Electronic Commerce
Digital money and electronic payment
I. What is money?
• What is digital money?
• A digital money system
• Ecash and stored value cards
II. Electronic payment systems
• What types of transaction schemes are being
used?
• How can payments be settled?
School of Library and Information Science
Electronic Commerce
I. What is money?
“Money is in reality a symbolic representation of value,
rather than true value itself
[It is] an institution for a transparent exchange of goods
and services based upon a convenient unit of
transaction ... universally accepted within a given
societal group
Today not all money is tangible: increasingly, information
about money is becoming more important than money
itself”
Srivastava, L. and Mansell. R. (1998). Electronic Cash and the
Innovation Process: A User Paradigm
School of Library and Information Science
Electronic Commerce
“Money was originally a physical substance .... It could …
be alive, as cattle were one of the oldest forms of money.
Today although much of the money used by individuals …
is still in the form of notes and coins its quantity is small
in comparison with the intangible money that exists only
as entries in bank records.
If experiments with … digital cash succeed then perhaps
coins and banknotes will become as obsolete as cowrie
shells. If that happens the change in the nature of money
will surely have significant effects on society.
The challenge … is to ensure that such changes are
beneficial to … society in general.”
Davies, R. (2003). Electronic Money, or E-Money, and Digital Cash
http://www.ex.ac.uk/~RDavies/arian/emoney.html
School of Library and Information Science
Electronic Commerce
“Money” is only a state of Mind; not a reality in, of, or for,
itself. Many people often seek it as if it were the real or the
only ends to be obtained through one’s efforts. If money
remains a state of Mind, therefore a spiritual reality and not
an end in itself, then you always will have what you truly
need and deserve. Money as an energy principle of spiritual
reality, naturally flows to us as we earn a right livelihood.
Be concerned with the quality of the service you give to
others … and you will be working with the flow.
Money flows in unseen channels like electricity flows
through wires. Because it is spiritual energy in motion, we
never really have “possession” of it. To be preoccupied
with possessing it … squanders our own Life energy…
McMurphy, J. (2002). What is money?
http://www.innerself.com/Money_Matters/What_is_Money.htm
School of Library and Information Science
Electronic Commerce
Paper money is guaranteed by law to have
redeemable stored value
It is a medium of exchange and a measure of
value
This gives us confidence to use checks, credit and debit
cards and to use electronic transfer of funds
In large-scale wholesale transactions, money can be seen
as “transactional information”
It is transmitted electronically over closed, wire transfer
systems
Now, money in retail transactions is becoming electronic
Digital cash is an electronic “proxy” for paper $
School of Library and Information Science
Electronic Commerce
Historically, precious metals became the
standard of value backing money
They became more important than other commodities
because they are
Portable , divisible, durable
Homogeneous, recognizable, secure
Stable in value
Valuable and available in small amounts
The world adopted the gold standard as the basis of the
value of money during the 1800s
School of Library and Information Science
Electronic Commerce
Goods and services are no longer purchased with other
goods and services (barter), or gold or silver (early money
economy)
We use paper “fiduciary monies” or credit instruments
These instruments are represented by paper, plastic, or
metallic tokens
Checks, bank notes, government issues
A credit card is a written promise to pay
They are fully functional forms of money with an
exchange value rated in terms of the basic unit of
money (usually a fixed quantity of gold or silver)
These are offset against each other in the banking
system, so little gold or silver needs to be transferred
School of Library and Information Science
Electronic Commerce
Hard currency (notes and coins) is considered
the most liquid monetary asset there is
It can quickly be turned into money (liquidity)
This is very convenient, but currency does not hold its
value as well as other assets
It does not earn interest and its real value drops during
periods of inflation
A dollar remains a dollar, but due to inflation its
purchasing power will be less
Less liquid assets (savings, art, land) earn interest or
appreciate in value
They are not as affected as money is by inflation,
although they are harder to convert to money
School of Library and Information Science
Electronic Commerce
The value of money depends on the confidence of those
who use it
The dollar has value because it is widely accepted as a
means by which to exchange goods and services
Money has three main functions:
Means of exchange
Without money, we would have to exchange goods
and services directly (barter)
Unit of measurement
Money allows us to compare the value of goods and
service
A standard for pricing goods and the means of
buying and selling them
School of Library and Information Science
Electronic Commerce
Money is
A unit of measurement (more)
We can compare costs, income, and profit across time
It is a foundation of the accounting system and allows
us to plan and make economic decisions
A means of storing purchasing power for future use
As a reserve, money allows us to accumulate savings
over time and to lend those savings to someone else
It makes it much simpler for us to make contracts
We use it to promise to do something now for payment
in the future
The Bank of Canada (2002). What is money?
http://www.bankofcanada.ca/en/backgrounders/bg-m1.htm
School of Library and Information Science
Electronic Commerce
“Electronic money and electronic payments
systems for retail transactions are commanding
widespread attention.
