1. Chapter 14 Electronic Payment Systems
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2. Learning Objectives
Understand the crucial factors determining the success of e-payment methods
Describe the key elements in securing an
e-payment
Discuss the players and processes involved in using credit cards online
Describe the uses and benefits of purchase cards
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3. Learning Objectives (cont.)
Describe different categories, methods of programming, and potential uses of smart cards
Discuss various online alternatives to credit card payments and identify under what circumstances they are best used
Describe the processes and parties involved in e-checks
Discuss the operation and benefits of e-billing
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4. LensDoc: Credit Card Dilemma
LensDoc—online retailer of:
Contact lenses
Sun and magnifying glasses
Dental care and personal care products
Customers pay by credit card (90% of all online purchases in the U.S.)
Easy to purchase
Easy to purchase fraudulently
Contact lenses cannot be returned once used, but unsatisfied customers want their money back
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5. LensDoc: Credit Card Dilemma (cont.)
Solutions:
Process credit card purchases by hand
Require:
Home address
Shipping address
Investigating alternative methods of payment
Cash cards
Special card-swiping peripherals
Credit card processing services
Currently disadvantages outweigh advantages of any of these alternatives
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6. Figure 14-1 LensDoc Payment
Source: Used with the permission of LensDoc, Inc.
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7. Electronic Payments: An Overview
E-payment methods
Credit cards
Electronic funds transfer (EFT)
E-payments
Smart cards
Digital cash and script
Digital checks
E-billing
All have the ability to transfer payment from one person or party to another
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8. Electronic Payments: An Overview (cont.)
Four parts involved in e-payments
Issuer
Customer/payer/buyer
Merchant/payee/seller
Regulator
Key issue of trust must be addressed
Privacy
Authentication and authorization
Integrity
Nonrepudiation
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9. Electronic Payments: An Overview (cont.)
Crucial factors in determining which method of e-payment achieves widespread acceptance
Independence
Interoperability and portability
Security
Anonymity
Divisibility
Ease of use
Transaction fees
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10. Security for E-Payments
Public key infrastructure
Plaintext Encryption algorithm
Ciphertext Key
Types of encryption systems
Symmetric (private key)
Used to encrypt and decrypt plain text
Shared by sender and receiver of text
Asymmetric (public key)
Uses a pair of keys
Public key to encrypt the message
Private key to decrypt the message
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11. Figure 14-2 Private Key Encryption
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12. Public Key Encryption Speed of Key Size of key Rijndael algorithm
RSA algorithm
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13. Security for E-Payments (cont.)
Digital Signatures: authenticity and nondenial
Analogous to handwritten signature
Based on public keys
Used to:
Authenticate the identity of the sender of a message or document
Ensure the original content of the electronic message or document is unchanged
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14. Security for E-Payments (cont.)
Digital Signatures: authenticity and nondenial (cont.)
Benefits:
Portable
Cannot be easily repudiated or imitated
Can be time stamped
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15. Figure 14-4 Digital Signatures
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16. Security for E-Payments (cont.)
Digital certificates
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 : 6/18/04
Signed : CA’s Signature
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17. Security for E-Payments (cont.)
Secure socket layer/transport layer security
Secure socket layer (SLL)—handle on Web browser, utilizing CAs and data encryption
Encryption
Digital certificates
Digital signatures
In 1996 SSL was standardized and named transport layer security (TSL)
Operates at TCP/IP layer (base layer for Internet)
IPSec—secure version of IP protocol
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18. Secure Socket Layer (SSL)
SET Vs. SSL
Secure Electronic Transaction
(SET)
Secure Socket Layer (SSL)
Complex
Simple
SET—tailored to credit card payment to merchants
SSL—protocol for general-purpose secure message exchanges (encryption)
SET protocol hides customer’s credit card information from merchants and order information to banks, to protect privacy (dual signature)
SSL protocol may use a certificate, but there is no payment gateway. Merchants need to receive ordering information and credit card information (capturing process initiated by merchants)
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19. Figure 14-5 InformIT.com Online Bookstore
Source: informit.com.
