Introduction

Outline
 The ‘Net Effect’ on Payment/E-Payment
 Impact on Developed Countries
 Starting point for Developing Nations
 New Opportunities
 Conventional Payment
Mechanisms in United States
 Approx 80% of payments in Cash

Non-Cash Trans. Trans. Average

Payment Volume Value Value
Instrument
Check 71% 10% $1,179
1999 – Source BIS

C/D Card 25% 0.1% $59

C/D Transfer 2.5% 2% $2,000
by ACH
Wire Transfer 0.1% 86% $4.3m
 International Trade involves Wire Transfers,
Letters of Credit etc.
Retail Payments – Net Evolution
 Cash – evolving (very slowly) to Internet based
systems such as Paypal
 Credit-Card based systems
– Ideal for Internet – already a global payment method –
tradition of ‘card-not-present’
– Combined with Secure Socket Layer, it is used for
almost all retail E-commerce – high fraud rate
 Retail Check – being eroded by Electronic Bill
Payment, electronic home banking
Trade Payments – Net Evolution
 Check Payments migrating to Electronic Transfers
– in the U.S. via the Automated Clearing House
(ACH) networks
– FSTC E-check and BIPS Projects
 ACH Transfers growing in importance
– European Initiatives: STEP1 (<€50K)
– Global Initiatives : WATCH, CLS
– Internet access to these is coming
 Total trading Systems
– Bolero, Tradecard
Other Aspects of Electronic
Trading
 Electronic Trust building becoming more
common
– Legislative Changes in E-Commerce in Europe,
US and Asia enable this
– PKI Infrastructure being (slowly) built
• Verisign
• Identrus
• Wisekey
– In combination with E-payments…will enable
complete transactions on-line
Conventional Payments in
Developing Countries
 Generally less developed banking industry
 Credit Cards not widely available
 More reliance on paper
 Foreign Exchange transactions more
problematic
 Being left out of new payment initiatives
Currently
1 + 32 + 10
9
New Opportunities
 On the Internet
no-one knows you
are a dog
 Internet banking
infrastructure is
cheap and easy to
build.. Opportunity to
leap-frog
 Open standards level
the paying field
 Must work with new
standards
Electronic Payment Systems

 Transaction reconciliation
– Cash or check
Electronic Payment Systems

– Intermediated reconciliation (credit or debit card, 3rd party money

order)
Electronic Payment Systems

 Online transaction systems

– Lack of physical tokens
• Standard clearing methods won’t work
• Transaction reconciliation must be intermediated
– Informational tokens
• Ecommerce enablers
– First Virtual Holdings, Inc. model
• Online payment systems (financial electronic data interchange)
– Secure Electronic Transaction (SET) protocol supported by Visa and
MasterCard
• Digital currency
Electronic Payment Systems

– Digital currency
• Non-intermediated transactions
• Anonymity
• Ecommerce benefits
– Privacy preserving
– Minimizes transactions costs
– Micropayments
– Security issues with digital currency
• Authenticity (non-counterfeiting)
• Double spending
• Non-refutability
Electronic Payment Systems

– Contemporary forms of digital currency

• Ecash
– Set up account with ecash issuing bank
• Account backed by outside money (credit card or cash)
– Move credit from account to ecash mint
• Public key encryption used to validate coins: third parties can
“bite” the coin electronically by asking the issuing bank to verify
its encryption
– Spend ecoin at merchant site that accepts ecash
– Merchant then deposits ecoin in his account at his participating bank, or
keeps it on hand to make change, or spends the ecash at a supplier
merchant’s site.
• Role of encryption
Encryption
 The need for encryption in ecommerce
– Degree of risk vs. scope of risk
– Institutional versus individual impact
– Obvious need for ecurrencies.
 Public key cryptography: an overview
– One-way functions
– How it works
• Parties to the transaction will be called Alice and Bob.
• Each participant has a public key, denoted PA and PB for Alice and
Bob respectively, and a secret key, denoted SA and SB respectively
Encryption

• Each person publishes his or her public key, keeping the secret key
secret.
• Let D be the set of permissible messages
– Example: All finite length bit strings or strings of integers
• The public key is required to define a one-to-one mapping from the
set D to itself (without this requirements, decryption of the message is
ambiguous).
– Given a message M from Alice to Bob, Alice would encrypt this using
Bob’s public key to generate the so-called cyphertext C=PB(M). Note
that C is thus a permutation of the set D.
• The public and secret keys are inverses of each other
– M=SB(PB(M))
– M=SA(PA(M))
• The encryption is secure as long as the functions defined by the
public key are one-way functions
Encryption
 The RSA public key cryptosystem
– Finite groups
• Finite set of elements (integers)
• Operation that maps the set to itself (addition, multiplication)
• Example: Modular (clock) arithmetic
– Subgroups
• Any subset of a given group closed under the group operation
– Z2 (i.e. even integers) is a subgroup (under addition) of Z

