Ch 11:Payment Systems for Electronic Commerce Presented by Sharon Taylor

Introduction Paypal, founded in 1999 Paypal, founded in 1999 Biggest use is clearing auctions on eBay Biggest use is clearing auctions on eBay Fees Fees Profit margin Profit margin Payment surveillance software Payment surveillance software Bought by e-Bay in 2002 Bought by e-Bay in 2002

Online Processing Basics Most popular electronic transfers from consumer’s checking accounts Most popular electronic transfers from consumer’s checking accounts 1.Automated payments for auto 2.Insurance and mortgage Most popular Internet payment method: credit cards Most popular Internet payment method: credit cards

Scrip Digital cash minted by a company Digital cash minted by a company Only goods of that company Only goods of that company Most currently (eScrip) for not-for-profit fundraising Most currently (eScrip) for not-for-profit fundraising Primary and secondary schools in U.S. Primary and secondary schools in U.S.

Payment Card Types Credit card Credit card 1.Spending limit based on credit history 2.Pay entire balance or minimum payment 3.Interest on unpaid balance 4.Widely accepted 5.30 days to dispute online purchase 6.“Card not present purchases”

Debit Card 1. Removes amount of sale from bank account 2. Transfers to sellers bank 3. Usually has name of credit card issuer 4. By agreement with issuing bank

Charge Card 1. American Express, Diner’s Club 2. No spending limit 3. Entire balance due each month 4. No interest charge or line of credit 5. Issued by retailers

Single Use Cards 1. Not classed as payment cards 2. Issued by payment card firm 3. Unique card number valid for one transaction only 4. American Express, MBNA, Citigroup, J.P. Morgan

Advantages of Payment Cards 1. Fraud protection for merchants 2. Limited liability if stolen 3. Worldwide acceptance 4. Currency conversion handled by issuer 5. No special hardware or software needed

Disadvantages of Payment Cards 1. Issuer charges merchants per- transaction fees 2. And a monthly processing fee 3. Not cost effective for small transactions

Payment Acceptance & Processing EMV standard for handling transactions EMV standard for handling transactions 1. Developed by Europay, Mastercard and Visa 2. Now called MasterCard International Must ship within 30 days of charge Must ship within 30 days of charge Info sent using SSL encryption Info sent using SSL encryption

Steps in transaction 1. Merchant authenticates payment card 2. Checks to see funds are available 3. Puts hold on the credit line or funds 4. Settlement occurs in a few days 5. Funds move between banks

Open and Closed Loop System Closed loop systems Closed loop systems –Card issuer pays merchants that accept the card directly and does not use an intermediary Open loop systems Open loop systems –Involve three or more parties –Systems using Visa or MasterCard are examples

Merchant Accounts To process payment cards for Internet transactions an online merchant must set up a merchant account To process payment cards for Internet transactions an online merchant must set up a merchant account New merchant must supply New merchant must supply –Business plan –Details about existing bank accounts –Business and personal credit history

Processing Payments Online InternetSecure InternetSecure –Provides secure payment card services First Data First Data –Provides merchant payment card processing services with the following programs ICVERIFY, PCAuthorize, and WebAuthorize ICVERIFY, PCAuthorize, and WebAuthorize Banks connect to an Automated Clearing House (ACH) through highly secure, private leased telephone lines Banks connect to an Automated Clearing House (ACH) through highly secure, private leased telephone lines

Processing a Payment Card Transaction

Electronic Cash Term that describes any value storage and exchange system created by a private entity that Term that describes any value storage and exchange system created by a private entity that –Does not use paper documents or coins –Can serve as a substitute for government- issued physical currency Attractive in two arenas Attractive in two arenas –Sale of goods and services of less than $10 –Sale of higher-priced goods and services to those without credit cards

Micropayments and Small Payments Micropayments Micropayments –Internet payments for items costing from a few cents to approximately a dollar Small payments Small payments –Payments of less than $10

Privacy and Security of Electronic Cash Concerns about electronic payment methods include Concerns about electronic payment methods include –Privacy and security –Independence –Portability –Convenience Advantages of electronic cash Advantages of electronic cash –Independent and portable

Holding Electronic Cash: Online and Offline Cash Online cash storage Online cash storage –Trusted third party is involved in all transfers of electronic cash –Holds consumers’ cash accounts Offline cash storage Offline cash storage –Virtual equivalent of money kept in a wallet –No third party is involved in the transaction Double-spending Double-spending –Spending electronic cash twice

Advantages and Disadvantages of Electronic Cash Advantages of electronic cash Advantages of electronic cash –Transactions are more efficient –Transfer on the Internet costs less than processing credit card transactions Disadvantages of electronic cash Disadvantages of electronic cash –Use provides no audit trail –Problem of money laundering arises –Susceptible to forgery