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20. Figure 14-6 InformIT.com SSL Encryption
Source: informit.com.
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21. E-Cards Three common types of payment cards
Credit cards—provides holder with credit to make purchases up to a limit fixed by the card issuer
Charge cards—balance on a charge card is supposed to be paid in full upon receipt of monthly statement
Debit card—cost of a purchase drawn directly from holder’s checking account (demand-deposit account)
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22. E-Cards (cont.) The Players Cardholder Merchant (seller)
Issuer (your bank)
Acquirer (merchant’s financial institution, acquires the sales slips)
Card association (VISA, MasterCard)
Third-party processors (outsourcers performing same duties formerly provided by issuers, etc.)
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23. Figure 14-7 Online Credit Card Processing
Source: The E-Commerce Book: Building the E-Empire by S. Korper and J. Ellis, copyright © 2000 by Academic Press, reproduced by permission of the publisher.
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24. E-Cards (cont.) E-wallets
One-click shopping—saving your order information on retailer’s Web server
Name
Shipping address
Billing address
Credit card information
E-wallet—software downloaded to cardholder’s desktop that stores same information and allows one-click-like shopping
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25. E-Cards (cont.) Other security risks with credit cards Stolen cards
Reneging by the customer—authorizes a payment and later denies it
Theft of card details stored on merchant’s computer—isolate computer storing information so it cannot be accessed directly from the Web
Overcoming risks with virtual credit cards
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26. E-Cards (cont.) B2B Purchasing Purchase cards
Instrument of choice for B2B purchasing
Special-purpose, non-revolving payment cards issued to employees solely for purchasing and paying for nonstrategic materials and services
B2B Purchasing
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27. E-Cards (cont.) Purchase cards—operate like other credit cards
Cardholder of corporation places an order for goods or services
Supplier processes transaction with authorization of card issuer
Issuer verifies purchase authorization
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28. E-Cards (cont.) Purchase cards—operate like other credit cards (cont.)
All cardholders’ transactions processed centrally—one payment for all purchases
Each cardholder reviews monthly statement
Card issuer analyzes transactions—standard and ad hoc reports are made
Card issuer creates electronic file to upload to corporation’s ledger system
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29. E-Cards (cont.) Benefits of purchasing cards Cost savings
Productivity gains
Bill consolidation
Payment reconciliation
Preferred pricing
Management reports
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30. E-Cards (cont.) Smart Cards
Integrated circuit (IC) microprocessor cards—includes IC chips with programmable functions that make cards “smart”
Integrated circuit (IC) memory cards—no processor
Suitable for uses where card performs fixed operation
Disposable, prepaid (phone cards)
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31. E-Cards (cont.) Optical memory cards
Stores 4MB of data; once written, data cannot be changed or removed
Ideal for keeping records (medical files)
Require expensive card readers
Categorize smart cards by how they store data
Contact card—insert in smart card reader
Contactless card—embedded antenna read by another antenna (mass-transit applications)
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32. Contactless IC Cards Proximity Card Amplified Remote Sensing Card
Used to access buildings and pay for 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)
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33. Figure 14-8 Smart Card Image
Embedded chip
Source: Visa.
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34. E-Cards (cont.) Smart cards are computer devices and require:
Chip with an operating system to run applications
Programming language to write applications
Multipurpose cards use new operating systems
MultOS
JavaCard
Microsoft windows for smart cards
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35. E-Cards (cont.) Important applications of smart card use: Loyalty
Financial
Information technology
Health and social welfare
Transportation
Identification
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36. E-Cash and Payment Card Alternatives
E-cash and credit card alternatives (for micropayments—under $10)
E-cash (eCoin.net)
Identity of user hidden from merchant
Easier to use than earlier e-cash systems
Requires specialized software
Qpass (Qpass.com)
Set up Qpass account
User name and password
What credit card to charge
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37. E-Cash and Payment Card Alternatives (cont.)
