Electronic Money E-commerce currency Will Banks Be Disintermediated? Will Central Banks Be...

Electronic Money

E-commerce currency

Will Banks Be Disintermediated?

Will Central Banks Be Disintermediated?

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What is a Commercial Transaction?

Customer walks into store, examines wares Customer decides to purchase item Customer pays for item Merchant delivers item Returns/exchanges

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Types of Money?

Method Anonymous Trail Credit/debit Peer to Peer

Cash

Credit Card

Check/Debit

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Types of Money? (2)

Method Immediate/delay Gross/net Fees: Fixed or fraction

Cash

Credit CardNetFraction

Check/Debit GrossFixed

In the physical world, check payments far outnumber credit card transactions. Not so on the internet.

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Types of Money (3)

Timing:contemporaneous, before or after transaction

Finality and Revocability

Privacy, Anonymity

Authentication(can I have 2 pieces of ID, please?”)

Vulnerability to Fraud or Loss

Convenience and Cost of Instrument

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Rules That Govern Payment Systems

In the US, state law: the Universal Commercial Code: negotiable instruments, checking systems, deposits.

Federal Law regulates banks. Regulation Z protects consumer interests in credit card transactions (limiting liability). Regulation E governs electronic funds transfers.

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How is Commerce on the Internet Different?

“On the Internet, nobody knows you’re a dog.” Customer & merchant never meet Large potential for fraud Internet transactions easily intercepted

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Guiding Principles for Digital Money

Speedily move authentic, authorized, integrity-protected, confidential, non-repudiable messages over an untrustworthy medium between counterparties who need share no prior relationship.

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Not simple! For example: What does “authorized” mean?

Carrying two signatures?

Self-authorizing, like cash?

Having a delegation chain wired into it?

Provably logged into a repository?

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Independence of location Security (no re-spending) Privacy (no traceability) Offline payment (independence of transport means)

Transferability (liquid + identity removed)

Divisibility and recombination There are currently more systems than there

ever will be

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Internet Payment Taxonomy

Wave 3:

Wave 2:

Wave 1:

Credit CardsCredit Cards

EDIEDI

SmartCardsSmartCards

Wave 4:

MicrocommerceMicrocommerce

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Building Trust Consumer skepticism [ATM saga] Bank conservatism another issue Authentication: merchant and customer Transaction security Transaction integrity Non-repudiability Consumer protection Authorization Confidentiality

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Parts of the Puzzle

Problem Solution

Transaction security encryptionConsumer authentication digital signature/certificateMerchant authentication digital signature/certificatetransaction integrity message digestsopen vs. closed models standards vs. proprietaryOperating costs for cash, check, credit

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Additional parts to the puzzle

Micropayments:

processing a transaction could cost $0.50 to $1.00

Pre- or post-paid tokens as a substitute

Transaction costs:

24 cents for automated call inquiry

$1.82 for call center rep $2.93 for rep. In a branch

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Electronic Payment Methods

Offline Systems Secure Servers Payment Systems Commerce Environments Digital Cash [smart cards]

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Electronic Payment Methods SET is the answer, but you have to phrase the

question very carefully… Sought after characteristics:

- Wide recognition- Preservation of value

- Hard to counterfeit- Convenient- Anonymous? (or maybe not?)- Legal? (or maybe not?)

Middleman:

Can be the phone company, ISP, credit card, etc.

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Basic Architecture: 3 basic pieces:- Wallet- Cash Register- Gateway

2 Basic forms: - Conventional payment over new vehicle, or- Fundamentally new type

SEIGNORAGE - a “Holy Grail”

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Offline (?) Systems PO Orders, 800, 900 numbers, etc. Cellular phone as debit/credit device First Virtual (credit cards) Digicash (eCash) Mark Twain Bank (chapter 11 in

1998) -- hard drive wallet Cybercash, cybercoin, electronic wallet Mondex ISP (ipin) eCharge (phone & AT&T), Qpass (credit

card)

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First Virtual Internet Payment System

No use of secure protocols No sensitive information transmitted over

Internet Reliance on off-line channels Non-tangible merchandise only

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How First Virtual Worked (overview)

Customer Merchant

Online Third PartyProcessors

ClientBrowser

Merchant’sServer

VISA

DigiCash

AmericanExpress

BankAccounts

Private Label Cards

Charge CardsCredit Cards

DebitCards

J.C. Penney

PaymentServer

Request

AuthorizationVerification

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Why First Virtual Worked

Credit card # never transmitted over Internet

Customer can cancel sales in cases of fraud, unsuitability of merchandise

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Advantages/Limitations of FV Credit card # not transmitted over Internet Customer can cancel sales in cases of fraud,

unsuitability of merchandise Customers who abuse system Can’t be used for tangible goods Adoption spotty MOVE TO MESSAGEMEDIA, Only (?) 150,000

accounts First mover, 1995

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Secure Servers Use SSL or S-HTTP to

– encrypt transmission– identify merchant to customer– [identify customer to merchant]

Simple: customer types credit card # into fill-out form

BankMerchant

?

