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Stored Value System

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					Electronic Commerce




   Digital money and electronic payment
   I. What is money?
      • What is digital money?
      • A digital money system
      • Ecash and stored value cards
      II. Electronic payment systems
         • What types of transaction schemes are being
           used?
         • How can payments be settled?



                             School of Library and Information Science
Electronic Commerce




  I. What is money?
  “Money is in reality a symbolic representation of value,
  rather than true value itself
  [It is] an institution for a transparent exchange of goods
  and services based upon a convenient unit of
  transaction ... universally accepted within a given
  societal group
  Today not all money is tangible: increasingly, information
  about money is becoming more important than money
  itself”
  Srivastava, L. and Mansell. R. (1998). Electronic Cash and the
     Innovation Process: A User Paradigm



                                   School of Library and Information Science
Electronic Commerce



 “Money was originally a physical substance .... It could …
 be alive, as cattle were one of the oldest forms of money.
 Today although much of the money used by individuals …
 is still in the form of notes and coins its quantity is small
 in comparison with the intangible money that exists only
 as entries in bank records.
 If experiments with … digital cash succeed then perhaps
 coins and banknotes will become as obsolete as cowrie
 shells. If that happens the change in the nature of money
 will surely have significant effects on society.
 The challenge … is to ensure that such changes are
 beneficial to … society in general.”
 Davies, R. (2003). Electronic Money, or E-Money, and Digital Cash
 http://www.ex.ac.uk/~RDavies/arian/emoney.html


                                  School of Library and Information Science
Electronic Commerce



“Money” is only a state of Mind; not a reality in, of, or for,
itself. Many people often seek it as if it were the real or the
only ends to be obtained through one’s efforts. If money
remains a state of Mind, therefore a spiritual reality and not
an end in itself, then you always will have what you truly
need and deserve. Money as an energy principle of spiritual
reality, naturally flows to us as we earn a right livelihood.
Be concerned with the quality of the service you give to
others … and you will be working with the flow.
Money flows in unseen channels like electricity flows
through wires. Because it is spiritual energy in motion, we
never really have “possession” of it. To be preoccupied
with possessing it … squanders our own Life energy…
McMurphy, J. (2002). What is money?
http://www.innerself.com/Money_Matters/What_is_Money.htm


                               School of Library and Information Science
Electronic Commerce



 Paper money is guaranteed by law to have
  redeemable stored value
   It is a medium of exchange and a measure of
   value
   This gives us confidence to use checks, credit and debit
   cards and to use electronic transfer of funds
 In large-scale wholesale transactions, money can be seen
 as “transactional information”
   It is transmitted electronically over closed, wire transfer
   systems
  Now, money in retail transactions is becoming electronic
   Digital cash is an electronic “proxy” for paper $


                               School of Library and Information Science
Electronic Commerce




  Historically, precious metals became the
  standard of value backing money
    They became more important than other commodities
    because they are
     Portable , divisible, durable
     Homogeneous, recognizable, secure
     Stable in value
     Valuable and available in small amounts
    The world adopted the gold standard as the basis of the
    value of money during the 1800s



                               School of Library and Information Science
Electronic Commerce


 Goods and services are no longer purchased with other
 goods and services (barter), or gold or silver (early money
 economy)
 We use paper “fiduciary monies” or credit instruments
   These instruments are represented by paper, plastic, or
   metallic tokens
    Checks, bank notes, government issues
    A credit card is a written promise to pay
   They are fully functional forms of money with an
   exchange value rated in terms of the basic unit of
   money (usually a fixed quantity of gold or silver)
   These are offset against each other in the banking
   system, so little gold or silver needs to be transferred

                              School of Library and Information Science
Electronic Commerce



  Hard currency (notes and coins) is considered
  the most liquid monetary asset there is
    It can quickly be turned into money (liquidity)
    This is very convenient, but currency does not hold its
    value as well as other assets
     It does not earn interest and its real value drops during
     periods of inflation
     A dollar remains a dollar, but due to inflation its
     purchasing power will be less
  Less liquid assets (savings, art, land) earn interest or
  appreciate in value
    They are not as affected as money is by inflation,
    although they are harder to convert to money

                                School of Library and Information Science
Electronic Commerce


  The value of money depends on the confidence of those
  who use it
    The dollar has value because it is widely accepted as a
    means by which to exchange goods and services
  Money has three main functions:
    Means of exchange
     Without money, we would have to exchange goods
     and services directly (barter)
    Unit of measurement
     Money allows us to compare the value of goods and
     service
     A standard for pricing goods and the means of
     buying and selling them

