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Online Monetary Transactions

Kazan State UniversityInstructor: Sasa Dekleva

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Outline Credit cart transactions

Transaction processing Enablers Fraud

Digital currencies E-Wallets Peer-to-peer payment Smart cards Micropayments Business-to-business transactions E-billing Payment standards

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Introduction Secure electronic funds transfer is

crucial to e-commerce Examination of how individuals and

organizations conduct monetary transactions on the Internet

Credit-card transactions, digital cash and e-wallets, smart cards, micropayments and electronic bill presentment and payment

Electronic-payment enablers

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Credit Card Transactions Popular form of payment for online purchases

Initial resistance due to security concerns 95% of retail purchases paid for by credit cards

To accept credit-card payments, a merchant must have a merchant account

Traditional merchant accounts accept only POS POS (point-of-sale) transactions(point-of-sale) transactions

Card-not-present (CNP) transactionCard-not-present (CNP) transaction Merchant does not see actual card being used in the

purchase The merchants are liable for chargebacks

a transaction for which the card-issuing institution will not be paid

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Online Credit-Card Transaction AuthorizationAuthorization

The money is available to complete the transaction Acquiring bank or processorAcquiring bank or processor

The bank with which the merchant holds an account Issuing bankIssuing bank

The bank from which the buyer obtained the credit card, and the credit-card association

Verification Money issued to merchant after

product/service is distributed

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Online Credit Card Transaction Step 1

Consumer makes a purchase at an online store, credit card information received by e-store

Step 2 Credit card information is sent from the merchant to

the acquiring bank Step 3 and Step 4

The issuing bank accepts the transaction and the authorization code is sent back

Step 5 The merchant ships the product and payment is

issued

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Options for Enabling Internet Payments Develop in-house transaction

processing capability by building the connections with in-house

resources purchasing payment-processing software

Outsource the process to third-party gateway services

Outsource payment processing as part of an outsourced e-commerce solution

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In-House/Software Solution Advantages

organization maintains control of the process in-house is not vulnerable to potential outages by outsourced

processors Disadvantages

high initial costs implementation takes time requires in-house e-commerce expertise requires 24 x 7 system monitoring

Providers of payment processing software include: IBM, Trintech, HP Verifone, PaylinX, Atomic Software, Spyrus and ICVerify and Tellan

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Outsourced Payment Gateway Solution Advantages

low start-up costs is quick to implement customers pay only for transactions that are

processed requires few in-house resources will scale as transaction volume increases technical enhancements are handled by

outsourcer flexibility exists for selecting acquiring bank

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Outsourced Payment Gateway Solution Disadvantages

control is in the hands of the outsourcer vulnerability to possible system outages may be costly over time when transaction

volumes become large Providers of outsourced Internet payment

gateway services include CyberCash, Signio CyberSource, iTransact, Vitessa, SkipJack, ATS Gateway, WorldPay, Authorize.net and First Ecom.com

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E-Commerce Hosted Solution Advantages

low initial costs nonstrategic functions are outsourced

Disadvantages control and customized applications are limited transaction costs may be high

Many ISPs and ASPs provide merchant e-commerce and payment hosting solutions and the number is growing rapidly; Earthlink, PSINet, Mindspring and ICOM are just a few

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Online Credit-Card Fraud Chargeback

When a credit-card holder claims a purchase was made by an unauthorized individual, or when a purchase was not received

The charges in question are not the responsibility of the credit-card holder

On the Internet, neither a scan of the card nor a signature is registered and the cost is incurred by the merchant

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Digital Currency Digital cashDigital cash

Stored electronically, used to make online electronic payments

Similar to traditional bank accounts Used with other payment technologies (digital wallets) Alleviates some online credit-card transactions security

fears Allows those with no credit cards to shop online Merchants accepting digital-cash payments avoid credit-

card transaction fees Early e-cash methods have failed

First Virtual left the business DigiCash failed to attract interest in its architecture CyberCash terminated its CyberCoin e-cash program