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Secure Servers: Limitations

Roll-your-own credit card validation No built-in transaction processing No customer authentication (yet) Crippled cryptography on “export” versions Credit card #’s not necessarily secure on

merchant’s server

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Online Payment Systems: CyberCash

Essentially, an encrypted card Both credit card and debit card models Secure online payment for tangible goods Supported by many banks “CyberCoin” system for small purchases of

intangible items Discontinued in 1999

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How CyberCash Worked

Bank

Merchant

Bank

$

Virtual Wallet Virtual Cash Register

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What CyberCash Cost

Free to consumer Software free to merchant

– Transaction fees set by credit card and issuing bank

– Fee schedules similar to those of a mail order house: 2-3% of transaction price + fixed fees

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SFNB:

Security First Network Bank http://www.sfnb.com Pineville, KY to Atlanta, GA Complete internet solution Competitive banking rates, products and and

costs Used to be a much bigger deal

now usurped by “me-too” regular banks

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Secure Electronic Transaction Specification (SET)

VISA, Mastercard, Netscape, Microsoft A standard, not a product Specifies

– Customer authentication– Merchant authentication– Transaction encryption– Transaction validation

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SET objectives:

Information confidentiality Data integrity Authentication (as above) Interoperability

•Card details not disclosed to merchant

• Both merchant and customer identified

•Prevents fraud

•Eliminates middleman

•Incredibly complex, slow, lots of crypto

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SET

$

SET supports DES for bulk data encryption and RSA for signatures and encryption of keys and bankcard numbers.

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SET

Bank

Merchant

Bank

$

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Example - Payment MethodMMS/Verifone option “out of the box”

MerchantMerchant

CardholderCardholder

Acquirer/processorAcquirer/processorMS Wallet andMS Wallet andclient controlclient control

vGATEvGATEPayment serverPayment server

$$

MERCHANT & COMPANYMERCHANT & COMPANY

$$

MerchantMerchantServerServer

MicrosoftMicrosoft

CardCardnetworknetwork

vPOSvPOS

Cleartext/SSLCleartext/SSL

Issuing financial institutionIssuing financial institution

VeriFone SETVeriFone SET

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DigiCash True anonymous peer-to-peer currency -

“CyberBucks” Handful of banks and merchants Now in chapter 11

Bank Bank

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Digital Cash

Bi-lateral transaction (all other forms are Tri-lateral) Purchase digital cash from bank. Cash must be backed by

legal tender Use digital cash at stores which accept it Stores redeem digital cash at the bank Bank does not know who was the actual buyer of the cash

(anonymity)

Problems: Just like cash if you lose it ..... Problems: Legal/government problems

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Digi-Cash

Bank Digital CurrencyServer

Transfer digital cash

Payor Payee

Check for Double Spending

IssueCash

Database ofspent “notes”

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Electronic Checks

Accounting Server

Transfer electronic check

Payor Check forPayor Authenitcation

Payee

checkdeposit

Bank

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Banks prefer Electronic Checks

They work in the same way as traditional checks.

Electronic checks are well suited for clearing micropayments; their use of conventional cryptography makes it much faster than systems based on public-key cryptography (e-cash).

Electronic checks create float and the availability of float is an important requirement for commerce.

The third-party accounting server can make money by charging the buyer or seller a transaction fee or a flat rate fee, or it can act as a bank and provide deposit accounts and make money on the deposit account pool.

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Banks prefer Electronic Checks

Financial risk is assumed by the accounting server and may result in easier acceptance.

Reliability and scalability are provided by using multiple accounting servers.

There can be an interaccount server protocol to allow buyer and seller to "belong" to different domains, regions, or countries.

