Electronic Money

E-commerce currency

Will Banks Be Disintermediated?

Will Central Banks Be Disintermediated?

 E-commerce 2
Prof. S. Rafaeli
 E-commerce 3
Prof. S. Rafaeli
 E-commerce 4
Prof. S. Rafaeli
 E-commerce 5
Prof. S. Rafaeli
 E-commerce 6
Prof. S. Rafaeli
 E-commerce 7
Prof. S. Rafaeli
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

E-commerce 8
Prof. S. Rafaeli
 Types of Money?
Method Anonymous Trail Credit/debit Peer to Peer

Cash    

Credit Card    

Check/Debit    

E-commerce 9
Prof. S. Rafaeli
 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.

E-commerce 10
Prof. S. Rafaeli
Types of Money (3)
 Timing:  Authentication
contemporaneous, (can I have 2 pieces of
before or after ID, please?”)
transaction  Vulnerability to Fraud
 Finality and or Loss
Revocability  Convenience and Cost
 Privacy, Anonymity of Instrument

E-commerce 11
Prof. S. Rafaeli
 E-commerce 12
Prof. S. Rafaeli
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.

E-commerce 13
Prof. S. Rafaeli
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

E-commerce 14
Prof. S. Rafaeli
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.
E-commerce 15
Prof. S. Rafaeli
Guiding Principles for Digital
Money
 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?

E-commerce 16
Prof. S. Rafaeli
 E-commerce 17
Prof. S. Rafaeli
Guiding Principles for Digital
Money
 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
E-commerce 18
Prof. S. Rafaeli
 Internet Payment Taxonomy

Wave 4:
Microcommerce
Wave 3:
SmartCards

Wave 2:
Credit Cards
Wave 1:
EDI
E-commerce 19
Prof. S. Rafaeli
Building Trust
 Consumer skepticism [ATM saga]
 Bank conservatism another issue
 Authentication: merchant and customer
 Transaction security
 Transaction integrity
 Non-repudiability
 Consumer protection
 Authorization
 Confidentiality E-commerce 20
Prof. S. Rafaeli
Parts of the Puzzle
Problem Solution

Transaction security encryption

Consumer authentication digital signature/certificate
Merchant authentication digital signature/certificate
transaction integrity message digests
open vs. closed models standards vs. proprietary
Operating costs for cash, check, credit

E-commerce 21
Prof. S. Rafaeli
Additional parts to the puzzle
 Micropayments:  Transaction costs:

 processing a transaction could

 24 cents for automated call
cost $0.50 to $1.00
inquiry
 Pre- or post-paid tokens as a
 $1.82 for call center rep
substitute
 $2.93 for rep. In a branch

E-commerce 22
Prof. S. Rafaeli
Electronic Payment Methods
 Offline Systems
 Secure Servers
 Payment Systems
 Commerce Environments
 Digital Cash
 [smart cards]

E-commerce 23
Prof. S. Rafaeli
Electronic Payment Methods
 SETis the answer, but you have to phrase the
question very carefully…
 Sought after characteristics:
- Wide recognition Middleman:
- Preservation of value Can be the phone
- Hard to counterfeit company, ISP,
- Convenient credit card, etc.
- Anonymous? (or maybe not?)
- Legal? (or maybe not?)
E-commerce 24
Prof. S. Rafaeli
Electronic Payment Methods

E-commerce 25
Prof. S. Rafaeli
Electronic Payment Methods
 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”
E-commerce 26
Prof. S. Rafaeli
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) E-commerce
Prof. S. Rafaeli
27
 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

E-commerce 28
Prof. S. Rafaeli
How First Virtual Worked
(overview)
Customer Merchant

Client Request
Merchant’s
Browser Server

Verification Authorization

Payment
Server

Online Third Party

Processors

Charge Cards Bank Private Label

Credit Cards DigiCash
Accounts Cards
VISA American
Debit J.C. Penney
Express
Cards E-commerce 29
Prof. S. Rafaeli
Why First Virtual Worked
 Credit card # never transmitted over
Internet
 Customer can cancel sales in cases of fraud,
unsuitability of merchandise

E-commerce 30
Prof. S. Rafaeli
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 E-commerce 31
Prof. S. Rafaeli
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

Merchant
? Bank

E-commerce 32
Prof. S. Rafaeli
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

E-commerce 33
Prof. S. Rafaeli
 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

E-commerce 34
Prof. S. Rafaeli
How CyberCash Worked
Merchant

Virtual Wallet Virtual Cash Register

Bank
Bank

$
E-commerce 35
Prof. S. Rafaeli
 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

E-commerce 36
Prof. S. Rafaeli
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
E-commerce 37
Prof. S. Rafaeli
Secure Electronic Transaction
Specification (SET)
 VISA, Mastercard, Netscape, Microsoft
 A standard, not a product
 Specifies
– Customer authentication
– Merchant authentication
– Transaction encryption
– Transaction validation

E-commerce 38
Prof. S. Rafaeli
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
E-commerce 39
Prof. S. Rafaeli
SET

SET supports DES for bulk data

encryption and RSA for signatures and
encryption of keys and bankcard numbers.