                             School of Library and Information Science
Electronic Commerce


  Money is
    A unit of measurement (more)
     We can compare costs, income, and profit across time
     It is a foundation of the accounting system and allows
     us to plan and make economic decisions
    A means of storing purchasing power for future use
     As a reserve, money allows us to accumulate savings
     over time and to lend those savings to someone else
     It makes it much simpler for us to make contracts
     We use it to promise to do something now for payment
     in the future
  The Bank of Canada (2002). What is money?
  http://www.bankofcanada.ca/en/backgrounders/bg-m1.htm

                                School of Library and Information Science
Electronic Commerce




 “Electronic money and electronic payments
 systems for retail transactions are commanding
 widespread attention.
 These systems, wherein neither legal tender, nor paper
 checks, nor credit-card numbers change hands at the
 time of purchase, have already started to spread across
 the globe. They offer significant and profitable
 opportunities for changing the way consumers pay for the
 widest possible range of goods and services.”
 United States Department of the Treasury Conference (1996). An
 Introduction to Electronic Money Issues. Toward Electronic Money
 and Banking: The Role of Government. p. 1.




                                 School of Library and Information Science
Electronic Commerce




  Electronic money is a store of monetary value, held in
  digital form, which is available for immediate exchange in
  transactions
    It is a new form of currency that acts as a generalized
    medium of exchange
      Gold --> Paper $ --> Plastic --> Digital cash
    It is an electronic replacement for physical cash (a file)
    It is easily stored, transferred, and difficult to forge
    It has no intrinsic value: “numbers are money”
      As with paper $, there is a “promise” to convert it to
      physical cash


                                School of Library and Information Science
Electronic Commerce




  “Commodity money circulates because the
         stability of the society gives ground for
         confidence that the money will continue to be
  accepted habitually in exchange for goods and services.
  Similarly, the credit instruments of any government, bank,
  corporation, firm, or individual will circulate more or less
  widely in proportion to public confidence in its promises
  to pay.
  Likewise, a possible introduction of a digital cash system
  will require a period of long-term trust”
  Kienzle, J, and Perrig, A. (1996). Digital Money: A divine gift or Satan's
  malicious tool?
  http://lglwww.epfl.ch/~jkienzle/old/Digital_Money/node10.html



                                     School of Library and Information Science
Electronic Commerce




 Digital cash is a “payment message bearing a digital
 signature which functions as a medium of exchange or
 store of value”
   It is an idea recorded in the hard drive of a computer
 To have value, digital cash must be exchangeable for
 ordinary cash
   It must be be exchangeable for goods or services priced
   in terms of ordinary or digital cash
 Like a typical check, it represents an obligation of a
 private company rather than the central bank or treasury
   Typically it will not be issued by the government


                              School of Library and Information Science
Electronic Commerce




     Berentsen, A. (nf). Digital Money and Monetary Control. ISOC.
     http://www.isoc.org/inet98/proceedings/ 3f/3f_2.htm

                                  School of Library and Information Science
Electronic Commerce


  There are two types of e-money
  Identified e-money
    Contains information revealing the identity of the
    person who originally withdrew it from the bank
    It enables the bank to track the money as it moves
    through the economy (like credit cards)
    You request digital cash from your bank
     The bank signs a file (an amount of emoney) with its
     secret key and sends it to you
      The amount is debited from your account
     You verify this signature with the bank’s public key
      You know it’s valid and you can spend it

                              School of Library and Information Science
Electronic Commerce


  Banks will have multiple private keys
    Different denominations would be signed with different
    private keys
  When the bank issues the cash it
    Subtracts that amount from your account
    Records the identifying number of the electronic note
    and who it was issued to
  When making a purchase, the shop contacts the bank to
  verify that the money is a valid
    The bank checks its records to see if it is a valid note
    and to ensure that the note has not already been spent
    If the verification occurs, the bank credits the shop’s
    account, debits your account, and you get the stuff

                               School of Library and Information Science
Electronic Commerce


  This system provides security for all parties
    Because of the bank’s digital signature, the customer
    knows that the bank note is valid
    The shop can verify that the note is legal tender
    The bank can ensure that the note is not spent more
    than once
  The spender of the electronic note can be traced because
  the bank keeps a record of each note spent
  In this way anybody who cheats can easily be tracked
  down
  Since all financial transactions can be traced, law
  enforcement can more easily investigate fraud, money
  laundering, tax avoidance and other irregularities

                              School of Library and Information Science
Electronic Commerce


 Anonymous e-money is known as digital cash and works
 like real paper cash
   Once withdrawn from an account, it can be spent or
   given away without leaving a transaction trail
   It is created with blind signatures
   A blind signature allows a person to get a file digitally
   signed by another party without revealing information
   about the file to the other party
    It involves multiplying the file by a random number and
    encrypting it with the other’s public key
    They decrypt the file, sign it and return it
    Divide by the random number and restore the file with
    the signature

