1. Chapter 8 Electronic Payment Systems and Security 1

2. Learning Objectives Describe typical electronic payment systems for EC Identify the security requirements for safe electronic payments Describe the typical security schemes used to meet the security requirements Identify the players and procedures of the electronic credit card system on the Internet Discuss the relationship between SSL and SET protocols

3. Learning Objectives (cont.) Discuss the relationship between electronic fund transfer and debit card Describe the characteristics of a stored value card Classify and describe the types of IC cards used for payments Discuss the characteristics of electronic check systems

4. SSL Vs. SET: Who Will Win? A part of SSL (Secure Socket Layer) is available on customers’ browsers – it is basically an encryption mechanism for order taking, queries and other applications – it does not protect against all security hazards – it is mature, simple, and widely use SET ( Secure Electronic Transaction) is a very comprehensive security protocol – it provides for privacy, authenticity, integrity, and, or repudiation – it is used very infrequently due to its complexity and the need for a special card reader by the user – it may be abandoned if it is not simplified/improved

5. Payments, Protocols and Related Issues SET Protocol is for Credit Card Payments Electronic Cash and Micropayments Electronic Fund Transfer on the Internet Stored Value Cards and Electronic Cash Electronic Check Systems

6. Payments, Protocols and Related Issues (cont.) Security requirements Authentication: A way to verify the buyer’s identity before payments are made Integrity: Ensuring that information will not be accidentally or maliciously altered or destroyed, usually during transmission Encryption: A process of making messages indecipherable except by those who have an authorized decryption key Non-repudiation: Merchants need protection against the customer’s unjustifiable denial of placed orders, and customers need protection against the merchants’ unjustifiable denial of past payment

7. Security Schemes Secret Key Cryptography (symmetric) Scrambled Message Original Message Sender Internet Scrambled Message Key sender (= Key receiver ) Encryption Original Message Receiver Key receiver Decryption

8. Security Schemes (cont.) Public Key Cryptography Sender Original Message Scrambled Message Public Key receiver Original Message Receiver Private Key receiver Internet Message Sender Original Message Scrambled Message Private Key sender Original Message Receiver Public Key sender Internet Digital Signature

9. Security Schemes (cont.) Digital Signature A digital signature is attached by a sender to a message encrypted in the receiver’s public key The receiver is the only one that can read the message and at the same time he is assured that the message was indeed sent by the sender Sender encrypts a message with her private key Any receiver with senders public key can read it Analogous to handwritten signature

10. Security Schemes (cont.) Certificate Name : “Richard” key-Exchange Key : Signature Key : Serial # : 29483756 Other Data : 10236283025273 Expires : 6/18/96 Signed : CA’s Signature Identifying the holder of a public key (Key- Exchange) Issued by a trusted certificate authority (CA)

11. Security Schemes (cont.) Certificate Authority - e.g. VeriSign RCA BCA GCA CCAMCA PCA RCA : Root Certificate Authority BCA : Brand Certificate Authority GCA : Geo-political Certificate Authority CCA : Cardholder Certificate Authority MCA : Merchant Certificate Authority PCA : Payment Gateway Certificate Authority Hierarchy of Certificate Authorities Certificate authority needs to be verified by a government or well trusted entity ( e.g., post office) Public or private, comes in levels (hierarchy) A trusted third party services Issuer of digital certificates Verifying that a public key indeed belongs to a certain individual

12. Electronic Credit Card System on the Internet The Players yCardholder yMerchant (seller) yIssuer (your bank) yAcquirer (merchant’s financial institution, acquires the sales slips) yBrand (VISA, Master Card)

13. Electronic Credit Card System on the Internet (cont.) The process of using credit cards offline A cardholder requests the issuance of a card brand (like Visa and MasterCard) to an issuer bank in which the cardholder may have an account. The authorization of card issuance by the issuer bank, or its designated brand company, may require customer’s physical visit to an office. A plastic card is physically delivered to the customer’s address by mail. The card can be in effect as the cardholder calls the bank for initiation and signs on the back of the card. The cardholder shows the card to a merchant to pay a requested amount. Then the merchant asks for approval from the brand company. Upon the approval, the merchant requests payment to the merchant’s acquirer bank, and pays fee for the service. This process is called a “capturing process” The acquirer bank requests the issuer bank to pay for the credit amount.