• Subgroups can be generated by applying the operation to elements of the

group
• Example with mod 12 arithmetic (operation is addition)
Encryption

1  x mod 12

2  x mod 12
Encryption

3  x mod 12

4  x mod 12
Encryption

5  x mod 12

6  x mod 12
Encryption

7  x mod 12

8  x mod 12
Encryption

9  x mod 12

10  x mod 12
Encryption

11  x mod 12
Encryption
 A key result: Lagrange’s Theorem
– If S’ is a subgroup of S, then the number of elements of S’ divides
the number of elements of S.
– Examples:

 Z 2  Z12 , Z 2  6  Z12  12
 Z 3  Z12 , Z 3  4  Z12  12
 Z 4  Z12 , Z 4  3  Z12  12
 Z 5  Z12 , Z 5  12  Z12  12
Encryption
 Solving modular equations
– RSA uses modular groups to transform messages (or blocks of
numbers representing components of messages) to encrypted form.
– Ability to compute the inverse of a modular transformation allows
decryption.
– Suppose x is a message, and our cyphertext is y=ax mod n for
some numbers a and n. To recover x from y, then, we need to be
able to find a number b such that x=by mod n.
– When such a number exists, it is called the mod n inverse of a.
– A key result: For any n>1, if a and n are relatively prime, then
the equation ax=b mod n has a unique solution modulo n.
Encryption
 In the RSA system, the actual encryption is done using
exponentiation.
 A key result:

Fermat’s L ittle Theorem

If p is prime, then for any a  Z p a  0,
a p 1 mod p  1
Encryption
 RSA technicals
– Select 2 prime numbers p and q
– Let n=pq
– Select a small odd integer e relatively prime to (p-1)(q-1)
– Compute the modular inverse d of e, i.e. the solution to the
equation

de  1 mod  p  1 q  1
– Publish the pair P=(e,n) as the public key
– Keep secret the pair S=(d,n) as the secret key
Encryption
– For this specification of the RSA system, the message domain is Zn
– Encryption of a message M in Zn is done by defining

–
C  P ( M )  M e
mod n
Decrypting the message is done by computing

S  C   C d mod n
Encryption
– Let us verify that the RSA scheme does in fact define an invertible
mapping of the message.

 For any M  Z n
P  S  M    S  P  M    M ed mod n.
 Since d and e are modular inverses of each other
ed  1  k  p  1 q  1
for some integer k . Hence,
M ed mod n  MM k ( p 1)( q1) mod n
 MM ( p 1) M k ( q 1) mod n
 M M 
( q 1) k
mod n  M
(the last steps follow by applying Fermat' s theorem.)
Encryption
– Note that the security of the encryption system rests on the fact
that to compute the modular inverse of e, you need to know the
number (p-1)(q-1), which requires knowledge of the factors p and
q.
– Getting the factors p and q, in turn, requires being able to factor
the large number n=pq. This is a computationally difficult
problem.
– Some examples:

http://econ.gsia.cmu.edu/spear/rsa3.asp
Encryption
 Applications
– Direct message encryption
– Digital Signatures
• Use secret key to encrypt signature: S(Name)
• Appended signature to message and send to recipient
• Recipient decrypts signature using public key: P(S(Name)=Name
– Encrypted message and signature
• Create digital signature as above, appended to message, encrypt
message using recipients public key
• Recipient uses own secret key to decrypt message, then uses senders
public key to decrypt signature, thus verifying sender
Policy Issues
 Privacy and verification
 Transaction costs and micro-payments
 Monetary effects
– Domestic money supply control and economic policy levers
– International currency exchanges and exchange rate stability
 Market organization effects
– Development of new financial intermediaries
 Effects on government
– Seniorage
– Legal issues
E-payment systems
 To transfer money over the Internet
 Methods of traditional payment
– Check, credit card, or cash
 Methods of electronic payment
– Electronic cash, software wallets, smart cards,
and credit/debit cards
– Scrip is digital cash minted by third-party
organizations

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Requirements for e-payments
 Atomicity
– Money is not lost or created during a transfer
 Good atomicity
– Money and good are exchanged atomically
 Non-repudiation
– No party can deny its role in the transaction
– Digital signatures

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Desirable Properties of Digital Money
 Universally accepted
 Transferable electronically
 Divisible
 Non-forgeable, non-stealable
 Private (no one except parties know the amount)
 Anonymous (no one can identify the payer)
 Work off-line (no on-line verification needed)

No known system satisfies all.