These systems, wherein neither legal tender, nor paper
checks, nor credit-card numbers change hands at the
time of purchase, have already started to spread across
the globe. They offer significant and profitable
opportunities for changing the way consumers pay for the
widest possible range of goods and services.”
United States Department of the Treasury Conference (1996). An
Introduction to Electronic Money Issues. Toward Electronic Money
and Banking: The Role of Government. p. 1.
School of Library and Information Science
Electronic Commerce
Electronic money is a store of monetary value, held in
digital form, which is available for immediate exchange in
transactions
It is a new form of currency that acts as a generalized
medium of exchange
Gold --> Paper $ --> Plastic --> Digital cash
It is an electronic replacement for physical cash (a file)
It is easily stored, transferred, and difficult to forge
It has no intrinsic value: “numbers are money”
As with paper $, there is a “promise” to convert it to
physical cash
School of Library and Information Science
Electronic Commerce
“Commodity money circulates because the
stability of the society gives ground for
confidence that the money will continue to be
accepted habitually in exchange for goods and services.
Similarly, the credit instruments of any government, bank,
corporation, firm, or individual will circulate more or less
widely in proportion to public confidence in its promises
to pay.
Likewise, a possible introduction of a digital cash system
will require a period of long-term trust”
Kienzle, J, and Perrig, A. (1996). Digital Money: A divine gift or Satan's
malicious tool?
http://lglwww.epfl.ch/~jkienzle/old/Digital_Money/node10.html
School of Library and Information Science
Electronic Commerce
Digital cash is a “payment message bearing a digital
signature which functions as a medium of exchange or
store of value”
It is an idea recorded in the hard drive of a computer
To have value, digital cash must be exchangeable for
ordinary cash
It must be be exchangeable for goods or services priced
in terms of ordinary or digital cash
Like a typical check, it represents an obligation of a
private company rather than the central bank or treasury
Typically it will not be issued by the government
School of Library and Information Science
Electronic Commerce
Berentsen, A. (nf). Digital Money and Monetary Control. ISOC.
http://www.isoc.org/inet98/proceedings/ 3f/3f_2.htm
School of Library and Information Science
Electronic Commerce
There are two types of e-money
Identified e-money
Contains information revealing the identity of the
person who originally withdrew it from the bank
It enables the bank to track the money as it moves
through the economy (like credit cards)
You request digital cash from your bank
The bank signs a file (an amount of emoney) with its
secret key and sends it to you
The amount is debited from your account
You verify this signature with the bank’s public key
You know it’s valid and you can spend it
School of Library and Information Science
Electronic Commerce
Banks will have multiple private keys
Different denominations would be signed with different
private keys
When the bank issues the cash it
Subtracts that amount from your account
Records the identifying number of the electronic note
and who it was issued to
When making a purchase, the shop contacts the bank to
verify that the money is a valid
The bank checks its records to see if it is a valid note
and to ensure that the note has not already been spent
If the verification occurs, the bank credits the shop’s
account, debits your account, and you get the stuff
School of Library and Information Science
Electronic Commerce
This system provides security for all parties
Because of the bank’s digital signature, the customer
knows that the bank note is valid
The shop can verify that the note is legal tender
The bank can ensure that the note is not spent more
than once
The spender of the electronic note can be traced because
the bank keeps a record of each note spent
In this way anybody who cheats can easily be tracked
down
Since all financial transactions can be traced, law
enforcement can more easily investigate fraud, money
laundering, tax avoidance and other irregularities
School of Library and Information Science
Electronic Commerce
Anonymous e-money is known as digital cash and works
like real paper cash
Once withdrawn from an account, it can be spent or
given away without leaving a transaction trail
It is created with blind signatures
A blind signature allows a person to get a file digitally
signed by another party without revealing information
about the file to the other party
It involves multiplying the file by a random number and
encrypting it with the other’s public key
They decrypt the file, sign it and return it
Divide by the random number and restore the file with
the signature
School of Library and Information Science
Electronic Commerce
Blind signatures
You create your own emoney “coins” which are tagged
with ID numbers randomly generated by your emoney
software
The coins are “blinded” by a random number used to
multiply the ID numbers (but not the value of the coins)
They are sent to the bank, each in its own digital
“envelope”
The bank encodes the blinded numbers with its private
key, debits your account, and sends them back to you
Your emoney software removes the “blinding”
You now have a valid emoney and since your software has
removed the “envelope,” the bank can’t track the your use
of the money
School of Library and Information Science
Electronic Commerce
There are two varieties of each type of e-money
Online emoney requires interaction with a bank via
modem or network to conduct a transaction with a third
party
Offline emoney means you can conduct a transaction
without having to directly involve a bank
This type of e-money (true digital cash) is the most
complex form of e-money because of the doublespending problem
Once I give it to you, I should not be able to spend it
again
How can we prevent this?