14. Cardholder Merchant credit card Card Brand Company Payment authorization, payment data Issuer Bank Cardholder Account Acquirer Bank Merchant Account account debit data payment data Credit Card Procedure (offline and online) 14 payment data amount transfer © Prentice Hall, 2000

15. Secure Electronic Transaction (SET) Protocol 1. The message is hashed to a prefixed length of message digest. 2. The message digest is encrypted with the sender’s private signature key, and a digital signature is created. 3. The composition of message, digital signature, and Sender’s certificate is encrypted with the symmetric key which is generated at sender’s computer for every transaction. The result is an encrypted message. SET protocol uses the DES algorithm instead of RSA for encryption because DES can be executed much faster than RSA. 4. The Symmetric key itself is encrypted with the receiver’s public key which was sent to the sender in advance. The result is a digital envelope. 15 Sender’s Computer © Prentice Hall, 2000

16. Sender’s Computer Sender’s Private Signature Key Sender’s Certificate + + Message + Digital Signature  Receiver’s Certificate Encrypt Symmetric Key Encrypted Message  Receiver’s Key-Exchange Key Encrypt Digital Envelope  Message Message Digest  16 © Prentice Hall, 2000

17. 5. The encrypted message and digital envelope are transmitted to receiver’s computer via the Internet. 6. The digital envelope is decrypted with receiver’s private exchange key. 7. Using the restored symmetric key, the encrypted message can be restored to the message, digital signature, and sender’s certificate. 8. To confirm the integrity, the digital signature is decrypted by sender’s public key, obtaining the message digest. 9. The delivered message is hashed to generate message digest. 10. The message digests obtained by steps 8 and 9 respectively, are compared by the receiver to confirm whether there was any change during the transmission. This step confirms the integrity. Receiver’s Computer Secure Electronic Transaction (SET) Protocol (cont.) 17 © Prentice Hall, 2000

18. Receiver’s Computer Decrypt Symmetric Key Encrypted Message  Sender’s Certificate + + Message compare  Digital Envelope Receiver’s Private Key-Exchange Key  Decrypt Message Digest Digital Signature Sender’s Public Signature Key  Decrypt Message Digest  18

19. Entities of SET Protocol in Cyber Shopping IC Card Reader Customer x Customer y With Digital Wallets Certificate Authority Electronic Shopping Mall Merchant AMerchant B Credit Card Brand Protocol X.25 Payment Gateway 19

20. SET Vs. SSL Secure Electronic Transaction (SET) Secure Socket Layer (SSL) ComplexSimple SET is tailored to the credit card payment to the merchants. SSL is a protocol for general- purpose secure message exchanges (encryption). SET protocol hides the customer’s credit card information from merchants, and also hides the order information to banks, to protect privacy. This scheme is called dual signature. SSL protocol may use a certificate, but there is no payment gateway. So, the merchants need to receive both the ordering information and credit card information, because the capturing process should be initiated by the merchants.

21. Electronic Fund Transfer (EFT) on the Internet An Architecture of Electronic Fund Transfer on the Internet Internet Payer Cyber Bank Bank Cyber Bank Payee Automated Clearinghouse VAN Bank VAN Payment Gateway Payment Gateway

22. Debit Cards A delivery vehicle of cash in an electronic form Mondex, VisaCash applied this approach Either anonymous or onymous CyberCash has commercialized a debit card named CyberCoin as a medium of micropayments on the Internet

23. Financial EDI It is an EDI used for financial transactions – EDI is a standardized way of exchanging messages between businesses – EFT can be implemented using a Financial EDI system Safe Financial EDI needs to adopt a security scheme used for the SSL protocol Extranet encrypts the packets exchanged between senders and receivers using the public key cryptography

