Electronic Payment Systems
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
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
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)
-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 CENTRAL BANK 4. SELLER’S BANK SENDS CASH TO CENTRAL BANK 3. SELLER’S BANK CREDITS SELLER’S BANK ACCOUNT BUYER’S BANK SELLER’S BANK 2. SELLER DEPOSITS CASH IN SELLER’S BANK ACCOUNT THE VISIBLE TRANSACTION BUYER SELLER 1. BUYER PHYSICALLY GIVES CASH TO SELLER Cash Transaction
Minimum Transaction Value Typical Transaction Value Maximum Transaction Value Macro $5.00 $50.00 Mini $0.10 $1.00 $10.00 Micro $0.001 $0.01 $1.00 Ecommerce Payment Ranges SOURCE: COMPAQ CORP.
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
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
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)
Parties to a Credit Card Transaction CARD, TELEPHONE, INTERNET BUYER SELLER DIALUP OR LEASED LINE U.S. MAIL! SELLER’S BANK BUYER’S BANK CARD ASSOCIATION PROPRIETARY NETWORK
Secure Sockets Layer (SSL) if it has one SOURCE: WEB SECURITY
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)
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
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
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 . . .
Microprocessor Contacts Card (Upside-down) Epoxy Smart Card Structure Contacts: Contacts (8) SOURCE: SMART CARD FORUM
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
Mondex Overview SOURCES: OKI, MONDEX USA
Mondex Components (Hitachi) Electronic Cash Register Cashless ATM PCMCIA Reader/Writer Key Fob Balance Reader Electronic Wallet SOURCE: HITACHI
Octopus SONY RC-S833 CONTACTLESS SMART CARD SONY READER/WRITER I/O SPEED: 211 Kbps SOURCE: SONY
Financial Aggregation • Idea: allow access to all assets through a single portal • Citigroup • Electronic bill presentment • CheckFree demo, EIPP • Paytrust • Mobile • Vodaphone demo
EBPP Participants PERSONAL FINANCE SYSTEM, AGGREGATOR, BANK DATA PARSING BILL FORMATTING BILLER HOSTING DATA FLOW BILL INFO PAYMENT ORDERS MONEY FLOW PAYMENT AND REMITTANCE PROCESSING SOURCE: EBILLING.ORG
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
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