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- 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anonymous e-money is withdrawn from an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

 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 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

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

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 float
Float- the period of time between a purchase and actual

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

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 Payments
Figure 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: eCharge
Figure 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 funds
Ex) 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).

 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.

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

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 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.

 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 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,

• 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 Merchan
t
Payment
gateway

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

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