality - third parties should not be able to monitor such payments; • settlement - banking institutions must have a separate way of settling their accounts.

12. Digital Payment Systems • Digital Credit Card Payment Systems • Digital Check Payment Systems • Digital Cash • Micropayments • E-billing • Peer-To-Peer Payments • E-Wallets

13. CyberCash Inc., built an Internet system for protecting credit card presentation (1995): a number of credit cards are held in a software wallet, used by the consumer to register several credit cards (another software package provides similar services to the merchant); messages are encrypted using a random symmetric key, which in turn is included in the message encrypted with the recipient's public key; the CyberCash public key is built into the wallet and merchant’s software. Digital Credit Card

14. consumers generate a public­private-key pair when they register credit cards with the wallet, and the public key is sent to a CyberCash database; while consumers, merchants, and CyberCash all have public­private-key pairs, only CyberCash knows everyone's public key (a limitation).  CyberCash can exchange info securely with consumers/merchants (communication relies on CyberCash to authenticate all signatures). Digital Credit Card (cntd)

15. Digital Credit Card (cntd)

16. On the Internet a check can be replaced with a digitally signed message: payer uses a secure processor in the form of a PC card, to generate a digitally payment instruction or check; check is transmitted to the merchant, where it is endorsed digitally; check is sent to the merchant’s bank where it is cleared using an ACH - Automated Clearing House (as shown in Fig. of next page). Digital Checks

17. Digital Checks (cntd)

18. Digital Checks (cntd) • a consortium of banks working through the Financial Services Technology Consortium (FSTC) Inc. has demonstrated a prototype; • standards for conveying invoice/remittance information are important; • FSTC model (unlike CyberCash) assumes that public keys/certificates are widely available; • tokens (PC Cards) protect the private key, designed to provide a high level of protection against such threats as Trojan horse software.

19. Digital Cash • stored electronically on a device in the consumer’s possession (hard disk or smart cards); • should allow people to pay small amounts online and merchants to avoid credit-card transaction fees (micropayments); • possibility of payment by monthly bills (e-billing); • allows those with no credit cards to shop online; • should not require intermediary (peer-to-peer payments); • may require other payment technologies (e-wallets).

20. Digital Cash (cntd) • gift cash, often sold as points, can be redeemed at leading shopping sites • an effective way of giving those without credit cards, the ability to make purchases on the Web e.g.Flooz; • points-based rewards • points are acquired for completing specified tasks including visiting Web sites, registering or buying products e.g. MyPoints, CyberGold, NetIncentive; • points can then be redeemed e.g. Beenz.

21. Digital Cash (cntd) eCash Technologies, Inc. (previously DigiCash) • prepaid system; • secure digital-cash provider that allows you to withdraw funds from your traditional bank account; • e-coins are stored on hard disk (requires e-wallet). see also FirstVirtual, Milicent.

22. Smart Cards • A smart card has a computer chip embedded on its front-side, and holds more information than ordinary credit cards with magnetic strip • contact smart cards: to read information on smart cards and update information, contact smart cards need to be placed in a smart card reader; • contactless smart cards: have both a coiled antenna and a computer chip inside, enabling the cards to transmit information;

23. Smart Cards (cntd) • allows reloadable stored value account; • can require the user to have a password, giving the smart card a security advantage over credit cards • information can be designated as "read only" or as "no access”; • possibility of personal identity theft. See eg. American Express Blue, Mondex, Visa...

24. Micropayments • payments involving small amounts (say £3); • companies offering nominally priced products and services (e.g. music, pictures, video) need to generate a profit; • consumers need a cost-efficient way to acquire nominally priced products. When we use credit cards: • merchants must pay a fee for each transaction; • the cost of some payments may be smaller than the standard transaction fee, causing merchants to incur losses.

25. E-billing To offer micropayments, some companies develop new forms of payment system based on monthly bills: • strategic partnerships with utility companies • eCharge uses ANI (Automatic Number Identification) to verify the identity of the customer and the purchases they make, and charges their phone bill; • outsource payment-management systems • Qpass where customers receive special bills based on their monthly transactions (see Ppass transactions model in Fig of next page);

26. E-billing (cntd)

27. Peer-To-Peer Payments • PayPal offers service called X payments which can be used to enable credit-card payment for auction items in real time (the transaction begins processing immediately after it is initiated), reducing risk of fraud or overdrawn accounts. However, difficult for individuals to accept credit card payments

28. Peer-To-Peer Payments (cntd) Digital cash allows online monetary transfers between consumers: • eCash allows the transfer of digital cash via e-mail between two people who have accounts at eCash enabled banks; • PayPal allows user to send money to anyone with an account and an e-mail address. See also YahooPayDirect, MoneyZap...

29. E-Wallets Potential consumers often (>25%) give up transactions because the form is complicated E-wallets is a technology which allows to: • keep track of your billing and shipping information so that it can be entered with one click at participating merchants’ sites; • store e-checks, e-cash and credit-card information.

30. E-Wallets (ctnd) This technology has not been adopted yet: • E-wallets are site-based: need multi-site wallets (Electronic Commerce Modeling Language(ECML) as a standard, see www.ecml.org); • E-Wallets are just “form-fillers”: need add-on technologies (eg. receipt generation, automatic price-comparison).

31. Further issues • Alternate consumer payment options (e.g. www.debit-it.com); • B2B transactions (e.g. www.paymentech.com); • Online banking (e.g. E*trade.com). See Deitel & Deitel & Nieto Ch. 5, for more details.

32. (1) What is the conventional way of paying by check? Explain your answer diagrammatically using four main participants: a consumer, a merchant, the consumer’s bank and the merchant’s bank. Comment on the advantages and disadvantages of this model. (2) What are the issues involved in developing an online payment system? (3) Describe with the aid of a diagram the traditional procedure followed for credit card payments. (4) Describe the CyberCash model. (5) What are electronic checks and how do they work? Review Questions

33. (6) Describe the E-Wallets approach. How does it contribute to online payments and what issues does it raise? (7) Comment on the idea and use of the digital cash approach. (8) Define the term peer-to-peer payments. Where and how can it be used? What are its advantages / disadvantages? (9) What are smart cards. How and where can they be used? Identify two main categories. (10) Define the term micro-payments. How can companies accept such payments. Review Questions (cntd)

34. (11) Compare and contrast the different types of online payment models discussed in this topic. Do you see any similarities between any of these? Are any of these models clearly complementary to each other? Justify your answer. (12) Can you see any of the payment models discussed in this topic dominating the market? Justify your answer. Review Questions (cntd)