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                Senior Lecturer
Department of Computer Science and Engineering,
                Anna University,
               Chennai – 600025.

               Dr.R.BASKARAN,DCSE                 1


      Dr.R.BASKARAN,DCSE   2
               Real-World Cash
• Money
  – Medium of exchange to simplify transactions
  – Standard of value
  – Store of value to facilitate the concept of saving

• Cash continues to be the most widely used
  form of payment
  –   Convenience
  –   Wide acceptance
  –   Anonymity
  –   No cost of use
  –   No audit trail
                    Dr.R.BASKARAN,DCSE                   3

• Electronic money (also known as e-money,
  electronic cash, electronic currency, digital money,
  digital cash or digital currency) refers to money or
  scrip which is exchanged only electronically.

• use of computer networks, the internet and digital
  stored value systems.

• it is a collective term for financial cryptography and
  technologies enabling it.

                     Dr.R.BASKARAN,DCSE                    4

  Conventional Cash is:




Bad for Remote Transactions
       Dr.R.BASKARAN,DCSE     5
  Off-line Electronic Cash refers to two-
              party payment


             • Low Communication Requirements

                       Dr.R.BASKARAN,DCSE                 6
                    Electronic money
When commerce goes electronic, the means of paying for goods and services
must also go electronic. Paper-based payment systems cannot support the speed,
security, privacy, and internationalization necessary for electronic
commerce. In this section, we discuss four methods of electronic payment:
• electronic funds transfer (EFT)
• digital cash
• ecash
• credit card
                     Characteristics of Electronic Money

                             Dr.R.BASKARAN,DCSE                                  7
        Electronic Funds Transfer
Electronic funds transfer (EFT), introduced in the late 1960s, uses
the existing banking structure to support a wide variety of
payments. For example, consumers can establish monthly
checking account deductions for utility bills, and banks can
transfer millions of dollars.

EFT is essentially electronic checking. Instead of writing a check
and mailing it, the buyer initiates an electronic checking
transaction (e.g., using a debit card at a point-of-sale terminal).
The transaction is then electronically transmitted to an
intermediary (usually the banking system), which transfers the
funds from the buyer's account to the seller's account.

A banking system has one or more common clearinghouses that
facilitate the flow of funds between accounts in different banks.

                         Dr.R.BASKARAN,DCSE                           8
                      Digital Cash
• One of the first forms of alternative payment systems

• Not really “cash” – rather, are forms of value storage and value
  exchange that have limited convertibility into other forms of
  value, and require intermediaries to convert

• Many of early examples have disappear; concepts survive as
  part of P2P payment systems

• Digital cash is an electronic parallel of notes and coins.

• Two variants of digital cash are presently available: prepaid
  cards and smart cards.

                         Dr.R.BASKARAN,DCSE                          9
                     Digital Cash
• The phonecard, the most common form of prepaid card, was
  first issued in 1976 by the forerunner of Telecom Italia.

• The problem with special-purpose cards, such as phone and
  photocopy cards, is that people end up with a purse or wallet full
  of cards.

• A smart card combines many functions into one card.

• A smart card can serve as personal identification, credit card,
  ATM card, telephone credit card, critical medical information
  record and as cash for small transactions.

• A smart card, containing memory and a microprocessor, can
  store as much as 100 times more data than a magnetic-stripe
  card. The microprocessor can be programmed.
                         Dr.R.BASKARAN,DCSE                            10
Smart Cards

• Smart card – plastic card (the size of a credit card) that contains an
  embedded chip on which digital information can be stored and
   – Debit cards are an implementation

                            Dr.R.BASKARAN,DCSE                             11
              Smart Cards

• Stored-value cards
• Can hold private user data, such as
  financial facts
• Can store about 100 times more
  information than a magnetic strip plastic
• Safer than conventional credit cards

                Dr.R.BASKARAN,DCSE            12
                     Credit Card
• Represents an account that extends credit to consumers,
  permitting consumers to purchase items while deferring
  payment, and allows consumers to make payments to multiple
  vendors at one time

• Credit card associations – Nonprofit associations (Visa,
  MasterCard) that set standards for issuing banks

• Issuing banks – Issue cards and process transactions

• Processing centers (clearinghouses) – Handle verification of
  accounts and balances

                        Dr.R.BASKARAN,DCSE                       13
How an Online Credit Card Transaction

 • Processed in much the same way that in-store purchases are

 • Major difference is that online merchants do not see or take
   impression of card, and no signature is available (CNP

 • Participants include consumer, merchant, clearinghouse,
   merchant bank (acquiring bank) and consumer’s card issuing

