epay8.ppt

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

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

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

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)

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

Types of Payment Systems
• Credit card
– SSL, SET protocols
• Payment orders, direct transfers, checks
– Automated Clearing House (ACH)
• Online Banking
– Wingspan
• Intermediaries
– PayPal
• Stored-Value Cards, Smart Cards, Wallets
– Mondex
– Octopus

Types of Payment Systems
• Micropayment (usually below $0.10)
– Millicent
• Aggregation
– Centralized account for merchants + customers (Qpass)
• Digital Scrip
– Flooz, Beenz (both now bankrupt)
• Electronic Cash
– eCash

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)

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

Secure Sockets Layer (SSL)
if it has one
SOURCE: WEB SECURITY

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)

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

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

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
. . .

Smart Card Structure
Contacts (8)
SOURCE: SMART CARD FORUM
Epoxy
Microprocessor
Contacts
Card
(Upside-down)
Contacts:

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

Mondex Overview
SOURCES: OKI, MONDEX USA

Mondex Components (Hitachi)
Cashless ATM Electronic Cash Register
PCMCIA Reader/Writer
Electronic
Wallet
Key Fob
Balance
Reader
SOURCE: HITACHI

Octopus
SOURCE: SONY
SONY RC-S833
CONTACTLESS SMART CARD
I/O SPEED: 211 Kbps
SONY READER/WRITER

Financial Aggregation
• Idea: allow access to all assets through a single portal
• Citigroup
• Electronic bill presentment
– CheckFree demo, EIPP
– Paytrust
• Mobile
– Vodaphone demo

EBPP Participants
DATA PARSING
BILL FORMATTING
BILLER HOSTING
PERSONAL FINANCE SYSTEM,
AGGREGATOR,
BANK
PAYMENT AND REMITTANCE
PROCESSING SOURCE: EBILLING.ORG
DATA FLOW 
 MONEY FLOW
BILL
INFO
PAYMENT
ORDERS

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

Q A
&

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