1 pertemuan 11 ebusiness-ais: trading in the electronic network matakuliah: f0662/ web based...
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Pertemuan 11eBusiness-AIS: Trading in the Electronic
Network
Matakuliah : F0662/ Web Based Accounting
Tahun : 2005
Versi : 1/0
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Learning Outcomes
Pada akhir pertemuan ini, diharapkan mahasiswa
akan mampu :
• Menjelaskan prosedur, resiko dan sistem pengndalian pada trading in the electronic network (e-Business) (TIK-11)
• Sistem pembayaran secara electronis (TIK-11)
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Outline Materi
• Materi 1 Consumer Trading in eBusiness
• Materi 2 The Electronic Payment Systems
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E-Commerce Applications
• Retail and Wholesale: TPS
• Manufacturing
• Marketing
• Investment and Finance
• Auctions
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An Overview of Transaction Processing Systems
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Product and Information Flow for HP Printers Ordered Over the Web
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TPS, MIS/DSS, and Special-Purpose Information Systems
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Traditional Transaction Processing Methods
• Batch processing – method of computerized processing in which business transactions are accumulated over a period of time and prepared for processing as a single unit
• On-line transaction processing (OLTP) - method of computerized processing in which each transaction is processed immediately and the affected records are updated
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Batch versus On-Line Processing
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Integration of a Firm’s TPSs
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Transaction Processing Activities
• Data collection
• Data editing
• Data correction
• Data manipulation
• Data storage
• Document production and reports
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Data Processing Activities Common in Transaction Processing Systems
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Point-of-Sale Transaction System
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Systems that Support Order Processing
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Order Processing Systems
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Business Resumption Planning
The process of anticipating and minimizing the effects of disasters.
• Focuses primarily on two issues: – maintaining the integrity of corporate information– keeping key information systems running until normal
operations can be resumed
• Disaster recovery – implementation of the business resumption plan
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Introductionto
Developed from, David Zolzer, Northwestern State University—Louisiana
E-commerce Payment Systems
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Types of Payment Systems
Cash is legal tender defined by a national authority to represent value
Float is the period of time between a purchase and the actual payment for the purchase
Checking transfers are funds transferred directly via a signed draft or check from a consumer’s checking account to a merchant or other individual
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Most Common Payment Systems, Based on Number or Transactions
Page 284, Figure 6.1
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Most Common Payment Systems, Based on Dollar Amount
Page 285, Figure 6.2
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Types of Payment Systems
Credit card represent an account that extends credit to consumers, permits consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time
Credit card associations are nonprofit organizations that set standards for issuing banks
Issuing banks actually issue credit cards and process transactions
Processing centers or clearing houses handle verification of accounts and balances
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Types of Payment Systems
Stored value payments systems are accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed
Debit cards immediately debit a checking or other demand deposit account
Accumulating balance payment systems are accounts that accumulate expenditures and to which consumers make periodic payments
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Dimensions of Payment Systems
Page 288,
Table 6.1
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Current E-commerce Payment Systems
Digital Cash generate a private form of currency that can be spent at e-commerce sites
Online store value systems rely on prepayments, debit cards, or checking accounts to create value in an account that can be used for e-commerce shopping
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Current E-commerce Payment Systems
Digital accumulating balance payment systems accumulate small charges and bill the consumer periodically. These systems are especially suited for processing micropayments for digital accounts
Digital credit accounts extend the online functionality of existing credit card payment systems
Digital checking systems create digital checks for e-commerce remittances and extend the functionality of existing bank checking systems
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How an Online Credit Card Transaction Works
Page 292, Figure 6.4
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Limitations of Online Credit Card Payment Systems
Security Neither the merchant not the consumer can be fully authenticated
Merchant Risk Consumers can repudiate charges
Cost Roughly 3.5% of purchase plus transaction fee
Social Equity Young adults do not have credit cards Almost 100 million adult Americans cannot afford cards or are
considered poor risks
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SET: Secure Electronic Transaction Protocol
An open standard for the e-commerce industry developed and offered by MasterCard and Visa as a way to facilitate and encourage improved security for credit card transactions
Uses a digital certificate to verify a sender’s identity
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How credit cards work
Visa Net
Acquirer
Issuer
Merchant
Duncan Unwin, QSI Payments Inc., 2000Duncan Unwin, QSI Payments Inc., 2000
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Electronic Payments:SET: Visa, Mastercard
Specification which:• use public-key and private-key cryptography• authenticate cardholders and merchants using digital certification• provide confidentiality of payment data merchant does not see the credit card number
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How SET Transaction Work
Page 295, Figure 6.5
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B2C Digital Payment Systems
Digital Wallets Digital Cash
Online Stored Value Systems Smart Card Stored Value Systems
Digital Accumulating Balance Payment Systems
Digital Credit Card Payment Systems Digital Checking Payment Systems
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Digital money and electronic payment
