Payment System

Refer Chapter – 11 from book Gary P. Schneider soft copy

 Online payment Basics
• The transaction made using between B2B companies are EFTs.
• In this chapter we will study about a number of online payment alternatives that
are available to businesses and individual consumers for B2C transactions.
• Traditional payment methods:
 Cash
 Checks
 Credit Cards
 Debit Cards
Most popular consumer electronic transfers are automated payments of:
• Auto loans
• Insurance payments
• Mortgage payments made from consumers’ checking accounts
Scrip
• Digital cash minted by a company instead of by a government.
• Cannot be exchanged for cash, it must be exchanged for goods or services by
company that issued scrip.
• Like a gift certificate that is good at more than one store.
 Different Payment Technologies
 Payment cards
Electronic cash
Software wallets/electronic wallets
Smart cards/stored value cards
 Payment Cards
The term payment card describes all types of plastic cards used to make purchases

• Credit card

• Has a spending limit based on a user’s credit history.

• The issuer charge interest on any unpaid balance.

• Debit card
• Removes an amount from a cardholder’s bank account
• Transfers it to the seller’s bank account
• Charge card
• Example : American Express
• Carries no spending limit
• Amount charged is due at the end of the billing period.
Advantages and disadvantages of Payment Cards
Advantages:
• Worldwide acceptance
• Provide fraud protection.
• Built-in security for merchants
Disadvantage:
• Payment card service companies charge merchants per-transaction fees and
monthly processing fees.
 Payment Acceptance and Processing
• Steps followed once a merchant receives a consumer’s payment card information:
• Merchant authenticates payment card
• Merchant checks with payment card issuer
• To ensure that credit or funds are available
• Puts a hold on the credit line or the funds needed to cover the charge
• Settlement occurs
• Closed loop systems
• Card issuer pays the merchants that accept the card directly and does not use an
intermediary
• Open loop systems
• Involve three or more parties
• Systems using Visa or MasterCard are examples
Merchant Account
• A merchant bank is a bank that does business with sellers that accept
payment cards.
• To process payment cards for Internet transactions an online
merchant must set up a merchant account
• New merchants must supply:
• Business plans
• Details about existing bank accounts
• Business and personal credit histories
 Processing Payment Cards Online
• InternetSecure
• Provides secure payment card
services.
• It supports payments with visa and
mastercard.
• It provides risk management and
fraud detection.
• First Data
• Provides merchant payment card
processing services with the
following programs:
• ICVERIFY and Web Authorize
• Banks connect to an Automated
Clearing House (ACH) through highly
secure, private leased telephone lines
 Electronic Cash/E-cash/Digital Cash
• Term that describes any value storage and exchange system created by a private
entity that:
• Does not use paper documents or coins
• Can serve as a substitute for government-issued physical currency
• It can be exchanged for physical cash on demand, as it is issued by private entities
there is a need for common standards among all cash issuers.
• Attractive in two arenas:
• Sale of goods and services of less than $10.
• Sale of goods and services to those without credit cards.
 Privacy and Security of Electronic Cash
• Concerns about electronic payment methods include:
• Privacy and security
• Independence
• Portability
• Convenience
 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
 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.
• Independent and portable
• Disadvantages
• Susceptible to forgery
• No audit trail
• Money laundering and fraud
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.

• CyberCash
• CyberCoins
• DigiCash
• Coin.Net
 Micropayments and Small Payments
• Micropayments
• Internet payments for items costing from a few cents to approximately a dollar

• Small payments
• Payments of less than $10
Holding Electronic Cash: Online and Offline
Cash
• Online cash storage
• Trusted third party is involved in all transfers of electronic cash
• Holds consumers’ cash accounts

• Offline cash storage

• Virtual equivalent of money kept in a wallet
• No third party is involved in the transaction

