Electronic Payment Systems

Digital Tokens

Digital / Electronic token:- Cash that is backed by bank

3 types-

1. Cash or real-time

2. Debit or pre-paid

3. Credit or post-paid

Dimensions of analyzing

• The nature of transaction for which the instrument is designed• The means of settlement used

– Credit, electronic bill payment, cash• Approach to security, anonymity and authentication• The question of risk

Electronic cash (e-cash)

• E-cash is an electronic payment option

• The cash could be stored on a remote computer’s memory, in smart cards,

or in other easily transported standard or special-purpose devices

Remote computer’s memory:-

• The user downloads electronic money from his bank account using

special software and stores the E-cash on his local hard drive. • To pay a WWW merchant electronically, the E-cash user goes

through the software to pay the desired amount from the E-cash "wallet" to the merchants local hard drive ("wallet") after passing the transaction through an E-cash bank for authenticity verification.

• The merchant can then pay its bills/payroll with this E-cash or

upload it to the merchant's hard currency bank account. • The E-cash company makes money on each transaction from the

merchant (this fee is very small, however) and from royalties paid by

banks which provide customers with E-cash software/hardware for a

small monthly fee. • Transactions between individuals would not be subject to a fee.

Properties of e-cash

1. Monetary value

2. Interoperability

3. Retrievability

4. security

E-cash in action

• Digital signature• Private & public keys• Bank supplies its public key to customers

Purchasing e-cash from currency servers

1. Establishment of an account

2. Maintaining enough money in the account to back the purchase

Using the digital currency

• Advantage of e-cashInstant settlement

• Drawback of e-cashInability to divide into smaller amountsCurrency fluctuations

Smart Cards

A "smart card" is a microprocessor card of credit card dimensions or smaller, with various tamper-resistant properties (e.g. a secure crypto-processor, secure file system, human-readable features) and is capable of providing security services (e.g. confidentiality of information in the memory).

In Japan, France, Germany, Singapore smart cards are used to pay public phone calls, transportation etc.

Types of smart cards

1. Relationship based smart cards2. Electronic purses

Relationship based smart cards

It is an enhancement of existing card services that a financial institution

delivers to its customers via a chip-based card

Services

1. Access to multiple financial accounts- debit, credit, investment

2. Variety of functions- cash access, bill payment, balance enquiry

3. Multiple access options at multiple locations using multiple devices- ATM, personal computer, PDA

4. Info of card holder

Electronic purses

Wallet sized smart cards embedded with programmable microchips that stores sums of money for people to use

Purse can be loaded with money at an ATM

Once depleted the purse can be recharged with more money

It can be used to pay the bills

Small bills like photocopies, laundry , parking fees etc

Credit based payment

3 categories

1. Payments using plain credit card details

2. Payments using encrypted credit card details

3. Payments using third party verification

Encryption & credit cards

Sequence of steps for secure transaction

1. Customer presents card to the merchant2. Merchant validates customer’s identity as the owner of the card3. Merchant relays credit card charge & signature to its bank4. Bank relays this info to customer’s bank for authorization approval5. Customer’s bank returns authentication & authorization to the

merchant

Processing payments using encrypted credit cards

Customer

Merchant's server

Send encrypted credit card number

Send information

Online credit card processors

Customer’s bank

Monthly purchase statement

verify

authorize

OKCheck for credit card

authenticity and sufficient funds

Third party processor & credit card

• Consumers register with a third party on the internet (OTPPs) to verify electronic micro transactions

• Example of companies:-

First Virtual (http://www.fv.com/)

Open market (http://www.openmarket.com/)

OTPP- On-line Third Party Processors

OTPPs process

1. Consumer C acquires an OTPP a/c number

2. C requests for item from merchant M by quoting OTPP a/c number

3. M contacts OTPP payment server with C’s a/c number

4. OTPP verifies a/c number & checks for funds

5. OTPP sends an electronic message to the buyer. Buyer responds as Yes, No , Fraud

6. If Yes, OTPP informs M

7. OTPP will not debit buyer’s a/c until it receives

confirmation of purchase completion

Online payment process using a third party processor

customer merchant

Merchant’s server

Client browser

request

Payment server

Credit cards

visa

Charge cards

American express

Bank accounts

Debit cards

Private label cards

Digicash

On-line third party processors with links to multiple payment systems

verification authorization

Risk in electronic payment system

• Mistakes & Disputes• Privacy issues• Credit risk

Designing electronic payment systems

• Privacy• Security• Intuitive interfaces• Database integration• Brokers• Pricing• standards