I. What is money?
• What is digital money?
• A digital money system
• Ecash and stored value cards
II. Electronic payment systems
• What types of transaction schemes are being used?
• How can payments be settled?
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What is money?
“Money is in reality a symbolic representation of value, rather than true value itself
[It is] an institution for a transparent exchange of goods and services based upon a convenient unit of transaction ... universally accepted within a given societal group
Today not all money is tangible: increasingly, information about money is becoming more important than money itself”Srivastava, L. and Mansell. R. (1998). Electronic Cash and the Innovation Process: A User Paradigm
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“Money was originally a physical substance .... It could … be alive, as cattle were one of the oldest forms of money. Today although much of the money used by individuals … is still in the form of notes and coins its quantity is small in comparison with the intangible money that exists only as entries in bank records.
If experiments with … digital cash succeed then perhaps coins and banknotes will become as obsolete as cowrie shells. If that happens the change in the nature of money will surely have significant effects on society.
The challenge … is to ensure that such changes are beneficial to … society in general.”Davies, R. (2003). Electronic Money, or E-Money, and Digital Cash http://www.ex.ac.uk/~RDavies/arian/emoney.html
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“Money” is only a state of Mind; not a reality in, of, or for, itself. Many people often seek it as if it were the real or the only ends to be obtained through one’s efforts. If money remains a state of Mind, therefore a spiritual reality and not an end in itself, then you always will have what you truly need and deserve. Money as an energy principle of spiritual reality, naturally flows to us as we earn a right livelihood. Be concerned with the quality of the service you give to others … and you will be working with the flow.
Money flows in unseen channels like electricity flows through wires. Because it is spiritual energy in motion, we never really have “possession” of it. To be preoccupied with possessing it … squanders our own Life energy…McMurphy, J. (2002). What is money? http://www.innerself.com/Money_Matters/What_is_Money.htm
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Paper money is guaranteed by law to have redeemable stored value
It is a medium of exchange and a measure of value
This gives us confidence to use checks, credit and debit cards and to use electronic transfer of funds
In large-scale wholesale transactions, money can be seen as “transactional information”
It is transmitted electronically over closed, wire transfer systems
Now, money in retail transactions is becoming electronic
Digital cash is an electronic “proxy” for paper $
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Historically, precious metals became the standard of value backing money
They became more important than other commodities because they are
Portable , divisible, durable
Homogeneous, recognizable, secure
Stable in value
Valuable and available in small amounts
The world adopted the gold standard as the basis of the value of money during the 1800s
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Goods and services are no longer purchased with other goods and services (barter), or gold or silver (early money economy)
We use paper “fiduciary monies” or credit instruments
These instruments are represented by paper, plastic, or metallic tokens
Checks, bank notes, government issues
A credit card is a written promise to pay
They are fully functional forms of money with an exchange value rated in terms of the basic unit of money (usually a fixed quantity of gold or silver)
These are offset against each other in the banking system, so little gold or silver needs to be transferred
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Hard currency (notes and coins) is considered the most liquid monetary asset there is
It can quickly be turned into money (liquidity)
This is very convenient, but currency does not hold its value as well as other assets
It does not earn interest and its real value drops during periods of inflation
A dollar remains a dollar, but due to inflation its purchasing power will be less
Less liquid assets (savings, art, land) earn interest or appreciate in value
They are not as affected as money is by inflation, although they are harder to convert to money
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The value of money depends on the confidence of those who use it
The dollar has value because it is widely accepted as a means by which to exchange goods and services
Money has three main functions:
Means of exchange
Without money, we would have to exchange goods and services directly (barter)
Unit of measurement
Money allows us to compare the value of goods and service
A standard for pricing goods and the means of buying and selling them
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Money is
A unit of measurement (more)
We can compare costs, income, and profit across time
It is a foundation of the accounting system and allows us to plan and make economic decisions
A means of storing purchasing power for future use
As a reserve, money allows us to accumulate savings over time and to lend those savings to someone else
It makes it much simpler for us to make contracts
We use it to promise to do something now for payment in the future
The Bank of Canada (2002). What is money? http://www.bankofcanada.ca/en/backgrounders/bg-m1.htm
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“Electronic money and electronic payments systems for retail transactions are commanding widespread attention.
