ELECTRONIC PAYMENT

SYSTEMS
Conventional payment
mechanism
 In the past , barter system was introduced
in which people exchange their products or
services to fulfill the needs .
 This system did not grow well because
traders could not carry over long distances
what the others needed, traders could not
anticipate what the others needed.
 It was essentially determined by demand
and supply
Contd.
 The came the concept of money the
earlier forms of money were seashells,
gold
 The came the currency based money
which is widely used by
organizations ,trade systems in their
transactions
 Contd…
 As time went on the banking system
came into existence and grew well in the
trading world
 People keep their money for own
convenience and security and withdraw
their money whenever needed.
 Banks utilizes the money of customers to
promote social and business activities by
lending the money to business operations
Contd.
 Most money transfers have started
taking place on paper like bills of
exchange,moneyorders,cheque,drafts,
letters of credit .
The advent of electronic networking of
banks had improved the performance
of banks through faster
communication and
Provide convenience to customers .
E-payment systems

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 To transfer money over the Internet

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 Methods of traditional payment
 Check, credit card, or cash
 Methods of electronic payment
 Electronic
cash, software wallets, smart
cards, and credit/debit cards

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Desirable Properties of Digital
Money

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 Universally accepted
 Transferable electronically

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 Divisible

 Non-forgeable, non-stealable

 Private (no one except parties know the amount)

 Anonymous (no one can identify the payer)

 Work off-line (no on-line verification needed)

No known system satisfies all.

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Electronic tokens
 Cash or real time
 Debit or prepaid

 Credit or postpaid
Dimension for analyzing E-tokens
 Nature of transaction for which
instrument is designed
 Means of settlement used

 Approach to security, anonymity and

authentication
 Question of risk
E-CASH
Cash
 Reasons for popularity of cash
 easy to transport and transfer
 no transaction costs (no third party is
involved directly)
 no audit trail is left behind (that’s why
criminals like it)
 Lack of trust in banking system
 Inefficient clearing and settlement of non-
cash transactions.
 Negative real interest rates paid on bank
deposits
Properties of cash

 Negotiable
 Legaltender
 Bearer instrument
 No need of bank a/c
Properties of E-cash
 Monetary value
 Interoperable

 Storable and retrievable

 security
E-cash Concept
Merchant
1. Consumer buys e-cash from Bank
2. Bank sends e-cash bits to consumer (after
5 charging that amount plus fee)
4 3. Consumer sends e-cash to merchant
4. Merchant checks with Bank that e-cash
Bank 3 is valid (check for forgery or fraud)
5. Bank verifies that e-cash is valid
2 6. Parties complete transaction: e.g.,
1
merchant
present e-cash to issuing bank for deposit
once goods or services are delivered
Consumer
Electronic Cash Issues
 E-cash must allow spending only once
 Must be anonymous, just like regular
currency
 Safeguards must be in place to prevent
counterfeiting
 Must be independent and freely transferable
regardless of nationality or storage
mechanism
 Divisibility
and Convenience
 Currency fluctuations
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E-CHEQUE
E-cheque
 Process flow

4. User sends Certified e-

cheque to payee
1. User
Creates
e- 3. Certified e-
Cheques cheque is sent back
electronically to the 5. Payee
user deposits
Certified
e-
cheque
in bank
online

6. Banks settle the payment

through Electronic clearing
2. Bank verifies details.
Certify e-cheque and send back to user.
Advantages of e-Cheques
 Highly secure - uses digital signatures
 They are a fast and convenient mode of
electronic payment
 Process automation leads to lowering of costs