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Digital Currency Gift cash, often sold as points, can be

redeemed at leading shopping sites An effective way of giving those without credit cards,

the ability to make purchases on the Web Flooz

Points-based rewards Points are acquired for completing specified tasks

including visiting Web sites, registering or buying products

Points can then be redeemed Beenz

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E-Wallets E-walletsE-wallets

Keep track of your billing and shipping information so that it can be entered with one click at participating sites

Store e-checks, e-cash and credit-card information Credit-card companies offer a variety of e-wallets

Visa e-wallets MBNA e-wallet allows one-click shopping at member sites Entrypoint.com offers a personalized desktop toolbar that

includes an e-wallet A group of e-wallet vendors have standardized

technology with Electronic Commerce Modeling Electronic Commerce Modeling Language (ECML)Language (ECML)

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Alternate Consumer Payment Options Checks or money orders through the mail Cash on delivery (COD)Cash on delivery (COD) Debit cards

Offer an alternative for card-holders to access their accounts

Funds are instantly deducted from checking account Can withdraw cash from Automatic Teller Machines (ATMs)Automatic Teller Machines (ATMs)

Checking-account numbers Companies such as AmeriNet allow merchants to accept

checking-account numbers as a valid form of payment AmeriNet provides authorization, account settlement,

distribution and shipping (fulfillmentfulfillment) and customer service inquiries

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Peer-To-Peer Transactions Allow online monetary transfers between consumers eCash allows the transfer of digital cash via e-mail between

two people who have accounts at eCash-enabled banks PayPal (acquired by X.com) offers X paymentsX payments

Allows user to send money to anyone with an e-mail address Can be used to enable credit-card payment for auction items in

real timereal time (the transaction begins processing immediately after it is initiated), reducing the risk of fraud or overdrawn accounts

BillPoint (Wells Fargo/eBay venture) Allows buyers to submit electronic payments to sellers’ checking

accounts Tradesafe.com (partnering with Fleet Bank) larger

transactions, B2B Other providers: ProPay, eMoneyMail (BankOne), eCount,

MoneyZap (First Data Corp.), PayMe.com

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P2P Payments Two primary P2P methods

Funds are moved from one consumer’s bank account to another at the time of the transaction

cannot be repudiated easily buyers have no recourse for faulty sales because sellers are

not validated by the payment providers a "buyer beware" situation

Individuals receive credit card payments P2P credit card payments enable buyers to dispute

transactions sellers are more likely to actually receive payments because

a buyer's fear of fraudulent sellers is reduced payers credit card numbers are hidden from payees no wait for payments to arrive fees are higher than for direct account transfers

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P2P Payments Most person-to-person payment services work via

e-mail The sender gives a bank-account or credit-card number to

the service The service sends the recipient an e-mail alert The recipient can then have the money transferred to his

or her bank account, or receive a paper check NYCE's system eliminates these cumbersome

procedures Its solution would enable financial institutions and their

customers to make real-time P2P payments via automated teller machines (ATMs) Web-accessible personal computers other devices

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P2P Providers X.com (acquired PayPal.com) ProPay BillPoint (Wells Fargo/eBay venture) TradeSafe (partnering with Fleet Bank) eMoneyMail (BankOne) eCount MoneyZap (First Data Corp.) PayMe.com

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Smart Cards Smart cardSmart card

Card with computer chip embedded on its face, holds more information than ordinary credit card with magnetic strip

ContactContact smart cards To read information on smart cards and update information,

contact smart cards need to be placed in a smart card readersmart card reader ContactlessContactless smart cards

Have both a coiled antenna and a computer chip inside, enabling the cards to transmit information

Can require the user to have a password, giving the smart card a security advantage over credit cards

Information can be designated as "read only" or as "no access"

Possibility of personal identity theft

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Inside a Smart Chip

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Business Applications Debit/Credit Cards Electronic Purse Transportation Health Telecommunications

Loyalty Pay-TV Network Security ID/Access

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Mobile Communication Applications Typical Wireless intranet services include:

e-mail secure access to corporate databases stock trading mobile banking ticketing shopping betting

Subscriber identity module is critical; it performs: network identification and user authentication additional security layers storage and execution of user-configurable applications