These systems, wherein neither legal tender, nor paper checks, nor credit-card numbers change hands at the time of purchase, have already started to spread across the globe. They offer significant and profitable opportunities for changing the way consumers pay for the widest possible range of goods and services.”United States Department of the Treasury Conference (1996). An Introduction to Electronic Money Issues. Toward Electronic Money and Banking: The Role of Government. p. 1.
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Electronic money is a store of monetary value, held in digital form, which is available for immediate exchange in transactions
It is a new form of currency that acts as a generalized medium of exchange
Gold --> Paper $ --> Plastic --> Digital cash
It is an electronic replacement for physical cash (a file)
It is easily stored, transferred, and difficult to forge
It has no intrinsic value: “numbers are money”
As with paper $, there is a “promise” to convert it to physical cash
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“Commodity money circulates because the stability of the society gives ground for confidence that the money will continue to be accepted habitually in exchange for goods and services. Similarly, the credit instruments of any government, bank, corporation, firm, or individual will circulate more or less widely in proportion to public confidence in its promises to pay.
Likewise, a possible introduction of a digital cash system will require a period of long-term trust” Kienzle, J, and Perrig, A. (1996). Digital Money: A divine gift or Satan's malicious tool? http://lglwww.epfl.ch/~jkienzle/old/Digital_Money/node10.html
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Digital cash is a “payment message bearing a digital signature which functions as a medium of exchange or store of value”
It is an idea recorded in the hard drive of a computer
To have value, digital cash must be exchangeable for ordinary cash
It must be be exchangeable for goods or services priced in terms of ordinary or digital cash
Like a typical check, it represents an obligation of a private company rather than the central bank or treasury
Typically it will not be issued by the government
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Berentsen, A. (nf). Digital Money and Monetary Control. ISOC. http://www.isoc.org/inet98/proceedings/ 3f/3f_2.htm
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There are two types of e-money
Identified e-money
Contains information revealing the identity of the person who originally withdrew it from the bank
It enables the bank to track the money as it moves through the economy (like credit cards)
You request digital cash from your bank
The bank signs a file (an amount of emoney) with its secret key and sends it to you
The amount is debited from your account
You verify this signature with the bank’s public key
You know it’s valid and you can spend it
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Banks will have multiple private keys
Different denominations would be signed with different private keys
When the bank issues the cash it
Subtracts that amount from your account
Records the identifying number of the electronic note and who it was issued to
When making a purchase, the shop contacts the bank to verify that the money is a valid
The bank checks its records to see if it is a valid note and to ensure that the note has not already been spent
If the verification occurs, the bank credits the shop’s account, debits your account, and you get the stuff
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This system provides security for all parties
Because of the bank’s digital signature, the customer knows that the bank note is valid
The shop can verify that the note is legal tender
The bank can ensure that the note is not spent more than once
The spender of the electronic note can be traced because the bank keeps a record of each note spent
In this way anybody who cheats can easily be tracked down
Since all financial transactions can be traced, law enforcement can more easily investigate fraud, money laundering, tax avoidance and other irregularities
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Anonymous e-money is known as digital cash and works like real paper cash
Once withdrawn from an account, it can be spent or given away without leaving a transaction trail
It is created with blind signatures
A blind signature allows a person to get a file digitally signed by another party without revealing information about the file to the other party
It involves multiplying the file by a random number and encrypting it with the other’s public key
They decrypt the file, sign it and return it
Divide by the random number and restore the file with the signature
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Blind signatures
You create your own emoney “coins” which are tagged with ID numbers randomly generated by your emoney software
The coins are “blinded” by a random number used to multiply the ID numbers (but not the value of the coins)
They are sent to the bank, each in its own digital “envelope”
The bank encodes the blinded numbers with its private key, debits your account, and sends them back to you
Your emoney software removes the “blinding”
You now have a valid emoney and since your software has removed the “envelope,” the bank can’t track the your use of the money
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There are two varieties of each type of e-money
Online emoney requires interaction with a bank via modem or network to conduct a transaction with a third party
Offline emoney means you can conduct a transaction without having to directly involve a bank
This type of e-money (true digital cash) is the most complex form of e-money because of the double-spending problem
Once I give it to you, I should not be able to spend it again
How can we prevent this?
