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Chapter 7

Chapter 7. Electronic Payment Systems. Electronic Commerce. Objectives. Four methods for collecting customer payments Credit and debit card processing How electronic wallets work History and future of electronic cash systems, how they work and are implemented Smart cards

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Chapter 7

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  1. Chapter 7 Electronic Payment Systems Electronic Commerce

  2. Objectives • Four methods for collecting customer payments • Credit and debit card processing • How electronic wallets work • History and future of electronic cash systems, how they work and are implemented • Smart cards • Which payment systems are most popular and which are likely to gain acceptance

  3. Electronic Payment Systems • Three methods of payment currently • Cheque, credit card, or cash • Four methods of electronic payment • Electronic cash, electronic wallets, smart cards, and credit/debit cards

  4. Electronic Cash Storage • Two methods • On-line • Individual does not have possession personally of electronic cash • Trusted third party, e.g. e-banking, bank holds customers’ cash accounts • Off-line • Customer holds cash on smart card or electronic wallet • Fraud and double spending require tamper-proof encryption

  5. How Electronic Cash Works • Customer opens account with bank in person and establishes identity • Thereafter, digital certificate serves as proof of identity • Once identified, bank issues e-currency and deducts amount from customer’s account (minus service fee) • Customer spends e-cash with merchant who validates it to prevent forgery or fraud • Merchant presents e-cash to issuing bank for deposit once goods or services are received

  6. Electronic Cash Issues • Primary advantage is with purchase of items less than £5 • Credit card transaction fees make small purchases unprofitable • Facilitates Micropayments – eg for items costing less than £1 • Must be anonymous, just like regular currency • Safeguards must be in place to prevent counterfeiting • Must be independent and freely transferable regardless of nationality or storage mechanism

  7. Beenz Home Page

  8. Beenz is pushing up Daisies!

  9. Electronic Cash Summary • Advantages • More efficient, eventually meaning lower prices • Lower transaction costs • Anybody can use it, unlike credit cards, and does not require special authorization • Disadvantages • Tax trail non-existent, like regular cash • Money laundering • Susceptible to forgery

  10. CyberCash -- A Pioneer in Electronic Cash

  11. CyberCash Story(http://www.internetweek.com/news/news082098-4.htm)

  12. Electronic Wallets • Stores credit card, electronic cash, owner identification and address • Makes shopping easier and more efficient • Eliminates need to repeatedly enter identifying information into forms to purchase • Works in many different stores to speed checkout • Amazon.com one of the first online merchants to eliminate repeat form-filling for purchases

  13. Electronic Wallets – an Assessment(http://www.computing.co.uk/Features/1134792)

  14. IBM and Micropayments(http://www.alphaworks.ibm.com/tech/micropayments)

  15. Smart Cards • Plastic card containing an embedded microchip • Can contain cash • Over 100 times more information storage than a magnetic-striped plastic card • Information is encrypted, unlike credit cards which have account number on its face, making credit theft practically impossible

  16. Smart Cards • Available for over 10 years • So far not successful in U.S., but popular in Europe, Australia, and Japan • Unsuccessful in U.S. partly because few card readers available • Smart cards gradually reappearing in U.S.; success depends on: • Critical mass of smart cards that support applications • Compatibility between smart cards, card-reader devices, and applications

  17. Mondex Smart Card Processing Figure 7-12

  18. Mondex Smart Card • Holds and dispenses electronic cash • Developed by MasterCard International • Requires specific card reader for merchant or customer to use card over Internet • Supports micropayments as small as 2p and works both online and off-line at stores or over the telephone

  19. Mondex Smart Card • Disadvantages • Card carries real cash in electronic form, creating the possibility of theft • No deferred payment as with credit cards -cash is dispensed immediately

  20. Octopus Smart Card - Trains(http://www.kcrc.com/eng/company/lrts_octopus.html)

  21. Octopus Smart Card - Buses(http://www.citybus.com.hk/eng/RouSer/Octopus/concession_list.asp)

  22. Octopus Smart Card – Auto Reloading(http://www.daoheng.com/bf07.htm)

  23. Octopus Smart Card- A Downside?(http://asia.cnn.com/2001/BUSINESS/asia/08/12/hk.octopuskids/)

  24. Schlumberger Sema Smart Cards(http://www1.slb.com/smartcards)

  25. Credit and Charge Cards • Credit card • Used for the majority of Internet purchases • Has a preset spending limit • Charge card • No spending limit • Entire amount charged due at end of billing period • Merchants must set up merchant accounts to accept payment cards

  26. Processing a Payment Card Order Figure 7-13

  27. Secure Electronic Transaction (SET) Protocol • Jointly designed by MasterCard and Visa with backing of Microsoft, Netscape, IBM, GTE, SAIC, and others • Designed to provide security for card payments as they travel on the Internet • Contrasted with Secure Socket Layers (SSL) protocol, SET validates consumers and merchants in addition to providing secure transmission

  28. Secure Electronic Transaction (SET) Protocol • Goal is single method of conducting payment transactions on the Internet • Acceptance of standard has been slow • SET specification • Uses public key cryptography and digital certificates for validating both consumers and merchants • Provides privacy, data integrity, user and merchant authentication, and consumer nonrepudiation

  29. M(obile)-Payments – the future?(http://www.paycircle.org/) “Analysts believe that easy mobile payment is one of the main prerequisites for the success of m-commerce. When the mobile phone can function as an electronic wallet for mobile payments, including micropayments, application developers will find it attractive to introduce new mobile communication services to the market. Examples include mobile entertainment (downloads of music, mobile gambling, etc.), information services (sports news, horoscopes, location-based services, etc.), and real-world services (paying parking fees, buying train or concert tickets, etc.). Network operators envision micropayments as an attractive business that does not compete with banks or credit card companies. For the end user, PayCircle will make m-commerce easy and secure and thus eliminate the major hurdles to widespread adoption and popularity.” PayCircle.org Press release Jan 23rd 2002

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