ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Electronic Payment Systems Lecture 12 Peer-to-Peer Payments, Electronic Banking

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Outline Peer-to-peer payments –PayPal –eCount.com Electronic banking Aggregation, screen-scraping B2B payments

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Peer-to-Peer (P2P) Concepts P2P –payments not involving a bank –payments “directly” between payor and payee –classic example: cash – payments, 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 SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal > 40,000,000 accounts RTGS payment system Credit card hub Bookkeeping & accounting system Low-value foreign exchange system

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal Structure PayPal Private Bank X.COM’s BANK INTERACTS WITH BANKING SYSTEM THROUGH ACH ONLY MAINTAINS LEDGERS NO MOVEMENT OF REAL MONEY WITHIN PAYPAL 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 SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal It’s a big disk drive! - $100 + $100

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 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 SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal Concepts Merchants pay low fees; individuals pay nothing Interest paid on deposits Mass (bulk) payments possible Business model: fees + float FDIC pass-through insurance –Against bankruptcy of PayPal –Different protection for fraud Mobile payments supported

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal Fees SOURCE: PAYPALPAYPAL

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal and Foreign Exchange 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.S. PayPal Bank U.K. PayPal $ Acct eBay

PayPal Worldwide 38 countries PayPal available PayPal available + Local Bank Acct. Withdrawal Currencies: USD, CAD, GBP, EUR, JPY SOURCE: PAYPAL

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal Statistics Average ticket (2003): $54 69% of payments auction-related Payment volume ~USD 15B/year Profit: ~230M/year, about 1.5% of volume Growth, payment volume ( ): 68% Growth, number of users ( ): 49% What would happen if PayPal could be used for everything?

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal Concepts Merchants pay low fees; individuals pay nothing Interest paid on deposits Mass (bulk) payments Business model: fees + float Mobile payments possible What would happen if PayPal could be used for everything?

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Total PayPal Payment Volume SOURCE: PAYPAL 2003 TOTAL > 14 BILLION

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS PayPal Growth by Number of Users APRIL, 2004 > 41 MILLION SOURCE: PAYPAL

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Payments Market SOURCE: CELENT.COMCELENT.COM

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Ecount.com SOURCE: LAUDON & TRAVER

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS eBanking: an 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

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Electronic Banking Opportunities Financial supply chain (FSC) Consumer marketing (statement has hyperlinks!) Data-rich environment Customized financial services & relationship Moving toward fee for services instead of floats and spreads Greater security through digital signatures Risk reduction through speed Computer-initiated services means more services

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Banking Services Consumer –Payments, eChequeseCheques –Savings –Loan services –Aggregation of accounts –Securities Both –Bill presentment –Reporting Terrorism, laundering –24/7 generates business Business –Payments –Cash management –Credit –Financial instruments –Factoring –Trade financing –Insurance –Foreign exchange –Accounting –Integration with business systems

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 SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Internet Banking Services 2001 Offer in 2001Offer in 2004 Account Balances 52%91% Account Transfers 52%90% E-Bill Payment 41%84% E-Bill Presentment 10%64% P2P Payments 17%61% Brokerage Accounts 9%56% Account Aggregation 3%42% SOURCE: GRANT THORNTON 2001 % of Banks Surveyed

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Financial Aggregation Idea: allow access to all assets through a single portal SOURCE: VERTICAL ONEVERTICAL ONE

Aggregation Process FI FI with 3rd Party Non- FI with 3 rd Party Aggregator/ Portal Contractual Non- Contractual Knowledge/ Permission No Knowledge/ Permission Arrangement Data Feed Screen Scraping Methodology Brokerages Banks lnsurers Mortgage Originators Non- Financial Info What’s Aggregated SOURCE: BANKING INDUSTRY TECHNOLOGY SECRETARIAT FI = Financial institution

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Screen Scraping Obtaining data from screen display commands Client Web server Legacy database Terminal screen data Screen scraper Existing application HTML data Legacy system (mainframe) SOURCE: WIM GEVERS