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Online Offline
Identified
Anonymous
Types of emoney
Exists as a file
Traceable to you
Tracked by bank
On a smart card
Traceable
Renewable
Exists as a file
Not traceable
Tracked by bank
On a smart card
Not traceable
Hard to track
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A digital money system requires
Security
Two people should be able to exchange digital cash without any party being able to alter or reproduce the electronic token
The transaction protocol must ensure high-level security with sophisticated encryption techniques
This involves using private key encryption
The authentication of sender and receiver involves digital signatures
Online verification can prevent double-spending, or other off-line techniques must be used
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User-friendliness
Users should not have to understand the cryptographic techniques involved in the exchange
The workings of the protocol should be transparent to them
Digital cash should be simple to use
It should be easy to spending perspective and to accept as a form of payment
Complicated systems are difficult to administer and raise the failure rate due to errors of the user
Simplicity leads to a critical mass of users and this leads to wide acceptability
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Portability
People should be able to easily carry their digital cash and exchange it within alternative delivery systems
Non-computer-network delivery channels should be able to handle digital money
The security and use of digital cash should not be dependent on any physical location
The cash can be transferred through computer networks and off the computer network into other storage devices
Digital wealth should not be restricted to a unique, proprietary computer network
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Transferability
Digital cash should be transferable to other users
If I pay the bill for three friends, they should be able to easily transfer their share of the bill to me
Peer-to-peer payments should be possible without a third party
Neither party should be required to have registered merchant status
Neither party should have to be online to do this
Digital money can then be used for gifts, charity, or tips
Other person-to-person payments become possible, like payments to children, friends, colleagues or neighbors
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Anonymity
Anonymous digital cash allows personal financial privacy
It is untraceable
A digital cash withdrawal cannot be associated with its subsequent deposit
Transactions made with it are unlinkable.
It is impossible to associate two different digital cash transactions made by the same person with each other
Grabbe, J.O. (nd). Digital Cash and the Future of Money http://www.aci.net/kalliste/dcfutmo.htm
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Digital money has to preserve the privacy of those engaged in the transaction
The anonymity of physical cash should be carried into this world
Encryption separates payment information from buyer identity
Only the value is transferred
It must be non-refutable
Electronic receipts can be stored on the device
It must be divisible
Digital cash in a given amount must be able to be subdivided into smaller amounts (fungible)
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You must be able to write a digital check
You should be able to fill in the amount of money that you want to pay onto some sort of digital form
This form can be easily transferred to another party
There must be a record of this transaction
Digital cash should last forever
You should be able to store it somewhere safe for years and then be able to retrieve it for use
It should not expire
It should maintain value until lost or destroyed provided that the issuer has not debased the unit to nothing or gone out of business
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It must have value, acceptability, availability, security, and convenience
Many retailers and banks must accept it
We trust that it can be converted
It must be easy to use
It should minimize transaction costs
Non-cash payments involve verification and authentication for each transaction (ex: checks)
Offline, cash is used for 85% of all transactions, even though it accounts for 5% of the value of these transactions
Digital money will serve a similar function
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How is electronic money (e-money) possible?