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M-Commerce Leonia Bank of Finland

Offers Internet banking customers SIM cards for their GSM phones with an embedded digital certificate

Consumers to identify themselves as they conduct financial transactions via a mobile phone

Telecom Italia-Mobile Issued over 3 million smart cards for its customers'

handsets last year SIM cards identify customers Telecom Italia offers services such as mobile

banking, audible e-mail, and computer games

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Advantages of Using Smart Cards There are three reasons to move to chip:

fraud can be reduced because: chips are harder to duplicate than magnetic stripes the chip can hold customer data that can foil criminals

processing costs are reduced as merchants reduce the frequency of calls into a central database to check a cardholder's credit

new features can be added to smart cards to generate new revenue and to retain customers

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Micropayments Credit card transactions are too expensive for

payments below $10 MicropaymentsMicropayments Single-click purchasing

Requires a password and one mouse click vendors typically receive a 10 to 35 percent share of the

purchase price Several vendors

QPass gathers charges for a user's purchases into a single monthly credit card charge

Cha Technologies uses preloaded accounts, billing an amount (typically $20) to a consumer's credit card account

Trivnet and iPin are signing up ISPs to bill their customers for Internet purchases

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Visa Cash A stored value card contains money stored as

electronic value The cardholder inserts the card into a terminal and

presses a button to deduct the purchase amount There is no personal identification number (PIN), no

signature, and no identification Visa Cash issues three types of cards:

disposable (less expensive to manufacture and process) reloadable multiapplication (consumers have the advantage of stored

value on a credit, debit, or ATM card that they already have) Visa Cash is promoting Common Electronic Purse

Specification (CEPS)

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Strengths Offers several security options Uses existing settlement infrastructure Offers disposable and reloadable cards Can be combined with debit, credit, and

multiapplication cards Strength of Visa brand Reduces cash handling costs No person-to-person transfers Physical and virtual world use

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Limitations Still Mostly in the Pilot Stage Investment in Specialized Terminals Fees for Low-Value Transactions

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Visa Cash Accountable versus non-accountable systems Open versus closed systems How Visa Cash Works?

The transaction flow depends on the organization supporting Visa Cash

Funds are loaded on the chip; no online authorization is required

Consumer initiates the purchase by inserting a card into a small terminal at the point of sale

The consumer verifies the purchase amount by pushing a single button

At a vending machine, the consumer simply inserts the card at a machine and makes a selection

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Visa Cash Sample Ranges

ProductsProducts Memory Memory CapacitCapacity y (bytes)(bytes)

FeaturesFeatures

Visa Cash Disposable 416 Visa Cash Disposable electronic purse

Visa Cash Reloadable 1K Visa Cash Reloadable electronic purse plus Easy Entry debit/credit functions

Visa Cash Multifunctions

2K Visa Cash Reloadable plus Easy Entry plus Multifunctions

Visa Cash Multifunctions Loyalty

2, 4, 8K Visa Cash Reloadable plus Multifunctions plus Visa Loyalty

Visa Cash Multifunctions Public Key

4, 8K Visa Cash Multifunctions plus public key

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How Visa Cash Works

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Business-to-Business (B2B) Transactions Business-to-business (B2B) transactionsBusiness-to-business (B2B) transactions

Fastest growing sector of e-commerce payments Payments are often larger than B2C transactions and

involve complex business accounting systems PaymentechTM

Payment solution provider for Internet point-of-sale transactions

Brick-and-mortar and electronic merchants choose from transaction-processing options including debit cards, credit cards, checks and EBT authorization and settlement

EBT (Electronic Benefits Transfer)EBT (Electronic Benefits Transfer) Defined by the USDA as the electronic transfer of

government funds to retailers for the benefit of the needy

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B2B Transactions eCredit provides real-time, credit-transaction

capabilities of B2B size Clareon facilitates B2B transactions by

providing digital payment and settlement services

Payment is digitally signed, secured and authenticated via digital payment authentication digital payment authentication (DPA)(DPA)

Compatible with all enterprise resource planning enterprise resource planning (ERP)(ERP) systems and can adapt electronic records for companies, banks and each member of a given transaction

