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SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Task 16 Scan-Based Trading and Electronic Payments Michael I. Shamos, Ph.D.,

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Presentation on theme: "SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Task 16 Scan-Based Trading and Electronic Payments Michael I. Shamos, Ph.D.,"— Presentation transcript:

1 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Task 16 Scan-Based Trading and Electronic Payments Michael I. Shamos, Ph.D., J.D. Director, eBusiness Programs Institute for Software Research Carnegie Mellon University

2 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Outline Scan-Based Trading (SBT) Electronic Payment methods –Wire transfer –Credit transfer, ACH, International ACH –PayPal B2B payments SWIFT (Society for Worldwide Interbank Financial Telecommunication) Foreign exchange

3 Traditional Supply Chain DCBkRmCkOut Consumer scanner Supplier Warehouse Retailer's revenue point: Point-of-sale scanner Supplier's revenue point: Warehouse checkin Terms begin SOURCE: TERESA BRASHEARS Store

4 Direct store Delivery (DSD) DCBkRmMerchandisingCkOut Consumer scanner Supplier Retail Store Retailer's revenue point: Checkout scanner Supplier's revenue point: Backroom checkin Terms begin at delivery SOURCE: TERESA BRASHEARS

5 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Causes of Grocery Out of Stock 3% 8% 16% 19% 54% Store Personnel Unaware of OOS Condition - Did Not Order Item Replenishment From Warehouse Backroom/Display Inventory Not Restocked To Shelf Shelf Capacity Inadequate Promotion, Forecasting and Ordering SOURCE: COCA COLA RETAILCOUNCIL INDEPENDENT STUDY, 1996

6 Scan Based Trading (SBT) DCBkRmMerchandisingCkOut scanner X Supplier and retailer revenue: TIME-LINKED TO POS ALMOST SIMULTANEOUS Consumer Supplier Retailer Terms begin SOURCE: TERESA BRASHEARS

7 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Scan-Based Trading Supplier owns goods until they are sold Supplier reports quantity delivered; no store checkin When goods are scanned at point-of sale, supplier AND retailer are both paid Risk of shrinkage (loss, theft) is shared

8 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Scan-Based Trading Benefits Grocery Manufacturers of America study (2000) 3-4% increase in sales 100% elimination of invoice deductions Retailer savings of $5 - $10K per supplier per 100 stores (supplier saves $4K - $20K per 100 stores) Shrink controlled at 0.3% Back-door check-in time savings of minutes per load (supplier saves minutes) Wal-Mark is the largest grocery chain in the U.S. Wal-Mart keeps $50 billion of goods (total) in inventory SOURCE: viaLINKviaLINK

9 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Wal-Mart Supply Chain Management Retailer HQ POMS MDSS Satellite Supplier HQ R.L.D.S. Warehouse Store P.O.S. Scanning shipper ScanData Data SOURCE: HAK & PARTNERS MDSS = MGMT DECISION SUPPORT SYSTEM POMS = PRODUCTION & OPS MGMT SYSTEM POS = POINT OF SALE RLDS = RAPID LEAN DEPLOYMENT SYSTEM

10 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Paying for Scan-Based Trading Large retailers may have more than 1 million SKUs (stock-keeping units) and 100,000 suppliers Making daily payments to so many suppliers is a major payment problem Each supplier my give different discounts based on its contract with Wal-Mart Need data to compute the payments Need a mechanism to make the payments in many currencies

11 The Fundamental B2B Payment Problem SELLER BUYER Messaging & Trade Information Payment Buyer’s Bank Seller’s Bank Reconciliation of payment/trade Reconciliation of payment/trade SOURCE: DEBRA MITTERERDEBRA MITTERER SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS

12 Goal of a Payment System To allow the recipient to obtain money in his bank account (or an account from which he can easily transfer money) Payment in real money is called settlement Most payments are not settled individually –Example: bank cheques, ATM withdrawals – too small for separate transfers of funds; batched for efficiency Batching to determine how much money must be paid is called clearance or clearing Payment systems always provide for settlement Many payment systems also involve clearing