School of Library and Information Science
Electronic Commerce
Types of emoney
Online
Identified
Anonymous
Offline
Exists as a file
On a smart card
Traceable to you
Traceable
Tracked by bank
Renewable
Exists as a file
On a smart card
Not traceable
Not traceable
Tracked by bank
Hard to track
School of Library and Information Science
Electronic Commerce
A digital money system requires
Security
Two people should be able to exchange digital cash
without any party being able to alter or reproduce the
electronic token
The transaction protocol must ensure high-level security
with sophisticated encryption techniques
This involves using private key encryption
The authentication of sender and receiver involves
digital signatures
Online verification can prevent double-spending, or
other off-line techniques must be used
School of Library and Information Science
Electronic Commerce
User-friendliness
Users should not have to understand the cryptographic
techniques involved in the exchange
The workings of the protocol should be transparent to
them
Digital cash should be simple to use
It should be easy to spending perspective and to accept
as a form of payment
Complicated systems are difficult to administer and
raise the failure rate due to errors of the user
Simplicity leads to a critical mass of users and this
leads to wide acceptability
School of Library and Information Science
Electronic Commerce
Portability
People should be able to easily carry their digital cash
and exchange it within alternative delivery systems
Non-computer-network delivery channels should be
able to handle digital money
The security and use of digital cash should not be
dependent on any physical location
The cash can be transferred through computer
networks and off the computer network into other
storage devices
Digital wealth should not be restricted to a unique,
proprietary computer network
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Electronic Commerce
Transferability
Digital cash should be transferable to other users
If I pay the bill for three friends, they should be able to
easily transfer their share of the bill to me
Peer-to-peer payments should be possible without a third
party
Neither party should be required to have registered
merchant status
Neither party should have to be online to do this
Digital money can then be used for gifts, charity, or tips
Other person-to-person payments become possible, like
payments to children, friends, colleagues or neighbors
School of Library and Information Science
Electronic Commerce
Anonymity
Anonymous digital cash allows personal financial
privacy
It is untraceable
A digital cash withdrawal cannot be associated with its
subsequent deposit
Transactions made with it are unlinkable.
It is impossible to associate two different digital cash
transactions made by the same person with each other
Grabbe, J.O. (nd). Digital Cash and the Future of Money
http://www.aci.net/kalliste/dcfutmo.htm
School of Library and Information Science
Electronic Commerce
Digital money has to preserve the privacy of those
engaged in the transaction
The anonymity of physical cash should be carried into
this world
Encryption separates payment information from buyer
identity
Only the value is transferred
It must be non-refutable
Electronic receipts can be stored on the device
It must be divisible
Digital cash in a given amount must be able to be
subdivided into smaller amounts (fungible)
School of Library and Information Science
Electronic Commerce
You must be able to write a digital check
You should be able to fill in the amount of money that
you want to pay onto some sort of digital form
This form can be easily transferred to another party
There must be a record of this transaction
Digital cash should last forever
You should be able to store it somewhere safe for
years and then be able to retrieve it for use
It should not expire
It should maintain value until lost or destroyed provided
that the issuer has not debased the unit to nothing or
gone out of business
School of Library and Information Science
Electronic Commerce
It must have value, acceptability, availability, security,
and convenience
Many retailers and banks must accept it
We trust that it can be converted
It must be easy to use
It should minimize transaction costs
Non-cash payments involve verification and
authentication for each transaction (ex: checks)
Offline, cash is used for 85% of all transactions, even
though it accounts for 5% of the value of these
transactions
Digital money will serve a similar function
School of Library and Information Science
Electronic Commerce
How is electronic money (e-money) possible?