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Screen Scraping Some systems produce as their only output commands to 80 x 24 display terminals Sequences of characters telling the terminal to move its cursor and display data, e.g. ^M0238Feb. ^M024416, ^M displays “Feb. 16, 2004” in row 2, starting at col. 38 Screen scraping involves virtual simulation of the display terminal to retrieve the data Vendors –Teamstudio screensurferTeamstudio screensurfer Move to row 02, column 38 and display “Feb. ”

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Financial Aggregation Issues Account consolidation –Different accounts in one bank –Different accounts in different banks Screen scraping –Combine brokerage, insurance with banking Web BillPay –Requires registration of vendors EIPP

CashEdge Account Aggregation SOURCE: CASHEDGECASHEDGE

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Treasury Workstation TWS SCOPE SOURCE: SELKIRK FINANCIAL TECHNOLOGIESSELKIRK FINANCIAL TECHNOLOGIES

THE UNIVERSITY OF HONG KONG JANUARY 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Online Customers Hold More Products with Wells Fargo9%9% 6%6% 8% 10% 13%13% 14% 15% 12% 11% 13% SOURCE: WELLS FARGO, 1999

THE UNIVERSITY OF HONG KONG JANUARY 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS 95% have Higher Balances-2% 32% 24% 20% 25% 15% 28% 24% 37% 20% 13% 6% -11% Online vs. Offline Customers’ Balances % Difference SOURCE: WELLS FARGO, 1999

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Attrition is Lower (36%) (54%) SOURCE: WELLS FARGO, 1999

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS SOURCE: SYNERGISTICS AGE: Consumers Strongly Prefer 24-hour Access To Banking

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS HSBC Hexagon System

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS HSBC Hexagon System

HSBC Hexagon Payment

HSBC Trade Services

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS B2B Payment Types Example Like wire transfer Like promissory note or purchase order Like bank- accepted bill of lading Like a letter of credit or escrow payment Purpose Buyer trusts Seller to deliver Seller trust Buyer to PAY Seller doubts Buyer ability to PAY Buyer doubts seller ability to DELIVER Payment Type Payment Order Payment Obligation Certification Conditional Payment Orders & Obligations can be future dated Attributes can be combined, eg conditional certified payment obligation Obligations can be discounted by seller’s bank & traded freely SOURCE: DEBRA MITTERERDEBRA MITTERER

Seller’s bankBuyer’s bank Initiation 2 2 Initiation confirmation 4 SellerBuyer Initiation confirmation 3 Initiation response 3 5 Signed receipt Agree on terms of purchase 1 Syntax validation Non repudiation Transaction statuse-paymentsPlus bank co-branded TrustAct Server B2B Payments

Seller’s bank Buyer’s bank SellerBuyer Credit confirmation 9’ Debit confirmation 8’ *Optional flow 6 Confirm conditions* 7 Funds transfer 8 Debit advice 9 Credit advice Confirm conditions* 6 e-paymentsPlus bank co-branded TrustAct Server B2B Payments

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Major Ideas P2P is cheap P2P can be ubiquitous ( ) P2P is real-time eBanking is unexplored territory –Start: replicate paper statements Aggregation B2B payments as part of a larger trade process

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Q A &

Banking Services Consumer –Payments, eChequeseCheques –Savings –Loan services –Aggregation of accounts –Securities Both –Bill presentment –Reporting Terrorism, laundering –24/7 generates business Business –Payments –Cash management –Credit –Financial instruments –Factoring –Trade financing –Insurance –Foreign exchange –Accounting –Integration with business systems

OBI with B2B Payment Requisitioner Supplier Payment Authority Buying Organization Supplier Search Requisitioner Profile Mgmt. Approval Catalog Mgmt. Price Info. Mgmt. Order Entry & Inv. Mgmt. 1. Connect to BO's Web Server and Select a Hyperlink to SO's catalog. 2. Authenticate Requisitioner using Digital Certificate 3. OBI Order Request 4. Add Administrative Information 5. OBI Order 6. Obtain Credit Authorization 7. Issue Invoice and Receive Payment    aa  bb    SOURCE: JAE KYU LEE

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Online Payment Revenue Growth SOURCE: CELENTCELENT

ELECTRONIC PAYMENT SYSTEMS SPRING 2004COPYRIGHT © 2004 MICHAEL I. SHAMOS Non-Card eCommerce Payments SOURCE: CELENTCELENT ACH PayPal Checkfree …