Unit 3a

Copyright © 2004 Pearson Education, Inc. Slide 6-1

UNIT – 3 Electronic Payment Systems


Concept of E- Money E money is an electronic medium in which the users

can simply transfer payments from their own bank accounts (without middle man) to the account of the merchant, electronically and securely over the internet.

E money comes in different forms: smart cards, credit cards, debit cards, stored value cards etc.

The properties of e- money are: 1) Monetary value

2) Security 3) Interoperability (move back and forth

in different systems)

4)Retrievability ( capable of being regained)


Types of e- money1) Identified e-money - identified e-money contains

information revealing the identity of the person who originally withdrew the money from the bank. Also, in much the same manner as credit cards, identified e-money enables the bank to track the money as it moves through the economy. Eg. Credit cards

2) Anonymous E-money - anonymous-money works just like real notes and cash. Once anonymous e-money is withdrawn from an account, it can be spent or given away without leaving a transaction trail. Eg. ATM


Online e-money - online means you need to interact with a bank (via modem or network) to conduct a transaction with a third party. eg.credit card, debit card

Offline e-money - offline means you can conduct a transaction without having to directly involve a bank. Offline anonymous e-money (true digital cash) is the most complex form of e-money. eg, deposit in one’s account through ATM


Other properties of e- money

Privacy (All levels of privacy are technically possible.

Acceptability (widely acceptable to merchants) Ease of integration (website interface must be

effective and well integrated) Customer base (it should be large to justify the

investment) Ease of use and ease of access.


What is electronic payment Electronic payment methods are the payments

made electronically rather than by paper (cash, checks, vouchers, etc) 95% of all e-commerce will be B2B transactions

by 2004, with only 5% for B2C (Research by Gartner Group)

Allows global reach, high speed, low transaction cost and highly automatic


Security for E-payments

Authentication Authenticity of business

Confidentiality Information privacy

Data Integrity Data must not be altered

Audit Trail Data should be trailed


Identification and authenticatethe ability to verify both the transacting parties

Authorizationthe ability to validate the rightful owner to the

transaction Integrity and confidentiality

the ability to transmit the transaction securelythe ability to store the transaction properly

AccountabilityThe ability to provide audit trail as evidence in

dispute Policies for sharing risks and liabilities

the mechanism to settle disputes/non-repudiation

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Security for E-payments Standards for E-payments

It is a must to have a generally accepted protocol for securing e-payments such as SSL

Implemented protocols1) SSL (Secure Sockets Layer)- Security protocol used by web browser and web

server to transmit sensitive information over the internet

- Uses private key to encrypt data2) SET (Secure Electronic Transaction)- Built with SSL- Uses digital wallet that holds customers certificates


Secure Sockets Layer (SSL)Secure Sockets Layer (SSL)A security protocol to protect sensitive data

transmitted over the Internet

Uses encryption to protect the transmission of data

When SSL session starts, server sends key to the browser, which returns random key to the server

Ensures that data are not tampered with or stolen en route 10


SET (Secure Electronic Transaction) Visa and MasterCard developed SET in 1996

specifically to handle electronic payments SET involves interaction among credit card holders,

merchants, issuing banks, payment processing organizations, and public key certificate authorities so it’s much more secure than SSL

SET is much more complex Success of SSL Expensive overhead


Secure Electronic Transfer - SETSecure Electronic Transfer - SET 3 party system - cardholder, merchant and

bank using SET-enabled systems

Uses digital certificate to ensure cardholder is who he/she says he/she is or claims to be

Credit card details are invisible to merchants, protected by encryption for clearing bank


Types of Payment Systems

Cash Checking Transfer Credit Card Stored Value Accumulating Balance


Cash Legal tender defined by a national authority to

represent value Most common form of payment in terms of number of

transactions Instantly convertible into other forms of value without

intermediation of any kind Portable, requires no authentication, and provides

instant purchasing power “Free” (no transaction fee), anonymous, low cognitive

demands Limitations: easily stolen, limited to smaller transaction,

does not provide any floatFloat- the period of time between a purchase and actual payment for the purchase


Checking Transfer Funds transferred directly via a signed draft or check

from a consumer’s checking account to a merchant or other individual

Most common form of payment in terms of amount spend

Can be used for both small and large transactions Some float Not anonymous, require third-party intervention

(banks) Introduce security risks for merchants (forgeries,

stopped payments), so authentication typically required


Credit Card Represents an account that extends credit to

consumers, permitting consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time

Credit card associations – Nonprofit associations (Visa, MasterCard) that set standards for issuing banks

Issuing banks – Issue cards and process transactions Processing centers (clearinghouses) – Handle

verification of accounts and balances


Stored Value

Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed

Examples: Debit cards, gift certificates, prepaid cards, smart cards

Debit cards: Immediately debit a checking or other demand-deposit account


Micro-payments

Internet payments for items costing from a few cents to around $10 , such as music videos

Some non-ecommerce examples are toll booths and bus fees. This system becomes very obsolete,


Accumulating Balance payment system

Accounts that accumulate expenditures and to which consumers make period payments

Some micro-payment systems will build an amount and then charge a larger sum for just that reason. These systems are called accumulated balance digital payment system. They will charge every month for the usage after the balance accumulates. An example of this is Vodafone.

