Chapter 8
Electronic Payment Systems
and Security
© Prentice Hall, 2000
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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
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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
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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
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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
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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
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Security Schemes
Secret Key Cryptography (symmetric)
Keysender (= Keyreceiver)
Original
Message
Sender
Scrambled
Message
Internet
Keyreceiver
Scrambled
Message
Original
Message
Decryption Receiver
Encryption
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Security Schemes (cont.)
Public Key Cryptography
Public Keyreceiver
Message
Original
Message
Scrambled
Message
Private Keyreceiver
Internet
Scrambled
Message
Sender
Receiver
Private Keysender
Digital
Original
Signature Message
Original
Message
Scrambled
Message
Public Keysender
Internet
Sender
Scrambled
Message
Original
Message
Receiver
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Security Schemes (cont.)
Digital Signature
Analogous to handwritten signature
Sender encrypts
a message with
her private key
A digital signature is
attached by a sender
to a message
encrypted in the
receiver’s public key
Any receiver with
senders public key
can read it
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
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Security Schemes (cont.)
Certificate
Identifying the holder of a public key (KeyExchange)
Issued by a trusted certificate authority (CA)
Name : “Richard”
key-Exchange Key :
Signature Key :
Serial # : 29483756
Other Data : 10236283025273
Expires : 6/18/96
Signed : CA’s Signature
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Security Schemes (cont.)
Certificate Authority - e.g. VeriSign
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
RCA
BCA
GCA
CCA
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
MCA
PCA
Hierarchy of Certificate Authorities
Certificate authority needs to be verified by a government or well trusted entity ( e.g., post office)
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Electronic Credit Card System
on the Internet
The Players
Cardholder
Merchant (seller)
Issuer (your bank)
Acquirer (merchant’s financial institution,
acquires the sales slips)
Brand (VISA, Master Card)
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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.
A plastic card is physically delivered
to the customer’s address by mail.
The cardholder shows the card to a
merchant to pay a requested
amount. Then the merchant asks
for approval from the brand
company.
The acquirer bank requests the
issuer bank to pay for the credit
amount.
The authorization of card issuance
by the issuer bank, or its designated
brand company, may require
customer’s physical visit to an office.
The card can be in effect as the
cardholder calls the bank for
initiation and signs on the back of
the card.
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”
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Cardholder
credit
card
Merchant
Payment authorization,
payment data
Card Brand Company
payment data
account debit data
payment data
amount transfer
Issuer Bank
Acquirer Bank
Cardholder
Account
Merchant
Account
Credit Card Procedure (offline and online)
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Secure Electronic Transaction (SET)
Protocol
Sender’s Computer
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.
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Sender’s Computer
Message


Sender’s Private
Signature Key
Message Digest
Digital Signature
+
Message
+

Encrypt
+
Symmetric
Key
Sender’s
Certificate
Receiver’s
Certificate
Encrypted
Message

Encrypt
Receiver’s
Key-Exchange Key
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Digital
Envelope
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Secure Electronic Transaction (SET)
Protocol (cont.)
Receiver’s Computer
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.
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Receiver’s Computer
Receiver’s Private
Key-Exchange Key
Decrypt

Digital
Envelope
Message


Message Digest
Decrypt
Symmetric
Key
Encrypted
Message
+
+
Sender’s
Certificate

compare

Decrypt
Digital Signature
Sender’s Public
Signature Key
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Message Digest
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IC Card
Reader
Customer y
Customer x
With Digital Wallets
Certificate
Authority
Electronic Shopping Mall
Merchant A
Merchant B
Payment Gateway
Protocol
X.25
Credit Card
Brand
Entities of SET Protocol in Cyber Shopping
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SET Vs. SSL
Secure Electronic Transaction (SET) Secure Socket Layer (SSL)
Complex
Simple
SET is tailored to the credit card
payment to the merchants.
SSL is a protocol for generalpurpose secure message
exchanges (encryption).
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.
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.
© Prentice Hall, 2000
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Electronic Fund Transfer (EFT)
on the Internet
Internet
Payee
Payer
Cyber Bank
Cyber Bank
Payment
Gateway
Payment
Gateway
Bank
VAN
Bank
Automated
Clearinghouse
VAN
An Architecture of Electronic Fund Transfer on the Internet
© Prentice Hall, 2000
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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
© Prentice Hall, 2000
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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
© Prentice Hall, 2000
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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
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Mondex Makes Shopping Easy
Shopping with Mondex
Adding money to the card
Payments in a new era of electronic
shopping
Paying on the Internet
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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
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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
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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 nonInternet 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
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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)
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Electronic Check Systems
Procedure of Financial Service Technology Consortium Prototype
Remittance
Invoice
Payer
Account
Receivable
Payee
E- Mail
WWW
Signature
“Card”
Signature “Card”
Workstation
Remittance
Check
Signature
Mall statement
E-Check line item
Remittance
E-mail
Certificate
Certificate
Check
Signature
Certificate
Certificate
Endorsement
Certificate
Certificate
Secure Envelope
ACH
Secure Envelope
ECP
Payer’s Bank
Debit account
Clear Check
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Payee’s Bank
Credit account
Deposit check
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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
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Payer’s
Payee’s
checkbook
check-receipt
agent
Issue a check
agent
Receipt
Payer
Payee
Checkbook,
screened result
report
Request of
screening check
issuance
control
agent of
payer’s
bank
Internet
present
control
agent of
payee’s
bank
clearing
A/C
DB
A/C
DB
payer’s bank
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payee’s bank
The Architecture of SafeCheck
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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
© Prentice Hall, 2000
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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
© Prentice Hall, 2000
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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.
© Prentice Hall, 2000
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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
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