1. Chapter 12 Electronic Payment Systems Electronic Commerce
E-commerce 2000 James D. Clark

2. Introduction to Electronic Payment Systems
Three methods of payment currently
Check, credit card, or cash
Four methods of electronic payment
Electronic cash, software wallets, smart cards, and credit/debit cards
Scrip is digital cash minted by third-party organizations
E-commerce 2000 James D. Clark

3. E-commerce 2000 James D. Clark
Electronic Cash
Primary advantage is with purchase of items less than $10
Credit card transaction fees make small purchases unprofitable
Micropayments
Payments for items costing less than $1
E-commerce 2000 James D. Clark

4. E-comm Transaction Ranges
Minimum
Transaction
Value
Typical
Transaction
Value
Maximum
Transaction
Value
Payment:
Macro
$5.00
$5,000
$50.00
Mini
$10.00
$0.10
$1.00
Throughout the world, cash—in the form of paper bills and metal coins—remains the most common method of payment. Despite the increasing popularity of credit and debit cards, cash offers two obvious benefits:
Cash is universally accepted, and
Cash provides an immediate transfer of value, eliminating the need for remote authorization.
Moreover, cash offers more practicality for everyday purchases such as buying a newspaper or buying an item from a vending machine. Credit, debit and cheques are not only too impractical for such common purchases, they're often not a possible alternative.
However, cash too has its limitations. Cash is:
expensive to produce
difficult to carry
awkward to handle, and
vulnerable to theft
Electronic cash is becoming an increasingly popular alternative to notes and coins because it offers added convenience, quicker and easier transactions, and lower handling costs for merchants and financial institutions.
Mondex e-cash offers the most technologically advanced electronic cash system in existence today, and its unique security architecture enables a range of functionality not offered by any other electronic cash scheme. People in many parts of the world already enjoy the unique benefits of Mondex electronic cash.
Micro
$0.001
$1.00
$0.01
Source: Digital Equipment Corporation
E-commerce 2000 James D. Clark

5. Micropayment Applications
To Buy Information
To Buy Software
Articles
Stock quotes and database queries
Cartoons and clip-art
Music and videos
Java applets
ActiveX Controls
Software add-ons
Games
To Meter/Audit Access
To applications
For services
By security clearance
To shared resources
E-commerce 2000 James D. Clark

6. Electronic Cash Issues
E-cash must allow spending only once
Must be anonymous, just like regular currency
Safeguards must be in place to prevent counterfeiting
Must be independent and freely transferable regardless of nationality or storage mechanism
Divisibility and Convenience
E-commerce 2000 James D. Clark

7. Electronic Cash Storage
Two methods
On-line
Individual does not have possession personally of electronic cash
Trusted third party, e.g. online bank, holds customers’ cash accounts
Off-line
Customer holds cash on smart card or software wallet
Fraud and double spending require tamper-proof encryption
E-commerce 2000 James D. Clark

8. Advantages and Disadvantages of Electronic Cash
More efficient, eventually meaning lower prices
Lower transaction costs
Anybody can use it, unlike credit cards, and does not require special authorization
Disadvantages
Tax trail non-existent, like regular cash
Money laundering
Susceptible to forgery
E-commerce 2000 James D. Clark

9. How Electronic Cash Works
Customer opens account with bank in person and establishes identity
Thereafter, digital certificate serves as proof of identity
Once identified, bank issues e-currency and deducts amount from customer’s account (minus service fee)
Customer spends e-cash with merchant who validates it to prevent forgery or fraud
Merchant presents e-cash to issuing bank for deposit once goods or services are received
E-commerce 2000 James D. Clark

10. Electronic Cash Security
Complex cryptographic algorithms prevent double spending
Anonymity is preserved unless double spending is attempted
Serial numbers can allow tracing to prevent money laundering
Does not prevent double spending, since the merchant or consumer could be at fault
E-commerce 2000 James D. Clark

11. Detecting Double Spending
Figure 7-3
E-commerce 2000 James D. Clark

12. Past and Present E-cash Systems
E-cash not popular in U.S., but successful in Europe and Japan
Reasons for lack of U.S. success not clear
Manner of implementation too complicated
Lack of standards and interoperable software that will run easily on a variety of hardware and software systems
E-commerce 2000 James D. Clark