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Types of E-payments
 E-cash
 Electronic wallets
 Smart card
 Credit card

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Electronic Cash
 Primary advantage is with purchase of
items less than $10
– Credit card transaction fees make small
purchases unprofitable
– Micropayments
• Payments for items costing less than $1

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E-cash Concept
Merchant
1. Consumer buys e-cash from Bank
2. Bank sends e-cash bits to consumer (after
5 charging that amount plus fee)
3. Consumer sends e-cash to merchant
4
4. Merchant checks with Bank that e-cash
Bank 3 is valid (check for forgery or fraud)
5. Bank verifies that e-cash is valid
6. Parties complete transaction: e.g., merchant
2 present e-cash to issuing back for deposit
1 once goods or services are delivered

Consumer still has (invalid) e-cash

Consumer

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Electronic Cash Issues

 E-cash must allow spending only once

 Must be anonymous, just like regular currency
– Safeguards must be in place to prevent
counterfeiting
– Must be independent and freely transferable
regardless of nationality or storage mechanism
 Divisibility and Convenience
 Complex transaction (checking with Bank)
– Atomicity problem

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Two storage methods
 On-line
– Individual does not have possession personally of
electronic cash
– Trusted third party, e.g. online bank, holds
customers’ cash accounts
 Off-line
– Customer holds cash on smart card or software
wallet
– Fraud and double spending require tamper-proof
encryption

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Advantages and Disadvantages of
Electronic Cash
 Advantages
– More efficient, eventually meaning lower prices
– Lower transaction costs
– Anybody can use it, unlike credit cards, and does
not require special authorization
 Disadvantages
– Tax trail non-existent, like regular cash
– Money laundering
– Susceptible to forgery

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Electronic Cash Security

 Complex cryptographic algorithms prevent

double spending
– Anonymity is preserved unless double spending
is attempted
 Serial numbers can allow tracing to prevent
money laundering
– Does not prevent double spending, since the
merchant or consumer could be at fault

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Blind Signatures
 Goal
– to have the bank sign documents without
knowing what they are signing.

 Why?
– Anonymity with Authentication

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 How to sign with blind fold?
 How?
Basic: Sign anything

1. You encrypt the message

2. Send it to the bank

3. The bank signs the message and

returns it

4. You decrypt the signed

message
5. You spend it

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 Cut and Choose
 Problems
The bank honors anything I write down
 Solution: the Cut-and-choose algorithm
1. Prepare n copies of the messages
and n different keys, and send them to
the bank
2. The bank requests the keys for and
opens n - 1 of them, and verifies them.
It then signs the remaining one.
3. The bank sends back the signed
message, which can then be
decrypted and spent

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Anonymous digital cash?
 Protocol #1
 Protocol #2
 Protocol #3
 Protocol #4

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 Detecting Double Spending

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 Past and Present E-cash Systems

 E-cash not popular in U.S., but successful

in Europe and Japan
– Reasons for lack of U.S. success not clear
• Manner of implementation too complicated
• Lack of standards and interoperable software that
will run easily on a variety of hardware and
software systems

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Past and Present E-cash Systems

 Checkfree
– Allows payment with online electronic checks
 Clickshare
– Designed for magazine and newspaper
publishers
– Miscast as a micropayment only system; only
one of its features
– Purchases are billed to a user’s ISP, who in turn
bill the customer

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 Past and Present E-cash Systems

 CyberCash
– Combines features from cash and checks
– Offers credit card, micropayment, and check payment services
– Connects merchants directly with credit card processors to provide
authorizations for transactions in real time
• No delays in processing prevent insufficient e-cash to pay for the
transaction
 CyberCoins
– Stored in CyberCash wallet, a software storage mechanism located on
customer’s computer
– Used to make purchases between .25c and $10
– PayNow -- payments made directly from checking accounts

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 Past and Present E-cash Systems
 DigiCash
– Trailblazer in e-cash
– Allowed customers to purchase goods and services using anonymous
electronic cash
– Recently entered Chapter 11 reorganization
 Coin.Net
– Electronic tokens stored on a customer’s computer is used to make
purchases
– Works by installing special plug-in to a customer’s web browser
– Merchants do not need special software to accept eCoins.
– eCoin server prevents double-spending and traces transactions, but
consumer is anonymous to merchant