 Operating expenditures like costs of printing

cheque books etc. are reduced
 Creates float, imp. requirement for
ecommerce
 Reliability and scalability using multiple
accounting servers
Smart Cards
 Smart cards are credit and debit cards
enhanced with microprocessors capable
of holding more information than the
traditional magnetic stripe.
 Smarts cards may have up to 8 kilobytes
of RAM, 346 kilobytes of ROM, 256
kilobytes of programmable ROM, and a
16-bit microprocessor.
Smart card devices
Types of Smart Cards
 Relationship based smart cards
 E-purses
1.Relationship based smart cards
 Itis an enhancement of existing card
services/or the addition of new services
that a financial institution delivers to its
customers via chip-based card.
 Access to multiple financial accounts
 Value-added marketing
 Card Holder information
 A variety Of functions such as Bill
Payments, balance enquiry, fund transfer
 Multiple Access points.
2. E-Purses
 Wallet size smart cards embedded with
programmable microchip that store
sums of money for people to use
instead of cash
 Example-
 To do payments for food
 Photocopies
 Fares
 Public phone calls Etc.
How it works?
 After E-purse is loaded with money.
Customer pays for candy.
 Then Vending Machine verifies
whether card is authentic or have a
enough money or not
 In few seconds, value of candy is
deducted from card and added in e
cash box of vending machine
Advantages
 The use of an e-purse is easy.
 Payment of small amounts

 It may also be a way to limit

expenditure.
 The merchant is guaranteed for the
payment
 Anonymity
Disadvantage
a lost or stolen e-purse can be used by
a third party
 Cross-border use

 E-purse cannot be used when payment

on delivery is desired
Credit card based e-payment
systems
 Credit
card payment on online
networks in 3 categories:
 Payment using plain credit card details
 Payments using encrypted credit card
details
 Payments using third party verification
Encryption and Credit Cards
1. A customer presents his credit card information
along with authenticity signature securely to
the merchant.
2. The merchant validates the customer’s identity
as the owner of the credit card account.
3. The merchant relays this information to its
bank or on-line credit card processors.
4. The bank relays the information to the
customer’s bank for authorization approval.
5. The customer’s bank verifies and sends back
the related information to the merchant.
Third-party processors and credit
cards
1. The customer acquires an OTPP
account number by filling out
registration form.
2. To purchase goods or services
consumer requests the item from the
merchant by giving his OTTP a/c no.
3. The merchant contacts the OTPP for
verification of the a/c no.
4. The OTPP payment server verifies the
a/c no. for vendor and checks for
sufficient funds.
Continue….
4. The OTPP server sends an e-message
to buyer and buyer will respond to it.
5. If OTPP payment server gets a Yes,
the merchant is informed and the
customer is allowed to download the
material.
6. The OTPP will not debit the buyer a/c
until it receives the confirmation of
purchase completion.
Risk and E payment systems
 Majorchallenge of e commerce is risk
management.
 Operation of payment systems incurs:

 Fraud or mistakes
 Privacy issues
 Credit risk
1.Risks from Mistakes and disputes
 Alle payments systems need some
ability to keep automatic records
 Features of automatic record includes:
 Permanent storage
 Accessibility and traceability

 Payment system database

 Data transfer to payment maker

 Needof record keeping conflicts with

Anonymity
2. Managing Information privacy
 Alldetails of a consumer’s payments
can easily be aggregated “where,
when and what the consumer “ buys is
stored
 This collection tells much about the
person and conflicts with individual’s
right of privacy
 Actually, Privacy must be maintained
against eavesdroppers and
unauthorized users.
3. Managing Credit Risks
Issues in Designing E payment
systems
 Privacy

 Security

 Intuitive
Interfaces
 Database integration

 Brokers

 Pricing

 Standards
Electronic money
 An electronic medium for making
payments that may be identified,
anoymonous,online,offline.
 Identified e-money:- also called
(digital cash) contains information that
makes it possible to identify the
person who withdraw the person from
the bank
 Anonymous e-money
EFT/POS
 This is an existing system ,the financial
trancations is completed at the point of sales
 It uses the card readers, located at merchant
premises,cardsof consumers are inserted in
machines while the trancations is being
processed
 Two variations this technique
 Credit card trancations


Debit card transactions
CREDIT CARD TRANSCATION
 WHEN THE PURCHASE TRANCATION IS
COMPLETED THE DATA ABOUT THE
TRANCATION IS AUTOMATICLLY
CAPTURED against the credit card
account and card issuer transfer the
money to merchant and raises a
monthly bill with the card user
Debit card trancations
 This is new form of value transfer
 Here an account holder of bank has a
token in the form of card
 This card authenticates the consumer
 Consumer enters the PIN code and
transfer the money from consumer
account to merchant account
 Compared to credit cards financial
trancations is more direct
Banks

