Internet Payment Mechanisms Group 0229 Brad Boles Larry Solomon Linda Watson Li Su Scott Way Eva Thomas

Introduction The key to successful commerce is a secure and stable payment mechanism and this is a fundamental requirement for the broad expansion of e-commerce.

History The earliest payment systems were very simple. Since goods were bartered directly the good themselves served as a payment mechanism.

History (continued) As trade became more complex the concept of money/currency was introduced. In recent times cash has given way to checks and credit cards as the principle forms of money. Today the vast majority of e-commerce in conducted with credit cards.

Services supported by Internet payments Consumer bill payment Invoice payment Cash management Supply chain settlement Procurement

Two types of payment systems In a Payment Instruction system a stream of data is sent instructing a third party to initiate a payment. The user of this type of system never actually takes possession of anything. In a Digital Money system a user can physically store data on an independent device that represents money that can be transferred at a later date.

UPS Traditionally, each type of payment is handled by a different system. For example, credit cards are handled by a POS system while EFT’s are processed by the ACH. In the Internet environment, a universal payment system (UPS) can be developed to support all types of payment transactions.

Old style “Internet” Banking In this scenario the payer’s bank supports UPS but the payee’s doesn’t. Only credit card and one way EFT transactions are supported. Validation of Payee’s funds is not done in real-time.

Current “Internet” banking Both the payer’s and the payee’s banks support UPS. This adds support for checks, notes, real-time verification but clearing is still not done in real-time.

The goal of Internet Banking Both the payee’s and the payer’s banks use direct connections between their UPS systems. This allows for real time clearing.

Bank Internet Payment System (BIPS) Developed by the Financial Services Technology Consortium (FSTC) provides a framework for UPS that maps to existing bank processes where possible. This system is currently being implemented at Citibank.

BIPS Supports Five Message Types

BIPS Push Payment

BIPS System Architecture NPP – Network Payment Protocol – XML based EPH – Event Process Handler PSI – Payment System Interface

BIPS Security Encryption from underlying transport (HTTPS, PGP, etc.) Authentication via digital certificates Public Key encryption (digital signatures) Event log

Future Opportunities

Micropayments Prices below 1 cent Prices below the cost of the transaction

Beyond Digital Wallets Third party vendor with ability to bill a user (such as ISP) Proxy for the transaction Can aggregate micro- payments

Conclusion “ Imagine Business to Consumer transactions being performed with a ‘digital wallet’ communicating with a ‘virtual cash register’ in a cyber shop!”

BIPS Implementation

NPP Messages in BIPS

Sample BIPS Messages Pull Payment

Sample BIPS Messages Initiator Status Request

Sample BIPS Messages Initiator Stop Request

Sample BIPS Messages Feasibility Request about a Payment

UPS Transaction Flow