PrivateBuy
User establishes account
User assigned 16-digit user number (anonymous address)
Hides user name and card number from merchant site
Relies on credit card system already in place
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38. Figure 14-9 PrivateBuy Anonymous Shopping
Source: privatebuys.com
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39. E-Cash and Payment Card Alternatives (cont.)
Echarge enables users to:
Establish accounts
Receive user ID and password
Use instead of credit card numbers
Purchases billed to user’s credit card
Merchants must establish payment option
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40. E-Cash and Payment Card Alternatives (cont.)
Stores cash downloaded from bank or credit card account
Common uses
Disposable vs. reloadable cards
Sample cards
Visa cash
Mondex
Electronic purses
Lack of interoperable equipment and standards
Common Electronic Purse Specification (CEPS)
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41. E-Cash and Payment Card Alternatives (cont.)
E-loyalty and rewards programs
Loyalty programs online
Beenz.com
Consumer earns beenz by visiting, registering, or purchasing at 300 participating sites
Beenz are stored and used for later purchases
Partnered with MasterCard to offer rewardzcard—stored-value card used in U.S. and Canada for purchases where MasterCard is accepted
Transfer beenz into money to spend on Web, by phone, mail order, physical stores
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42. E-Cash and Payment Card Alternatives (cont.)
MyPoints-CyberGold
Customers earn cash
Cash used for later purchases or applied to credit card account
RocketCash
Combines online cash account with rewards program
User opens account and adds funds
Used to make purchases at participating merchants
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43. E-Cash and Payment Card Alternatives (cont.)
Person-to-person (P2P) payments and gifts
Enable transfer of funds between two individuals
Repaying money borrowed
Paying for an item purchased at online auction
Sending money to students at college
Sending a gift to a family member
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44. Figure 14-11 Sending money with PayPal
Source: paypal.com.
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45. E-Checking 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
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46. E-Checking (cont.) Current checking system
Role of clearinghouses in the check-clearing process
Magnetic ink characters (MICR)
Costs of the current system
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47. Figure 14-12 MICR Check Characters
Source: echecksecure.com
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48. E-Checking (cont.) Electronic version of paper check
Leverage check payment systems
Fit within current business practices, eliminate need for process reengineering
Work like paper check with fewer manual steps
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49. E-Checking (cont.)
Designed to meet needs of businesses and consumers (state of the art security systems)
Used by all bank customers with checking accounts
Enhance existing bank accounts with new EC features
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50. E-Checking (cont.) Benefits of e-checking for industry-wide savings
Online check collection process
Online notices of check returns
Truncating paper checks at bank of first deposit
Creating new cash management product opportunities
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51. E-Checking (cont.) echecksecure.com eCheck Secure
Third party vendor with software for e-check purchases
Aimed at B2C sites
echecksecure.com
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52. E-Checking (cont.) Truncating paper checks at bank of first deposit
Creating new cash management product opportunities
Checkfree (checkfree.com) leading third-party e-billing vendor
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53. Figure 14-13 E-Check Processing by eCheck Secure
Source: echecksecure.com
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54. Figure 14-14 Digital of Signatures in E-Check Processing
Source: Anderson (1998).
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55. E-Checking (cont.) Treasury Department expects e-checks to:
Enhance security through use of public key cryptography
“Push” a payment to the payee and not “pull” funds from general account of the U.S.
Leverage Internet for its strength as ubiquitous communication vehicle
Increase payment choices for U.S. Treasury payees
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56. E-Billing Customers are either individuals or companies
Two common models of e-billing
Biller direct—customer receives bill from a single merchant
Third-party consolidators—presents bills from multiple merchants
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57. Figure 14-15 E-Bill Presentment
Source: echecksecure.com
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58. Figure 14-16 E-Billing Process for Single Biller
Source: ebilling.org.
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59. Figure 14-17 E-Billing Processes for Bill Consolidator
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Source: ebilling.org.

60. Managerial Issues
In the B2C world, understand your customers and products
In the B2B world, keep an open mind about online alternatives
In-house or outsource
Security continues to be a major issue
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