                         Dr.R.BASKARAN,DCSE                       14
How an Online Credit Transaction Works

              Dr.R.BASKARAN,DCSE    15
   Limitations of Online Credit Card
           Payment Systems

• Security – neither merchant nor consumer can be fully

• Cost – for merchants, around 3.5% of purchase price plus
  transaction fee of 20-30 cents per transaction

• Social equity – many people do not have access to credit cards
  (young adults, plus almost 100 million other adult Americans
  who cannot afford cards or are considered poor risk)

                        Dr.R.BASKARAN,DCSE                         16
       Electronic payments: Issues

• Secure transfer across internet
• High reliability: no single failure point
• Atomic transactions
• Anonymity of buyer
• Economic and computational efficiency: allow
• Flexiblility: across different methods
• Scalability in number of servers and users

                 Dr.R.BASKARAN,DCSE          17
  Electronic Bill Presentment and

• Online payment systems for monthly bills

• Electronic Bill Presentment and Payment
  (EBPP) – system that sends bills over the
  Internet and provides an easy-to-use
  mechanism (perhaps a button) to pay for
  them if the amount looks correct

                Dr.R.BASKARAN,DCSE            18
Growth of the EBPP Market

         Dr.R.BASKARAN,DCSE   19
       Electronic Bill Presentment and
                                                    Walk In business
                                   Office           offices
Payment Methods

                                      Mail In Payments

                     Automatic Bank Draft

           On line Payments

                       Dr.R.BASKARAN,DCSE                              20
       Electronic Bill Presentment and
2007                                 Pay Agent     Pay agent
                                                   Walk Ins
Payment Methods
                                    Mail In Payments

                            Automatic Bank Draft

                      On line Payments


                        Dr.R.BASKARAN,DCSE                     21
Old Bill                    New Bill

           Dr.R.BASKARAN,DCSE          22

• Security is very important when moving
• Common security measures
  – Encryption
  – Secure Sockets Layers
  – Secure Electronic Transactions

               Dr.R.BASKARAN,DCSE          23

• Encryption – scrambles the contents of
  a file so that you can’t read it without
  having the right decryption key
• Often through public key encryption
  (PKE) – uses two keys: a public key for
  everyone and private key for only the
  recipient of the encrypted information

               Dr.R.BASKARAN,DCSE            24
        Secure Sockets Layers

• Secure Sockets Layer (SSL)…
  – Creates a secure connection between a
    Web client and server
  – Encrypts the information
  – Sends the information over the Internet
• Denoted by lock icon on browser or
  https:// (notice the “s)

               Dr.R.BASKARAN,DCSE             25
   Secure Electronic Transactions

• Secure Electronic Transaction (SET)
  – transmission method that ensures
  transactions are legitimate as well as
  – Helps verify use of a credit card, for
    example, by sending the transaction to the
    credit issuer as well as the seller/supplier

                 Dr.R.BASKARAN,DCSE                26
       E-Payments: Secure transfer

• SSL: Secure socket layer
   – below application layer
• S-HTTP: Secure HTTP:
   – On top of http

                     Dr.R.BASKARAN,DCSE   27
          SSL: Secure Socket Layer
• Application protocol independent
• Provides connection security as:
   – Connection is private: Encryption is used after an initial
     handshake to define secret (symmetric) key
   – Peer's identity can be authenticated using public
     (asymmetric) key
   – Connection is reliable: Message transport includes a
     message integrity check (hash)
• SSL Handshake protocol:
   – Allows server and client to authenticate each other
     and negotiate a encryption key

                      Dr.R.BASKARAN,DCSE                   28
             SSL Handshake Protocol

• 1. Client "Hello": challenge data, cipher specs
• 2. Server "Hello": connection ID, public key certificate, cipher
• 3. Client "session-key": encrypted with server's public key
• 4. Client "finish": connection ID signed with client's private key
• 5. Server "verify": client's challenge data signed with server's
  private key
• 6. Server "finish": session ID signed with server's private key
• Session IDs and encryption options cached to avoid renegotiation
  for reconnection

                           Dr.R.BASKARAN,DCSE                          29
              S-HTTP: Secure HTTP

• Application level security (HTTP specific)
• "Content-Privacy-Domain" header:
   – Allows use of digital signatures &/ encryption
   – Various encryption options
• Server-Browser negotiate
   – Property: cryptographic scheme to be used
   – Value: specific algorithm to be used
   – Direction: One way/Two way security