Examples: utility, phone, American Express accounts



Electronic billing presentment and payment systems

Support electronic payments for online

and physical store purchases of goods or

services after the purchase have taken place

Yahoo! Bill Pay, CheckFree


ePayment is still evolving ...ePayment is still evolving ...

New ePayment Solutions

Security Infrastructure

Business Realities

Authentication Models

Spa

Customer Profiles

Payment Types

22

http://www.passport.com/Consumer/Default.asp?lc=1033

https://www.paypal.com/affil/[email protected]


Dimensions of Payment Systems


Current Online Payment Systems Credit cards are dominant form of online

payment, accounting for around 80% of online payments in 2002

New forms of electronic payment include: Digital cash Online stored value systems Digital accumulating balance payment

systems Digital credit accounts Digital checking


Online Merchants’ Actual and Preferred Online PaymentsFigure 6.3, Page 315


How an Online Credit Card Transaction Works

Processed in much the same way that in-store purchases are

Major difference is that online merchants do not see or take impression of card, and no signature is available

Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer’s card issuing bank


How an Online Credit Transaction Works


Limitations of Online Credit Card Payment Systems Security – neither merchant nor consumer can be fully

authenticated Cost – for merchants, around 3.5% of purchase price

plus transaction fee of 20-30 cents per transaction Social equity – many people do not have access to

credit cards (young adults, plus almost 100 million other adult Americans who cannot afford cards or are considered poor risk)


The SET (Secure Electronic Transaction) Protocol

Standard protocol for handling transactions on the web. This protocol is supported by Microsoft, Verisign, Netscape,

IBM etc. Authenticates cardholder and merchant identity through use

of digital certificates, encryption and digital signature. An open standard developed by MasterCard and Visa Transaction process similar to standard online credit card

transaction, with more identity verification Thus far, has not caught on much, due to costs involved in

integrating SET into existing systems, and lack of interest among consumers


Basic goals of SET are:

- Confidentiality- Integrity- Secrecy- Public Key Cryptography- Merchant Authentication- Validating digital signatures- Interoperability


How SET Transactions Work


Digital Wallets Concept of digital wallet relevant to many of the new

digital payment systems Seeks to emulate the functionality of traditional wallet Most important functions:

Authenticate consumer through use of digital certificates or other encryption methods

Store and transfer value Secure payment process from consumer to

merchant Give consumers the benefit of entering their

information just once


Types of Digital Wallets


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



Digital Cash One of the first forms of alternative payment

systems Not really “cash” – rather, are forms of value

storage and value exchange that have limited convertibility into other forms of value, and require intermediaries to convert

Many of early examples have disappear; concepts survive as part of P2P payment systems


Examples of Digital Cash


Digicash: How First Generation Digital Cash Worked


Online Stored Value Systems

Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account

Rely on value stored in a consumer’s bank, checking or credit card account



How Ecount.com Works: A Stored Value System


Smart Cards

Another kind of stored value system based on credit-card sized plastic cards that have embedded chips that store personal information, financial facts, private keys, account information and soon .

Two types: Contact – connection with smart card reader Contact-less –use of antenna to carry out

transaction. Examples: Mondex, American Express Blue


Smart cards can be categorized on the basis of the following:

- Integrated Circuit (IC) Microprocessor cards: adding, deleting, manipulating information ,read/write capabilities.

- IC Memory Cards: can store data, no processor- Optical Memory Cards: can store data, but have

larger memory than IC cards


Digital Accumulating Balance Payment Systems

Allows users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the month

Examples: Qpass and iPin


Digital Accumulating Balance Payment Systems


Digital Credit Card Payment Systems Extend the functionality of existing credit

cards for use as online shopping payment tools

Focus specifically on making use of credit cards safer and more convenient for online merchants and consumers

Example: eCharge


Digital Credit Card Payment Systems


How a Digital Credit Card Payment Systems Works: eChargeFigure 6.9, Page 334


Digital Checking Payment Systems

Extend the functionality of existing checking accounts for use as online shopping payment tools

Examples: eCheck, Achex (MoneyZap)


Digital Checking Payment Systems


How Digital Checking Works: eCheck


Types of Electronic payments (B2B) Electronic checks Purchasing cards Electronic letters of credit Electronic Funds Transfer

Transfer of fundsEx) ATM, Internet banking

Electronic Benefits Transfer Transfer of benefits

Ex) Debit card for food stamps


A purchasing card (also abbreviated as PCard or P-Card) is a form of company charge card that allows goods and services to be procured without using a traditional purchasing process. In the UK, purchasing cards are usually referred to as procurement cards.