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Aggregation
 Used when individual transactions are too small for
credit card (e.g. $2.00)
 Consumer and Merchant sign up with Aggregator
 Consumer makes purchase. Merchant notifies
Aggregator.
 Aggregator keeps Consumer’s account. When amount
owed is large enough (or every month), charges to
Consumer’s credit card
 Aggregator sends money (less fees) to Merchant
 QPASS, CyberCash, GlobeID
 Past and Present E-cash Systems
 MilliCent
– Developed by Digital, now part of Compaq
– Electronic scrip system
– Participating merchant creates and sells own scrip to broker at a discount
• Consumers register with broker and buy bulk generic scrip, usually
with credit card
• Customers buy by converting broker scrip to vendor-specific scrip,
i.e. scrip that a particular merchant will accept
– Customers can purchase items of very low value
– Brokers required for two reasons:
• Small payments require aggregation to insure profitability
• System is easier to use -- customer need only deal with one broker for
all their scrip needs

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Electronic Wallets
 Stores credit card, electronic cash, owner
identification and address
– Makes shopping easier and more efficient
• Eliminates need to repeatedly enter identifying
information into forms to purchase
• Works in many different stores to speed checkout
– Amazon.com one of the first online merchants
to eliminate repeat form-filling for purchases

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An Electronic Checkout Counter Form

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Electronic Wallets
 Agile Wallet
– Developed by CyberCash
– Allows customers to enter credit card and identifying information once,
stored on a central server
– Information pops up in supported merchants’ payment pages, allowing
one-click payment
– Does not support smart cards or CyberCash, but company expects to soon
 eWallet
– Developed by Launchpad Technologies
– Free wallet software that stores credit card and personal information on
users’ computer, not on a central server; info is dragged into payment
form from eWallet
– Information is encrypted and password protected
– Works with Netscape and Internet Explorer

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Electronic Wallets
 Microsoft Wallet
– Comes pre-installed in Internet Explorer 4.0,
but not in Netscape
– All information is encrypted and password
protected
– Microsoft Wallet Merchant directory shows
merchants setup to accept Microsoft Wallet

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 Entering Information Into Microsoft Wallet

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W3C Proposed Standard for Electronic
Wallets
 World Wide Web Consortium (W3C) is attempting to create an
extensible and interoperable method of embedding micropayment
information on a web page
– Extensible systems allow improvement of the system without eliminating
previous work
 Merchants must accept several payment options to insure the widest
possible Internet audience
– Merchants must embed in their Web page payment information specific
to each payment system
– This redundancy spurred W3C to develop common standards for Web
page markup for all payment systems
– Must move quickly to prevent current methods from becoming
entrenched

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 W3C Electronic Commerce Interest Group (ECIG) Draft
Standard Architecture

 Client (consumer’s web browser) initiates

micropayment activity
– Client browser includes Per Fee Link Handler
module and one or more electronic wallets
– New HTML tags will carry micropayment
information

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W3C Proposed Micropayment HTML Tags

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The ECML Standard
 Electronic Commerce Modeling Language (ECML)
proposed standards for electronic wallets
– Companies forming the consortium are America Online,
IBM, Microsoft, Visa, and MasterCard
– Ultimate goal is for all commerce sites to accept ECML
– Unclear how this standard will incorporate privacy
standards W3C set forth
– Electronic Commerce Modeling Language (ECML)
Wallet/Merchant Standards Initiative,
Initiative July 1999
(Next four slides)

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Current state of the market - online data
exchanges
 Providing payment and order information to merchants while shopping
online is typically a manual consumer process
 27% of online buyers abandon orders before check-out due to the hassle of
filling out forms 1
 There is no standard way for identifying the specific data attributes that
consumers must provide to merchants during an online transaction
– This significantly complicates/limits the ability for digital wallets to
automatically exchange information with a merchant web site
 “76% of merchants surveyed indicated they are willing to participate in a
multi site wallet enterprise,” indicating that “multi site wallets offer reduced
acquisition costs that far outweigh the risk to merchants of losing an existing
customer” 1