FSTC-Electronic Check Project

Payer’s BankDebit Account

Payee

SignatureCard

Payer

Check

SignatureCertificateCertificate

E-Mail

Payee’s BankCredit Account

AccountsReceivable

ACH or ECP

Deposit check

Clear check

Remittance

Mail statementE-Check line item

Remittance

Signature “Card”

Remittance

E-Mail or WWW

Check


Deposit


CONCEPT

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Micro-Payments

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Micropayment Applications

To Meter/Audit Access

To Buy InformationArticles

Stock quotes and database queries

Cartoons and clip-art

Music and videos

To applications

For services

By security clearance

To shared resources

To Buy SoftwareJava applets

ActiveX Controls

Software add-ons

Games

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Internet Payment Transaction Ranges

Payment:

Maximum Maximum TransactionTransaction

ValueValue

TypicalTypicalTransactioTransactio

nnValueValue

MinimumMinimumTransactionTransaction

ValueValue

Mini $10.00$0.10 $1.00

Macro $5.00 $500.00$50.00

Micro $0.001 $1.00$0.01

Source Digital Equipment Corp.

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Who is the Micropayment Customer?

Traditional

Content Providers

New Age

Content Providers

“Home Alone”

Content Providers

Applet developers

Search engines

Rating services

Serialized soaps

Interactive games

Software add-ons

Shopping agents

Buyer/Seller brokering

Newspapers

Magazines

Directories

Book publishers

Newsletters

Photo libraries

Music publishers

Clip-art

e-zines

Personal essays

Subject indexes

How-To Guides

Cookbooks

Annotated bookmark files

Personalized filtering

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Per-access purchasingBased on user needInfrequent users

Bulk purchasing (aka subscriptions)Fixed price/fixed durationFrequent users

Advertising rebatesAds separate from contentUser are paid to read advertising

Content Provider Requirements

Three usage scenarios...

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Micropayment System Requirements

Support increasingly smaller transaction values Support payments both from users and to users Scale to support 100K Web sites by year 2000, 1M sites

by 2005 Be inclusive in nature Be global in scope Provide both public domain and commercial components

Overall scheme must:

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Proposed Micropayment Schemes

Carnegie Mellon

ClickShare Corp.

CyberCash

DigiCash

Digital Equipment

First Virtual

IBM

W3C

Advocate Name Basis

Netbill

ClickShare

CyberCoin

ecash

Millicent

Virtual PIN

micropayment iKP

MPTP

aggregate credit card

aggregate credit card

electronic coin

digital cash

scrip

credit card

vendor accounts

vendor accounts


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Digital’s Micropayment System Millicent(now Compaq)

Vendor-specific currency, called scrip Transactions:

Values down to 0.1 centsCost down to 0.002 cents

Distributed design scales well with high transaction volumes

Millicent V1.0 trial ended in November 1998 Digital (Compaq) will not be a “broker”


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How Millicent Worked

CustomerCustomerContentContentProviderProvider

BrokerBroker$ Money

Scrip

Scrip License

Soft goods

$ Money


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Micropayments Issues

Adoption by Internet users? How can anyone make money on

such small transactions? What about marginal cost of reproduction? Will different micropayment systems

ever interoperate? Risk Management: What about fraud and

control?

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Other govt. / legal / political issues

Money supply issues? Money Laundering? Govt. backdoor, trapdoor, Clipper? Munitions?

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New generation?

iPIN http://www.ipin.com(ISP)

eCHARGE http://www.echarge.com(phone)

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New generation?

CheckFree Transpoint PayMyBills.

com

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New generation?

1ClickCharge http://www.1clickcharge.com(thin client,pre-pay)

Qpass http://www.qpass.com

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New generation?

BEENZ

: Websites reward you with beenz for your presence on their site or for a little interaction.

http://www.beenz.com

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Stamps as currency?

E-Stamp http://www.estamp.com

Stamps.com

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New generation, still

Pay-Pal(x.com)

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URLs (1)

First Virtual– http://www.fv.com/

CyberCash– http://www.cybercash.com/

Open Market– http://www.openmarket.com/

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URLs (2) SET

– http://www.visa.com/ Microsoft Merchant

– http://www.microsoft.com Netscape LivePayment

– http:://home.netscape.com/ Millicent

http://www.millicent.digital.com/ DigiCash

– http://www.digicash.com/

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URLs (3)

iPIN http://www.ipin.com eCHARGE http://www.echarge.com 1ClickCharge

http://www.1clickcharge.com Qpass http://www.qpass.com

Electronic Money E-commerce currency Will Banks Be Disintermediated? Will Central Banks Be...

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