Fall 2000C.Watters1 World Wide Web and E-Commerce Internet Payment Schemes

Fall 2000C.Watters2 Payment Models B2C –Credit cards –Digital wallet –Smart cards –E-cash B2B –EFT (Account transfers) G2C –EFT (Account transfers)

Fall 2000C.Watters3 Ways and Means  Use money in your account (debit card)  Use your credit card (borrow money)  Spend actual coin  Spend value taken from your account  Use cheques in electronic form (clear)  EFT – move money around

Fall 2000C.Watters4 Payments, Protocols and Related Issues 1.Credit Card Payments and SET 2.Electronic Fund Transfer on the Internet 3.Electronic Cash & stored value cards 4.Electronic Cheque/check Systems

Fall 2000C.Watters5 1.Credit Card Payments

Fall 2000C.Watters6 Electronic Credit Card System on the Internet The Players  Cardholder  Merchant (seller)  Issuer (your bank)  Acquirer (merchant’s financial institution, acquires the sales slips)  Brand (VISA, Master Card)

Fall 2000C.Watters7 The process of using credit cards offline cardholder requests issuance of a card brand (like Visa and MasterCard) to an issuer bank Credit Card System Card is authorized by the issuer bank, or its designated brand company A plastic card is physically delivered to the customer’s address by mail. The card is in effect when cardholder calls the bank for initiation and signs on the back of the card. The cardholder shows the card to a merchant. Then the merchant asks for approval from the brand company. Upon the approval, the merchant requests payment to the merchant’s bank, and pays fee for the service. The acquirer bank requests the issuer bank to pay for the credit amount.

Fall 2000C.Watters8 SET (Visa and Mastercard)  Cardholder with electronic wallet  Merchant  CA (Certificate Authority)  Payment gateway

Fall 2000C.Watters9 SET (Secure Electronic Transaction)  Defined by credit card co.s to enable credit card purchases over the Internet  Uses public key digital signatures and certificates for security and authentication  Implements a new type of transaction  Albeit similar to traditional credit card transactions

Fall 2000C.Watters10 SET  Some Credit card transactions are considered online  Web shopping is online  is offline (echecks are offline)  Set transaction includes  Cardholder  Internet merchant  Payment gateway (connects to regular credit card network)  Communication in real-time using SET transaction

Fall 2000C.Watters11 Credit Card Transaction with SET

Entities of SET Protocol in Cyber Shopping IC Card Reader Customer x Customer y With Digital Wallets Certificate Authority Electronic Shopping Mall Merchant AMerchant B Credit Card Brand Protocol X.25 Payment Gateway 12 © Prentice Hall, 2000

Fall 2000C.Watters13 2.EFT (electronic funds transfers)  Transfer funds from one bank account to another  Automated Clearing House (ACH)  Debit card  Financial EDI

Fall 2000C.Watters14 ACH (Automated Clearing House)  Developed in 70’s by banks to replace paper checks  Supports both automatic payments and automatic deposits  Required a new trust model and business practices  Authorization for recurring transactions often given to receiving party  Usually between institutions (ie., bank account to bank account)

Fall 2000C.Watters15 Electronic Fund Transfer (EFT) on the Internet An Architecture of Electronic Fund Transfer on the Internet Internet Payer Cyber Bank Bank Cyber Bank Payee Automated Clearinghouse VAN Bank VAN Payment Gateway Payment Gateway

16 Financial EDI : EDI on the Internet

Fall 2000C.Watters17 Debit Cards  Card that authorizes an EFT from a bank account  ie., pay now if sufficient funds exist merchant/customer pays  With a PIN considered an online transaction  With a signature considered offline  Used mostly by individuals

Fall 2000C.Watters18 Debit Card Bank Automated Clearinghouse Payer customer Payee merchant

Fall 2000C.Watters19 3.E-cash  3.1 Electronic money  3.2 Stored-value cards  3.3 Digital Wallet  3.4 Variations

Fall 2000C.Watters Electronic money  First DigiCash then NetCash  Like cash  User is issued money as bills/coins uniquely id’d  Use of bills must be traced (not used twice)  Not widely accepted

Fall 2000C.Watters21 Electronic Money DigiCash –The analogy of paper money or coins –Expensive, as each payment transaction must be reported to the bank and recorded –May conflict with the role of central bank’s bill issuance

Fall 2000C.Watters Stored Value Cards  Like photocopy or phone card with $10 on it  Card has a value but no money (bills) has been issued  Useful for micropayments  May be used anonymously

Fall 2000C.Watters23 Smart Cards  Since 1970’s  Plastic card with magnetic strip  Apply initial value- decreases with use  Telephone card  Photocopy card  New ones have embedded chip  Mondex  VisaCash