13. E-commerce 2000 James D. Clark
Electronic Wallets
Stores credit card, electronic cash, owner identification and address
Makes shopping easier and more efficient
Eliminates need to repeatedly enter identifying information into forms to purchase
Works in many different stores to speed checkout
Amazon.com one of the first online merchants to eliminate repeat form-filling for purchases
E-commerce 2000 James D. Clark

14. An Electronic Checkout Counter Form
Figure 7-9
Agile Wallet
Developed by CyberCash
Allows customers to enter credit card and identifying information once, stored on a central server
Information pops up in supported merchants’ payment pages, allowing one-click payment
Does not support smart cards or CyberCash, but company expects to soon
eWallet
Developed by Launchpad Technologies
Free wallet software that stores credit card and personal information on users’ computer, not on a central server; info is dragged into payment form from eWallet
Information is encrypted and password protected
Works with Netscape and Internet Explorer
E-commerce 2000 James D. Clark

15. W3C Proposed Standard for Electronic Wallets
World Wide Web Consortium (W3C) is attempting to create an extensible and interoperable method of embedding micropayment information on a web page
Extensible systems allow improvement of the system without eliminating previous work
Merchants must accept several payment options to insure the widest possible Internet audience
Merchants must embed in their Web page payment information specific to each payment system
This redundancy spurred W3C to develop common standards for Web page markup for all payment systems
Must move quickly to prevent current methods from becoming entrenched
E-commerce 2000 James D. Clark

16. E-commerce 2000 James D. Clark
Smart Cards
Credit card sized cards with a embedded silicon chip
Used to digitally sign the payment and to encrypt your credit card details in a manner that cannot be reused by the merchant
Faq’s about smart cards
Smart cards -- credit card sized cards with a embedded silicon chip -- are a key element in building a secure, safe payment mechanism for the Internet. The silicon chip, which provides a microprocessor and memory on the credit card, can be used to digitally sign the payment and to encrypt your credit card details in a manner that cannot be reused by the merchant.
Credit cards based on smart cards are already used widely in Europe, for instance in France where all Visa cards have been smart cards since '93. Banks in many other European and Asia Pacific countries, as well as those in the US are planning to introduce these types of cards in the '97 and '98 timeframe.
In fact two forms of smart card for payment on the Internet exist: the classical credit card enhanced with a chip, and "Electronic Purses" such as the Visacash card shown here. These cards are similar to pre-paid phone cards, except that they can be used to pay for anything, not just phone calls! The card shown here was issued for the Atlanta Olympics. Members of the public could purchase these cards from banks and other outlets such as cinemas, and use them through the Olympic Village and Atlanta for purchases.
In the world of the Internet these cards provide a further payment mechanism -- for instance for "micro-payments" in buying web-pages, where the card would be automatically debited a few cents for each page accessed. At long last it will be possible for information providers to sell content on the Web, rather than giving it away! Electronic Purses, also known as stored value cards, are being piloted by Citibank in New York and are now widely used in European countries such as Germany, Holland and Belgium.
E-commerce 2000 James D. Clark

