1. Chapter 8 Electronic Payment Systems and Security1

2. Learning Objectives Describe typical electronic payment systems for EC
Identify the security requirements for safe electronic payments
Describe the typical security schemes used to meet the security requirements
Identify the players and procedures of the electronic credit card system on the Internet
Discuss the relationship between SSL and SET protocols

3. Learning Objectives (cont.)
Discuss the relationship between electronic fund transfer and debit card
Describe the characteristics of a stored value card
Classify and describe the types of IC cards used for payments
Discuss the characteristics of electronic check systems

4. SSL Vs. SET: Who Will Win?
A part of SSL (Secure Socket Layer) is available on customers’ browsers
it is basically an encryption mechanism for order taking, queries and other applications
it does not protect against all security hazards
it is mature, simple, and widely use
SET ( Secure Electronic Transaction) is a very comprehensive security protocol
it provides for privacy, authenticity, integrity, and, or repudiation
it is used very infrequently due to its complexity and the need for a special card reader by the user
it may be abandoned if it is not simplified/improved

5. Payments, Protocols and Related Issues
SET Protocol is for Credit Card Payments
Electronic Cash and Micropayments
Electronic Fund Transfer on the Internet
Stored Value Cards and Electronic Cash
Electronic Check Systems

6. Payments, Protocols and Related Issues (cont.)
Security requirements
Authentication: A way to verify the buyer’s identity before payments are made
Integrity: Ensuring that information will not be accidentally or maliciously altered or destroyed, usually during transmission
Encryption: A process of making messages indecipherable except by those who have an authorized decryption key
Non-repudiation: Merchants need protection against the customer’s unjustifiable denial of placed orders, and customers need protection against the merchants’ unjustifiable denial of past payment

7. Keysender (= Keyreceiver)
Security Schemes
Secret Key Cryptography (symmetric)
Scrambled Message
Keysender (= Keyreceiver)
Encryption
Original Message
Receiver
Keyreceiver
Decryption
Original Message
Sender
Scrambled Message
Internet

8. Security Schemes (cont.)
Public Key Cryptography
Scrambled Message
Public Keyreceiver
Original Message
Receiver
Private Keyreceiver
Sender
Original Message
Internet
Scrambled Message
Message
Scrambled Message
Private Keysender
Original Message
Receiver
Public Keysender
Digital
Signature
Sender
Original Message
Internet
Scrambled Message

9. Security Schemes (cont.)
Digital Signature
Analogous to handwritten signature
Sender encrypts a message with her private key
Any receiver with senders public key can read it
The receiver is the only one that can read the message and at the same time he is assured that the message was indeed sent by the sender
A digital signature is attached by a sender to a message encrypted in the receiver’s public key

10. Security Schemes (cont.)
Certificate
Identifying the holder of a public key (Key-Exchange)
Issued by a trusted certificate authority (CA)
Name : “Richard”
key-Exchange Key :
Signature Key :
Serial # :
Other Data :
Expires : 6/18/96
Signed : CA’s Signature

11. Security Schemes (cont.)
Certificate Authority - e.g. VeriSign
Public or private, comes in levels (hierarchy)
A trusted third party services
Issuer of digital certificates
Verifying that a public key indeed belongs to a certain individual
RCA : Root Certificate Authority
BCA : Brand Certificate Authority
GCA : Geo-political Certificate Authority
CCA : Cardholder Certificate Authority
MCA : Merchant Certificate Authority
PCA : Payment Gateway
Certificate Authority
RCA
BCA
GCA
CCA
MCA
PCA
Hierarchy of Certificate Authorities
Certificate authority needs to be verified by a government or well trusted entity ( e.g., post office)

12. Electronic Credit Card System on the Internet
The Players
Cardholder
Merchant (seller)
Issuer (your bank)
Acquirer (merchant’s financial institution, acquires the sales slips)
Brand (VISA, Master Card)

13. Electronic Credit Card System on the Internet (cont.)
The process of using credit cards offline
A cardholder requests the issuance of a card brand (like Visa and MasterCard) to an issuer bank in which the cardholder may have an account.
The authorization of card issuance by the issuer bank, or its designated brand company, may require customer’s physical visit to an office.
A plastic card is physically delivered to the customer’s address by mail.
The card can be in effect as the cardholder calls the bank for initiation and signs on the back of the card.
The cardholder shows the card to a merchant to pay a requested amount. Then the merchant asks for approval from the brand company.
Upon the approval, the merchant requests payment to the merchant’s acquirer bank, and pays fee for the service. This process is called a “capturing process”
The acquirer bank requests the issuer bank to pay for the credit amount.