                               School of Library and Information Science
Electronic Commerce


 Blind signatures
 You create your own emoney “coins” which are tagged
 with ID numbers randomly generated by your emoney
 software
   The coins are “blinded” by a random number used to
   multiply the ID numbers (but not the value of the coins)
   They are sent to the bank, each in its own digital
   “envelope”
   The bank encodes the blinded numbers with its private
   key, debits your account, and sends them back to you
   Your emoney software removes the “blinding”
 You now have a valid emoney and since your software has
 removed the “envelope,” the bank can’t track the your use
 of the money

                              School of Library and Information Science
Electronic Commerce




  There are two varieties of each type of e-money
  Online emoney requires interaction with a bank via
  modem or network to conduct a transaction with a third
  party
  Offline emoney means you can conduct a transaction
  without having to directly involve a bank
    This type of e-money (true digital cash) is the most
    complex form of e-money because of the double-
    spending problem
    Once I give it to you, I should not be able to spend it
    again
     How can we prevent this?

                               School of Library and Information Science
Electronic Commerce

                          Types of emoney

                           Online                  Offline


  Identified          Exists as a file         On a smart card
                      Traceable to you         Traceable
                      Tracked by bank          Renewable



  Anonymous           Exists as a file          On a smart card
                      Not traceable             Not traceable
                      Tracked by bank           Hard to track




                                    School of Library and Information Science
Electronic Commerce



 A digital money system requires
 Security
   Two people should be able to exchange digital cash
   without any party being able to alter or reproduce the
   electronic token
   The transaction protocol must ensure high-level security
   with sophisticated encryption techniques
    This involves using private key encryption
    The authentication of sender and receiver involves
    digital signatures
   Online verification can prevent double-spending, or
   other off-line techniques must be used


                              School of Library and Information Science
Electronic Commerce



 User-friendliness
   Users should not have to understand the cryptographic
   techniques involved in the exchange
    The workings of the protocol should be transparent to
    them
   Digital cash should be simple to use
    It should be easy to spending perspective and to accept
    as a form of payment
   Complicated systems are difficult to administer and
   raise the failure rate due to errors of the user
    Simplicity leads to a critical mass of users and this
    leads to wide acceptability


                              School of Library and Information Science
Electronic Commerce



  Portability
    People should be able to easily carry their digital cash
    and exchange it within alternative delivery systems
     Non-computer-network delivery channels should be
     able to handle digital money
    The security and use of digital cash should not be
    dependent on any physical location
     The cash can be transferred through computer
     networks and off the computer network into other
     storage devices
    Digital wealth should not be restricted to a unique,
    proprietary computer network


                               School of Library and Information Science
Electronic Commerce



Transferability
  Digital cash should be transferable to other users
    If I pay the bill for three friends, they should be able to
    easily transfer their share of the bill to me
  Peer-to-peer payments should be possible without a third
  party
    Neither party should be required to have registered
    merchant status
    Neither party should have to be online to do this
    Digital money can then be used for gifts, charity, or tips
    Other person-to-person payments become possible, like
    payments to children, friends, colleagues or neighbors

                                School of Library and Information Science
Electronic Commerce




  Anonymity
  Anonymous digital cash allows personal financial
  privacy
  It is untraceable
    A digital cash withdrawal cannot be associated with its
    subsequent deposit
  Transactions made with it are unlinkable.
    It is impossible to associate two different digital cash
    transactions made by the same person with each other
  Grabbe, J.O. (nd). Digital Cash and the Future of Money
  http://www.aci.net/kalliste/dcfutmo.htm



                                   School of Library and Information Science
Electronic Commerce



  Digital money has to preserve the privacy of those
  engaged in the transaction
    The anonymity of physical cash should be carried into
    this world
    Encryption separates payment information from buyer
    identity
     Only the value is transferred
  It must be non-refutable
    Electronic receipts can be stored on the device
  It must be divisible
    Digital cash in a given amount must be able to be
    subdivided into smaller amounts (fungible)

                              School of Library and Information Science
Electronic Commerce



 You must be able to write a digital check
   You should be able to fill in the amount of money that
   you want to pay onto some sort of digital form
   This form can be easily transferred to another party
   There must be a record of this transaction
 Digital cash should last forever
   You should be able to store it somewhere safe for
   years and then be able to retrieve it for use
   It should not expire
    It should maintain value until lost or destroyed provided
    that the issuer has not debased the unit to nothing or
    gone out of business

                              School of Library and Information Science
Electronic Commerce



  It must have value, acceptability, availability, security,
  and convenience
     Many retailers and banks must accept it
     We trust that it can be converted
     It must be easy to use
  It should minimize transaction costs
     Non-cash payments involve verification and
     authentication for each transaction (ex: checks)
     Offline, cash is used for 85% of all transactions, even
     though it accounts for 5% of the value of these
     transactions
      Digital money will serve a similar function


