Introduction

Outline
j The µNet Effect¶ on Payment/E-Payment j Impact on Developed Countries j Starting point for Developing Nations j New Opportunities

Conventional Payment Mechanisms in United States
j Approx 80% of payments in Cash

Non-Cash Payment Instrument Check
1999 ± Source BIS

Trans. Trans. Volume Value 71% 25% 2.5% 0.1% 10% 0.1% 2% 86%

Average Value $1,179 $59 $2,000 $4.3m

C/D Card C/D Transfer by ACH Wire Transfer

j International Trade involves Wire Transfers,

Letters of Credit etc.

etail Payments ± Net Evolution
j Cash ± evolving (very slowly) to Internet based

systems such as Paypal j Credit-Card based systems
± Ideal for Internet ± already a global payment method ± tradition of µcard-not-present¶ ± Combined with Secure Socket Layer, it is used for almost all retail E-commerce ± high fraud rate

j Retail Check ± being eroded by Electronic Bill

Payment, electronic home banking

Trade Payments ± Net Evolution
j Check Payments migrating to Electronic Transfers

± in the U.S. via the Automated Clearing House (ACH) networks
± FSTC E-check and BIPS Projects

j ACH Transfers growing in importance ± European Initiatives: STEP1 (<¼50K) ± Global Initiatives : WATCH, CLS ± Internet access to these is coming j Total trading Systems ± Bolero, Tradecard

Other Aspects of Electronic Trading
j 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
j Generally less developed banking industry j Credit Cards not widely available j More reliance on paper j Foreign Exchange transactions more

problematic j Being left out of new payment initiatives
Currently+ 1 9 32 +

10

New Opportunities
j On the Internet

no-one knows you are a dog j Internet banking infrastructure is cheap and easy to build.. Opportunity to leap-frog j Open standards level the paying field j Must work with new standards

Electronic Payment Systems
j Transaction reconciliation
± Cash or check

Electronic Payment Systems
± Intermediated reconciliation (credit or debit card, 3rd party money order)

Electronic Payment Systems
j 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 ³bite´ 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
j The need for encryption in ecommerce
± Degree of risk vs. scope of risk ± Institutional versus individual impact ± Obvious need for ecurrencies.

j 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
j 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 v x mod 12

2v x

12

Encryption

3v x

12

4v x

12

Encryption

5v x

12

6v x

12

Encryption

7v x

12

8v x

12

Encryption

9 v x mod 12

10 v x

12

Encryption

11 v x

12

Encryption
j 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:

y Z 2 Ž Z12 , Z 2 ! 6 z Z12 ! 12 y Z 3 Ž Z12 , Z 3 ! 4 z Z12 ! 12 y Z 4 Ž Z12 , Z 4 ! 3 z Z12 ! 12 y Z 5 Ž Z12 , Z 5 ! 12 z Z12 ! 12

Encryption
j 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
j In the RSA system, the actual encryption is done using

exponentiation. j A key result:

Fermat¶s Little Theorem If p is prime, then for any a  Z p a { 0, a p 1 mod p ! 1

Encryption
j 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 !message is done by computing ( M ) ! M e mod n ± Decrypting the

S C ! C mod n
d

Encryption
± Let us verify that the RSA scheme does in fact define an invertible mapping of the message.

y

or any M  Z n

P S M ! S P M ! M ed mod n. y Since d and e are modular inverses of each other ed ! 1  k p  1 q  1 for some integer k . ence, 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 follo by applying ermat' 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
j 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
j Privacy and verification j Transaction costs and micro-payments j Monetary effects
± Domestic money supply control and economic policy levers ± International currency exchanges and exchange rate stability

j Market organization effects
± Development of new financial intermediaries

j Effects on government
± Seniorage ± Legal issues

E-payment systems
j To transfer money over the Internet j Methods of traditional payment ± Check, credit card, or cash j 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
j Atomicity ± Money is not lost or created during a transfer j Good atomicity ± Money and good are exchanged atomically j Non-repudiation ± No party can deny its role in the transaction ± Digital signatures

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Desirable Properties of Digital Money
j Universally accepted j Transferable electronically j Divisible j Non-forgeable, non-stealable j Private (no one except parties know the

amount) j Anonymous (no one can identify the payer) j Work off-line (no on-line verification needed)
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Types of E-payments
j E-cash j Electronic wallets j Smart card j Credit card

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Electronic Cash
j 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 5 4 Bank 3

