Electronic Payment Systems

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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

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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

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Types of Money:
Token vs. Notational
Token money (value represented by physical article)
Represented by a physical article (e.g. cash, gift certificate,
travelers 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)

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Cash Transaction
-2. CENTRAL BANK ISSUES
FIDUCIARY MONEY
(ANTI-FORGERY) +
(SERIAL NUMBERS)

CENTRAL
BANK

-1. CENTRAL BANK SELLS

CASH TO BUYERS BANK

BUYERS
BANK

4. SELLERS BANK
SENDS CASH TO
CENTRAL BANK

3. SELLERS BANK
CREDITS SELLERS
BANK ACCOUNT

SELLERS
BANK
2. SELLER DEPOSITS
CASH IN SELLERS
BANK ACCOUNT

THE VISIBLE TRANSACTION

0. BUYERS BANK ALLOWS
BUYER TO DRAW CASH
FROM BUYERS ACCOUNT

BUYER

SELLER
1. BUYER PHYSICALLY
GIVES CASH TO SELLER

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Ecommerce Payment Ranges

Minimum
Transaction
Value

Typical
Transaction
Value

Maximum
Transaction
Value

Macro

$5.00

$50.00

Mini

$0.10

$1.00

$10.00

Micro

$0.001

$0.01

$1.00
SOURCE: COMPAQ CORP.

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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

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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

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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:
doesnt work for small amounts (too expensive)
doesnt work for large amounts (too expensive)

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Parties to a Credit Card Transaction

BUYER

CARD,
TELEPHONE,
INTERNET

SELLER

DIALUP OR
LEASED LINE

U.S. MAIL!

SELLERS
BANK

BUYERS
BANK

CARD
ASSOCIATION
PROPRIETARY NETWORK

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Secure Sockets Layer (SSL)

if it has one

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SOURCE: WEB SECURITY

PayPal
Pay anyone, anywhere via email
Draws funds from users 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)

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PayPal
ACCOUNT
HOLDER A

ACCOUNT
HOLDER AS
CREDIT CARD

1. A PAYS X VIA
PAYPAL (A HAS
ENOUGH IN PAYPAL
ACCOUNT)
INTERNET

2. OR: PAYPAL
CHARGES XS
CREDIT CARD

ACCOUNT
HOLDER AS
BANK

PAYPAL
ACCOUNT A
...
ACCOUNT X

3. OR: PAYPAL
INITIATES ACH
DEBIT

ACH
PROCESSOR

4. FUNDS ARE
DEPOSITED IN
PAYPALS BANK

PAYPALS
BANK

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6. PAYPAL NOTIFIES
X OF PAYMENT. X
CHOOSES PAYMENT
METHOD

ACCOUNT
HOLDER X

EMAIL

5. PAYPAL CREDITS
XS PAYPAL ACCOUNT

7. OR: PAYPAL
INITIATES
ACH CREDIT

ACCOUNT
HOLDER XS
BANK

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

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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
...

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Smart Card Structure

Contacts:

Microprocessor

Card
(Upside-down)

Contacts

Epoxy

Contacts (8)

SOURCE: SMART CARD FORUM

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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
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Mondex Overview

SOURCES: OKI, MONDEX USA

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Mondex Components (Hitachi)

Cashless ATM

PCMCIA Reader/Writer

Electronic Cash Register

Key Fob
Balance
Reader

Electronic
Wallet

SOURCE: HITACHI

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Octopus
SONY RC-S833
CONTACTLESS SMART CARD

SONY READER/WRITER

I/O SPEED: 211 Kbps

SOURCE: SONY

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

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EBPP Participants
PERSONAL FINANCE SYSTEM,
AGGREGATOR,
BANK

DATA PARSING
BILL FORMATTING
BILLER HOSTING

DATA FLOW
BILL
INFO
PAYMENT
ORDERS

MONEY FLOW

PAYMENT AND REMITTANCE

PROCESSING

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SOURCE: EBILLING.ORG

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

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Q&A
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