Online Payment Systems

Transcription

1 Online Payment Systems Prof. Sheizaf Rafaeli

2 Introduction: What is Money? Physical or Electronic Tokens or Commodities that can be have the following properties: Unit of Account defined value Medium of Exchange acceptability Store of Value non-perishable 2

3 What is Electronic Money? Narrow View of Term: Tokens of Exchange transacted Only electronically Examples: Facebook Gold, Digital Gold Currency, BitCoin, Terra TRC, and other electronic currencies Broad Usage of Term includes Both: Electronic Payment Authorization Credit cards Value Holding Electronic Tokens 3

4 Overview: Early Money Early Intermediary Tokens of Exchange Commodities or Objects of Perceived Worth Minted Coins standardized units of metal Code of Hammurabi: legal debt payment Trade Bills credit certificate for production Led to Local Merchant Banks for redemption Goldsmiths demand deposits & promissory notes 4

5 Beginnings of Modern Money Private Bank Notes Loans based on deposits on account Beginning of Fractional Banking National Currencies from Central Reserve Banks backed by Gold or Silver Legal Tender for Payments 5

6 Modern Fiat Money World War 1 & End of Gold Standard Scarcity of Gold Reserves with Enlarging Circulation Bank Notes no longer redeemable for gold Floating value in exchange market Money by Decree of Government Backed by issuers ability to repay debts Susceptible to public distrust Possible uncontrolled inflation or deflation 6

7 Types of Electronic Money Private Currency free banking Community Currency local acceptability World Currency trade reference Hard Currency non-reversible Soft Currency allows payment disputes 7

8 Private Currency Free Banking No Central Reserve Bank Free Entry into Banking Industry Freedom to Issue Notes, Accept Deposits, and Collect Checks for Payment Freedom to Borrow Money on Term Deposit Freedom to Lend Money & Invest Assets Bank Secrecy Act of 1970 Informal Value Transfer Systems IVTS required to cooperate in Anti-Money Laundering efforts Patriot Act enforcement 8

9 Community Currency Ithaca HOURS Ithaca, NY BerkShares Berkshire, MS Toronto Dollar Toronto, Ontario 9

10 World Currency Global Trade Reference Gold, British Pound, US Dollar, Euro, Yen Private Complementary Currency efforts International Monetary Fund (IMF) Special Drawing Rights (SDR) Supplementary Reserve Assets 10

11 Types of Payment Systems Cash Checking Transfer Credit Card Stored Value Accumulating Balance

12 Types of Money? Method Anonymous Trail Credit/debit Peer to Peer Cash Credit Card Check/Debit

13 E-Payments

14 Types of Money? (2) Method Immediate/delay Gross/net Fees: Fixed or fraction Cash Credit Card Net Fraction Check/Debit Gross Fixed In the physical world, check payments far outnumber credit card transactions. Not so on the internet. Think, too, about finality, revocability, convenience, vulnerability, timing (contemporaneous, before or after), independence of location, divisibility and recombination

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16 Cash Legal tender defined by a national authority to represent value Most common form of payment in terms of number of transactions Instantly convertible into other forms of value without intermediation of any kind Portable, requires no authentication, and provides instant purchasing power Free (no transaction fee), anonymous, low cognitive demands Limitations: easily stolen, limited to smaller transaction, does not provide any float

17 Checking Transfer Funds transferred directly via a signed draft or check from a consumer s checking account to a merchant or other individual Most common form of payment in terms of amount spend Can be used for both small and large transactions Some float Not anonymous, require third-party intervention (banks) Introduce security risks for merchants (forgeries, stopped payments), so authentication is typically required; Ensured checks (e.g. money orders) do not have this problem

18 Credit Card Represents an account that extends credit to consumers allows consumers to purchase items while deferring payment 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

19 Credit Card Players on the Net Cardholder Consumer or corporate purchaser using credit cards Merchant Entity that accepts credit cards and offers goods or services in exchange of payments Card Issuer Financial institution that establishes accounts for cardholders and issue credit cards Acquirer Financial institution that establishes an account for merchants and acquires the vouchers of authorized sales slips Card Brand Association of issuers and acquirers created to protect and advertise the card, enforces rules, and provide networking for institutions

20 Stored Value Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed Examples: Debit cards, gift certificates, prepaid cards, smart cards Debit cards: Immediately debit a checking or other demand-deposit account.

