2. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Electronic Payment Systems

3. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Outline Types of money –Fiduciary v. scriptural –Token v. notational Types of payment systems Cash Credit cards –SSL (TLS) protocol Intermediaries –PayPal Smart cards Electronic Bill Presentment

4. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Types of Money: Fiduciary vs. Scriptural Fiduciary money (fiat money, legal tender) –Issued by a central (government) bank –Has real “discharging power” (to discharge debts) –Cannot be refused Scriptural money (not legal tender) –Money not issued by central bank –Examples: bank accounts, travelers checks, gift certificates, scrips –Discharging power based on trust in issuer –Can be refused

5. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Types of Money: Token vs. Notational Token money (value represented by physical article) –Represented by a physical article (e.g. cash, gift certificate, traveler’s check) –Can be lost Notational money (value held in account balance) –Examples: bank accounts, frequent flyer miles –Transferred by order –Requires clearance (determining net effect of multiple orders) –Requires settlement (payment in fiduciary money) Hybrid money –Check, telephone card (carries promise of future service)

6. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Cash Transaction 1. BUYER PHYSICALLY GIVES CASH TO SELLER BUYER SELLER THE VISIBLE TRANSACTION -2. CENTRAL BANK ISSUES FIDUCIARY MONEY (ANTI-FORGERY) + (SERIAL NUMBERS) -1. CENTRAL BANK SELLS CASH TO BUYER’S BANK 0. BUYER’S BANK ALLOWS BUYER TO DRAW CASH FROM BUYER’S ACCOUNT 2. SELLER DEPOSITS CASH IN SELLER’S BANK ACCOUNT 3. SELLER’S BANK CREDITS SELLER’S BANK ACCOUNT 4. SELLER’S BANK SENDS CASH TO CENTRAL BANK CENTRAL BANK BUYER’S BANK SELLER’S BANK

7. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Ecommerce Payment Ranges MaximumTransactionValueTypicalTransactionValueMinimumTransactionValue Mini$10.00$0.10$1.00 Macro$5.00  $50.00 Micro$0.001$1.00$0.01 SOURCE: COMPAQ CORP.

8. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Types of Payment Systems Credit card –SSL, SET protocols Payment orders, direct transfers, checks –Automated Clearing House (ACH) Online Banking –WingspanWingspan Intermediaries –PayPalPayPal Stored-Value Cards, Smart Cards, Wallets –MondexMondex –OctopusOctopus

9. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Types of Payment Systems Micropayment (usually below $0.10) –MillicentMillicent Aggregation –Centralized account for merchants + customers (Qpass)Qpass Digital Scrip –Flooz, Beenz (both now bankrupt) Electronic Cash –eCasheCash

10. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Credit Cards The most expensive ePayment mechanism MasterCard: $0.29 + 2% of transaction value A $100 charge costs the merchant $2.29 Currently the most convenient method Advantage: allows credit People can buy more than they can afford Disadvantages: –doesn’t work for small amounts (too expensive) –doesn’t work for large amounts (too expensive)

11. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Parties to a Credit Card Transaction BUYER’S BANK SELLER’S BANK BUYER SELLER CARD ASSOCIATION CARD, TELEPHONE, INTERNET DIALUP OR LEASED LINE U.S. MAIL! PROPRIETARY NETWORK

12. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Secure Sockets Layer (SSL) if it has one SOURCE: WEB SECURITY

13. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS PayPal Pay anyone, anywhere via email Draws funds from user’s bank account, places credit hold on credit card for guarantee 16 million users –Bank of America has 3.3. million Accounts insured up to $100,000 Based on automated clearinghouse Withdraw funds anytime, or send to someone else Mobile payments (WAP)

14. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 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 EMAIL 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

15. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Smart Cards Magnetic stripe –140 bytes, cost $0.20-0.75 Memory cards –1-4 KB memory, no processor, cost $1.00-2.50 Optical memory cards –4 megabytes read-only (CD-like), cost $7.00-12.00 Microprocessor cards –Imbedded microprocessor (OLD) 8-bit processor, 16 KB ROM, 512 bytes RAM Equivalent power to IBM XT PC, cost $7.00-15.00 32-bit processors now available –Intelligent, active devices with defenses

16. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Smart Card Applications Ticketless travel: Seoul bus system –4M cards, 1B transactions since 1996 Authentication, ID Medical records Ecash Store loyalty programs Personal profiles Government –Licenses Mall parking...

17. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Smart Card Structure Contacts (8) SOURCE: SMART CARD FORUM Epoxy Microprocessor Contacts Card (Upside-down) Contacts:

18. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Mondex Smart-card-based, stored-value card (SVC) Subsidiary of MasterCard NatWest (National Westminister Bank, UK) et al. Secret chip-to-chip transfer protocol Value is not in strings alone; must be on Mondex card Loaded through ATM –ATM does not know transfer protocol; connects with secure device at bank Spending at merchants having a Mondex value transfer terminal

19. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Mondex Overview SOURCES: OKI, MONDEX USA

20. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Mondex Components (Hitachi) Cashless ATM Electronic Cash Register PCMCIA Reader/Writer Electronic Wallet Key Fob Balance Reader SOURCE: HITACHI

21. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Octopus SOURCE: SONYSONY SONY RC-S833 CONTACTLESS SMART CARD I/O SPEED: 211 Kbps SONY READER/WRITER

22. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Financial Aggregation Idea: allow access to all assets through a single portal Citigroup Electronic bill presentment –CheckFree demo, EIPPdemoEIPP –PaytrustPaytrust Mobile –Vodaphone demodemo

23. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS EBPP Participants DATA PARSING BILL FORMATTING BILLER HOSTING PERSONAL FINANCE SYSTEM, AGGREGATOR, BANK PAYMENT AND REMITTANCE PROCESSING SOURCE: EBILLING.ORGEBILLING.ORG DATA FLOW   MONEY FLOW BILL INFO PAYMENT ORDERS

24. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Key Takeaways epayment security accomplished with PKI PayPal is the fastest-growing technology in history Rising use of smart cards –Face-to-face minipayments Little movement toward electronic cash Online banking retains customers Electronic bill presentment/payment add value Profound changes in money flow are afoot

25. 20-751 ECOMMERCE TECHNOLOGY SUMMER 2002 COPYRIGHT © 2002 MICHAEL I. SHAMOS Q A &