Unit 3a1. Copyright © 2004 Pearson Education, Inc. Slide 6-1
UNIT – 3
Electronic Payment Systems
2. 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)
3. 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anonymous e-money is withdrawn from an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
4. 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
5. 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.
6. 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
7. 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
8. 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
9. 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
10. 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
11. 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
12. 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
13. Copyright © 2004 Pearson Education, Inc. Slide 6-13
Types of Payment Systems
Cash
Checking Transfer
Credit Card
Stored Value
Accumulating Balance
14. 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
15. 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
16. 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
17. 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
18. 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,
19. 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
21. 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
22. 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
23. Copyright © 2004 Pearson Education, Inc. Slide 6-23
Dimensions of Payment Systems
24. 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
25. Copyright © 2004 Pearson Education, Inc. Slide 6-25
Online Merchants’ Actual and
Preferred Online Payments
Figure 6.3, Page 315
26. 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
27. Copyright © 2004 Pearson Education, Inc. Slide 6-27
How an Online Credit Transaction Works
28. 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)
29. 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
30. 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
31. Copyright © 2004 Pearson Education, Inc. Slide 6-31
How SET Transactions Work
32. 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
33. Copyright © 2004 Pearson Education, Inc. Slide 6-33
Types of Digital Wallets
34. 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
36. 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
37. Copyright © 2004 Pearson Education, Inc. Slide 6-37
Examples of Digital Cash
38. Copyright © 2004 Pearson Education, Inc. Slide 6-38
Digicash: How First Generation Digital Cash Worked
39. 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
41. Copyright © 2004 Pearson Education, Inc. Slide 6-41
How Ecount.com Works: A Stored Value System
42. 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
43. 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
44. 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
45. Copyright © 2004 Pearson Education, Inc. Slide 6-45
Digital Accumulating Balance
Payment Systems
46. 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
47. Copyright © 2004 Pearson Education, Inc. Slide 6-47
Digital Credit Card Payment Systems
48. Copyright © 2004 Pearson Education, Inc. Slide 6-48
How a Digital Credit Card Payment
Systems Works: eCharge
Figure 6.9, Page 334
49. 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)
50. Copyright © 2004 Pearson Education, Inc. Slide 6-50
Digital Checking Payment Systems
51. Copyright © 2004 Pearson Education, Inc. Slide 6-51
How Digital Checking Works: eCheck
52. 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
53. 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).
54. 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.
56. 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.
57. 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
58. 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
59. 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
60. 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.
61. 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
62. 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,
63. 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
64. 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
65. Copyright © 2004 Pearson Education, Inc. Slide 6-65
http://www.powershow.com/view/201ba-YzQ2Z/Les
Editor's Notes 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