21 Accumulating Balance Accounts that accumulate expenditures and to which consumers make period payments Examples: utility, phone, American Express accounts

22 Most Common Payment Systems (Based on Number Of Transactions, 2000) 22

23 Most Common Payment Systems (Based on Amount, 2000) 23

24 Most Common Payment Systems, Based on Number Of Transactions SOURCE: Based on data from U.S. Census Bureau, 2005.

25 Most Common Payment Systems, Based on Dollar Amount SOURCE: Based on data from U.S. Census Bureau, 2005.

26 Current Online Payment Systems Credit cards are dominant form of online payment, accounting for around 85% of online payments in 2006 (BUT B2B!) New forms of electronic payment include: Digital cash Online stored value systems Digital accumulating balance payment systems Digital credit accounts Digital checking

27 Various Payment Methods Offered or Planned to be Offered by Online Merchants SOURCE: Based on data from Cybersource Corporation, 2005.

28 Online Credit Card Transactions Processed in much the same way that instore purchases are Major difference is that online merchants do not see or take impression of card, and no signature is available (CNP transactions) Participants include consumer, merchant, clearinghouse, merchant bank (acquiring bank) and consumer s card issuing bank

29 Online Credit Transactions (cont.) 29

30 Limitations of Online Credit Card Payment Systems Security merchant and/or consumer may not be fully authenticated ( and usually are not). Cost for merchants, around 3.5% of purchase price plus transaction fee of cents per transaction Many people do not have access to credit cards (young adults, say)

31 The SET (Secure Electronic Transaction) Protocol Authenticates cardholder and merchant identity through use of digital certificates An open standard developed by MasterCard and Visa Transaction process similar to standard online credit card transaction, with more identity verification Thus far, has not caught on much, due to costs involved in integrating SET into existing systems, and lack of interest among consumers

32 SET Transactions (cont.) 32

33 Digital Wallets Concept of digital wallet relevant to many of the new digital payment systems Seeks to emulate the functionality of traditional wallet Most important functions: Authenticate consumer through use of digital certificates or other encryption methods Store and transfer value Secure payment process from consumer to merchant Two major categories: Client-based digital wallets Gator.com, MasterCard Wallet Server-based digital wallets MSN Wallet

34 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 disappeared; concepts survive as part of P2P payment systems

35 Digicash: First Generation Digital Cash 35

36 PayPal: Second Generation of Digital Cash 36

37 PayPal (cont.) One of e-commerce s major success stories: Went public in 2002; acquired by ebay October 2002 for $1.5 billion An example of a peer-to-peer payment system Fills a niche that credit card companies avoided individuals and small merchants Piggybacks on existing credit card and checking payment systems Weakness: suffers from relatively high levels of fraud Competitors include Western Union (MoneyZap), AOL (AOLQuickcash) and Citibank (C2it)

38 Paypal video 3IfRBflQ

39 Online Stored Value Systems Permit consumers to make instant, online payments to merchants and other individuals based on value stored in an online account Rely on value stored in a consumer s bank, checking or credit card account

40 Smart Cards A type of stored value system based on credit-card sized plastic cards that have embedded chips that store personal information Two types: Contact: Mondex, American Express Blue Contactless: EZPass

41 Smart Cards Copyright 2004 Turban el al

42 Digital Accumulating Balance Payment Systems Allows users to make micropayments and purchases on the Web, accumulating a debit balance for which they are billed at the end of the month Examples: Qpass and ipin

43 Digital Credit Card Payment Systems Extend the functionality of existing credit cards for use as online shopping payment tools Focus specifically on making use of credit cards safer and more convenient for online merchants and consumers Example: echarge

44 echarge: a Digital Credit Card System 44

45 Digital Checking Payment Systems Extend the functionality of existing checking accounts for use as online shopping payment tools Examples: echeck, Achex (MoneyZap)

46 echeck: a Digital Checking System 46

47 Digital Payment Systems and the Wireless Web Mobile payment (m-payments) systems not very well established yet in U.S, but with growth in Wi-Fi and 3G cellular phone systems, this is beginning to change Example: Qpass, AT&T and Wayport venture to provide mobile payment and billing called GoPort Gartner predicts m-payments worldwide will total at least $30 billion by 2002; majority of transactions will be micro-m-payments

48 B2B Payment Systems More complex than B2C Two main types: Systems that replace traditional banks (example: Actrade) Existing banking systems extending to B2B marketplace (example: Orbian)

49 Electronic Billing Presentment and Payment (EBPP) Online payment systems for monthly bills EBPP expected to grow rapidly, to an estimated 40% of all households by 2007 Main business models in EBPP market include: Biller-direct Consolidator Above are supported by EBPP infrastructure providers

50 Growth of the EBPP Market SOURCE: Based on data from emarketer, Inc., 2004b; Forrester Research, 2005; authors estimates.