                      Dr.R.BASKARAN,DCSE              30
Secure end to end protocols

         Dr.R.BASKARAN,DCSE   31
               Credit Card Basics

• A credit card is part of a system of payments named
  after the small plastic card issued to users of the
• The issuer of the card grants a line of credit to the
  consumer (or the user) from which the user can
  borrow money for payment to a merchant or as a
  cash advance to the user.
• A credit card is different from a charge card, which
  requires the balance to be paid in full each month.
• In contrast, credit cards allow the consumers to
  'revolve' their balance, at the cost of having interest

                      Dr.R.BASKARAN,DCSE                    32
             Credit Card Basics

• Most credit cards are issued by local banks
  or credit unions, and are the same shape and
  size, as specified by the ISO 7810 standard.
• A credit card statement arrives every month,
  listing all charges and payments.
• Understand that cash advances may cost
  you a fee and a higher interest rate.
• Compare offers to determine which card
  offers you the best interest rate (also referred
  to as APR or finance charges).

                   Dr.R.BASKARAN,DCSE           33
              Did You Know
• The percentage of undergraduate students
  carrying at least 1 credit card has risen 24%
  since 1998
• 92% of college students have a credit card by
  their sophomore year
• Almost half (47%) of all college students carry
  four or more credit cards
• 21% of undergrads owed between $3000 &
  $7000 on their credit card – a 61% increase from
                   Dr.R.BASKARAN,DCSE               34
What are Credit Cards?

      Dr.R.BASKARAN,DCSE   35
   Are Debit Cards a type of
        Credit Card?

  NO!                 Debit Cards are:
                      • Not the same as credit
                      • Not a form of credit at
Debit=Credit            all
                      • Directly linked to your
                        bank account.

Debit cards allow payment and purchase
       to happen simultaneously
            Dr.R.BASKARAN,DCSE               36
         Why Use a Credit Card?

• Proper use can help establish good credit rating
• Conveniently accepted across United States
  and abroad
• Emergency buying power
• Additional form of identification
• Record of purchases on bill statement
• Often required to hold a reservation

                  Dr.R.BASKARAN,DCSE             37
          Why Not Use a Credit Card?
•   Improper use can damage credit rating
•   Higher risk for impulsive buying and overspending
•   Debt trap when used unwisely
•   Expensive way to borrow due to high interest
•   Less to spend in the future due to paying off
    purchases from past
•   Possible hidden fees & surcharges
•   Privacy is an increasing concern
•   Identity theft easier
                     Dr.R.BASKARAN,DCSE            38
               Types of Credit Cards
Cards where purchases can be made in many locations
• Bank Credit Cards
   – Card issued by financial institution
   – Credit is issued by service provider (Wells Fargo Visa
   – Balance paid-off at end of month or extended over period
     of time
• Travel and Entertainment Credit Cards
   – Credit and card issued by service provider (Diner’s Club)
   – Not accepted at as many locations as bank cards
   – Entire balance must be repaid in 30 days

                        Dr.R.BASKARAN,DCSE                 39
               Types of Credit Cards

Cards where purchases are made in particular location
• Retail Credit Cards
   – Credit and card issued by particular retailer (Old Navy,
     The Bon, Home Depot, Shell Oil)
   – Balance paid-off at end of month or extended over
     period of time

                       Dr.R.BASKARAN,DCSE                  40
             Obtaining a Credit Card

• Comparison shop when choosing the right card
• Know the facts
   – Terms and conditions of credit card accounts differ
   – Be aware of “hidden” costs of card(s)
• Federal Truth in Lending Act
   – Requires card issuer to display the cost of credit card
   – Schumer Box: easy to read box format

                       Dr.R.BASKARAN,DCSE                 41
                          A Schumer Box
                      you May Expect To See
Annual Percentage Rate for purchases   2.99% APR (.00819% daily periodic rate) on purchases and balance transfers until the
and balance transfers*                 first day of the billing cycle that includes the six (6) month anniversary date of the
                                       opening of your account. In the absence of the introductory rate, 12.99%
                                       APR(.03559% daily periodic rate) on purchases and balance transfers.**

Grace period for repayment of the      You will have a minimum of 25 days without a f inance charge on new
balance for purchases                  purchases if the total New Balance is paid in f ull each month by the statement
                                       closing date.

Method of computing the balance used   Average daily balance (including new purchases)
in calculating finance charges for

Annual fee                             $25

Minimum finance charge                 For each Billing Period that your Account is subject to a f inance charge, a
                                       minimum total Finance Charge of $0.50 will be imposed.

