1. Electronic Payment Systems
Chapter 7
Electronic Payment Systems
Electronic Commerce

2. Objectives We will discuss about:
Four methods for collecting customer payments
Credit and debit card processing
SET protocol protections for credit cards
How software wallets work
History and future of electronic cash systems, how they work and are implemented
Smart cards
Which payment systems are most popular and which are likely to gain acceptance

3. Introduction to Electronic Payment Systems
The largest distinction between a typical Web server and a Web commerce server is the concept of money - handling payments over the Internet.
Electronic payments are far cheaper than the traditional method of billing and payment systems (which includes invoicing/billing, mailing statements, receiving payments, and posting payments).
The methods of payment for business-to-consumer transactions are different than that of the business-to-business transactions.

4. Introduction to Electronic Payment Systems
There are three methods of payment in a traditional business transaction:
Check, credit card, or cash
There are four methods of payments in an electronic commerce transaction:
Electronic cash, software wallets, smart cards, and credit/debit cards
Scrip is digital cash minted by third-party organizations

5. Electronic Cash
Credit card-issuing banks make money partly by charging merchants a processing fee for a consumer transaction.
The processing fee range from 1.5 to 3 percent of a sell, in addition to a fee of, say, 20 cents per transaction.
This policy applies to both traditional business and electronic commerce.
These fees make small purchases unprofitable for a merchant.
Sometimes a merchant imposes a minimum credit card purchase amount to consumers (say $20) to make small transaction profitable.

6. Electronic Cash
Electronic cash (e-cash or digital cash) is used primarily for small purchase of items costing less than, say, $10
Micropayments
Payments for items costing $1 or less is termed as micropayments.
Paying 25 cents for a reprint of an article from a newspaper is an example.

7. Electronic Cash Issues
Electronic cash should have two important characteristics:
It must allow spending only once, like traditional cash
Must be anonymous, just like regular currency
Safeguards must be in place to prevent counterfeiting or the cash can not be used more than nonce
Must be independent and freely transferable regardless of nationality or storage mechanism

8. Beenz Home Page

9. Electronic Cash Storage
Two methods
On-line
Individual does not have possession 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 (to two merchants) require tamper-proof encryption

10. CyberCash -- A Pioneer in Electronic Cash

11. 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

12. 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

13. 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

14. Detecting Double Spending

15. 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

16. Past and Present E-cash Systems
Checkfree
Allows payment with online electronic checks
Clickshare
Designed for magazine and newspaper publishers
Miscast as a micropayment only system; only one of its features
Purchases are billed to a user’s ISP, who in turn bill the customer

17. Using Checkfree To Pay A Bill Online

18. Clickshare’s Home Page

19. Past and Present E-cash Systems
CyberCash
Combines features from cash and checks
Offers credit card, micropayment, and check payment services
Connects merchants directly with credit card processors to provide authorizations for transactions in real time
No delays in processing prevent insufficient e-cash to pay for the transaction

20. Past and Present E-cash Systems
CyberCoins Service from CyberCash
Stored in CyberCash wallet, a software storage mechanism located on customer’s computer
Used to make purchases between 25c and $10
PayNow -- payments made directly from checking accounts

21. CyberCash’s CashRegister Service

22. Past and Present E-cash Systems
DigiCash
Allowed customers to purchase goods and services using anonymous electronic cash
Recently entered Chapter 11 reorganization

23. Past and Present E-cash Systems
Coin.Net
Electronic tokens stored on a customer’s computer is used to make purchases
Works by installing special plug-in to a customer’s web browser
Merchants do not need special software to accept eCoins.
eCoin server prevents double-spending and traces transactions, but consumer is anonymous to merchant

24. eCoin.net Home Page

25. Past and Present E-cash Systems
MilliCent
Developed by Digital, now part of Compaq
Electronic scrip system
Participating merchant creates and sells own scrip to broker at a discount
Consumers register with broker and buy bulk generic scrip, usually with credit card
Customers buy by converting broker scrip to vendor-specific scrip, i.e. scrip that a particular merchant will accept

26. Past and Present E-cash Systems
MilliCent cont’d
Customers can purchase items of very low value
Brokers required for two reasons:
Small payments require aggregation to insure profitability
System is easier to use -- customer need only deal with one broker for all their scrip needs

27. MilliCent Demonstration Page

28. 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

29. An Electronic Checkout Counter Form

30. Electronic Wallets 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

31. Electronic Wallets 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

32. Electronic Wallets Microsoft Wallet
Comes pre-installed in Internet Explorer 4.0, but not in Netscape
All information is encrypted and password protected
Microsoft Wallet Merchant directory shows merchants setup to accept Microsoft Wallet

33. Entering Information Into Microsoft Wallet

34. 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

35. W3C Proposed Standard for Electronic Wallets
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

36. Client (consumer’s web browser) initiates micropayment activity
W3C Electronic Commerce Interest Group (ECIG) Draft Standard Architecture
Client (consumer’s web browser) initiates micropayment activity
Client browser includes Per Fee Link Handler module and one or more electronic wallets
New HTML tags will carry micropayment information

37. W3C Proposed Micropayment HTML Tags

38. The ECML Standard
Electronic Commerce Modeling Language (ECML) proposed standards for electronic wallets
Companies forming the consortium are America Online, IBM, Microsoft, Visa, and MasterCard
Ultimate goal is for all commerce sites to accept ECML
Unclear how this standard will incorporate privacy standards W3C set forth

39. Smart Cards It is a plastic card containing an embedded microchip. It
Can store 100 times more information than a credit card
Can contain bank account information to dispense cash
Can also contain information on health insurance, private encryption keys, credit card numbers, and so on.