51 Major Players in the EBPP Marketspace

52 B2B Payment Systems More complex than B2C Major types: Systems that replace traditional banks (example: TradeCard, Orbian) Financial institutions hoping to extend to the B2B marketplace Credit card companies

53 Key Features of B2B Payment Systems Table 6.8, Page 343 Copyright 2007 Pearson Education, Inc. Slide 6-53

54 Electronic Billing Presentment and Payment (EBPP) Online payment systems for monthly bills Traditional billing: The processing cost of a traditional bill is estimated to $3-$7 Overall cost for billing $360-$840 million, or 4%-8% of the GDP The processing cost of a digital bill cents EBPP expected to grow rapidly, to nearly half all U.S. households by 2006 Different types of business models in EBPP market include: Biller-direct Consolidator Portal

55 Growth of the EBPP Market 55

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58 Micropayment Applications To Buy Information Articles Stock quotes and database queries Cartoons and clip-art Music and videos To Buy Software Java applets ActiveX Controls Software add-ons Games To Meter/Audit Access To applications For services By security clearance To shared resources

59 Internet Payment Transaction Ranges Payment: Minimum Transaction Value Typical Transaction Value Maximum Transaction Value Macro $5.00 $50.00 $ Mini $0.10 $1.00 $10.00 Micro $0.001 $0.01 $1.00 Source Digital Equipment Corp.

60 Who is the Micropayment Customer? Traditional Content Providers Newspapers Magazines Directories Book publishers Newsletters Photo libraries Music publishers Clip-art New Age Content Providers Applet developers Search engines Rating services Serialized soaps Interactive games Software add-ons Shopping agents Buyer/Seller brokering Home Alone Content Providers e-zines Personal essays Subject indexes How-To Guides Cookbooks Annotated bookmark files Personalized filtering

61 Electronic Cash and Micropayments Smart Cards The concept of e-cash is used in the non-internet environment Plastic cards with magnetic stripes (old technology) Includes IC chips with programmable functions on them which makes cards smart One e-cash card for one application Recharge the card only at designated locations, such as bank office or a kiosk. Future: recharge at your PC e.g. Mondex & VisaCash

62 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?

63 Managerial Issues Security solution providers can cultivate the opportunity of providing solutions for the secure electronic payment systems Electronic payment system solution providers can offer various types of electronic payment systems to electronic stores and banks Electronic stores should select an appropriate set of electronic payment systems Banks need to develop cyberbank services to be compatible with the various electronic payment system Credit card brand companies need to develop an EC standard like SET, and watch the acceptance by customers Smart card brand should develop a business model in cooperation with application sectors and banks Certificate authority needs to identify the types of certificate to 63

64 Other govt. / legal / political issues Money supply issues? Money Laundering? Govt. backdoor, trapdoor, Clipper? Munitions?

65 New generation? ipin (ISP) echarge (phone)

66 New generation? CheckFree Transpoint PayMyBills. com

67 New generation? 1ClickCharge (thin client, pre-pay) Qpass

68 New generation? BEENZ : Websites reward you with beenz for your presence on their site or for a little interaction.

69 Stamps as currency? E-Stamp Stamps.com

70 Types of Electronic Money Private Currency free banking Community Currency local acceptability World Currency trade reference Hard Currency non-reversible Soft Currency allows payment disputes 70

71 Private Currency Free Banking No Central Reserve Bank Free Entry into Banking Industry Freedom to Issue Notes, Accept Deposits, and Collect Checks for Payment Freedom to Borrow Money on Term Deposit Freedom to Lend Money & Invest Assets Bank Secrecy Act of 1970 Informal Value Transfer Systems IVTS required to cooperate in Anti-Money Laundering efforts Patriot Act enforcement 71

72 Community Currency Ithaca HOURS Ithaca, NY BerkShares Berkshire, MS Toronto Dollar Toronto, Ontario 72

73 World Currency Global Trade Reference Gold, British Pound, US Dollar, Euro, Yen Private Complementary Currency efforts International Monetary Fund (IMF) Special Drawing Rights (SDR) Supplementary Reserve Assets 73

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75 Example: BitCoin An Open-Source Peer-To-Peer Payment Network Using Digital Signatures & Encryption Public Private Key Encryption Alice & Bob Illustration Digital Certificate Blocking Chain Video: 75

76 BitCoin Debit/Smart Card Fees and Limits Monthy Service Charge 2.50 USD ATM Withdrawals 3 USD POS Purchase 3 USD Card to Card Transfer 5 USD Card cash out/administration Fee 15 USD Maximum ATM Withdrawal USD Maximum Card Balance USD Maximum Daily Spend USD 76

77 URLs (1) Up-to-date list First Virtual CyberCash Open Market

78 URLs (2) SET Microsoft Merchant Netscape LivePayment Millicent DigiCash

79 URLs (3) ipin echarge 1ClickCharge Qpass