$ E-commerce
Prof. S. Rafaeli
40
SET

Merchant

Bank Bank

$
E-commerce 41
Prof. S. Rafaeli
 Example - Payment Method
MMS/Verifone option “out of the box”

Microsoft
Merchant vPOS
Server vGATE
MERCHANT & COMPANY Payment server
VeriFone SET $

Merchant
Cleartext/SSL
Acquirer/processor
MS Wallet and
client control

Cardholder Issuing financial institution Card

$ network

E-commerce 42
Prof. S. Rafaeli
DigiCash
 Trueanonymous peer-to-peer currency -
“CyberBucks”
 Handful of banks and merchants
 Now in chapter 11
Bank Bank

E-commerce 43
Prof. S. Rafaeli
 Digital Cash

 Bi-lateraltransaction (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
E-commerce 44
Prof. S. Rafaeli
Digi-Cash
Transfer
digital cash

Payor Payee
Issue
Cash Check for
Double Spending
Database of
spent “notes”
Bank Digital Currency
Server
E-commerce 45
Prof. S. Rafaeli
Electronic Checks

E-commerce 46
Prof. S. Rafaeli
 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.

E-commerce 47
Prof. S. Rafaeli
 Banks prefer Electronic Checks

 Financialrisk is assumed by the accounting server

and may result in easier acceptance.
 Reliabilityand 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.

E-commerce 48
Prof. S. Rafaeli
 FSTC-Electronic Check Project
CONCEPT
Payer Payee
Accounts
Receivable
Remittance
Remittance
E-Mail or WWW

Signature
Signature Remittance “Card”
Card
Check Check
Signature Signature
Certificate Certificate
Certificate Certificate
E-Mail Deposit
Mail statement Deposit
E-Check line item Signature
check Certificate
Payer’s Bank Certificate
Debit Account ACH or ECP
Payee’s Bank
Clear check Credit Account
Micro-Payments

E-commerce 50
Prof. S. Rafaeli
 Micropayment Applications

To Buy Information To Buy Software

Articles Java applets
Stock quotes and database queries ActiveX Controls
Cartoons and clip-art Software add-ons
Music and videos Games

To Meter/Audit Access
To applications
For services
By security clearance
To shared resources
E-commerce 51
Prof. S. Rafaeli
 Internet Payment Transaction Ranges

Minimum Typical Maximum

Transaction Transaction Transaction
Payment: Value Value Value

Macro $5.00 $50.00 $500.00

Mini $0.10 $1.00 $10.00

Micro $0.001 $0.01 $1.00

Source Digital Equipment Corp.

E-commerce 52
Prof. S. Rafaeli
 Who is the Micropayment Customer?

Traditional New Age “Home Alone”

Content Providers Content Providers Content Providers

 Newspapers  Applet developers  e-zines

 Magazines  Search engines  Personal essays
 Directories  Rating services  Subject indexes
 Book publishers  Serialized soaps  How-To Guides
 Newsletters  Interactive games  Cookbooks
 Photo libraries  Software add-ons  Annotated
 Music publishers  Shopping agents bookmark files

 Clip-art  Buyer/Seller  Personalized

brokering filtering
E-commerce 53
Prof. S. Rafaeli
 Content Provider Requirements

Three usage scenarios...

Per-access purchasing
Based on user need
Infrequent users
Bulk purchasing (aka subscriptions)
Fixed price/fixed duration
Frequent users
Advertising rebates
Ads separate from content
User are paid to read advertising
E-commerce 54
Prof. S. Rafaeli
 Micropayment System Requirements

Overall scheme must:

 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

E-commerce 55
Prof. S. Rafaeli
 Proposed Micropayment
Schemes
Advocate Name Basis

Carnegie Mellon Netbill aggregate credit card

ClickShare Corp. ClickShare aggregate credit card
CyberCash CyberCoin electronic coin
DigiCash ecash digital cash
Digital Equipment Millicent scrip
First Virtual Virtual PIN credit card
IBM micropayment iKP vendor accounts
W3C MPTP vendor accounts

Source Digital Equipment Corp.

E-commerce 56
Prof. S. Rafaeli
 Digital’s Micropayment System Millicent
(now Compaq)

Vendor-specific currency, called scrip

Transactions:
Values down to 0.1 cents
Cost 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”

Source Digital Equipment Corp.

E-commerce 57
Prof. S. Rafaeli
 How Millicent Worked

Scrip
Content
Customer
Provider
Soft goods

Scrip License

$ Money $ Money
Broker

58
Source Digital Equipment Corp. E-commerce
Prof. S. Rafaeli
 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?

E-commerce 59
Prof. S. Rafaeli
Other govt. / legal / political
issues
 Money supply issues?
 Money Laundering?
 Govt. backdoor, trapdoor, Clipper?
 Munitions?

E-commerce 60
Prof. S. Rafaeli
New generation?

 iPIN http://www.ipin.com
(ISP)

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

E-commerce 61
Prof. S. Rafaeli
New generation?

 CheckFree
 Transpoint
 PayMyBills.
com

E-commerce 62
Prof. S. Rafaeli
New generation?

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

Qpass http://www.qpass.com

E-commerce 63
Prof. S. Rafaeli
New generation?

 BEENZ

http://www.beenz.com

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

E-commerce 64
Prof. S. Rafaeli
Stamps as currency?
 E-Stamp http://www.estamp.com

 Stamps.com

E-commerce 65
Prof. S. Rafaeli
New generation, still
 Pay-Pal
(x.com)

E-commerce 66
Prof. S. Rafaeli
URLs (1)
 First Virtual
– http://www.fv.com/
 CyberCash
– http://www.cybercash.com/
 Open Market
– http://www.openmarket.com/

E-commerce 67
Prof. S. Rafaeli
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/
E-commerce
Prof. S. Rafaeli
68
URLs (3)

 iPIN http://www.ipin.com
 eCHARGE http://www.echarge.com
 1ClickCharge
http://www.1clickcharge.com
 Qpass http://www.qpass.com

E-commerce 69
Prof. S. Rafaeli