Miscellaneous fees                     Cash advance f ee: 2.5% of amount of the cash advance, but not less than
                                       Late payment f ee: $25
                                       Over-the-credit-limit f ee: $25
                                       Returned check f ee: $25

                                        Dr.R.BASKARAN,DCSE                                                                      42
A Schumer Box and Credit Card Terms
 Annual                                    Balance
Percentage     Grace       Minimum        Calculatio      Annual       Transactio     Late
 Rate for    Period for    Finance        n Method         Fees        n Fees for   Payment
Purchases    Purchases     Charges           for                          Cash       Fees
                                          Purchases                    Advances
                          $.50 when a         daily                    2% with a
  19.9%       Not less       finance        balance     $20 per year   minimum        $29
               than       charge at a        method                    fee of $3
              25 days     periodic rate    (including
                           is charged         new

• Annual Percentage Rate (APR): interest rate charged for amount
  borrowed in terms of percentage per year
• Grace Period: amount of time allowed before finance charges
  (interest or cost of credit) are applied

                                 Dr.R.BASKARAN,DCSE                                         43
 A Schumer Box and Credit Card Terms
  Annual                                 Balance
Percentage     Grace       Minimum      Calculatio     Annual       Transactio     Late
 Rate for    Period for    Finance      n Method        Fees        n Fees for   Payment
Purchases    Purchases     Charges         for                         Cash       Fees
                                        Purchases                   Advances
                          $.50 when a      daily                    2% with a
  19.9%       Not less      finance       balance    $20 per year   minimum        $29
               than       charge at a     method                    fee of $3
              25 days       periodic    (including
                             rate is       new
                            charged     purchases
• Minimum Finance Charge: minimum amount charged for
  card use
• Balance Calculation Method: method used to determine
  balance including finance charges

                                 Dr.R.BASKARAN,DCSE                                      44
              Balance Calculation Methods

Creditors use a number of ways to determine how
interest, often called finance charges, accumulate
• Average Daily Balance Method (including new purchases with
   a grace period)
    – If the balance is not zero, interest is applied to new purchases
       when they are made, if balance is zero, a grace period is
       allowed before interest is charged
• Average Daily Balance Method (including new purchases with
   no grace period)
    – Regardless of the previous month’s balance, interest is
       to new purchases as they are made

                          Dr.R.BASKARAN,DCSE                         45
           Balance Calculation Methods

• Previous Balance Method
   – Interest is only paid on the previous balance, not on
     made since the last payment
• Two-cycle Average Daily Balance (including new purchases)
   – This method should be avoided by consumers!
   – The interest is paid on the current balance as well as the
     previous month’s balance, this leads to double finance
   – A zero-balance must be held for two months in order to
                         Dr.R.BASKARAN,DCSE                       46
 A Schumer Box and Credit Card Terms
  Annual                                   Balance
Percentage     Grace       Minimum        Calculatio    Annual    Transactio     Late
 Rate for    Period for    Finance        n Method       Fees     n Fees for   Payment
Purchases    Purchases     Charges           for                     Cash       Fees
                                          Purchases               Advances
                          $.50 when a         daily               2% with a
  19.9%       Not less       finance        balance     $20 per   minimum        $29
               than       charge at a        method      year     fee of $3
              25 days     periodic rate    (including
                           is charged         new

• Annual Fees: yearly charge for credit card ownership
• Cash Advance Transaction Fees: cash withdrawal
• Late Payment Fees: penalty fee for payments not
  made by the due date
                                   Dr.R.BASKARAN,DCSE                                  47
      Opening a Credit Account

1.   Applicant completes a credit application
2.   Lender conducts a credit investigation
3.   Applicant is given a credit rating
4.   Lender accepts or denies the credit request
5.   If accepted, applicant evaluates the credit card
     details (USE THE SCHUMER BOX!)
6.   Applicant accepts or refuses credit terms

                      Dr.R.BASKARAN,DCSE                48
           Understanding the Bill
• Minimum Payment Due: minimum amount to be paid
   – If this amount is paid and a balance is left on the
     account, additional finance charges will be included in
     the following month’s balance
• Past Due Amount: the previous amount due which was
  not paid before the due date
• Due Date: the day by which the company requires a
  payment to be made
• New Balance: the total amount owed on a credit card

                        Dr.R.BASKARAN,DCSE                 49
        Understanding the Bill (continued)
• Credit Line: the maximum amount of charges allowed
  to an account
• Closing Date: last day for transactions to be reported
  on the statement
• Charges, Payments, and Credits: the transactions
  which occur with the use of a credit card
• Finance Charge: charges assessed for credit card use

                     Dr.R.BASKARAN,DCSE               50