Cryptography and digital signatures make it possible
Banks and customers have public-key pairs
They use public keys to encrypt (security) and private
keys to sign (identification) blocks of digital data that
represent money orders
A bank “signs” the orders using its private key and
customers and merchants verify the signed money
orders using the bank’s public key
Customers sign deposits and withdraws using their
private keys and the bank uses their public keys to
verify the signed withdraws and deposits
Miller, J. (2002). E-money mini-FAQ (release 2.0).
http://www.ex.ac.uk/~RDavies/arian/emoneyfaq.html
School of Library and Information Science
Electronic Commerce
E-cash transmutes between digital and actual money as
transactions proceed between various entities
http://www.byte.com/art/9801/img/018cs7a2.htm
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Electronic Commerce
A typical ecash transaction
http://filebox.vt.edu/users/ licai/ch2.htm
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Electronic Commerce
Guiding principles of ecash
Independence: its security must not depend on its
existence in any physical location
Security: it can’t be reusable and can’t be respent
Privacy: it can’t be traced and must protect the privacy
of the users
Offline payment: merchants should not have to have a
net connections to make it work
Transferability: it must be able to be moved from one
person to another without traces of identity
Divisibility: it must be able to be broken into smaller
amounts
School of Library and Information Science
Electronic Commerce
How it might work
It depends on public-key cryptography and digital
signatures
Banks and customers have public-key encryption keys
They use their keys to encrypt (for security) and sign
(for identification) blocks of digital data that represent
money orders
A bank “signs” money orders using its private key
Customers and merchants verify signed money orders
with the bank's widely published public key
Customers sign deposits and withdraws using their
private key and the bank uses the customer's public key
to verify the signed withdraws and deposits
School of Library and Information Science
Electronic Commerce
How ecash works
Customer generates an electronic banknote with a
random serial number
A “blinding factor” is applied to the serial number so
the bank cannot trace the banknote in the future
A third party to handle and sign the message without
being able to see the actual message.
The blinded message is untraceable
Customer sends the blinded e-banknote to the bank
The bank deducts the amount from the customer's
account, signs the banknote (encrypts it) and sends it
back to the customer
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Electronic Commerce
Customer removes the blinding factor from the note
and uses it to make a purchase at a shop
The shop verifies the authenticity of the note using
the bank’s public key and sends it to the bank
The bank checks the note against a list of notes
already spent
If it’s good, it deposits the money into the shop’s
account, and sends back a confirmation to the shop
The shop then sends out the goods to the customer
School of Library and Information Science
Electronic Commerce
How ecash works
http://www.cs.newcastle.edu.au/.../ ecash/ecash.html
School of Library and Information Science
Electronic Commerce
Why use digital $?
Greater efficiencies and lower costs for businesses
Ecash eliminates the costs of handling coins and paper
The estimated cash handling cost for U.S. retailers and
banks is over $60 billion annually
“Studies have shown that a financial institution saves
between $.75 and $1.25 for each payment converted
from a deposit made with a teller to Direct Deposit”
“Annual costs savings to the banking industry as a
result of these new electronic payments should run
between $350 million and $500 million.”
-National Automated Clearing House Association
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Electronic Commerce
Ecash provides merchants with cost savings from
Reduced collection and deposit float associated with
coin, currency, and checks
Faster funds availability
Increased sales due to faster throughput at checkout
Consumer tend to spend more with stored value cards
Less tangible cash on hand
Reductions in some forms of fraud, since devices can
be fitted with tamper-resistant chips and strong crypto
protocols
Micromarketing
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Electronic Commerce
Expanding electronic government payments
The Debt Collection Act of 1996 mandated government.
use of EFT for all govt. payments, except tax refunds, by
1999
It includes anyone who, on or after July 26, 1996:
Applies for federal or retirement benefit payments;
Begins employment with a federal agency;
Enters into a contract or purchase order with the govt.