Providing Security for Electronic Cash Providing Security for Electronic Cash Cryptographic algorithms Cryptographic algorithms –Keys to creating tamperproof electronic cash that can be traced back to its origins Anonymous electronic cash Anonymous electronic cash –Electronic cash that cannot be traced back to the person who spent it Creating truly anonymous electronic cash Creating truly anonymous electronic cash –Requires a bank to issue electronic cash with embedded serial numbers

Detecting Double Spending of Electronic Cash

Electronic Cash Systems CheckFree CheckFree –Largest online bill processor in the world –Provides online payment processing services Clickshare Clickshare –An electronic cash system aimed at magazine and newspaper publishers

Electronic Cash Systems (continued) PayPal PayPal –Provides payment processing services to businesses and to individuals –Peer-to-peer (P2P) payment system Free payment clearing service for individuals Free payment clearing service for individuals

PayPal Payment Method Search Option on eBay Main Search Page

Electronic Wallets Hold credit card numbers, electronic cash, owner identification, and contact information Hold credit card numbers, electronic cash, owner identification, and contact information Give consumers the benefit of entering their information just once Give consumers the benefit of entering their information just once Make shopping more efficient Make shopping more efficient

Electronic Wallets (continued) Server-side electronic wallet 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 Client-side electronic wallet –Stores a consumer’s information on his or her own computer

Microsoft.NET Passport An electronic wallet operated by Microsoft An electronic wallet operated by Microsoft Passport consists of four integrated services Passport consists of four integrated services –Passport single sign-in service (SSI) –Passport Wallet service –Kids Passport service –Public profiles

Microsoft.NET Passport Home Page

Yahoo! Wallet Server side electronic wallet offered by Yahoo! Server side electronic wallet offered by Yahoo! Lets users store information about several major credit and charge cards Lets users store information about several major credit and charge cards Many industry observers and privacy rights activist groups are concerned about electronic wallets Many industry observers and privacy rights activist groups are concerned about electronic wallets

W3C Micropayment Standards Development Activity Common Markup for Micropayment Per- Fee-Links Common Markup for Micropayment Per- Fee-Links –Standards developed by W3C Electronic Commerce Interest Group (ECIG) –Provide extensible and interoperable way to embed micropayment information in a Web page Extensible system Extensible system –One that developers can add to (or extend) without voiding any earlier work on the system

W3C Proposed Micropayment HTML Tags

The ECML Standard Electronic Commerce Modeling Language (ECML) Electronic Commerce Modeling Language (ECML) –Users can enter credit card and address information once into an ECML-capable electronic wallet –Users control access to their ECML electronic wallets

Stored-Value Cards Can be an elaborate smart card with a microchip that records currency balance Can be an elaborate smart card with a microchip that records currency balance Common stored-value cards Common stored-value cards –Prepaid phone, copy, subway, and bus cards

Magnetic Strip Cards Cannot send or receive information Cannot send or receive information Cannot increment or decrement value of cash stored on the card Cannot increment or decrement value of cash stored on the card Processing must be done on a device into which the card is inserted Processing must be done on a device into which the card is inserted Smart card Smart card –Better suited for Internet payment transactions

Smart Cards Stored-value cards Stored-value cards Can hold private user data, such as financial facts Can hold private user data, such as financial facts Can store about 100 times more information than a magnetic strip plastic card Can store about 100 times more information than a magnetic strip plastic card Safer than conventional credit cards Safer than conventional credit cards

Octopus Smart Card Information on the Hong Kong Citybus Site

Smart Cards (continued) Smart Card Alliance Smart Card Alliance –Promotes benefits of smart cards –Promotes widespread acceptance of multiple- application smart card technology –Members include companies in banking, financial services, computer technology, and healthcare –Promotes compatibility among smart cards, card reader devices, and applications

Internet Technology and the Banking Industry Paper checks Paper checks –Used to make the largest dollar volume payments Check Clearing for the 21st Century Act (Check 21) Check Clearing for the 21st Century Act (Check 21) –Permits banks to eliminate the movement of physical checks entirely

Phishing Attacks Basic structure Basic structure –Attacker sends messages to a large number of recipients –Message states that an account has been compromised and the matter should be corrected –Message includes a link –User enters a login name and password, which the perpetrator captures –Once inside a victim’s account, the perpetrator can access personal information

Phishing Attack Countermeasures Most important step that companies can take today Most important step that companies can take today –Educate Web site users Many companies contract consulting firms that specialize in anti-phishing work Many companies contract consulting firms that specialize in anti-phishing work Anti-phishing technique Anti-phishing technique –Monitor online chat rooms used by criminals