ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Electronic Payment Systems Lecture 12 Peer-to-Peer Payments

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Peer-to-Peer Payments Are banks necessary? Peer-to-peer payments –PayPal Elliptic Curve Cryptography CHIPS, SWIFT

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Peer-to-Peer (P2P) Concepts P2P –payments not involving a bank –payments “directly” between payor and payee –classic example: cash –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

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal Structure x.com PayPal Private Bank X.COM’s BANK INTERACTS WITH BANKING SYSTEM THROUGH ACH ONLY MAINTAINS LEDGERS NO MOVEMENT OF REAL MONEY WITHIN PAYPAL PRIVATELY HELD COMPANY User User’s Bank USER INTERACTS WITH PAYPAL THROUGH BROWSER BETWEEN TWO PAYPAL USERS, TRANSACTIONS ARE PURELY BOOK ENTRIES IF REAL MONEY MUST MOVE, PAYPAL SENDS INSTRUCTIONS TO ITS BANK USER MAINTAINS NORMAL RELATIONS WITH HIS BANK eBay PUBLIC COMPANY

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal ACCOUNT HOLDER A ACCOUNT HOLDER A’S BANK ACCOUNT HOLDER X PAYPAL ACCOUNT A... ACCOUNT X ACCOUNT HOLDER X’S BANK ACH PROCESSOR ACCOUNT HOLDER A’S CREDIT CARD INTERNET PAYPAL’S BANK 1. A PAYS X VIA PAYPAL (A HAS ENOUGH IN PAYPAL ACCOUNT) 6. PAYPAL NOTIFIES X OF PAYMENT. X CHOOSES PAYMENT METHOD 2. OR: PAYPAL CHARGES X’S CREDIT CARD 3. OR: PAYPAL INITIATES ACH DEBIT 4. FUNDS ARE DEPOSITED IN PAYPAL’S BANK 7. OR: PAYPAL INITIATES ACH CREDIT 5. PAYPAL CREDITS X’S PAYPAL ACCOUNT 8. OR: PAYPAL MAILS CHECK TO X

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal Concepts Merchants pay low fees; individuals pay nothing Interest paid on deposits Mass (bulk) payments Business model: fees + float Relationship with eBay Mobile payments possible What would happen if PayPal could be used for everything?

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal Fees SOURCE: PAYPALPAYPAL

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal Fees SOURCE: PAYPALPAYPAL No fees for individuals Only merchants are charged Must be a merchant to receive credit card payments No fee for deposits or withdrawals from US banks

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal and Foreign Exchange eBay PayPal U.S. U.S. User U.S. User’s Bank PayPal U.K. U.K. PayPal Bank U.S. PayPal £ Acct U.K. User’s Bank U.K. User $ £ U.K. PayPal Bank U.K. PayPal $ Acct

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal IPO (Ticker: PYPL) PayPal filed for $80.5M public offering Sept Number of depositors: 20M, >90% market share No one else has more than 100,000 (less than 1%) Bank of America (largest in U.S.) has 3.3M regular depositors Search for “We accept PayPal” gave 36,000 hits Year 2000 revenue: $14.5M, lost $170M Year 2002 revenue: $200M, profit $5M Daily volume: 165,000 payments Annualized volume of payments handled: $3B Total number of Silicon Valley IPOs in 2001: 5

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal v. NASDAQ

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Payments Market SOURCE: CELENT.COMCELENT.COM

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Payments Growth SOURCE: CERTAPAYCERTAPAY

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS eBanking as Integrated Activity $ $$ $ $ Management Cash forecasts AR AP balances payments investment/ debt hedging general ledger Operations Accounting Brokers BanksVendorsCustomers eBanking B2B B2C eTrading ERP eCRM Production Mgmt SOURCE: SELKIRKSELKIRK

Australia Integrated eBanking Framework Receipts SOURCE: VICTORIA DEPT OF TREASURY AND FINANCE (AU)VICTORIA DEPT OF TREASURY AND FINANCE (AU) Financial Markets Human Services Justice Taxes Tolls Salaries Suppliers Service Providers Transfer Payments Bank Service and Transaction Mgmt Cash Management Single Acct for Govt OR Single Acct for Dept TCV Departmental Accounting Public Ledger and Central Agencies Payments RevenueExpenditure EFT cards cheq cash Value Transfer Information Flows Fund Flows Commonwlth Educat, NRE Parliam, AG Bank internet electronic Maxi teleph mail counter EFT cards cheq cash internet electronic teleph mail Outer Budget Balances E-CommerceE-Business Government Outputs: Budget Sector

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Treasury Workstation TWS SCOPE SOURCE: SELKIRK FINANCIAL TECHNOLOGIESSELKIRK FINANCIAL TECHNOLOGIES

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Mobile Aggregators SOURCE: VERTICAL ONEVERTICAL ONE SEE ALSO YODELEE2GOYODELEE2GO WIRELESS BANKING: EDSEDS

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Mobile phone centric future Millions More handsets than PCs connected to the Internet by the end of 2003 ! Projected cellular subscribers (Nokia 2000) Projected PCs connected to the Internet (Dataquest 02/2000) Projected Web handsets (Nokia 2000)

...entering the paybox-PIN on the mobile phone 4 Clearing& settlement is done via electronic direct debit 5 Consumer authorises the payment to the Internet shop by... 3 Consumer has goods in shopping basket and selects “paybox - pay with mobile phone“ on website 1 paybox connects transaction partners and rings consumer on mobile phone 2 paybox Paybox SOURCE: PAYBOX NORDIC AB

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS AUTHENTICATION AND AUTHORIZATION MADE OVER GSM NETWORK Transaction Space Internet Transaction Space Internet Payment Space Banking Network Payment Space Banking Network Authorization Space GSM Network Authorization Space GSM Network TRANSACTION TRIGGERED OVER THE INTERNET PAYMENT MADE THROUGH BANKING NETWORK Paybox Combines Networks SOURCE: PAYBOX NORDIC AB works with any mobile phone any network provider supports WAP via GPRS or UMTS high taxicab penetration 4% of all B2C in Germany

paybox paybox: Payment Procedure CustomerVendor 1. Send phone number 6. Ship goods 2. Send phone # + amount 5. Confirm payment 3. Call customers mobile phone 4. Confirm recipient + amount (PIN) SOURCE: ANDREAS KUNZ

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Paybox Features Payment authentication by mobile phone, relies on SIM identification and GSM encryption Started in May 2000 in Germany, now also operational in Austria, Spain and Sweden with more to come (e.g. Britain) 50% owned by Deutsche Bank Amounts: starting at about 1€ Transfer to other mobile phone (1-2% or 25 cent fees) or bank account possible Offline shopping possible

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Major Ideas P2P is cheap P2P can be ubiquitous ( ) No certificates, but could generalize –B2B payments Mobile services

ELECTRONIC PAYMENT SYSTEMS FALL 2002COPYRIGHT © 2002 MICHAEL I. SHAMOS Q A &