14. Credit Card Procedure (offline and online)
Cardholder
Merchant
credit card
Card Brand Company
Payment authorization, payment data
Issuer Bank
Cardholder
Account
Acquirer Bank
Merchant
account debit data
payment data
payment data
amount transfer
Credit Card Procedure (offline and online) 14
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15. Secure Electronic Transaction (SET) Protocol
Sender’s Computer
1. The message is hashed to a prefixed length of message digest.
2. The message digest is encrypted with the sender’s private signature key, and a digital signature is created.
3. The composition of message, digital signature, and Sender’s certificate is encrypted with the symmetric key which is generated at sender’s computer for every transaction. The result is an encrypted message. SET protocol uses the DES algorithm instead of RSA for encryption because DES can be executed much faster than RSA.
4. The Symmetric key itself is encrypted with the receiver’s public key which was sent to the sender in advance. The result is a digital envelope. 15
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16. Sender’s Private Signature Key
Sender’s Computer
Sender’s
Certificate +
Message
Digital Signature 
Message
Message Digest 
Sender’s Private Signature Key
Receiver’s
Certificate
Encrypt
Symmetric Key
Encrypted Message 
Receiver’s
Key-Exchange Key
Encrypt
Digital
Envelope  16
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17. Secure Electronic Transaction (SET) Protocol (cont.)
Receiver’s Computer
5. The encrypted message and digital envelope are transmitted to receiver’s computer via the Internet.
6. The digital envelope is decrypted with receiver’s private exchange key.
7. Using the restored symmetric key, the encrypted message can be restored to the message, digital signature, and sender’s certificate.
8. To confirm the integrity, the digital signature is decrypted by sender’s public key, obtaining the message digest.
9. The delivered message is hashed to generate message digest.
10. The message digests obtained by steps 8 and 9 respectively, are compared by the receiver to confirm whether there was any change during the transmission. This step confirms the integrity. 17
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18. Receiver’s Computer   +   
Digital
Envelope
Receiver’s Private Key-Exchange Key 
Decrypt
Decrypt
Symmetric Key
Encrypted Message 
Sender’s
Certificate +
Message
Message Digest 
compare 
Message Digest
Digital Signature
Sender’s Public Signature Key 
Decrypt 18
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19. Entities of SET Protocol in Cyber Shopping
IC Card
Reader
Customer x
Customer y
With Digital Wallets
Certificate
Authority
Electronic Shopping Mall
Merchant A
Merchant B
Credit Card
Brand
Protocol
X.25
Payment Gateway
Entities of SET Protocol in Cyber Shopping 19
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20. Secure Electronic Transaction (SET) Secure Socket Layer (SSL)
SET Vs. SSL
Secure Electronic Transaction (SET)
Secure Socket Layer (SSL)
Complex
Simple
SET is tailored to the credit card payment to the merchants.
SSL is a protocol for general-purpose secure message exchanges (encryption).
SET protocol hides the customer’s credit card information from merchants, and also hides the order information to banks, to protect privacy. This scheme is called dual signature.
SSL protocol may use a certificate, but there is no payment gateway. So, the merchants need to receive both the ordering information and credit card information, because the capturing process should be initiated by the merchants.

21. Electronic Fund Transfer (EFT) on the Internet
Payer
Payee
Cyber Bank
Cyber Bank
Payment
Gateway
Payment
Gateway
Bank
Bank
VAN
Automated
Clearinghouse
VAN
An Architecture of Electronic Fund Transfer on the Internet

22. Debit Cards A delivery vehicle of cash in an electronic form
Mondex, VisaCash applied this approach
Either anonymous or onymous
CyberCash has commercialized a debit card named CyberCoin as a medium of micropayments on the Internet

23. Financial EDI It is an EDI used for financial transactions
EDI is a standardized way of exchanging messages between businesses
EFT can be implemented using a Financial EDI system
Safe Financial EDI needs to adopt a security scheme used for the SSL protocol
Extranet encrypts the packets exchanged between senders and receivers using the public key cryptography

24. Electronic Cash and Micropayments
Smart Cards
The concept of e-cash is used in the non-Internet environment
Plastic cards with magnetic stripes (old technology)
Includes IC chips with programmable functions on them which makes cards “smart”
One e-cash card for one application
Recharge the card only at designated locations, such as bank office or a kiosk. Future: recharge at your PC
e.g. Mondex & VisaCash