Fall 2000C.Watters24 Cash Cards A delivery vehicle of cash in an electronic form Mondex, VisaCash applied this approach Either anonymous or onymous CyberCash commercialized a card named CyberCoin for micropayments on the Internet ($0.25 to $10.00)

Fall 2000C.Watters25 Mondex Card and Shopping Shop with Mondex – put in Merchants machine Can Add money to the card by phone or or special machines Payments restricted to value of card Allow transfers between cards (wallets) on the Internet

Fall 2000C.Watters26 Mondex example Flash demo wallet.swf

Fall 2000C.Watters27 Mondex phones

Fall 2000C.Watters28 Mondex POS devices

Fall 2000C.Watters29 VisaCash

Fall 2000C.Watters Digital Wallets A wallet is a small software program and data that is used for online purchase transactions. Eg. CyberCash –provides the Wallet software free – allows several methods of payment (for example, several different credit cards).

Fall 2000C.Watters31 Using a Wallet you order something, the order is sent to the merchant. The merchant (actually, the merchant's server) sends back an invoice to consumer Consumer launches the Wallet in computer Consumer selects "Pay,“ the CyberCash software on the merchant server sends a message back to the consumer's PC to activate the "Wallet“ software. Consumer selects one of the cards defined in the Wallet and clicks. The transaction includes real-time credit card authorization. CyberCash plans to incorporate an electronic "Cash" and "Coin“ system to use for transactions that are considered small for credit cards.

Fall 2000C.Watters32 E-cash (

Fall 2000C.Watters Variations Peer-to-Peer Payments PayPal X payments – eBay BillPoint –

Fall 2000C.Watters34 Contactless IC Cards Proximity Card –Used to access buildings and for paying in buses and other transportation systems –Bus, subway and toll card in many cities Amplified Remote Sensing Card –Good for a range of up to 100 feet, and can be used for tolling moving vehicles at gates –Pay toll without stopping (e.g. Highway 91 in California)

Fall 2000C.Watters35 MicroPayments  What happens when the charge is less than the fee??  Credit card transactions cost the merchant  On line digital info may generate lots of small charges (eg.,1/10 ¢ or less for a web page or music track)  Generally want to aggregate these charges for billing

Fall 2000C.Watters36 paying through the ISP

Fall 2000C.Watters37 4.Electronic Cheques  Target is B2B where $value is high  Replaces paper cheque  Takes only minutes to clear  EFT  But with two certificates and a remittance invoice for the payer

Fall 2000C.Watters38 SafeCheck 1998  Agent based checkbook on checkholder’s PC  Can validate check issuance  Used by USA Treasury 

Payer’s checkbook agent Payee’s check-receipt agent PayerPayee Issue a check Receipt A/C DB A/C DB control agent of payer’s bank control agent of payee’s bank clearing Checkbook, screened result Request of screening check issuance present report payer’s bankpayee’s bank Internet The Architecture of SafeCheck 39 © Prentice Hall, 2000

Fall 2000C.Watters40 eCheck  eChecks work the same way a check does.  check writer "writes" the eCheck using one of many types of electronic devices  "gives" the eCheck to the payee electronically.  payee "deposits" the Electronic Check, receives credit, and "clears" the eCheck to the paying bank.  the paying bank validates the eCheck and then "charges" the check writer's account for the check.

Fall 2000C.Watters41 Electronic Check Systems Check Signature Remittance Invoice Secure Envelope Remittance Check Signature Certificate Remittance Secure Envelope Certificate Endorsement Certificate Signature “Card” Signature “Card” Workstation Mall statement E-Check line item Payer’s Bank Debit account Payee’s Bank Credit account E- Mail WWW ACH ECP Clear Check Deposit check PayerPayee Account Receivable Procedure of Financial Service Technology Consortium Prototype

Fall 2000C.Watters42 Electronic Check Book –Counterpart of electronic wallet –To be integrated with the accounting information system of business buyers and with the payment server of sellers –To save the electronic invoice and receipt of payment in the buyers and sellers computers for future retrieval –Example : SafeCheck –Used mainly in B2B

Fall 2000C.Watters43 Integrating Payment Methods Two potential consolidations: –The on-line electronic check is merging with EFT –The electronic check with a designated settlement date is merging with electronic credit cards Security First Network Bank (SFNB) –First cyberbank –Lower service charges to challenge the service fees of traditional banks Visa –VisaCash is a debit card –ePay is an EFT service

Fall 2000C.Watters44 Recap on Payments  Use money in your account (debit card)  Use your credit card (borrow money)  Spend actual coin  Spend value taken from your account  Use cheques in electronic form (clear)  EFT – move money around