2 1

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

Consumer

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Electronic Cash Issues
j E-cash must allow spending only once j 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

j Divisibility and Convenience j Complex transaction (checking with Bank) ± 2/16/00 Atomicity problem EMTM 553
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Two storage methods
j On-line ± Individual does not have possession personally of electronic cash ± Trusted third party, e.g. online bank, holds customers¶ cash accounts j Off-line ± Customer holds cash on smart card or software wallet ± Fraud and double spending require tamperproof encryption
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Advantages and Disadvantages of Electronic Cash
j Advantages ± More efficient, eventually meaning lower prices ± Lower transaction costs ± Anybody can use it, unlike credit cards, and does not require special authorization j Disadvantages ± Tax trail non-existent, like regular cash ± Money laundering ± Susceptible to forgery
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Electronic Cash Security
j Complex cryptographic algorithms prevent

double spending
± Anonymity is preserved unless double spending is attempted

j 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
j Goal
± to have the bank sign documents without knowing what they are signing.

j Why? ± Anonymity with Authentication

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How to sign with blind fold?
j 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
j Problems The bank honors anything I write down j 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?
j Protocol #1 j Protocol #2 j Protocol #3 j Protocol #4

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Detecting Double Spending

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Past and Present E-cash Systems
j 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
j Checkfree ± Allows payment with online electronic checks j 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
j 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 j 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
j DigiCash ± Trailblazer in e-cash ± Allowed customers to purchase goods and services using anonymous electronic cash ± Recently entered Chapter 11 reorganization j 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
j Used when individual transactions are too

small for credit card (e.g. $2.00) j Consumer and Merchant sign up with Aggregator j Consumer makes purchase. Merchant notifies Aggregator. j Aggregator keeps Consumer¶s account. When amount owed is large enough (or every month), charges to Consumer¶s credit card j Aggregator sends money (less fees) to

Past and Present E-cash Systems
j 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
j 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
j 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 j 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
j 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
j 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
j 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

j 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
j 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 2/16/00± Electronic Commerce 553 EMTM Modeling Language

62

Current state of the market - online data exchanges
j

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

j

j

j

³76% of merchants surveyed indicated they are willing to participate in a multi site wallet enterprise,´ indicating that ³multi 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
j

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
±

j

Uniform field names only to start; will evolve over time

j

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

j

ECML is designed to be security protocol independent, support global implementations, and support any payment instrument ECML does not change the ³look and feel´ of a merchant¶s site
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j

Summary of current ECML specification
fi l mes T _Postal_Name_Prefix To_Postal_Name_First To_Postal_Name_Mi le To_Postal_Name_Last To_Postal_Name_Suffix To_Postal_Street_Line1 To_Postal_Street_Line2 To_Postal_Street_Line3 To_Postal_Cit To_Postal_StateProv To_Postal_PostalCode To_Postal_Countr Code To_Telecom_Phone_Number To_Online_Email mi fi l lengt fiel names com_Recei com_Recei com_Recei com_Recei com_Recei com_Recei com_Recei com_Recei Ecom_Recei Ecom_Recei Ecom_Recei Ecom_Recei Ecom_Recei Ecom_Recei tTo_Postal_Name_Prefix tTo_Postal_Name_First tTo_Postal_Name_Mi le tTo_Postal_Name_Last tTo_Postal_Name_Suffix tTo_Postal_Street_Line1 tTo_Postal_Street_Line2 tTo_Postal_Street_Line3 tTo_Postal_Cit tTo_Postal_StateProv tTo_Postal_PostalCode tTo_Postal_Countr Code tTo_Telecom_Phone_Number tTo_Online_Email mi fi l lengt c m_Shi com_Shi com_Shi com_Shi com_Shi com_Shi com_Shi com_Shi com_Shi Ecom_Shi Ecom_Shi Ecom_Shi Ecom_Shi Ecom_Shi 1 1 1 0 20 20 22 2 1 2 10 0 1 1 1 0 20 20 22 2 1 2 10 0 30 4 19 4 2 2 4 20 20 30 -

Ecom_BillTo_Postal_Name_Prefix Ecom_BillTo_Postal_Name_First Ecom_BillTo_Postal_Name_Middle Ecom_BillTo_Postal_Name_Last Ecom_BillTo_Postal_Name_Suffix Ecom_BillTo_Postal_Street_Line1 Ecom_BillTo_Postal_Street_Line2 Ecom_BillTo_Postal_Street_Line3 Ecom_BillTo_Postal_City Ecom_BillTo_Postal_StateProv Ecom_BillTo_Postal_PostalCode Ecom_BillTo_Postal_CountryCode Ecom_BillTo_Telecom_Phone_Number Ecom_BillTo_Online_Email