                               School of Library and Information Science
Electronic Commerce


  How is electronic money (e-money) possible?
  Cryptography and digital signatures make it possible
    Banks and customers have public-key pairs
    They use public keys to encrypt (security) and private
    keys to sign (identification) blocks of digital data that
    represent money orders
    A bank “signs” the orders using its private key and
    customers and merchants verify the signed money
    orders using the bank’s public key
    Customers sign deposits and withdraws using their
    private keys and the bank uses their public keys to
    verify the signed withdraws and deposits
  Miller, J. (2002). E-money mini-FAQ (release 2.0).
  http://www.ex.ac.uk/~RDavies/arian/emoneyfaq.html

                                 School of Library and Information Science
Electronic Commerce




  E-cash transmutes between digital and actual money as
  transactions proceed between various entities
  http://www.byte.com/art/9801/img/018cs7a2.htm

                                 School of Library and Information Science
Electronic Commerce
                      A typical ecash transaction




                 http://filebox.vt.edu/users/ licai/ch2.htm

                                    School of Library and Information Science
Electronic Commerce



  Guiding principles of ecash
    Independence: its security must not depend on its
    existence in any physical location
    Security: it can’t be reusable and can’t be respent
    Privacy: it can’t be traced and must protect the privacy
    of the users
    Offline payment: merchants should not have to have a
    net connections to make it work
    Transferability: it must be able to be moved from one
    person to another without traces of identity
    Divisibility: it must be able to be broken into smaller
    amounts


                                School of Library and Information Science
Electronic Commerce


 How it might work
 It depends on public-key cryptography and digital
 signatures
 Banks and customers have public-key encryption keys
   They use their keys to encrypt (for security) and sign
   (for identification) blocks of digital data that represent
   money orders
 A bank “signs” money orders using its private key
   Customers and merchants verify signed money orders
   with the bank's widely published public key
   Customers sign deposits and withdraws using their
   private key and the bank uses the customer's public key
   to verify the signed withdraws and deposits


                               School of Library and Information Science
Electronic Commerce



  How ecash works
  Customer generates an electronic banknote with a
  random serial number
    A “blinding factor” is applied to the serial number so
    the bank cannot trace the banknote in the future
    A third party to handle and sign the message without
    being able to see the actual message.
    The blinded message is untraceable
  Customer sends the blinded e-banknote to the bank
  The bank deducts the amount from the customer's
  account, signs the banknote (encrypts it) and sends it
  back to the customer


                              School of Library and Information Science
Electronic Commerce




   Customer removes the blinding factor from the note
   and uses it to make a purchase at a shop
     The shop verifies the authenticity of the note using
     the bank’s public key and sends it to the bank
   The bank checks the note against a list of notes
   already spent
     If it’s good, it deposits the money into the shop’s
     account, and sends back a confirmation to the shop
   The shop then sends out the goods to the customer




                              School of Library and Information Science
Electronic Commerce
                         How ecash works




          http://www.cs.newcastle.edu.au/.../ ecash/ecash.html
                                  School of Library and Information Science
Electronic Commerce




 Why use digital $?
 Greater efficiencies and lower costs for businesses
 Ecash eliminates the costs of handling coins and paper
    The estimated cash handling cost for U.S. retailers and
    banks is over $60 billion annually
    “Studies have shown that a financial institution saves
    between $.75 and $1.25 for each payment converted
    from a deposit made with a teller to Direct Deposit”
    “Annual costs savings to the banking industry as a
    result of these new electronic payments should run
    between $350 million and $500 million.”
         -National Automated Clearing House Association

                             School of Library and Information Science
Electronic Commerce



 Ecash provides merchants with cost savings from
    Reduced collection and deposit float associated with
    coin, currency, and checks
    Faster funds availability
    Increased sales due to faster throughput at checkout
    Consumer tend to spend more with stored value cards
    Less tangible cash on hand
    Reductions in some forms of fraud, since devices can
    be fitted with tamper-resistant chips and strong crypto
    protocols
    Micromarketing


                                School of Library and Information Science
Electronic Commerce



Expanding electronic government payments
   The Debt Collection Act of 1996 mandated government.
   use of EFT for all govt. payments, except tax refunds, by
   1999
   It includes anyone who, on or after July 26, 1996:
    Applies for federal or retirement benefit payments;
     Begins employment with a federal agency;
     Enters into a contract or purchase order with the govt.
     Files or renews a grant application
   After 1/1/99, all payments to individuals and businesses,
   including those without accounts at a financial
   institution, must be made electronically

