chapter 8 : electronic payment systems
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Chapter 8
Electronic Payment Systems
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LensDoc: Credit Card Dilemma
LensDoconline retailer of:
Contact lenses
Sun and magnifying glasses
Dental care and personal care products
Customers pay by credit card (90% of all onlinepurchases in the U.S.)
Easy to purchaseEasy to purchase fraudulently
Contact lenses cannot be returned once used, butunsatisfied customers want their money back
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LensDoc: Credit Card Dilemma (cont.)
Solutions:Process credit card purchases by hand
Require:
Home addressShipping address
Investigating alternative methods of payment
Cash cards
Special card-swiping peripherals
Credit card processing services
Currently disadvantages outweigh advantagesof any of these alternatives
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Electronic Payments: An Overview
E-payment methodsCredit cards
Electronic funds transfer (EFT)
E-paymentsSmart cards
Digital cash and script
Digital checks
E-billingAll have the ability to transfer payment fromone person or party to another
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Electronic Payments: An Overview (cont.)
Four parts involved in e-payments
IssuerCustomer/payer/buyer
Merchant/payee/seller
Regulator
Key issue of trust mustbe addressed
PrivacyAuthentication andauthorization
Integrity
Nonrepudiation
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Electronic Payments: An Overview (cont.)
Independence
Interoperability andportability
Security
Anonymity
Divisibility
Ease of use
Transaction fees
Crucial factors in determining which method of
e-payment achieves widespread acceptance
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Security for E-Payments
Public key infrastructurePlaintext Encryption algorithm
Ciphertext Key
Types of encryption systemsSymmetric (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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Figure 8-2
Private Key Encryption
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Public Key Encryption
Size of key
RSA algorithm
Speed of Key
Rijndael algorithm
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Digital Signatures: authenticity and nondenialAnalogous to handwritten signature
Based on public keys
Used to:Authenticate the identity of the sender of amessage or document
Ensure the original content of the electronic
message or document is unchangedBenefits:
Portable
Cannot be easily repudiated or imitated
Can be time stamped
Security for E-Payments (cont.)
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Figure 8-3
Digital Signatures
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Security for E-Payments (cont.)
Digital certificates
Identifying the
holder of a publickey (Key-Exchange)
Issued by a trustedcertificate authority
(CA)
Name : Richard
key-Exchange Key :
Signature Key :
Serial # : 29483756
Other Data : 10236283025273
Expires : 6/18/04
Signed : CAs Signature
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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 transportlayer security (TSL)
Operates at TCP/IP layer (base layer for Internet)
IPSecsecure version of IP protocol
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SET Vs. SSL
Secure Electronic Transaction(SET)
Secure Socket Layer (SSL)
Complex Simple
SETtailored to credit card
payment to merchants
SSLprotocol for general-
purpose secure messageexchanges (encryption)
SET protocol hides customerscredit card information frommerchants and orderinformation to banks, toprotect privacy (dualsignature)
SSL protocol may use acertificate, but there is no
payment gateway.Merchants need to receiveordering information andcredit card information(capturing process initiatedby merchants)
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E-Cards
Three common types of payment cardsCredit cardsprovides holder with credit tomake purchases up to a limit fixed by the cardissuer
Charge cardsbalance on a charge card issupposed to be paid in full upon receipt ofmonthly statement
Debit cardcost of a purchase drawn directlyfrom holders checking account (demand-deposit account)
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E-Cards (cont.)
The Players
Cardholder
Merchant (seller)Issuer (your bank)
Acquirer (merchants financial institution,acquires the sales slips)
Card association (VISA, MasterCard)
Third-party processors (outsourcers performingsame duties formerly provided by issuers, etc.)
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Figure 8-4
Online Credit Card Processing
Source: The E-Commerce Book: Building the E-Empireby S. Korper and J. Ellis, copyright 2000 by
Academic Press, reproduced by permission of the publisher.
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E-Cards (cont.)
E-wallets
One-click shoppingsaving your order informationon retailers Web server
Name
Shipping address
Billing address
Credit card informationE-walletsoftware downloaded to cardholdersdesktop that stores same information and allowsone-click-like shopping
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E-Cards (cont.)
Other security risks with credit cards
Stolen cards
Reneging by the customerauthorizes apayment and later denies it
Theft of card details stored on merchantscomputerisolate computer storing
information so it cannot be accessed directlyfrom the Web
Overcoming risks with virtual credit cards
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E-Cards (cont.)
Purchase cards
Instrument of choice for B2B purchasing
Special-purpose, non-revolving payment cardsissued to employees solely for purchasing andpaying for nonstrategic materials and services
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E-Cards (cont.)