Files or renews a grant application
After 1/1/99, all payments to individuals and businesses,
including those without accounts at a financial
institution, must be made electronically
School of Library and Information Science
Electronic Commerce
Digital money is information stored on a computer chip
in a plastic card or on a personal computer so that it
can be transmitted over the net
These products differ in their technical aspects from
conventional forms of payment
There are two basic ways of representing the value of
funds stored on an ecash device:
Balance-based: a single balance is stored and
updated with each transaction
Note-based: electronic “notes,” each with a fixed
value and serial number, are transferred from one
device to another
School of Library and Information Science
Electronic Commerce
Stored value cards
Digital money is a claim on a party, most commonly, the
issuer, stored in the form of computer code on a credit
card sized card or on the hard drive of a computer
Consumers purchase the claim with traditional money
Consumers exchange the claims for goods and services
with merchants who are willing to accept the claim as
payment
Cards representing such claims often go by the name
“stored value cards” (SVCs)
Cards containing computer chips are called “smart
cards”
School of Library and Information Science
Electronic Commerce
SVCs represent either “closed” or “open” systems
Closed SVCs are limited to a few outlets regardless of
location or to many in a relatively small geographic
area
An example of a closed-system SVC is the “merchantissuer” model system
The card issuer and the seller of the goods and
services are one and the same
Examples include:
The farecard used by riders of the subway system in
Washington, D.C.
Student smart cards or merchant credit cards
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Electronic Commerce
The user buys a claim on the merchant issuer with
traditional money and receives digital money in return
When the user buys goods or services from the
merchant-issuer, special point of sale (POS) devices
record the transactions with the merchant
The POS device reduces the value of the digital money
recorded on the card by the amount of the purchase
Although consumers make purchases with digital
money, the system is linked to the payment system by
the merchant-issuer’s relationship with its bank
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Electronic Commerce
SVCs that consumers can use at many different
businesses over a large geographic area are an open
system
They work in the same manner as bank-issued closedsystem SVCs
One difference is that a greater variety of businesses
over a relatively larger geographic area accept them
Another is that there can be third party sellers of digital
money
This means bypassing banks in transactions
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Electronic Commerce
There is a second type of open system
Digital money systems can operate independently of
banks and outside traditional payments systems
The user buys digital money from issuers using
traditional money
She “spends” it at a merchant, who then sends the
digital money to the issuer
It is redeemed with some form of traditional money
such as a check on a bank balance
In this system, the digital money does not pass through
the traditional payments clearing system, but circulates
outside it
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Electronic Commerce
In expansive open systems, digital money circulates
among users before being used with merchants, in much
the same manner as traditional cash
Users have their own special computer equipment
allowing them to transfer digital money from one user’s
card to another
This “peer-to-peer” transfer does not clear the
traditional payment system (in contrast to peer-to-peer
transfers involving paper checks)
The only points of contact between traditional payment
systems and digital money is the initial purchase of
digital money from the issuer with the use of traditional
money and redemption of digital money by merchants
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Electronic Commerce
Smart cards are a technology for carrying digital money
Memory cards: data storage space and password/PIN
access
Shared key cards: contain a secret key and can
exchange data with other cards sharing the key
Signature transporting cards: contain digital “blank
checks” that can be used in transactions
They are large pregenerated random number
sequences that can be assigned a denomination and
signed
These are $1.50-$3.50 for the chips and production
Signature creating cards: can generate the random
number sequences to use as checks
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Electronic Commerce
Most digital money systems are aiming at universal
accessibility
This will depend on the widespread public acceptance
of electronic cash
To reach this level of acceptance will require a
considerable investment by the financial services
industry and by merchants
It is expected that these costs will be transferred to the
end-user
School of Library and Information Science
Electronic Commerce
Digital money and electronic payment
I. What is digital money?
• Why use it?
• Ecash and Stored value cards
II. Electronic payment systems
• What types of transaction schemes are being
used?
• How can payments be settled?