                              School of Library and Information Science
Electronic Commerce




   Digital money is information stored on a computer chip
   in a plastic card or on a personal computer so that it
   can be transmitted over the net
   These products differ in their technical aspects from
   conventional forms of payment
   There are two basic ways of representing the value of
   funds stored on an ecash device:
     Balance-based: a single balance is stored and
     updated with each transaction
     Note-based: electronic “notes,” each with a fixed
     value and serial number, are transferred from one
     device to another


                              School of Library and Information Science
Electronic Commerce



 Stored value cards
 Digital money is a claim on a party, most commonly, the
 issuer, stored in the form of computer code on a credit
 card sized card or on the hard drive of a computer
    Consumers purchase the claim with traditional money
    Consumers exchange the claims for goods and services
    with merchants who are willing to accept the claim as
    payment
 Cards representing such claims often go by the name
 “stored value cards” (SVCs)
    Cards containing computer chips are called “smart
    cards”


                            School of Library and Information Science
Electronic Commerce



 SVCs represent either “closed” or “open” systems
    Closed SVCs are limited to a few outlets regardless of
    location or to many in a relatively small geographic
    area
     An example of a closed-system SVC is the “merchant-
     issuer” model system
     The card issuer and the seller of the goods and
     services are one and the same
     Examples include:
       The farecard used by riders of the subway system in
       Washington, D.C.
       Student smart cards or merchant credit cards


                             School of Library and Information Science
Electronic Commerce




 The user buys a claim on the merchant issuer with
 traditional money and receives digital money in return
    When the user buys goods or services from the
    merchant-issuer, special point of sale (POS) devices
    record the transactions with the merchant
     The POS device reduces the value of the digital money
     recorded on the card by the amount of the purchase
    Although consumers make purchases with digital
    money, the system is linked to the payment system by
    the merchant-issuer’s relationship with its bank




                             School of Library and Information Science
Electronic Commerce




 SVCs that consumers can use at many different
 businesses over a large geographic area are an open
 system
    They work in the same manner as bank-issued closed-
    system SVCs
    One difference is that a greater variety of businesses
    over a relatively larger geographic area accept them
    Another is that there can be third party sellers of digital
    money
     This means bypassing banks in transactions



                               School of Library and Information Science
Electronic Commerce



 There is a second type of open system
    Digital money systems can operate independently of
    banks and outside traditional payments systems
    The user buys digital money from issuers using
    traditional money
    She “spends” it at a merchant, who then sends the
    digital money to the issuer
    It is redeemed with some form of traditional money
    such as a check on a bank balance
    In this system, the digital money does not pass through
    the traditional payments clearing system, but circulates
    outside it


                              School of Library and Information Science
Electronic Commerce



 In expansive open systems, digital money circulates
 among users before being used with merchants, in much
 the same manner as traditional cash
    Users have their own special computer equipment
    allowing them to transfer digital money from one user’s
    card to another
    This “peer-to-peer” transfer does not clear the
    traditional payment system (in contrast to peer-to-peer
    transfers involving paper checks)
    The only points of contact between traditional payment
    systems and digital money is the initial purchase of
    digital money from the issuer with the use of traditional
    money and redemption of digital money by merchants


                              School of Library and Information Science
Electronic Commerce


 Smart cards are a technology for carrying digital money
    Memory cards: data storage space and password/PIN
    access
    Shared key cards: contain a secret key and can
    exchange data with other cards sharing the key
    Signature transporting cards: contain digital “blank
    checks” that can be used in transactions
     They are large pregenerated random number
     sequences that can be assigned a denomination and
     signed
     These are $1.50-$3.50 for the chips and production
    Signature creating cards: can generate the random
    number sequences to use as checks

                              School of Library and Information Science
Electronic Commerce




 Most digital money systems are aiming at universal
 accessibility
    This will depend on the widespread public acceptance
    of electronic cash
    To reach this level of acceptance will require a
    considerable investment by the financial services
    industry and by merchants
 It is expected that these costs will be transferred to the
 end-user




                              School of Library and Information Science
Electronic Commerce




   Digital money and electronic payment
   I. What is digital money?
      • Why use it?
      • Ecash and Stored value cards
      II. Electronic payment systems
         • What types of transaction schemes are being
           used?
         • How can payments be settled?