1 1 1 4 20 20 20 22 2 14 2 10 40

Ecom_Payment_Card_Name Ecom_Payment_Card_Type Ecom_Payment_Card_Number Ecom_Payment_Card_Verification Ecom_Payment_Card_Exp ate_ ay Ecom_Payment_Card_Exp ate_Month Ecom_Payment_Card_Exp ate_Year Ecom_Payment_Card_Protocol Ecom_ConsumerOrderID Ecom_SchemaVersion Ecom_TransactionComplete

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ECML implementation and Alliance participation
j j

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, ecommerce technology vendors, and other interested parties
±

www.ecml.org - the official web site of ECML

j

ECML has been enthusiastically endorsed by several e-commerce industry segments, including the following leading online merchants:
² ² ² ²

beyond.com Dell Computer fashionmall.com healthshop.com

² ² ² ²

Nordstrom.com Omaha Steaks Reel.com 1-800-Batteries

‡

To support the current version of ECML, a merchant will need to make a onetime 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
j Magnetic stripe ± 140 bytes, cost $0.20-0.75 j Memory cards ± 1-4 KB memory, no processor, cost $1.00-2.50 j Optical memory cards ± 4 megabytes read-only (CD-like), cost $7.00-12.00 j 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
j Plastic card containing an embedded

microchip j Available for over 10 years j So far not successful in U.S., but popular in Europe, Australia, and Japan j Unsuccessful in U.S. partly because few card readers available j Smart cards gradually reappearing in U.S.; success depends on:
± Critical mass of smart cards that support applications 2/16/00 EMTM 553
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Smart Card Applications
j Ticketless travel ± Seoul bus system: 4M cards, 1B transactions since 1996 ± Planned the SF Bay Area system j Authentication, ID j Medical records j Ecash j Store loyalty programs j Personal profiles j Government ± Licenses j Mall parking

...

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Advantages and Disadvantages of Smart Cards
j 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 j 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
j Holds and dispenses electronic cash (Smart-card based, stored-value j j j j j j

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 offline 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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Monde Smart Card Processing

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Mondex transaction
j 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.

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Mondex Smart Card
j Disadvantages ± Card carries real cash in electronic form, creating the possibility of theft ± No deferred payment as with credit cards -cash is dispensed immediately j 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

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Credit Cards
j 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) j Charge card ± No spending limit ± Entire amount charged due at end of billing period

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Payment Acceptance and Processing
j Merchants must set up merchant accounts to

accept payment cards j Law prohibits charging payment card until merchandise is shipped j 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 2/16/00 EMTM 553 travel through banking system into merchant¶s

76

Processing a Payment Card Order

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Open and Closed Loop Systems
j 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 j Open loop systems ± Transaction is processed by third party ± Visa and MasterCard are examples

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Setting Up Merchant Account
j 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

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Processing Payment Cards Online
j Can be done automatically by software

packaged with electronic commerce software j 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
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Credit Card Processing

SOURCE: PAYMENT PROCESSING INC.

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Payment Processing Services
j 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

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Payment Processing Services
j Tellan ± Provides PCAuthorize for smaller commerce sites and WebAuthorize for larger enterpriseclass 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 2/16/00 EMTM 553 ± The merchant¶s web site receives confirmation

83

Payment Processing Services
j 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 j 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
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Secure Electronic Transaction (SET) Protocol
j Jointly designed by MasterCard and Visa with backing of Microsoft,

Netscape, IBM, GTE, SAIC, and others j 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 j 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

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The SET protocol

The SET protocol coordinates the activities of the customer, merchant, merchant¶s bank, and card issuer. [Source: Stein]
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SET Payment Transactions
j 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 2/16/00 EMTM 553 charged

87

SET uses a hierarchy of trust

All parties hold certificates signed directly or indirectly by a certifying authority. [Source: Stein]
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SET Protocol
j Extremely secure ± Fraud reduced since all parties are authenticated ± Requires all parties to have certificates j So far has received lukewarm reception j 80 percent of SET activities are in Europe and Asian countries j 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