1 Jupiter Communications
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ECML - Wallet/Merchant Standard
 Creating a standard approach for the exchange of information will enhance the
ability for digital wallets to be used at all merchant sites and therefore
facilitate the growth of e-commerce
 ECML is a universal, open standard for digital wallets and online merchants
that facilitates the seamless exchange of payment and order information to
support online purchase transactions
– Uniform field names only to start; will evolve over time
 The ECML Alliance today:
– America Online, American Express, Brodia (formerly Transactor Networks),
Compaq, CyberCash, Discover, Financial Services Technology Consortium
(FSTC), IBM, MasterCard, Microsoft, Novell, SETCo, Sun Microsystems,
Trintech, and Visa
 ECML is designed to be security protocol independent, support global
implementations, and support any payment instrument
 ECML does not change the “look and feel” of a merchant’s site

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Summary of current ECML specification
min min
field field
field names length field names length

Ecom_ShipTo_Postal_Name_Prefix 4 Ecom_ReceiptTo_Postal_Name_Prefix 4
Ecom_ShipTo_Postal_Name_First 15 Ecom_ReceiptTo_Postal_Name_First 15
Ecom_ShipTo_Postal_Name_Middle 15 Ecom_ReceiptTo_Postal_Name_Middle 15
Ecom_ShipTo_Postal_Name_Last 15 Ecom_ReceiptTo_Postal_Name_Last 15
Ecom_ShipTo_Postal_Name_Suffix 4 Ecom_ReceiptTo_Postal_Name_Suffix 4
Ecom_ShipTo_Postal_Street_Line1 20 Ecom_ReceiptTo_Postal_Street_Line1 20
Ecom_ShipTo_Postal_Street_Line2 20 Ecom_ReceiptTo_Postal_Street_Line2 20
Ecom_ShipTo_Postal_Street_Line3 20 Ecom_ReceiptTo_Postal_Street_Line3 20
Ecom_ShipTo_Postal_City 22 Ecom_ReceiptTo_Postal_City 22
Ecom_ShipTo_Postal_StateProv 2 Ecom_ReceiptTo_Postal_StateProv 2
Ecom_ShipTo_Postal_PostalCode 14 Ecom_ReceiptTo_Postal_PostalCode 14
Ecom_ShipTo_Postal_CountryCode 2 Ecom_ReceiptTo_Postal_CountryCode 2
Ecom_ShipTo_Telecom_Phone_Number 10 Ecom_ReceiptTo_Telecom_Phone_Number 10
Ecom_ShipTo_Online_Email 40 Ecom_ReceiptTo_Online_Email 40

Ecom_BillTo_Postal_Name_Prefix 4 Ecom_Payment_Card_Name 30
Ecom_BillTo_Postal_Name_First 15 Ecom_Payment_Card_Type 4
Ecom_BillTo_Postal_Name_Middle 15 Ecom_Payment_Card_Number 19
Ecom_BillTo_Postal_Name_Last 15 Ecom_Payment_Card_Verification 4
Ecom_BillTo_Postal_Name_Suffix 4 Ecom_Payment_Card_ExpDate_Day 2
Ecom_BillTo_Postal_Street_Line1 20 Ecom_Payment_Card_ExpDate_Month 2
Ecom_BillTo_Postal_Street_Line2 20 Ecom_Payment_Card_ExpDate_Year 4
Ecom_BillTo_Postal_Street_Line3 20 Ecom_Payment_Card_Protocol 20
Ecom_BillTo_Postal_City 22
Ecom_BillTo_Postal_StateProv 2 Ecom_ConsumerOrderID 20
Ecom_BillTo_Postal_PostalCode 14
Ecom_BillTo_Postal_CountryCode 2 Ecom_SchemaVersion 30
Ecom_BillTo_Telecom_Phone_Number 10
Ecom_BillTo_Online_Email 40 Ecom_TransactionComplete -

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ECML implementation and Alliance
participation
 The ECML Alliance seeks widespread support for and adoption of the ECML standard
 ECML is publicly available today and can be easily implemented by online merchants, e-
commerce technology vendors, and other interested parties
– www.ecml.org - the official web site of ECML

 ECML has been enthusiastically endorsed by several e-commerce industry segments,

including the following leading online merchants:

– beyond.com – Nordstrom.com
– Dell Computer – Omaha Steaks
– fashionmall.com – Reel.com
– healthshop.com – 1-800-Batteries

• To support the current version of ECML, a merchant will need to make a one-
time change to incorporate the uniform field names into the check-out pages
of its web site, and make changes to CGI/ASP scripts
• Organizations interested in participating in the ECML Alliance should contact
coordinator@ecml.org with their indication of interest

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 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

– Embedded 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

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Smart Cards
 Plastic card containing an embedded microchip
 Available for over 10 years
 So far not successful in U.S., but popular in Europe,
Australia, and Japan
 Unsuccessful in U.S. partly because few card readers
available
 Smart cards gradually reappearing in U.S.; success
depends on:
– Critical mass of smart cards that support applications
– Compatibility between smart cards, card-reader devices, and
applications

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Smart Card Applications
 Ticketless travel
– Seoul bus system: 4M cards, 1B transactions since 1996
– Planned the SF Bay Area system
 Authentication, ID
 Medical records
 Ecash
 Store loyalty programs
 Personal profiles
 Government
– Licenses
 Mall parking
...

