Electronic Payment Systems
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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)
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Cash Transaction
-2. CENTRAL BANK ISSUES
FIDUCIARY MONEY
(ANTI-FORGERY) +
(SERIAL NUMBERS)
CENTRAL
BANK
-1. CENTRAL BANK SELLS
CASH TO BUYER’S BANK
BUYER’S
BANK
4. SELLER’S BANK
SENDS CASH TO
CENTRAL BANK
3. SELLER’S BANK
CREDITS SELLER’S
BANK ACCOUNT
SELLER’S
BANK
2. SELLER DEPOSITS
CASH IN SELLER’S
BANK ACCOUNT
THE VISIBLE TRANSACTION
0. BUYER’S BANK ALLOWS
BUYER TO DRAW CASH
FROM BUYER’S ACCOUNT
20-751 ECOMMERCE TECHNOLOGY
BUYER
SELLER
1. BUYER PHYSICALLY
GIVES CASH TO SELLER
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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.
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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)
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Parties to a Credit Card Transaction
CARD,
TELEPHONE,
INTERNET
BUYER
SELLER
DIALUP OR
LEASED LINE
U.S. MAIL!
SELLER’S
BANK
BUYER’S
BANK
CARD
ASSOCIATION
PROPRIETARY NETWORK
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Secure Sockets Layer (SSL)
if it has one
20-751 ECOMMERCE TECHNOLOGY
SOURCE: WEB SECURITY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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)
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
PayPal
ACCOUNT
HOLDER A
ACCOUNT
HOLDER A’S
CREDIT CARD
1. A PAYS X VIA
PAYPAL (A HAS
ENOUGH IN PAYPAL
ACCOUNT)
INTERNET
2. OR: PAYPAL
CHARGES X’S
CREDIT CARD
PAYPAL
ACCOUNT A
...
ACCOUNT X
6. PAYPAL NOTIFIES
X OF PAYMENT. X
CHOOSES PAYMENT
METHOD
ACCOUNT
HOLDER X
EMAIL
5. PAYPAL CREDITS
X’S PAYPAL ACCOUNT
3. OR: PAYPAL
INITIATES ACH
DEBIT
ACCOUNT
HOLDER A’S
BANK
ACH
PROCESSOR
4. FUNDS ARE
DEPOSITED IN
PAYPAL’S BANK
20-751 ECOMMERCE TECHNOLOGY
PAYPAL’S
BANK
SUMMER 2002
7. OR: PAYPAL
INITIATES
ACH CREDIT
ACCOUNT
HOLDER X’S
BANK
8. OR: PAYPAL MAILS CHECK TO X
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
...
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Smart Card Structure
Contacts:
Microprocessor
Contacts
Card
(Upside-down)
Epoxy
Contacts (8)
SOURCE: SMART CARD FORUM
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Mondex
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•
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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
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Mondex Overview
SOURCES: OKI, MONDEX USA
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Mondex Components (Hitachi)
Cashless ATM
PCMCIA Reader/Writer
Electronic Cash Register
Key Fob
Balance
Reader
Electronic
Wallet
SOURCE: HITACHI
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Octopus
SONY RC-S833
CONTACTLESS SMART CARD
SONY READER/WRITER
I/O SPEED: 211 Kbps
SOURCE: SONY
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Financial Aggregation
• Idea: allow access to all assets through a single portal
• Citigroup
• Electronic bill presentment
– CheckFree demo, EIPP
– Paytrust
• Mobile
– Vodaphone demo
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
20-751 ECOMMERCE TECHNOLOGY
SOURCE: EBILLING.ORG
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
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
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS
Q&A
20-751 ECOMMERCE TECHNOLOGY
SUMMER 2002
COPYRIGHT © 2002 MICHAEL I. SHAMOS