Paying via the Net Jan Damsgaard Dept. of Informatics Copenhagen Business School

EBUSSJan Damsgaard, 2004 General features of payment systems u Means to exchange value between parties u Different mechanisms –Cash –Documents (check, money orders, letters of credit) –Means of identification and associated payment mechanisms (debit/credit cards)

EBUSSJan Damsgaard, 2004 General features of payment systems u Features –Identity of the transaction and the payer –Cost of the payment method –Volume, amount of payment, distance of paying parties

EBUSSJan Damsgaard, 2004 Requirements for digital payment systems u Flexibility (different types of payments, anonymity vs. traceability) u Usability u Conversion capabilities u Universal u Integration with financial institutions u Scalability u Security of the payment t Integrity, Confidentiality, Availability Non repudiation

EBUSSJan Damsgaard, 2004 Different types of payments Type of PaymentFeatures Micro payment ( <5 $)Anonymity, usability, flexibility, conversion, scalability, very low cost Consumer payment (5<500 $)Traceability, usability, conversion, scalability, security, integration, low cost Business payment (>500 $) Traceability, security, conversion, integration, Cost not important

EBUSSJan Damsgaard, 2004 Four examples u The Internet Bookshop –Selling books on the net u The translation service –A freelance translator u The news agency –Delivers news on the Internet u Software Company –Sells and distribute its products on the Internet

EBUSSJan Damsgaard, 2004 Payment methods u Pre-paid systems –digital cash, debit accounts u Instant paid systems –integration with bank accounts, digital brokers u Post paid systems –credit cards and checks

EBUSSJan Damsgaard, 2004 Post-paid payment systems u Rely on the wide use of credit cards u Advantages –Widely known –Consumer protection –Currencies –Usability u Disadvantages –Cost –Security –Anonymity –Complex

EBUSSJan Damsgaard, 2004 Post-paid payment systems u Requires transaction completeness which cannot be guaranteed with SSL only

EBUSSJan Damsgaard, 2004 SET: Secure Electronic Transaction Protocol u Jointly developed by VISA and MASTERCARD u Backed by EU for secure transactions

EBUSSJan Damsgaard, 2004 SET Features u Involves: –Cardholder (the buyer) –Merchant (the seller) –Payment gateway (Merchant’s bank that verifies the credit card) –Certification Authorities (authenticate cardholder to merchant and merchant to payment gateway) u Enables –secure communication on the Internet between a merchant and a payment gateway –information confidentiality, hide customer order information from bank since order is processed by merchant and hides card information from merchant since payment is processed by bank

EBUSSJan Damsgaard, 2004 SET Features u Combines 3 products t Cardholders wallet –on the hard drive, contains digital certificate, or a smart card t Merchant gateway software t Gateway software for payment recipient u All 3 parties need SET compliant digital certificate

EBUSSJan Damsgaard, 2004 SET cont. u Generates two messages, one for the acquirer and one for the merchant u Each message contains only the information that is essential to that particular party in order to protect the privacy of as much information as possible

EBUSSJan Damsgaard, 2004 SET: Secure Electronic Transaction Protocol u Features –Highly secure –Low visibility (Merchant never receives any Credit Card numbers, and is protected despite lack of credit card imprint) –Recognized open standards –Non repudiation –Integration to other technological solutions (smartcards on credit cards, smart cards on mobile phones, enables easy distribution of keys and DS’s )

EBUSSJan Damsgaard, 2004 Examples of SSL based Instant paid systems: Direct bank connections u Available in Europe where electronic funds transfers is common u Integrates Web banking solutions with ordering and payments on the web u Instant transfer of a payment from a customers’ account to a merchants’ account u Requires move from a merchant’s side to the bank site (and back) u Good security because of the use of session passwords and other means to ensure secure transactions

EBUSSJan Damsgaard, 2004 Instant payment u Instant visibility and transfer of money u Good integration with other financial services u Requires well established infrastructure and good connections u Cumbersome with moves for small payments u Good for larger payments

EBUSSJan Damsgaard, 2004 Micro payment systems u Equivalent of cash residing on the computing device (computer, mobile device or smart card) u Requires a means to prevent copying, or altering; means to restore money, means to guarantee anonymity u An “embossment” process is used to add value to a “coin” from a user’s account without recording any information linking the user to the embossed coin u Enables transferable, anonymous payments

EBUSSJan Damsgaard, 2004 Digital Cash u Coins are purchased from the bank and stored on user’s hard drive –no accounts are required during the transaction u Encryption is used to transfer payments u Spent coins are redeemed by bank

Alice Merchant 1. Creates a blank coin 2. Place blank coin in digital envelope Bank Remove $1 from Alice’s account & “emboss” the digital envelope and blank coin with validating signature $1 Removes coin from digital envelope $1 Spends Coin Recognizes its own “emboss” (validating signature) and honors the coin $1 Redeem coin Blind Signature

EBUSSJan Damsgaard, 2004 Smart cards u Small cards which can be programmed to hold digital money u Money can be transferred between cards through readers, ATM’s or other devices (in future also mobile phones) u Can be loaded with value, stored and transferred u Sometimes controlled by a PIN-code u Resistant to cold, damp, electrical interference or x- rays

EBUSSJan Damsgaard, 2004 Paypal u You start with setting up a PayPal account at paypal.com u Any credit card or bank account will do u Send money and your account is debited; receive money and it is credited u The only catch is that the person on the other end has to have a PayPal account, too …

EBUSSJan Damsgaard, 2004 Paypal fees u It is free to send money –Open an account –Send money –Add funds –Withdraw money to a bank account

EBUSSJan Damsgaard, u Owned jointly by Danish financial institutions u For use in the three largest Danish towns –Plus in a number of company cantinas u Stand alone solution –No account –No PIN –Rechargeable

EBUSSJan Damsgaard, 2004 DANMONT cards are made of wood. Not plastic Transactions Pr. quarter

EBUSSJan Damsgaard, 2004 Mobile Phones u Can be used to pay online u SIM card and PIN code together provide instant cash u Cellular phone companies are experts in micro payment u Instant paid for consumer goods

EBUSSJan Damsgaard, 2004 Så er der film! u Sikker Nethandel – u E-Shoppens sikkerhed –

EBUSSJan Damsgaard, 2004 Assessment Framework FeaturePost-paidInstant PaidPre-paid AcceptabilityHighLow AnonymityLowHighMiddle ConvertibilityHigh EfficiencyLowHigh FlexibilityLowMiddleLow IntegrationHighLow-middleMiddle ReliabilityHigh ScalabilityHigh SecurityMiddleHighMiddle

EBUSSJan Damsgaard, 2004 Other types of payment u Loyalty points u The gift economy u Closed loop communities –Cake clubs u Etc …