Electronic Payment Systems

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

2. Outline • Peer-to-peer payments • PayPal • eCount.com • Electronic banking • Aggregation, screen-scraping • B2B payments

3. Peer-to-Peer (P2P) Concepts • P2P • payments not involving a bank • payments “directly” between payor and payee • classic example: cash • email payments, 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 • > 40,000,000 accounts • RTGS payment system • Credit card hub • Bookkeeping & accounting system • Low-value foreign exchange system

5. PayPal Structure PUBLIC COMPANY eBay 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

6. SHAMOS WEISS PayPal • It’s a big disk drive! - $100 + $100

7. 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

8. PayPal Concepts • Merchants pay low fees; individuals pay nothing • Interest paid on deposits • Mass (bulk) payments possible • Business model: fees + float • FDIC pass-through insurance • Against bankruptcy of PayPal • Different protection for fraud • Mobile payments supported

9. PayPal Fees SOURCE: PAYPAL

10. PayPal and Foreign Exchange eBay £ $ U.S. 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

11. PayPal Worldwide 38 countries Currencies: USD, CAD, GBP, EUR, JPY PayPal available PayPal available + Local Bank Acct. Withdrawal SOURCE: PAYPAL

12. PayPal Statistics • Average ticket (2003): $54 • 69% of payments auction-related • Payment volume ~USD 15B/year • Profit: ~230M/year, about 1.5% of volume • Growth, payment volume (2002-2003): 68% • Growth, number of users (2002-2003): 49% • What would happen if PayPal could be used for everything?

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

14. Total PayPal Payment Volume 2003 TOTAL > 14 BILLION SOURCE: PAYPAL

15. PayPal Growth by Number of Users APRIL, 2004 > 41 MILLION SOURCE: PAYPAL

16. Email Payments Market SOURCE: CELENT.COM

17. Ecount.com SOURCE: LAUDON & TRAVER

18. 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: an Integrated Activity SOURCE: SELKIRK

19. Electronic Banking Opportunities • Financial supply chain (FSC) • Consumer marketing (statement has hyperlinks!) • Data-rich environment • Customized financial services & relationship • Moving toward fee for services instead of floats and spreads • Greater security through digital signatures • Risk reduction through speed • Computer-initiated services means more services

20. Banking Services • Business • Payments • Cash management • Credit • Financial instruments • Factoring • Trade financing • Insurance • Foreign exchange • Accounting • Integration with business systems • Consumer • Payments, eCheques • Savings • Loan services • Aggregation of accounts • Securities • Both • Bill presentment • Reporting • Terrorism, laundering • 24/7 generates business

21. 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)

22. Internet Banking Services 2001 % of Banks Surveyed SOURCE: GRANT THORNTON 2001

23. Financial Aggregation • Idea: allow access to all assets through a single portal SOURCE: VERTICAL ONE

24. Aggregator/ Portal Arrangement Methodology What’s Aggregated Brokerages Data Feed FI Contractual Banks Screen Scraping lnsurers FI with 3rd Party • Non- • Contractual • Knowledge/ • Permission • No Knowledge/ Permission Mortgage Originators Screen Scraping Non- FI with 3rd Party Non-Financial Info Aggregation Process FI = Financial institution SOURCE: BANKING INDUSTRY TECHNOLOGY SECRETARIAT

25. Screen Scraping Obtaining data from screen display commands Legacy system(mainframe) Terminalscreen data HTML data HTMLdata Screen scraper Existing application Legacy database Web server Client SOURCE: WIM GEVERS

26. Move to row 02, column 38 and display “Feb. ” Screen Scraping • Some systems produce as their only output commands to 80 x 24 display terminals • Sequences of characters telling the terminal to move its cursor and display data, e.g. ^M0238Feb. ^M024416, ^M02482004displays “Feb. 16, 2004” in row 2, starting at col. 38 • Screen scraping involves virtual simulation of the display terminal to retrieve the data • Vendors • Teamstudio screensurfer

27. Financial Aggregation Issues • Account consolidation • Different accounts in one bank • Different accounts in different banks • Screen scraping • Combine brokerage, insurance with banking • Web BillPay • Requires registration of vendors • EIPP

28. CashEdge Account Aggregation SOURCE: CASHEDGE

29. Treasury Workstation TWS SCOPE SOURCE: SELKIRK FINANCIAL TECHNOLOGIES

30. Online Customers Hold More Products with Wells Fargo 15% 14% 13% 13% 13% 12% 11% 10% 9% 9% 8% 6% 6% SOURCE: WELLS FARGO, 1999

31. 95% have Higher Balances Online vs. Offline Customers’ Balances % Difference 37% 32% 28% 24% 25% 24% 20% 20% 15% 13% 6% -2% -11% SOURCE: WELLS FARGO, 1999

32. Attrition is Lower (36%) (54%) SOURCE: WELLS FARGO, 1999

33. Consumers Strongly Prefer 24-hour Access To Banking AGE: 18-34 35-49 50-64 65+ SOURCE: SYNERGISTICS

34. HSBC Hexagon System

35. HSBC Hexagon System

36. HSBC Hexagon Payment

37. HSBC Trade Services

38. B2B Payment Types Payment Type Payment Order Payment Obligation Certification Conditional Example Like wire transfer Like promissory note or purchase order Like bank-accepted bill of lading Like a letter of credit or escrow payment Purpose Buyer trusts Seller to deliver Seller trust Buyer to PAY Seller doubts Buyer ability to PAY Buyer doubts seller ability to DELIVER • Payment Orders & Obligations can be future dated • Attributes can be combined, eg conditional certified payment obligation • Obligations can be discounted by seller’s bank & traded freely SOURCE: DEBRA MITTERER

39. Initiation response Initiation confirmation 3 3 Initiation 2 e-paymentsPlus bank co-branded Initiation confirmation Initiation TrustAct Server 2 5 4 Signed receipt Initiation confirmation 1 Agree on terms of purchase B2B Payments Buyer’s bank Seller’s bank Syntax validation Non repudiation Transaction status Buyer Seller

40. 7 Funds transfer Debit confirmation Credit confirmation 8’ 9’ 6 Confirm conditions* e-paymentsPlus bank co-branded 8 9 Debit advice Credit advice TrustAct Server Confirm conditions* 6 *Optional flow B2B Payments Buyer’s bank Seller’s bank Buyer Seller

41. Major Ideas • P2P is cheap • P2P can be ubiquitous (email) • P2P is real-time • eBanking is unexplored territory • Start: replicate paper statements • Aggregation • B2B payments as part of a larger trade process

42. Q A &

43. Banking Services • Business • Payments • Cash management • Credit • Financial instruments • Factoring • Trade financing • Insurance • Foreign exchange • Accounting • Integration with business systems • Consumer • Payments, eCheques • Savings • Loan services • Aggregation of accounts • Securities • Both • Bill presentment • Reporting • Terrorism, laundering • 24/7 generates business

44. Catalog Mgmt. Price Info. Mgmt. Order Entry & Inv. Mgmt. OBI with B2B Payment Supplier  Requisitioner a   b    Buying Organization  Supplier Search Payment Authority Requisitioner Profile Mgmt. Approval 1. Connect to BO's Web Server and Select a Hyperlink to SO's catalog. 2. Authenticate Requisitioner using Digital Certificate 3. OBI Order Request 4. Add Administrative Information 5. OBI Order 6. Obtain Credit Authorization 7. Issue Invoice and Receive Payment SOURCE: JAE KYU LEE

45. Online Payment Revenue Growth SOURCE: CELENT

46. Non-Card eCommerce Payments ACH PayPal Checkfree … SOURCE: CELENT