2. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Electronic Payment Systems 20-763 Lecture 3 Virtual Money

3. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Virtual Money Value store (where is the value held?) –Checking account (disk file at the bank) –Debit card (value is in the bank, not on the card) –Prepaid phone card without magnetic stripe (value is at the phone company) –Phone card with magnetic stripe (value is on the card) Value representation (how is the value represented?) –Check (arbitrary units of currency) –Note, coin (fixed amount of currency) –Phone card (minutes)

4. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Electronic v. Virtual Money Electronic money: money measured in fiducial (currency) units stored in an electronic device accessible to the user –Money in electronic form stored on a portable support device, like a card) –Example: stored-value card Virtual money: value store remote from the physical support –Typically, a pointer to a bank account –Example: debit card

5. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Jeton Token: a representation of money or services (“scrip”) not issued by a central bank Examples: –Traveler’s check –Cashier’s check –Money order –Gift certificate Jeton: an electronic token Example: –Contents of a magnetic stripe phone card –Millicent scrip (micropayment)

6. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Flow of Virtual Money BUYER’S BANK (ISSUER) SELLER’S BANK (ACQUIRER) BUYER (PURSE HOLDER) SELLER CHARGING OPERATOR ACQUIRING OPERATOR 1. LOAD PURSE 2. VERIFY BUYER’S ACCOUNT 3. PAY 4. ACQUIRE CREDITS 5. DEPOSIT CREDITS 6. TRANSFER FUNDS

7. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Payment Methods: “Direct” 1. BUYER TRANSMITS PAYMENT COORDINATES TO SELLER BUYER’S BANK (ISSUER) SELLER’S BANK (ACQUIRER) BUYER SELLER INTERNET SECURE FINANCIAL NETWORK 2. SELLER REQUESTS PAYMENT THROUGH GATEWAY PAYMENT GATEWAY AUTHORIZATION SERVER 3. GATEWAY SEEKS AUTHORIZATION 4. TRANSACTION AUTHORIZED 5. TRANSACTION ENTERS PAYMENT NETWORK 6. BUYER’S BANK PAYS SELLER’S BANK 9. BUYER’S BANK NOTIFIES BUYER 7. SELLER’S BANK RECEIVES PAYMENT 8. SELLER’S BANK NOTIFIES SELLER

8. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Deposit and Clear (also used for paper checks) PAYORPAYEE PAYOR BANK PAYEE BANK 1. SEND CHECK 2. DEPOSIT CHECK 3. PRESENT 4. SETTLE 5. AVAILABLE FUNDS 6. SEND STATEMENT WRITE ENDORSE DEBIT CREDIT SOURCE: FSTC

9. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Cash and Transfer PAYORPAYEE PAYOR BANK PAYEE BANK 1. SEND CHECK 4. EFT 5. AVAILABLE FUNDS 6. SEND STMT WRITE ENDORSE DEBIT CREDIT 2. PRESENT 3. NOTIFY SOURCE: FSTC

10. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Lockbox PAYORPAYEE PAYOR BANK PAYEE BANK 1. SEND CHECK 2. PRESENT 5. UPDATE ACCOUNTS RECEIVABLE 6. SEND STMT WRITE DEBIT CREDIT 3. SETTLE SOURCE: FSTC

11. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Credit Transfer (Giro) Payment transfer order Very popular in Europe Order to a bank to transfer funds from customer to a specific account (possibly in a different bank) Giro does not go to the payee; goes to a bank Giro not initiated unless funds are available No return items (except unknown accounts)

12. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Funds Transfer (Giro) PAYORPAYEE PAYOR BANK PAYEE BANK 1. SEND ORDER 2. EFT 3. UPDATE ACCOUNTS RECEIVABLE 4. SEND STMT WRITE DEBIT CREDIT SOURCE: FSTC

13. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Bill of Lading (B/L) lade (variant of load, survives in the form laden) “to put or place as a load, especially for shipment.” Old solution to the goods atomicity problem Buyer sends seller a “sight draft” (order by buyer to buyer’s bank to pay seller) Seller delivers goods to a shipper Seller sends a B/L + sight draft to the buyer’s bank Shipper delivers goods to a dock in buyer’s country Buyer’s bank pays the sight draft, gives B/L to buyer Buyer hands shipper the B/L, claims the goods

14. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Bill of Lading (B/L) Transaction 1. BUYER SENDS SIGHT DRAFT TO SELLER 5. BUYER’S BANK PAYS DRAFT TO SELLER’S BANK BUYER’S BANK SELLER’S BANK BUYER SELLER 2. SELLER DELIVERS GOODS AND SIGHT DRAFT TO SHIPPER 7. BUYER’S BANK DEBITS BUYER’S ACCOUNT, GIVES B/L TO BUYER SHIPPER 3. SHIPPER CREATES B/L, SENDS IT WITH DRAFT TO BUYER’S BANK 6. SELLER’S BANK CREDITS SELLER’S ACCOUNT, NOTIFIES SELLER SHIPPER’S DOCK 4. SHIPPER SHIPS 8. BUYER PRESENTS B/L, CLAIMS GOODS SHIPPER IS AN ESCROW AGENT. IF B/L IS NOT PRESENTED, GOODS WILL NOT BE DELIVERED IF SELLER NEVER SHIPS GOODS, SHIPPER WILL NOT GENERATE B/L AND BUYER’S BANK WILL NOT PAY

15. 20-763 ELECTRONIC PAYMENT SYSTEMSFALL 2001COPYRIGHT © 2001 MICHAEL I. SHAMOS Q A &