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EMTM 553

89

Electronic payments: Issues
j Secure transfer across internet j High reliability: no single failure point j Atomic transactions j Anonymity of buyer j Economic and computational efficiency:

allow micropayments j Flexiblility: across different methods j Scalability in number of servers and users

E-Payments: Secure transfer
j SSL: Secure socket layer ± below application layer j S-HTTP: Secure HTTP: ± On top of http

SSL: Secure Socket Layer
j Application protocol independent j 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)

j SSL Handshake protocol:
± Allows server and client to authenticate each other and negotiate a encryption key

SSL Handshake Protocol
j 1. Client "Hello": challenge data, cipher specs j 2. Server "Hello": connection ID, public key certificate, cipher specs j 3. Client "session-key": encrypted with server s public key j 4. Client "finish": connection ID signed with client s private key j 5. Server "verify": client s challenge data signed with server s private key j 6. Server "finish": session ID signed with server s private key

j Session IDs and encryption options cached to avoid

renegotiation for reconnection

S-HTTP: Secure HTTP
j Application level security (HTTP specific) j "Content-Privacy-Domain" header: ± Allows use of digital signatures &/ encryption
± Various encryption options

j 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
j Money atomicity: no creation/destruction of

money when transferred
j Goods atomicity: no payment w/o goods and

viceversa.
± Eg: pay on delivery of parcel

j 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
j Credit card-based methods ± Credit card over SSL - First Virtual j Electronic Cheques ± - NetCheque j Anonymous payments ± - Digicash - CAFE j Micropayments j SmartCards
-SET

Encrypted credit card payment
j Set secure communication channel between

buyer and seller j Send credit card number to merchant encrypted using merchant¶s public key j Problems: merchant fraud, no customer signature j Ensures money but no goods atomicity j Not suitable for microtransactions

First virtual
j Customer assigned virtual PIN by phone j Customer uses PIN to make purchases j Merchant contacts First virtual j First virtual send email to customer j If customer confirms, payment made to

merchant j Not goods atomic since customer can refuse to pay j Not suitable for small transactions j Flood customer¶s mailbox, delay merchant

Cybercash
j Customer opens account with cybercash,

gives credit card number and gets a PIN j Special software on customer side sends PIN, signature, transaction amount to merchant j Merchant forwards to cybercash server that completes credit card transaction j Pros: credit card # not shown to server, fast j Cons: not for microtransactions

SET:Secure Electronic Transactions
j Merge of STT, SEPP, iKP j Secure credit card based protocol j 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 j Avoids merchant fraud, ensures money but

no goods atomicity

Electronic Cheques
j Leverages the check payments system, a

core competency of the banking industry. j Fits within current business practices j Works like a paper check does but in pure electronic form, with fewer manual steps. j Can be used by all bank customers who have checking accounts j Different from Electronic fund transfers

How does echeck work?
j Exactly same way as paper j Check writer "writes" the echeck using one

of many types of electronic devices j ´Gives" the echeck to the payee electronically. j Payee "deposits" echeck, receives credit, j Payee s bank "clears" the echeck to the paying bank. j Paying bank validates the echeck and "charges" the check writer s account for the

Anonymous payments
1. Withdraw money: cyrpographically encoded tokens 5. Deposit token at bank. If double spent reveal identity and notify police

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

merchant

Problems with the protocol
j 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

j High cost of cryptographic transformations:

not suitable for micropayments
j Examples: Digicash

Micropayments on hyperlinks

j HTML extended to have pricing details with

each link: displayed when user around the link j On clicking, browser talks to E-Wallet that initiates payment to webserver of the source site j Payment for content providers j Attempt to reduce overhead per transaction

Micropayments: NetBill
j Customer & merchant have account with NetBill server j 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 cryptochecksum and ± NetBill sends receipt to merchant and K to customer

Recent micropayment systems
Company Compaq IBM France Telecom Payment system Millicent IBM payment system Micrommerce Unique code mcent mpay microm

Smartcards
j 8-bit micro, < 5MHz, < 2k RAM, 20k ROM j Download electronic money on a card: wallet on a card j Efficient, secure, paperless, intuitive and speedy j Real and virtual stores accept them j Less susceptible to net attacks since disconnected j Has other uses spanning many industries, from banking to

health care

Mondex
j Smart card based sales and card to card

transfers j Money is secured through a password and transactions are logged on the card j Other operation and features similar to traditional debit cards j Card signs transaction: so no anonymity j Need card reader everywhere j Available only in prototypes

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