                               School of Library and Information Science
Electronic Commerce


  Electronically based payment systems have been around
  since the 1960s
    Banks use electronic funds transfer (EFT) to exchange
    “money”
    It is a transfer of debt from one bank to another
      Much of the money held by banks is in the form of
      debts owed by them or to them
      The evidence for this debt is in the bank’s computers
    EFT systems manage the information concerning
    these monetary debts
      They allow rapid and efficient transmission of data
      about these debts between banks and the updating of
      the debt records

                              School of Library and Information Science
Electronic Commerce



  EFT systems and retailer point of sales systems combine
  as EFTPOS (Electronic Funds Transfer at Point-of-Sale)
  The amount of the buyer’s purchase is entered into a
    POS terminal using a plastic card
    The data relating to this purchase are sent to the
    appropriate bank using a telecommunication link
    This bank then deducts the funds from the buyer’s
    account and transfers the amount to the seller’s
    account
    The buyer’s bank credits the seller’s account and
    takes on a debt to the seller
    The system immediately changes the information
    concerning indebtedness and starts charging interest


                             School of Library and Information Science
Electronic Commerce



     General Issues in the banking environment
     Banking regime is a highly complex and interrelated
     global system
     Multiple forces affect the evolution of banking:
        Consumer spending habits
        Interest rates/cost of money
        Federal Reserve policy
        Regulatory regime
     In general, the large and stable banks are losing
     ground to more non-traditional companies and
     services


                              School of Library and Information Science
Electronic Commerce




     Different components of the banking process are
       electronic to differing degrees
     Risk is an impediment, but not a driver
        The elimination of risk through security is not
        sufficient to promote home banking
        Banking is regulated by many different agencies
        (state governments, Federal Reserve, Office of
        the Comptroller of the Currency, FDIC)




                               School of Library and Information Science
Electronic Commerce




   How can payments be settled?
   Debit/Credit
      This refers to the way banks deal with transactions
      Credit: The bank pays the creditor before receiving
      payment from the purchaser
      Debit: The bank receives funds from purchaser
      before paying creditor
       This is a “pre-paid” system




                              School of Library and Information Science
Electronic Commerce



    Immediate/Delayed Settlement
      Here there is a time lag between the clearing of the
      payment and its settlement
        There is a time lag between the payer and the
        intermediary (the bank)
         When you pay off your credit card
       There is also a lag between the receiver and the
       intermediary
         When the merchant gets paid
      The purchaser benefits from the “float”
      The bank charges interest to cover the costs of
      assuming risk for completing the transaction


                              School of Library and Information Science
Electronic Commerce




     Gross/Net
        This is a relationship between clearing and
        settlement
        Gross payment is a one-to-one relation
         Each transaction has its own settlement
        Net payment is many-to-one
         Transactions are “batched”
         Net payment systems have lower operational
         costs (fewer settlements) but higher risks




                              School of Library and Information Science
Electronic Commerce


    Anonymous/Identified
       To what extent must the parties be identified in
       the transactions and settlements?
       Anonymous work well for small transactions but
       are riskier
       There is more need for authentication with large
       transactions
    Fixed/Fraction
       What is the fee structure of the transaction?
       Fixed fees cover the fixed costs of the transaction
       Fractional fees more efficient for risk fees and
       short term credit (microtransactions)


                               School of Library and Information Science
Electronic Commerce




         Types of Services: What do people do?
            Bill payment
            Purchasing instruments
            Transfer of money
            Borrow money
            Seek information (Inquiries, Statements)
            Cheat, steal, and defraud!




                                School of Library and Information Science
Electronic Commerce




    Bill Payment
    Becoming one of the most frequently performed
    activities on home computers
       Drivers include: need for more time, decreasing
       costs of software and hardware, bank promotion
       Generally a replacement for writing a check to
       pay a bill
       This is being extended to mortgage and loan
       payments as well




                              School of Library and Information Science
Electronic Commerce



Bill Payment: institutions generally charge by the
transaction (or a flat fee for a fixed number of transactions)
  Banking institutions, clearinghouses/brokers
Checkfree
  http://www.checkfree.com
  e-Bills are delivered right to your computer
   Involves 100s of companies
  e-Bills give you a real-time payment history who you
  paid, when you paid them and for how much
  You schedule to pay e-Bills at a specific time each month
  or make payments whenever you want
  e-Bill payments are guaranteed

                              School of Library and Information Science
Electronic Commerce




     Purchases
     Focus of most discussions about Internet and other
     electronic commerce
     Payments for purchases tend to be made by
        Credit card
        Debit card
        Stored value card
        Electronic money




                             School of Library and Information Science
Electronic Commerce




     Stored-Value Cards
     Value is actually stored in computer chips
       embedded in a card
        SVCs are considered more secure than credit or
        other bank cards
     Requires specialized hardware at the vendor’s point
     of sale
     Mondex (recently purchased by MasterCard) is one
     of the largest manufacturers




                              School of Library and Information Science
Electronic Commerce




     Experiments have included road tolls and university
     financial aid
     Advantages to merchant include:
        Increased security (both from fraudulent
        customers and from fraudulent employees)
        Lower transaction costs
        No online authorization required
        Avoids costs associated with cash and check
        handling
        Can be efficient for microtransactions