School of Library and Information Science
Electronic Commerce
Electronically based payment systems have been around
since the 1960s
Banks use electronic funds transfer (EFT) to exchange
“money”
It is a transfer of debt from one bank to another
Much of the money held by banks is in the form of
debts owed by them or to them
The evidence for this debt is in the bank’s computers
EFT systems manage the information concerning
these monetary debts
They allow rapid and efficient transmission of data
about these debts between banks and the updating of
the debt records
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Electronic Commerce
EFT systems and retailer point of sales systems combine
as EFTPOS (Electronic Funds Transfer at Point-of-Sale)
The amount of the buyer’s purchase is entered into a
POS terminal using a plastic card
The data relating to this purchase are sent to the
appropriate bank using a telecommunication link
This bank then deducts the funds from the buyer’s
account and transfers the amount to the seller’s
account
The buyer’s bank credits the seller’s account and
takes on a debt to the seller
The system immediately changes the information
concerning indebtedness and starts charging interest
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Electronic Commerce
General Issues in the banking environment
Banking regime is a highly complex and interrelated
global system
Multiple forces affect the evolution of banking:
Consumer spending habits
Interest rates/cost of money
Federal Reserve policy
Regulatory regime
In general, the large and stable banks are losing
ground to more non-traditional companies and
services
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Electronic Commerce
Different components of the banking process are
electronic to differing degrees
Risk is an impediment, but not a driver
The elimination of risk through security is not
sufficient to promote home banking
Banking is regulated by many different agencies
(state governments, Federal Reserve, Office of
the Comptroller of the Currency, FDIC)
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How can payments be settled?
Debit/Credit
This refers to the way banks deal with transactions
Credit: The bank pays the creditor before receiving
payment from the purchaser
Debit: The bank receives funds from purchaser
before paying creditor
This is a “pre-paid” system
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Immediate/Delayed Settlement
Here there is a time lag between the clearing of the
payment and its settlement
There is a time lag between the payer and the
intermediary (the bank)
When you pay off your credit card
There is also a lag between the receiver and the
intermediary
When the merchant gets paid
The purchaser benefits from the “float”
The bank charges interest to cover the costs of
assuming risk for completing the transaction
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Gross/Net
This is a relationship between clearing and
settlement
Gross payment is a one-to-one relation
Each transaction has its own settlement
Net payment is many-to-one
Transactions are “batched”
Net payment systems have lower operational
costs (fewer settlements) but higher risks
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Anonymous/Identified
To what extent must the parties be identified in
the transactions and settlements?
Anonymous work well for small transactions but
are riskier
There is more need for authentication with large
transactions
Fixed/Fraction
What is the fee structure of the transaction?
Fixed fees cover the fixed costs of the transaction
Fractional fees more efficient for risk fees and
short term credit (microtransactions)
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Types of Services: What do people do?
Bill payment
Purchasing instruments
Transfer of money
Borrow money
Seek information (Inquiries, Statements)
Cheat, steal, and defraud!
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Bill Payment
Becoming one of the most frequently performed
activities on home computers
Drivers include: need for more time, decreasing
costs of software and hardware, bank promotion
Generally a replacement for writing a check to
pay a bill
This is being extended to mortgage and loan
payments as well
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Electronic Commerce
Bill Payment: institutions generally charge by the
transaction (or a flat fee for a fixed number of transactions)
Banking institutions, clearinghouses/brokers
Checkfree
http://www.checkfree.com
e-Bills are delivered right to your computer
Involves 100s of companies
e-Bills give you a real-time payment history who you
paid, when you paid them and for how much
You schedule to pay e-Bills at a specific time each month
or make payments whenever you want
e-Bill payments are guaranteed
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Purchases
Focus of most discussions about Internet and other
electronic commerce
Payments for purchases tend to be made by
Credit card
Debit card
Stored value card
Electronic money
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Stored-Value Cards
Value is actually stored in computer chips
embedded in a card
SVCs are considered more secure than credit or
other bank cards
Requires specialized hardware at the vendor’s point
of sale
Mondex (recently purchased by MasterCard) is one
of the largest manufacturers
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Experiments have included road tolls and university
financial aid
Advantages to merchant include:
Increased security (both from fraudulent
customers and from fraudulent employees)
Lower transaction costs
No online authorization required
Avoids costs associated with cash and check
handling
Can be efficient for microtransactions
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Credit Cards
Consumer is issued credit card by issuer (generally a
bank or its agent)
Merchant has an account with an “acquiring”
institution (which allows it to accept credit cards)
Acquiring Institutions: Citicorp, NaBanco, First Data,
Bank One, GE Capital, First USA, EDS, Discover,
American Express
The processing agent actually generates the
authorization and processes the charges:
First Data, Global Payment Systems, VisaNet/Vital,
Wells-CES , Nova, Checkfree
School of Library and Information Science
Electronic Commerce
How can these transactions be carried out over the
web?