Purchasing Cards are usually issued to employees who are expected to follow their organization’s policies and procedures related to P-Card use, including reviewing and approving transactions according to a set schedule (at least once per month).

http://en.wikipedia.org/wiki/Charge_card


Electronic Benefit Transfer (EBT) is an electronic system that allows state welfare departments to issue benefits via a magnetically encoded payment card, used in the United States and the United Kingdom.[1]

Common benefits provided (in the United States) via EBT are typically of two general categories: food and cash benefits. Food benefits are federally authorized benefits that can be used only to purchase food and non-alcoholic beverages.

http://en.wikipedia.org/wiki/Welfare

http://en.wikipedia.org/wiki/Payment_card

http://en.wikipedia.org/wiki/Electronic_Benefit_Transfer#cite_note-1



Electronic Fund Transfer Electronic Fund Transfer ( EFT ) is one way in which

Banking applications have become more digital. It is a system that allows the customer to transfer their money to another account by sending the instructions to the bank.

Once the bank has receive this information, the banks computer system automatically transfers the certain amount from one account to the other.

An example of using Electronic Fund Transfer ( EFT ) is when a company has to pay its employees salary. On the pay day the company tells the bank to move the money from the companies account to the employees account.


Two Types of EFTTwo Types of EFT EFT is a generic term –

Describing two different methods of transferring funds electronically

- Wire transfer- Automated clearing house facilitator of wire transfers

and ACH transactions-- In most cases, the Federal

Reserve Bank (FRB) is the facilitator for both.

EFT

Wire Transfer ACH

• Common mistake to call an ACH payment a wire transfer– Each are handled by different departments at a bank

http://www.federalreserve.gov/


Wire TransferWire Transfer

Movement of funds is real time – effected immediately FRB open for fed wires up to 6:00 p.m. Book Transfers are memo posted up until midnight

characteristics of wire transfers Large dollar amounts Single payments Time sensitive - Settlement date same day as initiated

Wire Transfer

Fed Wire Book Transfer Foreign Wire

Between two banks Within same bank Foreign bank


Automated Clearing House (ACH) ACH Network – A batch-process, store and forward

for future settlement Any size dollar amounts, Generally batch payments (e.g.,

payroll to large number of payees, or drafts from large number of remitters)

A processing and delivery facility that provides for the distribution and settlement of electronic financial transactions.

Debits and credits are cleared electronically, rather than through the physical movement of checks or cash.

Two types of ACH (Automated Clearing House)

1) ACH CREDIT 2) ACH DEBIT


Challenges with Electronic payment system:Challenges with Electronic payment system:• Security challenges includeSecurity challenges include• Disclosure of private information Disclosure of private information • Counterfeiting Counterfeiting • Illegal alteration of payment dataIllegal alteration of payment dataBut, possible solutions are: SSL (Secure Socket But, possible solutions are: SSL (Secure Socket Layer) SET (Secure Electronic Transaction)Layer) SET (Secure Electronic Transaction)

• Also Advancement in technology along with Encryption Also Advancement in technology along with Encryption and validation technologies has made most transactions and validation technologies has made most transactions very secure which is more than enough to address the very secure which is more than enough to address the security issues.security issues.


For E- payment to be successful, there is a need of Reliable and cost effective infrastructure that can be accessed by majority of the population.

Computer n/w ( internet / mobile n/w) Banking activities & operations needs

to be automated n/w that links banks with other financial

institutions for clearing and payment confirmation


Infrastructure issues: Infrastructure issues:

• Frequent connectivity failure in telephone lines, Frequent connectivity failure in telephone lines, • Unavailability of dedicated data service Unavailability of dedicated data service networks and closed financial networks networks and closed financial networks • Frequent power interruption Frequent power interruption • No financial networks that links different No financial networks that links different banks, Automated clearing houses or ACHbanks, Automated clearing houses or ACH• Banks are not ready for e-paymentBanks are not ready for e-payment,


• Poor computer infrastructure- Africa• Low level internet penetration and poorly developed telecom. Infrastructure – Ethiopia• ATM, debit cards are unreliable – Nigeria• Telecom, and electricity are not available- Nepal


ePayment RisksePayment Risks

Internet

Private network

Internet

Bank network

•Use of stolen card

•Credit card number or password stolen from computer

•Unauthorised access

• Information modified in transit

•Payment info stolen from merchant

•Masquerading as legitimate merchant

•Key info stolen by merchant staff

• Information modified in transit

• Information stolen

Buyer Merchant

Payment gateway


http://www.powershow.com/view/201ba-YzQ2Z/Lesson_18_Electronic_Payment_Systems_powerpoint_ppt_presentation




Unit 3a

Economy & Finance

money e money

pearson education

anonymous emoney

identified emoney

online emoney

anonymous money

types of e

properties of e