25. Mondex Makes Shopping Easy
Shopping with Mondex
Adding money to the card
Payments in a new era of electronic
shopping
Paying on the Internet

26. Electronic Money DigiCash The analogy of paper money or coins
Expensive, as each payment transaction must be reported to the bank and recorded
Conflict with the role of central bank’s bill issuance
Legally, DigiCash is not supposed to issue more than an electronic gift certificate even though it may be accepted by a wide number of member stores

27. Electronic Money (cont.)
Stored Value Cards
No issuance of money
Debit card — a delivering vehicle of cash in an electronic form
Either anonymous or onymous
Advantage of an anonymous card
the card may be given from one person to another
Also implemented on the Internet without employment of an IC card

28. Electronic Money (cont.)
Smart card-based e-cash
Can be recharged at home through the Internet
Can be used on the Internet as well as in a non-Internet environment
Ceiling of Stored Values
To prevent the abuse of stored values in money laundry
S$500 in Singapore; HK$3,000 in Hong Kong
Multiple Currencies
Can be used for cross border payments

29. Contactless IC Cards Proximity Card Amplified Remote Sensing Card
Used to access buildings and for paying in buses and other transportation systems
Bus, subway and toll card in many cities
Amplified Remote Sensing Card
Good for a range of up to 100 feet, and can be used for tolling moving vehicles at gates
Pay toll without stopping (e.g. Highway 91 in California)

30. Electronic Check Systems
Procedure of Financial Service Technology Consortium Prototype
Check
Signature
Remittance
Invoice
Secure Envelope
Certificate
Endorsement
Signature “Card”
“Card”
Workstation
Mall statement
E-Check line item
Payer’s Bank
Debit account
Payee’s Bank
Credit account
E- Mail
WWW
ACH
ECP
Clear Check
Deposit check
Payer
Payee
Account
Receivable

31. Electronic Check Systems (cont.)
Electronic Checkbook
Counterpart of electronic wallet
To be integrated with the accounting information system of business buyers and with the payment server of sellers
To save the electronic invoice and receipt of payment in the buyers and sellers computers for future retrieval
Example : SafeCheck
Used mainly in B2B

32. Payer’s checkbook agent Payee’s check-receipt agent
Issue a check
Receipt
A/C DB
control
agent of
payer’s
bank
payee’s
clearing
Checkbook,
screened result
Request of
screening check
issuance
present
report
payer’s bank
payee’s bank
Internet
The Architecture of SafeCheck 32
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33. Integrating Payment Methods
Two potential consolidations:
The on-line electronic check is merging with EFT
The electronic check with a designated settlement date is merging with electronic credit cards
Security First Network Bank (SFNB)
First cyberbank
Lower service charges to challenge the service fees of traditional banks
Visa
VisaCash is a debit card
ePay is an EFT service

34. How Many Cards are Appropriate?
An onymous card
is necessary to
keep the certificates for
credit cards, EFT, and
electronic checkbooks
The stored value in
IC card can be delivered
in an anonymous mode
Malaysia’s Multimedia Supper Corridor project
pursues a One-Card system
Relationship Card by Visa is also attempting
a one card system

35. Five Security Tips
Don’t reveal your online Passcode to anyone. If you think your online Passcode has been compromised, change it immediately.
Don’t walk away from your computer if you are in the middle of a session.
Once you have finished conducting your banking on the Internet, always sign off before visiting other Internet sites.
If anyone else is likely to use your computer, clear your cache or turn off and re-initiate your browser in order to eliminate copies of Web pages that have been stored in your hard drive.
Bank of America strongly recommends that you use a browser with 128-bit encryption to conduct secure financial transactions over the Internet.

36. Managerial Issues
Security solution providers can cultivate the opportunity of providing solutions for the secure electronic payment systems
Electronic payment system solution providers can offer various types of electronic payment systems to electronic stores and banks
Electronic stores should select an appropriate set of electronic payment systems
Banks need to develop cyberbank services to be compatible with the various electronic payment system
Credit card brand companies need to develop an EC standard like SET, and watch the acceptance by customers
Smart card brand should develop a business model in cooperation with application sectors and banks
Certificate authority needs to identify the types of certificate to provide 36
© Prentice Hall, 2000