1. Customer sends his ID or encrypted credit card
number to the shop
Shop sends request for payment to the Credit card
company, which confirms customer by e-mail
After the confirmation, payment is made and
customer is billed, typically conventionally
Card number itself never goes through the net
unencrypted
Security
X
Peer-to-peer -
Low fees
-
Untraceability School of Library and Information Science
Electronic Commerce
2. Person “A” issues an electronic check
He sends it to person “B” and informs the bank of
his check
Person “B” asks for payment from the Bank
After the confirmation, the bank transfers money
from person A’s account to person B’s account
Security
X
Peer-to-peer
X
Low fees
X
Untraceability -
School of Library and Information Science
Electronic Commerce
Checks are closer to cash than to credit cards, because
peer-to-peer transfers are possible
Micro-payments are possible but banks are reluctant
to process them (high cost of check clearance)
CyberCash, NetCheck, and others offer digital checks
which are transferable between individuals
A customer opens an account in a netbank and
issues an electronic check to pay a bill
The recipient of this digital check sends it to the
netbank to confirm and cash it
Security is guaranteed by encryption and the bank's
confirmation process with the issuer of the check
(although the check can be traced across users)
School of Library and Information Science
Electronic Commerce
3. Person “A” asks the bank to issue digital cash
The bank issues digital cash and reduces the account
by that amount
“A” sends it to person “B”
“B” asks the bank for payment
After confirming that the digital cash is not doublespent, the bank increases “B’s” account by that
amount
Note that the bank cannot know who sent that digital
cash to person “B “
Security
X
Peer-to-peer
X
Low fees
X
Untraceability X
School of Library and Information Science
Electronic Commerce
First, an Internet user opens an account with real money
at a netbank
The customer asks the bank to issue a certain
amount of digital cash for use on the Internet
The bank issues this digital cash using encryption
and deducts the funds from the established account
When an individual uses digital cash, the encrypted data
that defines the actual electronic currency is given to
the merchant
The merchant in turn sends this data to the bank to
confirm it
School of Library and Information Science
Electronic Commerce
If the bank confirms that the digital cash is real, the bank
credits the merchant's bank account by that amount
It can also issue the merchant a sum of digital cash in
the same amount
Only the bank can confirm that this data - or, digital
cash - is legitimate and actually issued by the bank
Only the bank can verify that this that this data has not
been used elsewhere, or double-spent
The bank cannot know who used the digital cash, as
long as customers of the bank do not use it twice
School of Library and Information Science
Electronic Commerce
Digital cash will make transactions more efficient
It will make transactions less expensive because the
cost of transferring digital cash is low
Traditional money transfer requires branches, clerks,
ATMs, and specific electronic transaction systems
Overhead is paid for by from fees for money transfers
and credit card payments
Ecash uses the net network and the computers of its
users, so the cost of digital cash transfer is close to
zero
With the transaction completed on the net, the transfer
fee and bank tips are zero
School of Library and Information Science
Electronic Commerce
This low cost for transactions enables micro-payments,
like 10 cents or 50 cents, to be possible
This may encourage a new distribution system and
fee structure for music, video, and software
This is “super distribution”
This ability to finally handle micro-payments might also
provide a solution for the payment of fees to authors and
publishers for use of copyrighted materials in electronic
form
School of Library and Information Science
Electronic Commerce
Also, digital cash is also borderless
The cost of transfer within a state is almost equal to the
cost of transfer across different states
The cost of international money transfers, now much
higher than transfers within a given state, will be
reduced dramatically
It may take more than a week to send a small amount
of money to a foreign bank
If a given foreign bank accepts digital cash, this
delay is significantly reduced (as are the costs)
School of Library and Information Science
Electronic Commerce
Digital cash payments potentially can be used by
anyone with access to the net and to an netbank
While credit card payments are limited to
authorized stores, digital cash makes person-toperson payments possible
Even very small businesses and individuals can
use digital cash for all sorts of transactions
School of Library and Information Science
Electronic Commerce
Secure Electronic Transactions Standard (SET)
Jointly developed by Visa and Mastercard; supported
by GTE, Microsoft, Netscape, Verisign, IBM, and others
SET is a standard that allows secure credit card
transactions on the net
Using digital signatures, SET enables merchants to
verify that buyers are who they claim to be
It protects buyers by providing a mechanism for their
credit card number to be transferred directly to the
credit card issuer for verification
It allows billing without the merchant being able to see
the number
School of Library and Information Science
Electronic Commerce
http://www.byte.com/art/9706/img/067csd2.htm
School of Library and Information Science
Electronic Commerce
Microtransactions
Concept has generated much interest on the Internet
Micropayments are financial transactions for less than
$1.00
They are prevalent offline and typically executed using
cash
Online they are rare, because payment methods are too
costly for merchants to process small transaction
amounts
The costs of processing the transaction must be
lower than the cost of the goods and services
School of Library and Information Science
Electronic Commerce
Microtransactions are dependent upon low transaction
costs
Generally considered most promising for sale of “soft”
goods such as information, software, and entertainment
Question: Will consumers want to pay for such
information?
