Unit 3a
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  • For some people, these are payments linked to e-commerce transactions. This definition raises two problems 1. Many of e-commerce transactions are neither paid or settled over the internet. reason: most e-commerce site uses credit cards that uses internet only on the initial stage. 2. Electronic payments are broad.
  • if you are running an e-commerce site, you need to worry about
  • 3.2 -
  • How do you tell if a website is secure? S after http Lock symbol
  • 3.2 -
  • SSL is essentially point-to-point between buyer and seller, and makes no explicit provisions for involving financial institutions. Success of SSL reduced the need for SET Expense of heavy computational overhead makes SET based system slow and difficult to use
  • 3.2 -
  • B2B payments Electronic Funds Transfer Designed to transfer funds form one account to another Internet banking Electronic Benefits Transfer

Unit 3a Unit 3a Presentation Transcript

  • Copyright © 2004 Pearson Education, Inc. Slide 6-1 UNIT – 3 Electronic Payment Systems
  • Copyright © 2004 Pearson Education, Inc. Slide 6-2 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)
  • Copyright © 2004 Pearson Education, Inc. Slide 6-3 Types of e- money 1) 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 Once anonymous e-money is withdrawn from an account, it can be spent or given away without leaving a transaction trail.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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-4  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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-5 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.
  • Copyright © 2004 Pearson Education, Inc. Slide 6-6 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-7 Security for E-payments  Authentication  Authenticity of business  Confidentiality  Information privacy  Data Integrity  Data must not be altered  Audit Trail  Data should be trailed
  • Copyright © 2004 Pearson Education, Inc. Slide 6-8  Identification and authenticate the ability to verify both the transacting parties  Authorization the ability to validate the rightful owner to the transaction  Integrity and confidentiality the ability to transmit the transaction securely the ability to store the transaction properly  Accountability The ability to provide audit trail as evidence in dispute  Policies for sharing risks and liabilities the mechanism to settle disputes/non-repudiation 8
  • Copyright © 2004 Pearson Education, Inc. Slide 6-9 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 protocols 1) 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 data 2) SET (Secure Electronic Transaction) - Built with SSL - Uses digital wallet that holds customers certificates
  • Copyright © 2004 Pearson Education, Inc. Slide 6-10 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-11 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-12 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-13 Types of Payment Systems  Cash  Checking Transfer  Credit Card  Stored Value  Accumulating Balance
  • Copyright © 2004 Pearson Education, Inc. Slide 6-14 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 float Float- the period of time between a purchase and actual
  • Copyright © 2004 Pearson Education, Inc. Slide 6-15 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-16 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-17 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-18 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,
  • Copyright © 2004 Pearson Education, Inc. Slide 6-19 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-20
  • Copyright © 2004 Pearson Education, Inc. Slide 6-21 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-22 ePayment is still evolving ...ePayment is still evolving ... New ePayment Solutions Security Infrastructure Business Realities Authentication Models Spa Customer Profiles Payment Types 22
  • Copyright © 2004 Pearson Education, Inc. Slide 6-23 Dimensions of Payment Systems
  • Copyright © 2004 Pearson Education, Inc. Slide 6-24 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-25 Online Merchants’ Actual and Preferred Online Payments Figure 6.3, Page 315
  • Copyright © 2004 Pearson Education, Inc. Slide 6-26 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-27 How an Online Credit Transaction Works
  • Copyright © 2004 Pearson Education, Inc. Slide 6-28 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)
  • Copyright © 2004 Pearson Education, Inc. Slide 6-29 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-30 Basic goals of SET are: - Confidentiality - Integrity - Secrecy - Public Key Cryptography - Merchant Authentication - Validating digital signatures - Interoperability
  • Copyright © 2004 Pearson Education, Inc. Slide 6-31 How SET Transactions Work
  • Copyright © 2004 Pearson Education, Inc. Slide 6-32 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-33 Types of Digital Wallets
  • Copyright © 2004 Pearson Education, Inc. Slide 6-34 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-35
  • Copyright © 2004 Pearson Education, Inc. Slide 6-36 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-37 Examples of Digital Cash
  • Copyright © 2004 Pearson Education, Inc. Slide 6-38 Digicash: How First Generation Digital Cash Worked
  • Copyright © 2004 Pearson Education, Inc. Slide 6-39 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-40
  • Copyright © 2004 Pearson Education, Inc. Slide 6-41 How Ecount.com Works: A Stored Value System
  • Copyright © 2004 Pearson Education, Inc. Slide 6-42 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-43  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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-44 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-45 Digital Accumulating Balance Payment Systems
  • Copyright © 2004 Pearson Education, Inc. Slide 6-46 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-47 Digital Credit Card Payment Systems
  • Copyright © 2004 Pearson Education, Inc. Slide 6-48 How a Digital Credit Card Payment Systems Works: eCharge Figure 6.9, Page 334
  • Copyright © 2004 Pearson Education, Inc. Slide 6-49 Digital Checking Payment Systems  Extend the functionality of existing checking accounts for use as online shopping payment tools  Examples: eCheck, Achex (MoneyZap)
  • Copyright © 2004 Pearson Education, Inc. Slide 6-50 Digital Checking Payment Systems
  • Copyright © 2004 Pearson Education, Inc. Slide 6-51 How Digital Checking Works: eCheck
  • Copyright © 2004 Pearson Education, Inc. Slide 6-52 Types of Electronic payments (B2B)  Electronic checks  Purchasing cards  Electronic letters of credit  Electronic Funds Transfer  Transfer of funds Ex) ATM, Internet banking  Electronic Benefits Transfer  Transfer of benefits Ex) Debit card for food stamps
  • Copyright © 2004 Pearson Education, Inc. Slide 6-53  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).
  • Copyright © 2004 Pearson Education, Inc. Slide 6-54  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.
  • Copyright © 2004 Pearson Education, Inc. Slide 6-55
  • Copyright © 2004 Pearson Education, Inc. Slide 6-56 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.
  • Copyright © 2004 Pearson Education, Inc. Slide 6-57 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-58 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-59 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-60 Challenges with Electronic payment system:Challenges with Electronic payment system: • Security challenges includeSecurity challenges include • Disclosure of private informationDisclosure of private information • CounterfeitingCounterfeiting • Illegal alteration of payment dataIllegal alteration of payment data But, possible solutions are:  SSL (Secure SocketBut, possible solutions are:  SSL (Secure Socket Layer)  SET (Secure Electronic Transaction)Layer)  SET (Secure Electronic Transaction) • Also Advancement in technology along with EncryptionAlso Advancement in technology along with Encryption and validation technologies has made most transactionsand validation technologies has made most transactions very secure which is more than enough to address thevery secure which is more than enough to address the security issues.security issues.
  • Copyright © 2004 Pearson Education, Inc. Slide 6-61  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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-62 Infrastructure issues:Infrastructure issues: • Frequent connectivity failure in telephoneFrequent connectivity failure in telephone lines,lines, • Unavailability of dedicated data serviceUnavailability of dedicated data service networks and closed financial networksnetworks and closed financial networks • Frequent power interruptionFrequent power interruption • No financial networks that links differentNo 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,
  • Copyright © 2004 Pearson Education, Inc. Slide 6-63 • 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
  • Copyright © 2004 Pearson Education, Inc. Slide 6-64 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 Merchan t Payment gateway
  • Copyright © 2004 Pearson Education, Inc. Slide 6-65  http://www.powershow.com/view/201ba-YzQ2Z/Les