13 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Central Banks Legal tender (“real money”) is issued by central banks Every currency is issued by a central bank The U.S. central bank is the Federal Reserve Bank –PRC: People’s Bank of China (PBOC) –India: Bank of India –Singapore: Monetary Authority of Singapore (MAS) Commercial banks hold very little cash (just enough for tellers and ATMs) Commercial banks have accounts at the central bank Most money is not in cash, but is a ledger entry (account) in a database at the central bank

14 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS How Commercial Banks Pay Each Other They give instructions to the central bank to “move money” by updating their accounts in the central bank If Citibank wants to move USD 1 million to PNCBank, it sends an order to the central bank: ACCOUNTS AT THE CENTRAL BANK PNCBANK BANK A... BANK Z CITIBANK 2,107,071,775 1,134,299,321 USD 1,000,000 ACCOUNTS AT THE CENTRAL BANK PNCBANK BANK A... BANK Z CITIBANK 2,106,071,775 1,135,299,321 BEFORE TRANSFER AFTER TRANSFER

15 Fedwire: How Banks Pay Each Other Central banks maintain “real-time gross settlement systems (RTGS) to execute payment instructions The Federal Reserve RTGS is called Fedwire “Real-time” means less than 1 minute “Gross settlement” means that each order is processed as it is received. No batching These payments are called “wire transfers” Expensive: up to USD 50 per payment Used mainly for large amounts (average: USD 3.5M) Transfers cannot be made over the Internet (for security reasons) Banks usually have dedicated communication lines to the central bank

16 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Net Settlement Most payments are not made in real-time The data is sent to a clearing house Clearing house keeps track of the net amounts owed or owing from bank to bank Each transaction causes these amounts to be adjusted After a clearing period (e.g. 1 day), each bank is told the total amount it must pay or will receive Banks then use RTGS (in the U.S., Fedwire) to settle their debts

17 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Net Settlement Many payments are small and do not have to be made in real-time. The cost of RTGS is not justified Payments can be batch and settlement made for the whole batch later Net settlement through an automated clearing house (ACH) is used for: –credit/debit cards –checks –ATM withdrawals, credit transfers BUT: there is no upper limit on ACH payments Cost is low: about USD 0.10 per payment, 500 times cheaper than RTGS

18 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Payment Orders (Checks) MAKER (DRAWER) DATE CHECK NUMBER AMOUNT CURRENCY AUTHORIZED SIGNATURE OF MAKER’S AGENT DRAWEE BANK PAYEE THIS CHECK IS AN ORDER TO MELLON BANK TO PAY $100 TO PAYEE OR HIS TRANSFEREE FROM THE CARNEGIE MELLON UNIVERSITY ACCOUNT ACCOUNT NUMBER DRAWEE BANK NUMBER

19 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS CLEARING HOUSE MELLON BANK A... BANK Z CITIBANK Clearing Payment Orders (Check) CUSTOMER CMU OF MELLON BANK “PAY SHAMOS $100” CUSTOMER SHAMOS OF CITIBANK -100 CITIBANK CUSTOMER A CUSTOMER B... SHAMOS CUSTOMER Z MELLON BANK CUSTOMER A CUSTOMER CMU... CUSTOMER Y CUSTOMER Z 1. CMU SENDS CHECK TO SHAMOS 2. SHAMOS DEPOSITS CHECK AT CITI 3. CITIBANK CREDITS SHAMOS WITH $ CITI SENDS CHECK TO CLEARING HOUSE 5. CLEARING HOUSE ADDS $100 TO CITI, SUBTRACTS $100 FROM MELLON 8. CLEARING HOUSE SENDS CHECK TO MELLON 7. MELLON DEDUCTS $100 FROM CMU ACCOUNT 9. MELLON SENDS CHECK BACK TO CMU 6. CLEARING HOUSE SENDS MELLON DEBIT INFO