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Advantages and Disadvantages
of Smart Cards
 Advantages:
1. Atomic, debt-free transactions
2. Feasible for very small transactions (information commerce)
3. (Potentially) anonymous
4. Security of physical storage
5. (Potentially) currency-neutral
 Disadvantages:
1. Low maximum transaction limit (not suitable for B2B or most B2C)
2. High Infrastructure costs (not suitable for C2C)
3. Single physical point of failure (the card)
4. Not (yet) widely used

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Mondex Smart Card
 Holds and dispenses electronic cash (Smart-card based, stored-value
card)
 Developed by MasterCard International
 Requires specific card reader, called Mondex terminal, for merchant or
customer to use card over Internet
 Supports micropayments as small as 3c and works both online and off-
line at stores or over the telephone
 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

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 Mondex Smart Card Processing

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Mondex transaction
 Here's what happens "behind the scenes" during a Mondex transaction
between a consumer and merchant. Placing the card in a Mondex
terminal starts the transaction process:
1. Information from the customer's chip is validated by the merchant's chip.
Similarly, the merchant's card is validated by the customer's card.
2. The merchant's card requests payment and transmits a "digital signature"
with the request. Both cards check the authenticity of each other's
message. The customer's card checks the digital signature and, if satisfied,
sends acknowledgement, again with a digital signature.
3. Only after the purchase amount has been deducted from the customer's
card is the value added to the merchant's card. The digital signature from
this card is checked by the customer's card and if confirmed, the
transaction is complete.     

2/16/00 EMTM 553 73

Mondex Smart Card
 Disadvantages
– Card carries real cash in electronic form, creating the possibility of theft
– No deferred payment as with credit cards -cash is dispensed immediately
 Security
– Active and dormant security software
• Security methods constantly changing
• ITSEC E6 level (military)
– VTP (Value Transfer Protocol)
• Globally unique card numbers
• Globally unique transaction numbers
• Challenge-response user identification
• Digital signatures
– MULTOS operating system
• firewalls on the chip

2/16/00 EMTM 553 74

Credit Cards
 Credit card
– Used for the majority of Internet purchases
– Has a preset spending limit
– Currently most convenient method
– Most expensive e-payment mechanism
• MasterCard: $0.29 + 2% of transaction value
– Disadvantages
• Does not work for small amount (too expensive)
• Does not work for large amount (too expensive)
 Charge card
– No spending limit
– Entire amount charged due at end of billing period

2/16/00 EMTM 553 75

Payment Acceptance and Processing
 Merchants must set up merchant accounts to accept
payment cards
 Law prohibits charging payment card until merchandise is
shipped
 Payment card transaction requires:
– Merchant to authenticate payment card
– Merchant must check with card issuer to ensure funds are
available and to put hold on funds needed to make current charge
– Settlement occurs in a few days when funds travel through
banking system into merchant’s account

2/16/00 EMTM 553 76

Processing a Payment Card Order

2/16/00 EMTM 553 77

Open and Closed Loop Systems

 Closed loop systems

– Banks and other financial institutions serve as
brokers between card users and merchants -- no
other institution is involved
– American Express and Discover are examples
 Open loop systems
– Transaction is processed by third party
– Visa and MasterCard are examples

2/16/00 EMTM 553 78

Setting Up Merchant Account

 Merchant bank
– Also called acquiring bank
– Does business with merchants that want to
accept payment cards
– Merchant receives account where they deposit
card sales totals
– Value of sales slips is credited to merchant’s
account

2/16/00 EMTM 553 79

Processing Payment Cards Online

 Can be done automatically by software

packaged with electronic commerce
software
 Can contract with third party to handle
payment card processing
– Can also pick, pack, and ship products to the
customer
– Allows merchant to focus on web presence and
supply availability

2/16/00 EMTM 553 80

Credit Card Processing

SOURCE: PAYMENT
PROCESSING INC.