• Double-spending
• Spending electronic cash twice
 Providing Security for Electronic Cash
• Cryptographic algorithms
• Keys to creating tamperproof electronic cash that can be traced back to its
origins
• Anonymous electronic cash
• Electronic cash that cannot be traced back to the person who spent it
• Creating truly anonymous electronic cash
• Requires a bank to issue electronic cash with embedded serial numbers
 Electronic Cash Systems
• CheckFree
• Largest online bill processor in the world
• Provides online payment processing services
• Clickshare
• An electronic cash system aimed at magazine and newspaper publishers.
• Clickshare allows a consumer to have one account at a most-trusted website and buy from other
websites without having to pass around a credit-card number, register or give out personal
information. One ID, one account, one bill.
 Electronic Cash Systems
• PayPal
• Provides payment processing services
to businesses and to individuals
• Peer-to-peer (P2P) payment system
• Free payment clearing service for
individuals
 Electronic Wallets
• Hold credit card numbers, electronic cash, owner identification, and contact
information and provides this information to an electronic commerce site’s checkout
counter.

• Give consumers the benefit of entering their information just once

• Amazon.com one of the first online merchants to eliminate repeat form-filling for
purchases

• Make shopping more efficient

• Eliminates need to repeatedly enter identifying information into forms to
purchase
• Works in many different stores to speed checkout
 Electronic Wallets
• Server-side electronic wallet

• Stores a customer’s information on a remote server belonging to a particular

merchant or wallet publisher

• Client-side electronic wallet

• Stores a consumer’s information on his or her own computer

An Electronic Checkout Counter Form
 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
 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
Entering information into Microsoft Wallet
 Yahoo! Wallet
• Server side electronic wallet offered by Yahoo!

• Lets users store information about several major credit and charge cards

• Many industry observers and privacy rights activist groups are concerned about
electronic wallets

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 Stored Value Cards/Smart Card
• People carry a number of number of plastic cards – credit card, debit card, charge
cards, driver’s license, health insurance card, employee or student identification card
etc.
• One solution that can reduce all those cards to a single plastic card is called a stored
value card.
• Stored-value cards can be an elaborate smart card with a microchip that records
currency balance.
• Common stored-value cards include: Prepaid phone, copy, subway, and bus card
 Magnetic Strip Cards
• Magnetic strip cards
• Cannot send or receive information
• Cannot increment or decrement value of cash stored on the card
• Processing must be done on a device into which the card is inserted

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 Smart Cards
• Stored-value cards that…
• Can hold private user data, such as financial facts, account information, credit
card numbers, medical records.

• Can store about 100 times more information than a magnetic strip plastic
card

• Safer than conventional credit cards

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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
• 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
 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
 Smart Card Applications
• Ticketless travel
• Seoul bus system: 4M cards, 1B transactions since 1996
• Planned the SF Bay Area system
• Authentication, ID – student identification card
• Medical records- health insurance card
• E-cash
• Personal profiles
• Government
• Licenses
• Mall parking
 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.Not (yet) widely used
 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 micro-payments and works both online and off-line at stores
or over the telephone
• Secret chip-to-chip transfer protocol
Mondex Smart Card Processing
 Phishing Attacks
• Basic structure:
• Attacker sends e-mail messages to a
large number of recipients
• Message states that an account has
been compromised and the matter
should be corrected
• Message includes a link
• User enters a login name and
password, which the perpetrator
captures
• Once inside a victim’s account, the
perpetrator can access personal
information
• Countermeasures
• Most important step that companies
can take today is to educate Web site
users
• Many companies contract consulting
firms that specialize in anti-phishing
work
• Anti-phishing technique is to monitor
online chat rooms used by criminals
 Group Activity
In your group research these payment systems. Visit the following sites and
prepare an overview to be discussed in class:
• Group A -- The Fedwire system – accessible from www.ny.frb.org and click on
“banking information” and then “payment systems.” read the general
information about the US Payment system.
• Group: B -- The CHIPS system www.chips.org
• Group C -- The National Automated Clearinghouse Association
http://www.nacha.org/
• Group D National Securities Clearing Corporation – http://www.nscc.com