1. Electronic Payment Systems

2. Introduction Secure electronic funds transfer is crucial to e- commerce Examination of how individuals and organizations conduct monetary transactions on the Internet Credit-card transactions, digital cash and e-wallets, smart cards, micropayments and electronic bill presentment and payment are crucial

3. Online Payments- Characteristics Acceptability- Value stored in Digital Cash should be honoured and accepted by other banks and financial institutions for reconciliation. Convertibility- The electronic currency should be exchangeable with the other forms of electronic cash, paper currencies, deposit in accounts, notes or other financial instruments. Flexibility- The payment systems should be in position to accept several forms of payments rather than limiting the users to a single form of currency. Efficiency- mainly in the cost overheads involved in of operation of the digital payments. The cost of payment per transaction should be ideally close to zero.

4. Security- The digital currency should be stored in a form that is resistant to replication, double-spending and tampering. Usability- The user of the payment mechanism should be able to use it as easily as the real currency. It requires the payment system should be well integrated with the existing applications and processes that acquire role of transacting parties in electronic commerce. Reliability- The payment system should ensure and infuse confidence in users. Scalability- The payment system should offer scalable solution, it should be able to offer the same performance and cost per transactions overheads with a growing number of customers and transaction.

7. Credit-Card Transactions Popular form of payment for online purchases Resistance due to security concerns Most cards offer capabilities for online and offline purchases – Mastercard – American Express – Visa

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

9. 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.

10. 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) 10 payment data amount transfer

11. 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. 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. 11 zSender’s Computer

12. 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  12

13. 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. zReceiver’s Computer Secure Electronic Transaction (SET) Protocol (cont.) 13

14. 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  14

15. 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 15

16. 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. Merchants need to receive both the ordering information and credit card information, because the capturing process should be initiated by the merchants.

17. 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

18. 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

19. 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

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

21. Mondex Makes Shopping Easy Shopping with Mondex Adding money to the card Payments in a new era of electronic shopping Paying on the Internet

22. Electronic Money DigiCash yThe analogy of paper money or coins yExpensive, as each payment transaction must be reported to the bank and recorded yConflict with the role of central bank’s bill issuance yLegally, 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

23. Electronic Money (cont.) Stored Value Cards yNo issuance of money yDebit card — a delivering vehicle of cash in an electronic form yEither anonymous or onymous yAdvantage of an anonymous card xthe card may be given from one person to another yAlso implemented on the Internet without employment of an IC card

24. 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

25. Contactless IC Cards Proximity Card – Used to access buildings and for paying in buses and other transportation systems – Bus, subway and toll card in many cities Amplified Remote Sensing Card – Good for a range of up to 100 feet, and can be used for tolling moving vehicles at gates – Pay toll without stopping (e.g. Highway 91 in California)

26. 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

27. Electronic Check Systems (cont.) Electronic Checkbook yCounterpart of electronic wallet yTo be integrated with the accounting information system of business buyers and with the payment server of sellers yTo save the electronic invoice and receipt of payment in the buyers and sellers computers for future retrieval yExample : SafeCheck yUsed mainly in B2B

28. 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 28

29. 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

30. 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

31. 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.

32. 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 32

33. Managerial Issues 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 33

34. End of Chapter : E-Payments