2/16/00 EMTM 553 81

Payment Processing Services

 Internetsecure
– Provides secure credit card payment services
– Supports payments with Visa and MasterCard
– Provides risk management and fraud detection,
and ensures all proper security for credit card
transactions is maintained
– Ensures all transactions are properly credited to
merchant’s account

2/16/00 EMTM 553 82

Payment Processing Services
 Tellan
– Provides PCAuthorize for smaller commerce sites and
WebAuthorize for larger enterprise-class merchant sites
– Both systems capture credit card information from the
merchant’s form and connect directly to the bank network
using dial-up or private, leased lines
– Bank network receives credit information, performs credit
authorization, and deposits the money in the merchant’s
bank account
– The merchant’s web site receives confirmation or rejection
of the transaction, which is communicated to the customer

2/16/00 EMTM 553 83

Payment Processing Services
 IC Verify
– Provides electronic transaction processing for
merchants for all major credit and debit cards
– Also allows check guarantees and verification
transactions
– A CyberCash company
 Authorize.Net
– Online, real time service that links merchants with
issuing banks by simply inserting a small block of
HTML code into their transaction page

2/16/00 EMTM 553 84

Secure Electronic Transaction
(SET) Protocol
 Jointly designed by MasterCard and Visa with backing of Microsoft,
Netscape, IBM, GTE, SAIC, and others
 Designed to provide security for card payments as they travel on the
Internet
– Contrasted with Secure Socket Layers (SSL) protocol, SET validates
consumers and merchants in addition to providing secure transmission
 SET specification
– Uses public key cryptography and digital certificates for validating both
consumers and merchants
– Provides privacy, data integrity, user and merchant authentication, and
consumer nonrepudiation

2/16/00 EMTM 553 85

The SET protocol

The SET protocol coordinates the activities of the customer,

merchant, merchant’s bank, and card issuer. [Source: Stein]
2/16/00 EMTM 553 86
SET Payment Transactions
 SET-protected payments work like this:
– Consumer makes purchase by sending encrypted
financial information along with digital certificate
– Merchant’s website transfers the information to a
payment card processing center while a Certification
Authority certifies digital certificate belongs to sender
– Payment card-processing center routes transaction to
credit card issuer for approval
– Merchant receives approval and credit card is charged
– Merchant ships merchandise and adds transaction
amount for deposit into merchant’s account

2/16/00 EMTM 553 87

SET uses a hierarchy of trust

All parties hold certificates signed directly or

indirectly by a certifying authority. [Source: Stein]
2/16/00 EMTM 553 88
SET Protocol
 Extremely secure
– Fraud reduced since all parties are authenticated
– Requires all parties to have certificates
 So far has received lukewarm reception
 80 percent of SET activities are in Europe and Asian countries
 Problems with SET
– Not easy to implement
– Not as inexpensive as expected
– Expensive to integrated with legacy applications
– Not tried and tested, and often not needed
– Scalability is still in question

2/16/00 EMTM 553 89

Electronic payments: Issues

 Secure transfer across internet

 High reliability: no single failure point
 Atomic transactions
 Anonymity of buyer
 Economic and computational efficiency: allow
micropayments
 Flexiblility: across different methods
 Scalability in number of servers and users
E-Payments: Secure transfer
 SSL: Secure socket layer
– below application layer
 S-HTTP: Secure HTTP:
– On top of http
SSL: Secure Socket Layer
 Application protocol independent
 Provides connection security as:
– Connection is private: Encryption is used after an initial handshake
to define secret (symmetric) key
– Peer's identity can be authenticated using public (asymmetric) key
– Connection is reliable: Message transport includes a message
integrity check (hash)
 SSL Handshake protocol:
– Allows server and client to authenticate each other and negotiate a
encryption key
SSL Handshake Protocol
 1. Client "Hello": challenge data, cipher specs
 2. Server "Hello": connection ID, public key certificate, cipher specs
 3. Client "session-key": encrypted with server's public key
 4. Client "finish": connection ID signed with client's private key
 5. Server "verify": client's challenge data signed with server's private
key
 6. Server "finish": session ID signed with server's private key