20 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Settling Payment Orders (Checks) CLEARING HOUSE (FEDERAL RESERVE) MELLON BANK A... BANK Z CITIBANK +34,299, ,071,775 MELLON BANK CUSTOMER A CUSTOMER CMU... CUSTOMER Y CUSTOMER Z CITIBANK CUSTOMER A CUSTOMER B... SHAMOS CUSTOMER Z REAL-TIME GROSS SETTLEMENT SYSTEM (FEDWIRE) MELLON BANK A... BANK Z CITIBANK CLEARING HOUSE 1. AT END OF DAY, EACH BANK HAS A NET POSITIVE OR NEGATIVE CLEARING HOUSE BALANCE 2. BANKS WITH NEGATIVE BALANCES MUST PAY; THOSE WITH POSITIVE BALANCES RECEIVE MONEY +107,071, ,071, ,299, CLEARING HOUSE INFORMS CITI IT MUST PAY $107,071, CITI PAYS THE CLEARING HOUSE THROUGH RTGS 5. CLEARING HOUSE ADVISES MELLON IT WILL RECEIVE $34,299, CLEARING HOUSE PAYS MELLON $34,299,321

21 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS The “Automated Clearing House” MAKER (DRAWER) DATE CHECK NUMBER AMOUNT CURRENCY AUTHORIZED SIGNATURE OF MAKER’S AGENT DRAWEE BANK PAYEE DRAWER ACCOUNT NUMBER DRAWEE BANK NUMBER The paper check is just a carrier of information. Electronic transmission is better. We dematerialize the check (remove the paper) U S D DRAWER ACCOUNT NUMBER DRAWEE BANK NUMBER CHECK NUMBER AMOUNTCURRENCY PAYEE BANK NUMBER PAYEE ACCOUNT NUMBER DATE Only the digital information is sent to the clearing house

22 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Foreign Exchange Every bank must have an account at the central bank (or with another bank that has a central account) The account is (usually) denominated in that country’s currency and is used to settle obligations in that currency A foreign exchange transaction requires two settlements, one in each currency Therefore, two countries’ central banks (or settlement systems) are involved

23 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Foreign Exchange Currency = money of a central bank Every bank account is denominated in ONE currency All currencies have three-letter ISO currency codes: –USD (U.S. dollar)JPY (Japan yen) –GBP (Great Britain pound)CHF (Swiss franc) –HKD (Hong Kong dollar)EUR (Euro) Usually, the first two letters indicate the country; third letter is the first letter of the currency name Foreign exchange is a barter transaction –To buy GBP for USD, buyer has to find someone with GBP who wants USD

24 Foreign Exchange Example POUND BUYER’S BANK WANTS TO BUY 1M GBP B POUND SELLER’S BANK WILLING TO SELL 1M GBP FOR 1.6M USD S US RETAILER US RETAILER OWES UK FACTORY IN UK 1M GBP RETAILER ONLY HAS USD; FACTORY DEMANDS GBP RETAILER MUST BUY GBP UK FACTORY RETAILER ASKS ITS BANK B TO BUY GBP FROM BANK S BUT WHERE CAN BANK B PUT GBP? BANK B’S CORRESPONDENT C BANK B MUST HAVE A GBP ACCOUNT IN A UK BANK HOW CAN BANK S RECEIVE USD? BANK S’S CORRESPONDENT T BANK S MUST HAVE A USD ACCOUNT IN A US BANK T BANK B MOVES 1.6M USD TO ACCOUNT S IN BANK T BANK T NOTIFIES BANK S “1.6M USD IS NOW IN YOUR ACCOUNT” BANK S MOVES 1M GBP TO ACCOUNT B IN BANK C BANK C NOTIFIES BANK B: “1M GBP IS NOW IN YOUR ACCOUNT 1.6M USD 1M GBP

25 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Foreign Exchange Example BANK B (US) WANTS TO BUY 1 MILLION GBP FOR USD BANK S (UK) WILLING TO SELL 1 MILLION GBP FOR USD BANK T (US) BANK S USD ACCOUNT BANK C (UK) BANK B GBP ACCOUNT US FEDERAL RESERVE BANK BANK B USD ACCOUNT BANK T USD ACCOUNT THE BANK OF ENGLAND BANK S GBP ACCOUNT BANK C GBP ACCOUNT SETTLEMENT ONE: BANK B PAYS 1.6 MILLION USD TO BANK T SELLER S NOW HAS 1.6 MILLION USD IN BANK T SETTLEMENT TWO: BANK S TRANSFERS 1 MILLION GBP TO BANK C BUYER B NOW HAS 1 MILLION GBP IN BANK C US BANKS UK BANKS (NOSTRO ACCOUNT) CENTRAL BANKS