40. Smart Cards
Information is encrypted, unlike credit cards which have account number on its face, making credit theft practically impossible
A key like a Personal Identification Number (PIN) is required to unlock the information
To use from a browser, a card reader must be installed with the computer

41. Smart Cards It has been available for over 10 years
It was not successful in U.S., but popular in Europe, Australia, and Japan
Unsuccessful in U.S. partly because few card readers are available in stores
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

42. Mondex Smart Card Holds and dispenses electronic cash
Developed by MasterCard International
Requires a “Mondex Card Reader” for merchant or customer to be installed on the computer to use it over the Internet
Supports micropayments as small as 3 cents and works both online and off-line at stores or over the telephone

43. 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

44. Mondex Smart Card Processing

45. Credit and Charge Cards
Credit card (ex.: Visa or MasterCard)
Used for the majority of Internet purchases
Has a preset spending limit
Charge card (ex.: American Express)
No spending limit
Entire amount charged due at end of billing period
A merchants must set up a merchant account to accept payment cards (credit or charge cards)

46. Payment Acceptance and Processing
Law prohibits charging payment card until the merchandise is shipped. This works fine with a normal store, but not simply with the Internet shopping
Payment card transaction requires:
Merchant to authenticate payment card
Merchant must check with the card issuer to ensure funds are available and to put hold on funds needed to make current charge. (Processing charges for downloaded software can be requested immediately)
Settlement occurs in a few days when funds travel through banking system into merchant’s account

47. Open and Closed Loop Systems
Banks and other financial institutions serve as brokers between card users and merchants who want to use a particular type of card -- no other institution is involved
American Express and Discover are examples
Open loop systems
Transaction is processed by a third party, such as an acquiring bank, that works as an intermediary between the customer’s credit card issuing bank and the merchant’s bank.
Whenever a transaction is processed by a third party, it is called open loop system
Visa and MasterCard are examples

48. Setting Up a Merchant Account
Merchant bank (both Internet and non-Internet)
Does business with merchants that want to accept payment cards
Merchant receives an account number where they deposit card sales
Amounts of sales are credited to the merchant’s account on a periodic basis
Acquiring Bank (May be same as the Merchant bank)
Several third-party Internet and Web based credit card processing services are available to handle all details of processing credit cards

49. Processing Payment Cards Online
Can be done automatically by software packaged with the electronic commerce software
Use a payment processing service company: A merchant can contract a third party to handle all payment card processing
In both cases, a software is used to capture credit card information from the merchant’s form and connect directly to the processing bank network using dial-up or private, leased lines
The processing bank network receives credit information, performs credit card authorization with the issuing bank, and presents transaction for processing
The issuing bank then deposits the money in the merchant’s bank account
The merchant’s web site receives confirmation or rejection of the transaction, which is communicated to the customer

50. Processing a Payment Card Order

51. Processing a Payment Card Order
Processing Credit Cards for Online Payment - Microsoft Paper:

52. Payment Processing Services Company
Internetsecure
Provides secure credit card payment services
Supports payments with Visa and MasterCard
Provides risk management and fraud detection, and ensures all proper security for credit card transactions is maintained
Ensures all transactions are properly credited to merchant’s account
Tellan
Provides two software: PCAuthorize for smaller commerce sites and WebAuthorize for larger enterprise-class merchant sites

53. Payment Processing Services Company
IC Verify
Provides electronic transaction processing for merchants for all major credit and debit cards
Also allows check guarantees and verification transactions
Authorize.Net
Online, real time service that links merchants with issuing banks by simply inserting a small block of HTML code into their transaction page
The customer order is encrypted and transferred to the Authorize.net server.
The server then relays the transaction to the processing bank
The merchant must have an Authorize.net account to use the services
Visit Authorize.Net:

54. 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
SET protocol is based on the security requirements of Secure Socket Layers (SSL) protocol which uses message digest, private-public keys, encryption, digital signature, digital certificate, and digital envelope
In addition, SET validates consumers and merchants while providing secure electronic transmission

55. Secure Electronic Transaction (SET) Protocol
Goal is to have single method of conducting payment transactions on the Internet; although acceptance of the standard has been slow
SET specification:
Uses public key cryptography and digital certificates for validating both consumers and merchants.
It provides
Privacy: Hides customer credit card information from merchants and also hides order information from banks
Data integrity: Data is not altered; hashing/message digest
Authentication: A method to verify a buyer and merchant through digital signature
Nonrepudiation: Protection against customer’s denial of orders made and merchants denial of payments received

56. Secure Electronic Transaction (SET) Protocol
In SET protocol, there are four entities: cardholder, merchant, certificate authority, and payment gateway.
The role of payment gateway is to connect the Internet and proprietary networks of banks.
Each participating entity needs its own certificate
To keep the customer’s certificate in his or her PC, software called the electronic wallet, or digital wallet, is necessary

57. 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

58. 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

59. SET Protocol Visit VISA Web site for SET