17. E-commerce 2000 James D. Clark
                                            
Why should I accept Mondex electronic cash in my business?
How do I process a Mondex transaction?
Are merchant Mondex cards limited by the amount of cash they can hold?
What retailers are most suitable for Mondex electronic cash?
Can automated points of sale accept Mondex electronic cash?
When will Mondex e-cash be available in Sherbrooke?
Which financial institutions will offer the Mondex system in Sherbrooke?
Will the Sherbrooke program be exactly like Guelph?
Where is Mondex electronic cash accepted in the Sherbrooke region?
Mondex electronic cash offers merchants several benefits:
Reduced costs Since, unlike cash, Mondex e-cash has no physical presence, it reduces the costs associated with handling cash at point of sale. There is no need to give or receive change, wait for third party authorizations or customer signatures. And, since Mondex electronic cash works without the need for telephone lines and third party clearing and settlement, point-of-sale transaction fees are not incurred.
Increased security Mondex electronic cash also improves overall security at the point of sale. Value cannot be taken from the terminal, and POS terminals can be set to receive only so that Mondex value cannot be paid out of the terminal card without first entering a security code. This reduces the potential of theft and robbery.
Greater convenience Deposits can be made directly into the merchant's banking account by means of a telephone or PC deposit, any time of the day or night and as frequently as required.
Your consumer simply inserts their card into your Mondex terminal at the point of sale. Key in the value of the purchase and, once the consumer confirms the amount, the exact value is transferred automatically from their card to your merchant card installed within your terminal. No need to handle money or make change, receive remote authorizations, signatures or PIN codes.
Furthermore, a Mondex electronic wallet can be used for mobile transactions, such as for home deliveries, street kiosks and taxis. And Mondex transactions can also be conducted over a telephone line when both parties use Mondex-compatible telephones.
Yes, however the amount is reflective of normal transactional patterns experienced by each merchant, as well as possible regulatory requirements. For more information, contact the financial institution directly.
Any business that accepts cash as its primary form of payment—including fast food outlets, convenience stores and gas stations, as well as unattended operations such as vending machines and parking operations—are most suitable for Mondex transactions.
Yes, Mondex solutions already exist for parking, vending and many other unattended applications.
Mondex Canada will gradually begin to offer Mondex electronic cash to the Greater Sherbrooke region in the summer and fall of 1999.
Royal Bank and Le Mouvement des caisses Desjardins will offer the Mondex system in the Sherbrooke region. However, you do not have to be a current customer of either financial institution to request a card or participate as a merchant. For more information, contact Royal Bank and Caisses Desjardins directly.
No. The Sherbrooke implementation will provide an opportunity for the members of Mondex Canada to test refinements to the Mondex e-cash product and to gain valuable new-market experience. In 1999, Mondex Canada will test the benefits of a card incorporating debit and Mondex e-cash functions, while continuing to test a stand-alone Mondex e-cash card. The Mondex e-cash application will be offered on the MULTOS operating system.
Mondex electronic cash is accepted at more than 600 merchant locations as well as hundreds of additional unattended point of sale devices in Ascot, Fleurimont, Lennoxville, Rock Forest, Saint-Elie-d'Orford and Sherbrooke. For a complete list of Mondex merchants, click here.
E-commerce 2000 James D. Clark

18. E-commerce 2000 James D. Clark
Benefits
A cost effective, secure and convenient alternative to cash transactions is needed as cash is still the most important payment method in terms of number of transaction. Over 80% of transactions are made in cash. Smart cards offer several advantages over checks and credit cards:
Reduced handling costs
Improved ease of use
Lowered costs in infrastructural supports such as banking system and phone networks
Versatility of combining credit, debit and stored value cards in one convenient platform
Lower transaction costs
Ability to carry out offline, online and peer-to-peer transactions
Smart Card Advantages
Compared to conventional data transmission devices such as magnetic-stripe cards, smart cards offer enhanced security, convenience and economic benefits. In addition, smart card-based systems are highly configurable to suit individual needs. Finally, the multifunctionality as payment, application and networking devices renders a smart card as a perfect user interface in a mobile, networked economy.
Security
Smart cards incorporate encryption and authentication technologies that can implement issuer's and user's requirements for the highest degree of security. Using encryption, contents and data can be securely transferred via wired and wireless networks. Coupled with biometric authentication methods which rely on personal physical attributes, smart cards are used in distributing government welfare payments in order to reduce frauds and abuse. Health care cards allow doctors to access and manage patient's medical records and insurance information without compromising privacy. Personalized network access cards allow safer and easier management of diverse networks without a significant costs for access control.
Convenience
One use of the old fashioned memory cards is to replace various identification cards. Smart cards will combine paper, plastic and magnetic cards used for identification, automatic teller machines, copiers, toll collection, pay phones, health care and welfare administration. Universities, firms and governments rely on smart identification cards since they can contain more detailed data and enable many services to be integrated. Health care cards, for example, reduce document processing costs by allowing immediate access to personalized patient information stored in smart cards. Most other smart card uses combine identification function with specialized purposes as in military PX cards, government's Electronic Benefit Transfer cards, and university ID cards that are also used to pay for food and photocopies.
Economic Benefits
Smart cards reduce transaction costs by eliminating paper and paper handling costs in hospitals and government benefit payment programs. Contact and contactless toll payment cards streamline toll collection procedures, reducing labor costs as well as delays caused by manual systems. Maintenance costs for vending machines, petroleum dispensers, parking meters and public phones are lowered while revenues could increase, about 30% in some estimates, due to the convenience of the smart card payment systems in these machines.
Customization
A smart card contains all the data needed to personalize networking, Web connection, payments and other applications. Using a smart card, one can establish a personalized network connection anywhere in the world using a phone center or an information kiosk. Web servers will verify the user's identity and present a customized Web page, an connection and other authorized services based on the data read from a smart card. Personal settings for electronic appliances, including computers, will be stored in smart cards rather than in the appliances themselves. Phone numbers are stored in smart cards instead of phones. While appliances become generic tools, users only carry a smart card as the ultimate networking and personal computing device.
Multifunctionality
The processing power of a smart card makes it ideal to mix multiple functions. For example, government benefit cards will also allow users access to other benefit programs such as health care clinics and job training programs. A college identification card can be used to pay for food, phone calls and photocopies, to access campus networks and to register classes. By integrating many functions, governments and colleges can manage and improve their operations at lower costs and offer innovative services.
E-commerce 2000 James D. Clark