If so, how much?
How can the transaction costs be made low
enough for the merchant?
Strategies could include: batching, giving up
verification, giving up retractability
School of Library and Information Science
Electronic Commerce
Peppercoin
http://www.peppercoin.com
It uses mathematical probability to efficiently and
profitably process small transactions
Does not use transaction aggregation
Using mathematical probability requires far less
overhead than traditional transaction-aggregation
techniques
It reduces merchant transaction costs to a few pennies
per transaction
They can increase revenue through the sale of lowpriced content
Consumers have a single Peppercoin account across
multiple merchants
School of Library and Information Science
Electronic Commerce
PepperCoins are:
Cryptographically secure: it uses RSA digital
signatures
Universal and easy-to-use: any consumer can pay any
merchant using PepperCoins
No subscriptions are needed
Sealed and tamper-proof: it functions like pocket
change and cannot be altered
They can be sent across any channel, including email and text messages
Connectivity independent: merchants do not have to
check with the bank or payment service provider when
receiving a Peppercoin
School of Library and Information Science
Electronic Commerce
Paypal (an eBay Company)
http://www.paypal.com
It enables individuals or businesses with an email
address to securely, easily and quickly send and receive
payments online
It uses the existing financial infrastructure of bank
accounts and credit cards
It has a proprietary fraud prevention system to provide
a safe, global, real-time payment solutions
It has 40 million account members in 38 countries
Buyers and sellers on eBay, online retailers, online
businesses, and offline businesses transact with PayPal
School of Library and Information Science
Electronic Commerce
Verisign Payflow (was Cybercash)
http://www.verisign.com/products/payment.html
Payflow Pro accepts credit cards, purchase cards level
2 and 3 (for supported processors) and electronic
checks online
It can be used to process orders received offline via
telephone, fax, e-mail or in person
Integrates with shopping carts
Merchant purchases and installs software
Sets up account with credit card companies and bank
School of Library and Information Science
Electronic Commerce
How it works
Install Payflow Pro API client software on server
It establishes SSL connection between storefront and
VeriSign’s payment processing servers
Customer makes a purchase on storefront
Storefront passes transaction data to Payflow Pro client
The client passes the information to VeriSign
Payflow payment processing cycle begins
VeriSign securely routes customer information to a
network of banks, processors and other financial
institutions
School of Library and Information Science
Electronic Commerce
When the transaction is approved, approval information
is sent to VeriSign
VeriSign sends you and the customer email
confirmation that the transaction was approved
The entire approval process takes less than three
seconds (on average )
The client sends acknowledgement to VeriSign that you
have received the approval information
You decide to accept or reject the transaction
Once you accept, your acquiring bank credits your
Internet Merchant Account
School of Library and Information Science
Electronic Commerce
Transfers and Information
Examples:
Stock brokers: Etrade, e.Schwab
Mutual fund companies: Vanguard, AIM
Annuities: TIAA/CREF
Banks/S&Ls/Credit Unions: IU Credit Union
Microsoft, Intuit, and CheckFree have
developed a standard for exchange of financial
information over the Internet (Open Financial
Exchange)
School of Library and Information Science