                              School of Library and Information Science
Electronic Commerce




  Credit Cards
  Consumer is issued credit card by issuer (generally a
  bank or its agent)
  Merchant has an account with an “acquiring”
   institution (which allows it to accept credit cards)
     Acquiring Institutions: Citicorp, NaBanco, First Data,
     Bank One, GE Capital, First USA, EDS, Discover,
     American Express
  The processing agent actually generates the
  authorization and processes the charges:
     First Data, Global Payment Systems, VisaNet/Vital,
     Wells-CES , Nova, Checkfree


                              School of Library and Information Science
Electronic Commerce



    How can these transactions be carried out over the
    web?
    1. Customer sends his ID or encrypted credit card
    number to the shop
      Shop sends request for payment to the Credit card
      company, which confirms customer by e-mail
      After the confirmation, payment is made and
      customer is billed, typically conventionally
      Card number itself never goes through the net
      unencrypted


      Security        X             Peer-to-peer -
      Low fees        -             Untraceability -
                             School of Library and Information Science
Electronic Commerce




   2. Person “A” issues an electronic check
      He sends it to person “B” and informs the bank of
      his check
      Person “B” asks for payment from the Bank
      After the confirmation, the bank transfers money
      from person A’s account to person B’s account


      Security        X            Peer-to-peer        X
      Low fees        X            Untraceability -



                             School of Library and Information Science
Electronic Commerce



  Checks are closer to cash than to credit cards, because
  peer-to-peer transfers are possible
     Micro-payments are possible but banks are reluctant
     to process them (high cost of check clearance)
  CyberCash, NetCheck, and others offer digital checks
  which are transferable between individuals
      A customer opens an account in a netbank and
     issues an electronic check to pay a bill
     The recipient of this digital check sends it to the
     netbank to confirm and cash it
     Security is guaranteed by encryption and the bank's
     confirmation process with the issuer of the check
     (although the check can be traced across users)

                               School of Library and Information Science
Electronic Commerce



  3. Person “A” asks the bank to issue digital cash
     The bank issues digital cash and reduces the account
     by that amount
     “A” sends it to person “B”
     “B” asks the bank for payment
     After confirming that the digital cash is not double-
     spent, the bank increases “B’s” account by that
     amount
     Note that the bank cannot know who sent that digital
     cash to person “B “
     Security         X               Peer-to-peer       X
     Low fees         X              Untraceability X

                              School of Library and Information Science
Electronic Commerce




  First, an Internet user opens an account with real money
  at a netbank
     The customer asks the bank to issue a certain
     amount of digital cash for use on the Internet
     The bank issues this digital cash using encryption
     and deducts the funds from the established account
  When an individual uses digital cash, the encrypted data
  that defines the actual electronic currency is given to
  the merchant
     The merchant in turn sends this data to the bank to
     confirm it



                             School of Library and Information Science
Electronic Commerce




  If the bank confirms that the digital cash is real, the bank
  credits the merchant's bank account by that amount
    It can also issue the merchant a sum of digital cash in
    the same amount
    Only the bank can confirm that this data - or, digital
    cash - is legitimate and actually issued by the bank
    Only the bank can verify that this that this data has not
    been used elsewhere, or double-spent
    The bank cannot know who used the digital cash, as
    long as customers of the bank do not use it twice



                               School of Library and Information Science
Electronic Commerce



  Digital cash will make transactions more efficient
    It will make transactions less expensive because the
    cost of transferring digital cash is low
      Traditional money transfer requires branches, clerks,
      ATMs, and specific electronic transaction systems
      Overhead is paid for by from fees for money transfers
      and credit card payments
    Ecash uses the net network and the computers of its
    users, so the cost of digital cash transfer is close to
    zero
    With the transaction completed on the net, the transfer
  fee and bank tips are zero



                              School of Library and Information Science
Electronic Commerce




  This low cost for transactions enables micro-payments,
  like 10 cents or 50 cents, to be possible
    This may encourage a new distribution system and
    fee structure for music, video, and software
    This is “super distribution”
  This ability to finally handle micro-payments might also
  provide a solution for the payment of fees to authors and
  publishers for use of copyrighted materials in electronic
  form




                              School of Library and Information Science
Electronic Commerce




   Also, digital cash is also borderless
   The cost of transfer within a state is almost equal to the
   cost of transfer across different states
     The cost of international money transfers, now much
     higher than transfers within a given state, will be
     reduced dramatically
     It may take more than a week to send a small amount
     of money to a foreign bank
     If a given foreign bank accepts digital cash, this
     delay is significantly reduced (as are the costs)



                               School of Library and Information Science
Electronic Commerce




     Digital cash payments potentially can be used by
     anyone with access to the net and to an netbank
        While credit card payments are limited to
        authorized stores, digital cash makes person-to-
        person payments possible
        Even very small businesses and individuals can
        use digital cash for all sorts of transactions