24. Electronic Cash and Micropayments Smart Cards The concept of e-cash is used in the non-Internet environment Plastic cards with magnetic stripes (old technology) Includes IC chips with programmable functions on them which makes cards “smart” One e-cash card for one application Recharge the card only at designated locations, such as bank office or a kiosk. Future: recharge at your PC e.g. Mondex & VisaCash

25. Electronic Money DigiCash The analogy of paper money or coins Expensive, as each payment transaction must be reported to the bank and recorded Conflict with the role of central bank’s bill issuance Legally, DigiCash is not supposed to issue more than an electronic gift certificate even though it may be accepted by a wide number of member stores

26. Electronic Money (cont.) Stored Value Cards No issuance of money Debit card — a delivering vehicle of cash in an electronic form Either anonymous or onymous Advantage of an anonymous card the card may be given from one person to another Also implemented on the Internet without employment of an IC card

27. Electronic Money (cont.) Smart card-based e-cash – Can be recharged at home through the Internet – Can be used on the Internet as well as in a non- Internet environment Ceiling of Stored Values – To prevent the abuse of stored values in money laundry – S$500 in Singapore; HK$3,000 in Hong Kong Multiple Currencies – Can be used for cross border payments

28. Electronic Check Systems Check Signature Remittance Invoice Secure Envelope Remittance Check Signature Certificate Remittance Secure Envelope Certificate Endorsement Certificate Signature “Card” Signature “Card” Workstation Mall statement E-Check line item Payer’s Bank Debit account Payee’s Bank Credit account E- Mail WWW ACH ECP Clear Check Deposit check PayerPayee E-mail Account Receivable Procedure of Financial Service Technology Consortium Prototype

29. Electronic Check Systems (cont.) Electronic Checkbook Counterpart of electronic wallet To be integrated with the accounting information system of business buyers and with the payment server of sellers To save the electronic invoice and receipt of payment in the buyers and sellers computers for future retrieval Example : SafeCheck Used mainly in B2B

30. Payer’s checkbook agent Payee’s check-receipt agent PayerPayee Issue a check Receipt A/C DB A/C DB control agent of payer’s bank control agent of payee’s bank clearing Checkbook, screened result Request of screening check issuance present report payer’s bankpayee’s bank Internet The Architecture of SafeCheck 30

31. Integrating Payment Methods Two potential consolidations: – The on-line electronic check is merging with EFT – The electronic check with a designated settlement date is merging with electronic credit cards Security First Network Bank (SFNB) – First cyberbank – Lower service charges to challenge the service fees of traditional banks Visa – VisaCash is a debit card – ePay is an EFT service

32. How Many Cards are Appropriate? An onymous card is necessary to keep the certificates for credit cards, EFT, and electronic checkbooks The stored value in IC card can be delivered in an anonymous mode Malaysia’s Multimedia Supper Corridor project pursues a One-Card system Relationship Card by Visa is also attempting a one card system

33. Five Security Tips Don’t reveal your online Passcode to anyone. If you think your online Passcode has been compromised, change it immediately. Don’t walk away from your computer if you are in the middle of a session. Once you have finished conducting your banking on the Internet, always sign off before visiting other Internet sites. If anyone else is likely to use your computer, clear your cache or turn off and re-initiate your browser in order to eliminate copies of Web pages that have been stored in your hard drive. Bank of America strongly recommends that you use a browser with 128-bit encryption to conduct secure financial transactions over the Internet.

34. Managerial Issues Security solution providers can cultivate the opportunity of providing solutions for the secure electronic payment systems Electronic payment system solution providers can offer various types of electronic payment systems to electronic stores and banks Electronic stores should select an appropriate set of electronic payment systems Banks need to develop cyberbank services to be compatible with the various electronic payment system Credit card brand companies need to develop an EC standard like SET, and watch the acceptance by customers Smart card brand should develop a business model in cooperation with application sectors and banks Certificate authority needs to identify the types of certificate to provide 34 © Prentice Hall, 2000