26 International ACH A U.S. company with USD paying a German supplier with EUR CPA = Canadian Payments Association Equens – a Dutch payment processor IAT = International ACH Transaction IPF = International Payments Framework SOURCE: NACHA SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS

27 Financial Messaging Money never actually moves, except in cash form Most money is transferred by sending messages – payment orders – to and from banks Banks also send messages to their customers to advise of payments Financial messaging is ESSENTIAL to payment systems BUT: a financial message is NOT a settlement

28 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS S.W.I.F.T. Society for Worldwide Interbank Financial Telecommunication Non-profit, headquarters in Brussels Financial messaging system ONLY –NOT A PAYMENT SYSTEM –No accounts, no clearing, no settlement –Settlement must occur separately 4.6 billion messages/yr; USD 7 trillion value per day Average volume: 14M messages/day Cost ~ $0.20 per message; transit time 20 seconds Private IP network, NOT the Internet Uses swiftML, interoperable with ebXML SOURCE: SWIFTSWIFT

29 Slide 29 SWIFT Network (Feb. 2012) 10,000 financial institutions 212 countries % availability7 trillion USD/day Peak27M messages/day 4.4 billion messages / year SOURCE: SWIFTSWIFT

30 A SWIFT Message :50K ORDERING INSTITUTION :32A VALUE DATE, CURRENCY, AMOUNT :23B BANK OPERATION: CREDIT :20 TRANSACTION REF # :57A ACCOUNT WITH INSTITUTION :59 RECIPIENT :70 REMITTANCE INFORMATION, REASON FOR PAYMENT :71A DETAILS OF CHARGES. SHA = SHARED TRANSFER CHARGES MAC = MESSAGE AUTHENTICATION CODE CHK = CHECKSUM 103 = REMITTANCE 108 = MESSAGE REF

31 Slide 31 Internet SWIFT E-payments Plus System SWIFTNet SWIFTNet Link Payments application BuyerSeller Payments application TrustAct Link TrustAct Server e-paymentPlus Buyer's bankSeller's bank Invoices Payment Initiation Remittance advice SWIFTNet Link Payment Initiation Confirmation Remittance advice Initiation Response Initiation Confirmation Remittance advice SOURCE: SWIFT

32 SWIFT Message Types SEE ALL MESSAGE TYPES

33 Bridging Domestic Payments Systems

34 82 Federal Reserve U.S.Europe Originator Beneficiary Originating Bank Beneficiary Bank European Bank’s Correspondent SWIFT MT 100/103 $ $ European Retailer Payment to U.S. Supplier SOURCE: MID-AMERICA PAYMENT EXCHANGE

35 International Payments with SWIFT Company X Company A UK Wire transfer request London Bank Detroit Bank SWIFT Payment order (2 nd step) Debit Company A Credit Company X Credit Advice SWIFT instruction MT103 (1 st step) London bank’s correspondent in New York Payment via CHIPS or FEDWIRE (3 rd step) Correspondent of Detroit Bank in New York Credit advice (4 th step) Invoice US SOURCE: ROYAL BANK OF SCOTLAND

36 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS PayPal Wholly owned by eBay > 250M accounts, 50% “active” (Alipay has 500M) Accepted at 100,000 business sites USD 200B processed per year 25% cross-border 193 countries (up from 56 six years ago) 26 currencies (up from 6 six years ago) 7% of U.S. online payment Currently limited to USD 10,000 per payment –ASSUME THIS LIMIT WILL BE REMOVED SOURCE: PAYPAL

37 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS PayPal Real-time gross “settlement” system Credit card hub, mobile payments Bookkeeping & accounting system Low-value foreign exchange system Massive expansion in mobile –2010 USD 1 billion –2011 USD 4 billion –2012 USD 14 billion (twice as much as estimated) –2013 USD 20 billion –2014 USD 30 billion (expected) SOURCE: PAYPAL