Consumer’s 10. Confirm completion of Merchant’s

bank bank
5. Freeze customer’s money and against
it, transfer bank’s money

4. Instruct Bank 12. Debit money to 6. Advise 11. Inform

to transfer customer’s blocking of crediting
money to seller’s account & send money money
account debit information through
through monthly monthly
statement statement

9. Transmit receipt of goods

8. Acknowledge receipt of goods

Consumer 7. Dispatch Merchant
3. Bill, Shipping info, payment
instructions

2. Browse & select goods

1. Establish mutual credentials through X 509
E-COMMERCE PURCHASE TRANSACTION THROUGH E-CHEQUE

Consumer’s 6. Validate Cheque Merchant’s

bank 11. Clear Cheque bank

Clearing house

12. Debit money to 7. Confirm 10. Transmit

customer’s account & validity of acknowledg
send debit Cheque e receipt of
information through goods
monthly statement

5. Confirm validity of Cheque.

9. Acknowledge receipt of goods
8. dispatch goods

Consumer 3. E-Cheque Merchant

4. Acknowdement receipt e-chq

2. invoice, shipping payment inst.

1. Establish mutual credentials through X 509
CERTIFICATEAUTHORITY
SECURITY FEATURES OF E-CHEQUE

Invoice or Bill

Name of the Bank & Bank Code Digital Cheque

Digital Signature of the Bank
Digital Signature of Cheque issuer Amount Encrypt with
Payee name, account number, the private
Payee’s Bank’s Name & code key of Cheque
issuer
Invoice or Bill
Find Message
Digest
Public key of person issuing the Cheque
Encrypt with
the private key
Message Digest of Merchant &
transmit
X.509 of the Bank
TRANSACTION WITH SMART CARD

Customer’s Merchant’s
Bank Bank

Seller/Merchant/
Customer Vendor/Individual
E-Cash
 Ecash is based on digital signature
Bank supplies all its customers with
its public key, a bank enable to decode
any message with its private key.
E-CASH ORGANIZATION

Currency Identifier Currency Denomination

Issuing Authority
Unit of currency
64 bit or longer number chosen
by the consumer
Value of currency
Digital signature of issuer
 Purchase of E-Cash

2. Transfer funds for E-Mint or E-Cash issuer

purchase of e-cash

4. Issue 3. Send a set of random

Consumer’s Bank
E-Cash numbers as identifiers &
value for each number
1. Request for E-Cash
denomination & Consumer
number
TRANSACTIONS BETWEEN MERCHANT AND
CONSUMER

E-Cash issuer Authenticate E-

Cash with issuer
(Optional)
5. Acknowledge receipt of goods

4. Acknowledge receipt of E-Cash

Consumer Merchant
3. Send E-Cash

2. Invoice & Proof of dispatch

1. Browse & Select goods, authenticate both parties, order goods

 REDEEMING E-CASH

2. Credit E-Cash
4. Redeem E-Cash
Merchant’s Bank E-Cash issuer
3. Inform crediting E-Cash

1. Send E-Cash (&

optionally send the
acknowledgement of Merchant
receipt of goods for
Non-anonymous E-
Cash)
 PURCHASE OF E-CASH

Purchaser or
user’s bank

1. Request for 2. Transfer

e-cash funds
Purchaser or
3. Send a set of random E-Cash issuer
user
numbers & the value of e-cash
certificate for each number
 PURCHASE TRANSACTION

1. Browse, select & order goods

3. Invoice or bill and proof of dispatch

Customer 4. Send E-Cash Seller/Shop
6. Receipt of payment

5. Delete e- 2. Reserve
cash certificate 7. Claim goods by showing Goods item from
from the the payment receipt
inventory
storage Organize
shipping the
goods
 REDEMPTION OF E-CASH

Bank with Seller’s 4. Transfer money E-Cash issuer

account
3. Send e-cash in a secure
manner & Provide transaction 5. Delete
details, if required E-Cash
record
1. Send e-cash in a secure manner
Provide transaction details
Seller

2. Delete the E-Cash record

Blind Signatures

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 Goal

 to have the bank sign documents

EMTM 553
without knowing what they are signing.

 Why?

– Anonymity with Authentication

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 How to sign with blind fold?
 How?
Basic: Sign anything

2/16/00
EMTM 553
ou encrypt the message
2. Send it to the
bank
3. The bank signs
the message and
4. You decrypt
returns it
the
5. signed
You spend
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message