                              School of Library and Information Science
Electronic Commerce




 Secure Electronic Transactions Standard (SET)
    Jointly developed by Visa and Mastercard; supported
    by GTE, Microsoft, Netscape, Verisign, IBM, and others
    SET is a standard that allows secure credit card
    transactions on the net
    Using digital signatures, SET enables merchants to
    verify that buyers are who they claim to be
    It protects buyers by providing a mechanism for their
    credit card number to be transferred directly to the
    credit card issuer for verification
    It allows billing without the merchant being able to see
    the number


                              School of Library and Information Science
Electronic Commerce




            http://www.byte.com/art/9706/img/067csd2.htm
                                 School of Library and Information Science
Electronic Commerce




  Microtransactions
  Concept has generated much interest on the Internet
    Micropayments are financial transactions for less than
    $1.00
    They are prevalent offline and typically executed using
    cash
    Online they are rare, because payment methods are too
    costly for merchants to process small transaction
    amounts
    The costs of processing the transaction must be
    lower than the cost of the goods and services


                              School of Library and Information Science
Electronic Commerce




   Microtransactions are dependent upon low transaction
   costs
   Generally considered most promising for sale of “soft”
   goods such as information, software, and entertainment
     Question: Will consumers want to pay for such
     information?
      If so, how much?
     How can the transaction costs be made low
     enough for the merchant?
      Strategies could include: batching, giving up
      verification, giving up retractability


                              School of Library and Information Science
Electronic Commerce


  Peppercoin
    http://www.peppercoin.com
  It uses mathematical probability to efficiently and
  profitably process small transactions
    Does not use transaction aggregation
    Using mathematical probability requires far less
    overhead than traditional transaction-aggregation
    techniques
  It reduces merchant transaction costs to a few pennies
  per transaction
    They can increase revenue through the sale of low-
    priced content
  Consumers have a single Peppercoin account across
  multiple merchants

                                School of Library and Information Science
Electronic Commerce


  PepperCoins are:
  Cryptographically secure: it uses RSA digital
  signatures
  Universal and easy-to-use: any consumer can pay any
  merchant using PepperCoins
    No subscriptions are needed
  Sealed and tamper-proof: it functions like pocket
  change and cannot be altered
    They can be sent across any channel, including e-
    mail and text messages
  Connectivity independent: merchants do not have to
  check with the bank or payment service provider when
  receiving a Peppercoin

                             School of Library and Information Science
Electronic Commerce



   Paypal (an eBay Company)
     http://www.paypal.com
   It enables individuals or businesses with an email
   address to securely, easily and quickly send and receive
   payments online
     It uses the existing financial infrastructure of bank
     accounts and credit cards
     It has a proprietary fraud prevention system to provide
     a safe, global, real-time payment solutions
     It has 40 million account members in 38 countries
   Buyers and sellers on eBay, online retailers, online
   businesses, and offline businesses transact with PayPal


                               School of Library and Information Science
Electronic Commerce




  Verisign Payflow (was Cybercash)
  http://www.verisign.com/products/payment.html
  Payflow Pro accepts credit cards, purchase cards level
  2 and 3 (for supported processors) and electronic
  checks online
    It can be used to process orders received offline via
    telephone, fax, e-mail or in person
    Integrates with shopping carts
  Merchant purchases and installs software
    Sets up account with credit card companies and bank



                                School of Library and Information Science
Electronic Commerce



 How it works
 Install Payflow Pro API client software on server
   It establishes SSL connection between storefront and
   VeriSign’s payment processing servers
 Customer makes a purchase on storefront
 Storefront passes transaction data to Payflow Pro client
 The client passes the information to VeriSign
 Payflow payment processing cycle begins
 VeriSign securely routes customer information to a
 network of banks, processors and other financial
 institutions


                             School of Library and Information Science
Electronic Commerce




  When the transaction is approved, approval information
  is sent to VeriSign
    VeriSign sends you and the customer email
    confirmation that the transaction was approved
    The entire approval process takes less than three
    seconds (on average )
  The client sends acknowledgement to VeriSign that you
  have received the approval information
    You decide to accept or reject the transaction
    Once you accept, your acquiring bank credits your
    Internet Merchant Account


                              School of Library and Information Science
Electronic Commerce



     Transfers and Information
     Examples:
     Stock brokers: Etrade, e.Schwab
     Mutual fund companies: Vanguard, AIM
     Annuities: TIAA/CREF
     Banks/S&Ls/Credit Unions: IU Credit Union
     Microsoft, Intuit, and CheckFree have
     developed a standard for exchange of financial
     information over the Internet (Open Financial
     Exchange)



                             School of Library and Information Science

				
DOCUMENT INFO
Description: Stored Value System document sample