19. E-commerce 2000 James D. Clark
Smart Cards
Plastic card containing an embedded microchip
Can contain cash
Over 100 times more information storage than a magnetic-striped plastic card
Information is encrypted, unlike credit cards which have account number on its face, making credit theft practically impossible
E-commerce 2000 James D. Clark

20. E-commerce 2000 James D. Clark
Smart Cards
Available for over 10 years
So far not successful in U.S., but popular in Europe, Australia, and Japan
Unsuccessful in U.S. partly because few card readers available
Smart cards gradually reappearing in U.S.; success depends on:
Critical mass of smart cards that support applications
Compatibility between smart cards, card-reader devices, and applications
E-commerce 2000 James D. Clark

21. E-commerce 2000 James D. Clark
Mondex Smart Card
Disadvantages
Card carries real cash in electronic form, creating the possibility of theft
No deferred payment as with credit cards -cash is dispensed immediately
E-commerce 2000 James D. Clark

22. Credit and Charge Cards
Credit card
Used for the majority of Internet purchases
Has a preset spending limit
Charge card
No spending limit
Entire amount charged due at end of billing period
Merchants must set up merchant accounts to accept payment cards
E-commerce 2000 James D. Clark

23. Payment Acceptance and Processing
Law prohibits charging payment card until merchandise is shipped
Payment card transaction requires:
Merchant to authenticate payment card
Merchant must check with card issuer to ensure funds are available and to put hold on funds needed to make current charge
Settlement occurs in a few days when funds travel through banking system into merchant’s account
E-commerce 2000 James D. Clark

24. Open and Closed Loop Systems
Banks and other financial institutions serve as brokers between card users and merchants -- no other institution is involved
American Express and Discover are examples
Open loop systems
Transaction is processed by third party
Visa and MasterCard are examples
E-commerce 2000 James D. Clark

25. Setting Up Merchant Account
Merchant bank
Also called acquiring bank
Does business with merchants that want to accept payment cards
Merchant receives account where they deposit card sales totals
Value of sales slips is credited to merchant’s account
E-commerce 2000 James D. Clark

26. Processing Payment Cards Online
Can be done automatically by software packaged with electronic commerce software
Can contract with third party to handle payment card processing
Can also pick, pack, and ship products to the customer
Allows merchant to focus on web presence and supply availability
E-commerce 2000 James D. Clark

27. Processing a Payment Card Order
Figure 7-13
E-commerce 2000 James D. Clark

28. Secure Electronic Transaction (SET) Protocol
Jointly designed by MasterCard and Visa with backing of Microsoft, Netscape, IBM, GTE, SAIC, and others
Designed to provide security for card payments as they travel on the Internet
Contrasted with Secure Socket Layers (SSL) protocol, SET validates consumers and merchants in addition to providing secure transmission
E-commerce 2000 James D. Clark

29. Secure Electronic Transaction (SET) Protocol
Goal is single method of conducting payment transactions on the Internet
Acceptance of standard has been slow
SET specification
Uses public key cryptography and digital certificates for validating both consumers and merchants
Provides privacy, data integrity, user and merchant authentication, and consumer nonrepudiation
E-commerce 2000 James D. Clark

30. SET Payment Transactions
SET-protected payments work like this:
Consumer makes purchase by sending encrypted financial information along with digital certificate
Merchant’s website transfers the information to a payment card processing center while a Certification Authority certifies digital certificate belongs to sender
Payment card-processing center routes transaction to credit card issuer for approval
Merchant receives approval and credit card is charged
Merchant ships merchandise and adds transaction amount for deposit into merchant’s account
E-commerce 2000 James D. Clark

31. E-commerce 2000 James D. Clark
SET Protocol
So far has received lukewarm reception
80 percent of SET activities are in Europe and Asian countries
Problems with SET
Not easy to implement
Not as inexpensive as expected
Clumsy
Not tried and tested, and often not needed
E-commerce 2000 James D. Clark