38 PayPal Structure PayPal GE Bank PAYPAL’s BANK INTERACTS WITH BANKING SYSTEM THROUGH ACH ONLY MAINTAINS LEDGERS NO MOVEMENT OF REAL MONEY WITHIN PAYPAL User User’s Bank USER INTERACTS WITH PAYPAL THROUGH BROWSER BETWEEN TWO PAYPAL USERS, TRANSACTIONS ARE PURELY BOOK ENTRIES IF REAL MONEY MUST MOVE, PAYPAL SENDS INSTRUCTIONS TO ITS BANK USER MAINTAINS NORMAL RELATIONS WITH HIS BANK eBay PUBLIC COMPANY SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS

39 PayPal Structure PayPal Servers PayPal Ledger PATTY 1000 SHAMOS 0 User INTERNET PayPal’s Bank Account (GE Bank) User’s Bank Automated Clearing House BANKING SYSTEM:

40 Putting Money Into PayPal PayPal Servers PayPal Ledger PATTY 1000 SHAMOS 0 User INTERNET PayPal’s Bank Account (GE Bank) User’s Bank Automated Clearing House “PLEASE ADD $2500 TO MY PAYPAL ACCOUNT” “PLEASE TAKE $2500 FROM SHAMOS’ BANK” ACH DEBIT CLEARING HOUSE TELLS BANK AMOUNT OWED BANK PAYS CLEARING HOUSE PAYS PAYPAL’S BANK “ADD $2500 TO SHAMOS IN LEDGER

41 Putting Money Into PayPal PayPal Servers PayPal Ledger PATTY 1000 SHAMOS 2500 User INTERNET PayPal’s Bank Account (GE Bank) User’s Bank Automated Clearing House “PLEASE ADD $2500 TO MY PAYPAL ACCOUNT” “PLEASE TAKE $2500 FROM SHAMOS’ BANK” ACH DEBIT CLEARING HOUSE TELLS BANK AMOUNT OWED BANK PAYS CLEARING HOUSE PAYS PAYPAL’S BANK “ADD $2500 TO SHAMOS IN LEDGER

42 Paying A PayPal User PayPal Servers PayPal Ledger PATTY 1000 SHAMOS 2500 User INTERNET PayPal’s Bank Account (GE Bank) User’s Bank Automated Clearing House “PLEASE PAY PATTY $500”

43 Paying A PayPal User PayPal Servers PayPal Ledger PATTY 1500 SHAMOS 2000 User INTERNET PayPal’s Bank Account (GE Bank) User’s Bank Automated Clearing House “PLEASE PAY PATTY $500”

44 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS PayPal It’s a big disk drive! - $500 + $500

45 International PayPal Maintain accounts in 25 currencies SOURCE: PAYPAL AUDAustralian Dollar BRLBrazilian Real * CADCanadian Dollar CNYChinese Yuan CZKCzech Koruna DKKDanish Krone EUREuro GBPGreat Britain Pound HKDHong Kong Dollar HUFHungarian Forint ILSIsraeli New Shekel JPYJapanese Yen MYRMalaysian Ringgit * MXNMexican Peso NOKNorwegian Kroner NZDNew Zealand Dollar PHPPhilippine Peso PLNPolish Złoty SEKSwedish Krona SGDSingapore Dollar CHFSwiss Franc TWDTaiwan Dollar THBThai Bhat TKYTurkish Lira * USDU.S. Dollar * In-country only SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS

46 B2B Payments -- HSBC Hexagon Another possibility (not using SWIFT directly) is to communicate orders to a bank with branches around the world, like HSBC

47 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS HSBC Hexagon

48 HSBC Hexagon Payment

49 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Recommended Task 16 Payment Methods Wire transfer (Fedwire or equivalent) Credit transfer (ACH credit) International ACH (for cross-border payments) PayPal Multinational commercial bank You may use another method if you want to, BUT if you do not use one (or more) of the above you will need to justify your choice thoroughly

50 SCAN-BASED TRADING AND EPAYMENT JUNE 9, 2014 COPYRIGHT © 2014 MICHAEL I. SHAMOS Q A &


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