Purchase cardsoperate like other credit cards
Cardholder of corporation places an order forgoods or services
Supplier processes transaction withauthorization of card issuer
Issuer verifies purchase authorization
All cardholders transactions processedcentrallyone payment for all purchases
Each cardholder reviews monthly statementCard issuer analyzes transactionsstandardand ad hoc reports are made
Card issuer creates electronic file to upload to
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E-Cards (cont.)
Benefits of purchasing cardsCost savings
Productivity gains
Bill consolidation
Payment reconciliation
Preferred pricingManagement reports
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E-Cards (cont.)
Smart CardsIntegrated circuit (IC) microprocessor cards
includes IC chips with programmable functions thatmake cards smart
Integrated circuit (IC) memory cardsno processorSuitable for uses where card performs fixed
operationDisposable, prepaid (phone cards)
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E-Cards (cont.)
Optical memory cards
Stores 4MB of data; once written, datacannot be changed or removed
Ideal for keeping records (medical files)
Require expensive card readers
Categorize smart cards by how they store data
Contact cardinsert in smart card readerContactless cardembedded antenna readby another antenna (mass-transitapplications)
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Contactless IC Cards
Proximity CardUsed to access buildings and pay for busesand other transportation systems
Bus, subway and toll card in many cities
Amplified Remote Sensing CardGood for a range of up to 100 feet, and can
be used for tolling moving vehicles at gatesPay toll without stopping (e.g. Highway 91 inCalifornia)
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Figure 8-5
Smart Card Image
Embedded
chip
Source: Visa.
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E-Cards (cont.)
Important applications of smart card use:
Loyalty
FinancialInformation technology
Health and social welfare
Transportation
Identification
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E-Cash and
Payment Card Alternatives
E-cash and credit card alternatives (formicropaymentsunder $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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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 frommerchant site
Relies on credit card system already inplace
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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 users credit card
Merchants must establish payment option
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E-Cash and
Payment Card Alternatives (cont.)
Stores cash downloaded from bank or creditcard account
Common uses
Disposable vs. reloadable cards
Sample cards
Visa cash
MondexElectronic purses
Lack of interoperable equipment and standards
Common Electronic Purse Specification (CEPS)
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E-Cash and
Payment Card Alternatives (cont.)
E-loyalty and rewards programsLoyalty programs online
Beenz.comConsumer earns beenz by visiting,registering, or purchasing at 300participating sites
Beenz are stored and used for laterpurchases
Partnered with MasterCard to offerrewardzcardstored-value card used in U.S.and Canada for purchases where MasterCardis accepted
Transfer beenz into money to spend on Web,by phone, mail order, physical stores
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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 rewardsprogram
User opens account and adds funds
Used to make purchases at participatingmerchants
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E-Cash and
Payment Card Alternatives (cont.)
Person-to-person (P2P) payments and giftsEnable transfer of funds between two
individualsRepaying money borrowed
Paying for an item purchased at onlineauction
Sending money to students at collegeSending a gift to a family member
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Figure 8-7
Sending money with PayPal
Source:paypal.com.
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E-Checking
Electronic checkbookCounterpart of electronic wallet
To be integrated with the accountinginformation system of business buyers andwith the payment server of sellers
To save the electronic invoice and receipt ofpayment in the buyers and sellers computers
for future retrievalExample : SafeCheck
Used mainly in B2B
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E-Checking (cont.)
Current checking systemRole of clearinghouses in the check-clearingprocess
Magnetic ink characters (MICR)
Costs of the current system
Electronic version of paper check
Leverage check payment systemsFit within current business practices, eliminateneed for process reengineering
Work like paper check with fewer manual steps
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E-Checking (cont.)
Designed to meet needs of businesses and consumers (stateof the art security systems)
Used by all bank customers with checking accounts
Enhance existing bank accounts with new EC features
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 productopportunities
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E-Checking (cont.)
Truncating paper checks at bank of firstdeposit
Creating new cash management productopportunities
Checkfree (checkfree.com) leading third-party
e-billing vendor
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E-Checking (cont.)
Treasury Department expects e-checks to:
Enhance security through use of public keycryptography
Push a payment to the payee and not pullfunds from general account of the U.S.
Leverage Internet for its strength as ubiquitous
communication vehicleIncrease payment choices for U.S. Treasurypayees
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E-Billing
Customers are either individuals orcompanies
Two common models of e-billingBiller directcustomer receives bill from asingle merchant
Third-party consolidatorspresents bills frommultiple merchants
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Managerial Issues
In the B2C world, understand your customersand products
In the B2B world, keep an open mind aboutonline alternatives
In-house or outsource
Security continues to be a major issue