 Session IDs and encryption options cached to avoid

renegotiation for reconnection
S-HTTP: Secure HTTP
 Application level security (HTTP specific)
 "Content-Privacy-Domain" header:
– Allows use of digital signatures &/ encryption
– Various encryption options
 Server-Browser negotiate
– Property: cryptographic scheme to be used
– Value: specific algorithm to be used
– Direction: One way/Two way security
Secure end to end protocols
E-Payments: Atomicity
 Money atomicity: no creation/destruction of
money when transferred
 Goods atomicity: no payment w/o goods and
viceversa.
– Eg: pay on delivery of parcel
 Certified delivery: the goods delivered is
what was promised:
– Open the parcel in front of a trusted 3rd party
Anonymity of purchaser
Payment system types
 Credit card-based methods
– Credit card over SSL - First Virtual -SET
 Electronic Cheques
– - NetCheque
 Anonymous payments
– - Digicash - CAFE
 Micropayments
 SmartCards
Encrypted credit card payment

 Set secure communication channel between

buyer and seller
 Send credit card number to merchant
encrypted using merchant’s public key
 Problems: merchant fraud, no customer
signature
 Ensures money but no goods atomicity
 Not suitable for microtransactions
 First virtual
 Customer assigned virtual PIN by phone
 Customer uses PIN to make purchases
 Merchant contacts First virtual
 First virtual send email to customer
 If customer confirms, payment made to merchant
 Not goods atomic since customer can refuse to pay
 Not suitable for small transactions
 Flood customer’s mailbox, delay merchant
Cybercash
 Customer opens account with cybercash, gives
credit card number and gets a PIN
 Special software on customer side sends PIN,
signature, transaction amount to merchant
 Merchant forwards to cybercash server that
completes credit card transaction
 Pros: credit card # not shown to server, fast
 Cons: not for microtransactions
SET:Secure Electronic Transactions
 Merge of STT, SEPP, iKP
 Secure credit card based protocol
 Common structure:
– Customer digitally signs a purchase along with price
and encrypts in bank’s public key
– Merchant submits a sales request with price to bank.
– Bank compares purchase and sales request. If price
match, bank authorizes sales
 Avoids merchant fraud, ensures money but no
goods atomicity
Electronic Cheques
 Leverages the check payments system, a core
competency of the banking industry.
 Fits within current business practices
 Works like a paper check does but in pure
electronic form, with fewer manual steps.
 Can be used by all bank customers who have
checking accounts
 Different from Electronic fund transfers
How does echeck work?
 Exactly same way as paper
 Check writer "writes" the echeck using one of
many types of electronic devices
 ”Gives" the echeck to the payee electronically.
 Payee "deposits" echeck, receives credit,
 Payee's bank "clears" the echeck to the paying
bank.
 Paying bank validates the echeck and "charges"
the check writer's account for the check.
 Anonymous payments
5. Deposit token at bank.
If double spent reveal
identity and notify police
1. Withdraw money:
cyrpographically encoded
tokens

merchant
customer
3. Send token after adding
merchant’s identity

4. Check validity and send goods

2. Transform so merchant can check
validity but identity hidden
Problems with the protocol
 Not money atomic: if crash after 3, money
lost
– if money actually sent to merchant: returning to
bank will alert police
– if money not sent: not sending will lead to loss
 High cost of cryptographic transformations:
not suitable for micropayments
 Examples: Digicash
Micropayments on hyperlinks

 HTML extended to have pricing details with

each link: displayed when user around the link
 On clicking, browser talks to E-Wallet that
initiates payment to webserver of the source site
 Payment for content providers
 Attempt to reduce overhead per transaction
 Micropayments: NetBill
 Customer & merchant have account with NetBill server
 Protocol:
– Customer request quote from merchant, gets quote and accepts
– Merchant sends goods encrypted by key K
– Customer prepares & signs Electronic Purchase Order having
<price, crypto-checksum of goods>
– Merchant countersigns EPO, signs K and sends both to NetBill
server
– NetBill verifies signatures and transfers funds, stores K and crypto-
checksum and
– NetBill sends receipt to merchant and K to customer
Recent micropayment systems
Company Payment Unique
system code
Compaq Millicent mcent

IBM IBM payment mpay

system
France Micrommerce microm
Telecom
Smartcards
 8-bit micro, < 5MHz, < 2k RAM, 20k ROM
 Download electronic money on a card: wallet on a card
 Efficient, secure, paperless, intuitive and speedy
 Real and virtual stores accept them
 Less susceptible to net attacks since disconnected
 Has other uses spanning many industries, from banking to
health care
Mondex
 Smart card based sales and card to card
transfers
 Money is secured through a password and
transactions are logged on the card
 Other operation and features similar to
traditional debit cards
 Card signs transaction: so no anonymity
 Need card reader everywhere
 Available only in prototypes