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B2B Transactions Electronic consolidation and reconciliation of

the business transaction process Companies can keep track of a transaction from

order-to-payment settlement while reducing administrative costs, errors, waste and complexity in the supply chain

eTime Capital Order-fulfillment providersOrder-fulfillment providers

Companies attempting to bring supply chain expertise and logistical services to Internet businesses 

Internet-based electronic B2B transactions will augment, but not replace, traditional Electronic Electronic Data Interchange (EDI)Data Interchange (EDI) systems

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TradeCard Provides a global B2B e-commerce infrastructure

Cross-border data management and payment Buyer creates pre-formatted electronic purchase

order and presents document to seller Purchase order data stored electronically in

TradeCard database, and electronic invoices and packing slips are produced from data

Uses a patented "data compliance engine" to check documents against original purchase order

If discrepancies are found, concerned parties are notified immediately and can negotiate to resolve the conflict

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TradeCard TradeCard awaits delivery confirmation from a

third-party logistics services provider (3PL)third-party logistics services provider (3PL) Industry terminology for a shipping company

When confirmation is received and compliance met, TradeCard completes the financial transaction by sending request for payment to the buyer’s financial institution

TradeCard enables large-scale and large-dollar commerce without credit-card payment through direct interaction with existing financial institutions

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Developing Payment Standards Essential to the success of e-commerce Businesses offering domestic and

international services must have assurance that payment will be received, that it is secure and that it is valid

Open Financial Exchange (OFX) Developed and presented by Intuit, Microsoft

and Checkfree in 1997 To serve as a standard mechanism for the

exchange of financial information

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Jalda Developed by Ericsson An open standard online payment system that

connects content providerscontent providers (anyone selling a good or service on the Internet) with an Internet Payment Provider (IPP)Internet Payment Provider (IPP)

Accommodates transactions involving small fees

Purchases can be made through the Web and using wireless devices

A PIN code authorizes the transaction

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Paybox: Pan-European Mobile Payments Paybox uses the mobile phone as an

authorization and confirmation device Payments can be made to:

e-commerce Web sites directly to merchants as cash transfers between individuals

Current business model: charge a small consumer subscription fee (5 euros

per annum) charge merchants for each transaction with an

average commission of around 3 percent

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Paybox Payment ProcessA Web Paybox transaction operates as follows:1. A user selects a product to purchase on a Web site and opts to pay

via Paybox2. The user enters his/her mobile phone number as a payment

identifier (for users unwilling to disclose their mobile number to merchants, Paybox provides an alternative ID)

3. The merchant's system contacts Paybox with the payment request and user ID

4. The Paybox IVR system calls the user's mobile phone and asks the user to enter a PIN

5. The user enters a PIN number to confirm the payment6. After a few seconds the user receives an SMS message as payment

confirmation7. Payments are debited from the user's bank account8. Paybox consolidates merchant payments and forwards them twice

a month

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Paybox Technology Paybox uses:

a centralized Envox interactive voice response (IVR) system that uses a voice over IP European backbone provided by KPNQwest

application code is built and maintained in-house and runs in an Apache/Tomcat environment hosted on Hewlett-Packard servers using an Oracle database

Technically complex system that has required more than 50 person years of effort to develop to its current state

Support is provided by a combination of e-mail, call centers and Web FAQ pages

Peak performance of this architecture is claimed to be around 1,000 payments per minute

Can be scaled to support future systems exploiting data-enabled phones at rates of up to 10,000 transactions per minute

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Paybox History and Ownership Established in Germany in 1999 In the second half of 2000, expanded into Spain,

then Sweden and Austria United Kingdom planned to follow in late 2001 In the first half of 2001, there were approximately

300,000 consumer subscribers and 5,000 merchants in Germany with a much smaller number in other countries

Paybox is a private company; 50 percent is owned by Deutsche Bank and 4.8 percent by debitel

Competitors: PayPal (United States), Movilpago and Caixamovil (Spain), Sonera Mobile Pay (Finland), and Mint (Sweden)