Cryptography and digital signatures make it possible
Banks and customers have public-key pairs
They use public keys to encrypt (security) and private keys to sign (identification) blocks of digital data that represent money orders
A bank “signs” the orders using its private key and customers and merchants verify the signed money orders using the bank’s public key
Customers sign deposits and withdraws using their private keys and the bank uses their public keys to verify the signed withdraws and deposits
Miller, J. (2002). E-money mini-FAQ (release 2.0). http://www.ex.ac.uk/~RDavies/arian/emoneyfaq.html
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E-cash transmutes between digital and actual money as transactions proceed between various entitieshttp://www.byte.com/art/9801/img/018cs7a2.htm
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http://filebox.vt.edu/users/ licai/ch2.htm
A typical ecash transaction
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Guiding principles of ecash
Independence: its security must not depend on its existence in any physical location
Security: it can’t be reusable and can’t be respent
Privacy: it can’t be traced and must protect the privacy of the users
Offline payment: merchants should not have to have a net connections to make it work
Transferability: it must be able to be moved from one person to another without traces of identity
Divisibility: it must be able to be broken into smaller amounts
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How it might work
It depends on public-key cryptography and digital signatures
Banks and customers have public-key encryption keys
They use their keys to encrypt (for security) and sign (for identification) blocks of digital data that represent money orders
A bank “signs” money orders using its private key
Customers and merchants verify signed money orders with the bank's widely published public key
Customers sign deposits and withdraws using their private key and the bank uses the customer's public key to verify the signed withdraws and deposits
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How ecash works
Customer generates an electronic banknote with a random serial number
A “blinding factor” is applied to the serial number so the bank cannot trace the banknote in the future
A third party to handle and sign the message without being able to see the actual message.
The blinded message is untraceable
Customer sends the blinded e-banknote to the bank
The bank deducts the amount from the customer's account, signs the banknote (encrypts it) and sends it back to the customer
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Customer removes the blinding factor from the note and uses it to make a purchase at a shop
The shop verifies the authenticity of the note using the bank’s public key and sends it to the bank
The bank checks the note against a list of notes already spent
If it’s good, it deposits the money into the shop’s account, and sends back a confirmation to the shop
The shop then sends out the goods to the customer
70http://www.cs.newcastle.edu.au/.../ ecash/ecash.html
How ecash works
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Why use digital $?Greater efficiencies and lower costs for businesses
Ecash eliminates the costs of handling coins and paper
The estimated cash handling cost for U.S. retailers and banks is over $60 billion annually
“Studies have shown that a financial institution saves between $.75 and $1.25 for each payment converted from a deposit made with a teller to Direct Deposit”
“Annual costs savings to the banking industry as a result of these new electronic payments should run between $350 million and $500 million.”
-National Automated Clearing House Association
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Ecash provides merchants with cost savings from
Reduced collection and deposit float associated with coin, currency, and checks
Faster funds availability
Increased sales due to faster throughput at checkout
Consumer tend to spend more with stored value cards
Less tangible cash on hand
Reductions in some forms of fraud, since devices can be fitted with tamper-resistant chips and strong
crypto protocols
Micromarketing
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Expanding electronic government payments
The Debt Collection Act of 1996 mandated government. use of EFT for all govt. payments, except tax refunds, by 1999
It includes anyone who, on or after July 26, 1996:
Applies for federal or retirement benefit payments;
Begins employment with a federal agency;
Enters into a contract or purchase order with the govt.
Files or renews a grant application
After 1/1/99, all payments to individuals and businesses, including those without accounts at a financial institution, must be made electronically
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Digital money is information stored on a computer chip in a plastic card or on a personal computer so that it can be transmitted over the net
These products differ in their technical aspects from conventional forms of payment
There are two basic ways of representing the value of funds stored on an ecash device:
Balance-based: a single balance is stored and updated with each transaction
Note-based: electronic “notes,” each with a fixed value and serial number, are transferred from one device to another
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Stored value cards
Digital money is a claim on a party, most commonly, the issuer, stored in the form of computer code on a credit card sized card or on the hard drive of a computer
Consumers purchase the claim with traditional money
Consumers exchange the claims for goods and services with merchants who are willing to accept the claim as payment
Cards representing such claims often go by the name “stored value cards” (SVCs)
Cards containing computer chips are called “smart cards”
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SVCs represent either “closed” or “open” systems
Closed SVCs are limited to a few outlets regardless of location or to many in a relatively small geographic area
An example of a closed-system SVC is the “merchant- issuer” model system
The card issuer and the seller of the goods and services are one and the same
Examples include:
The farecard used by riders of the subway system in Washington, D.C.
Student smart cards or merchant credit cards
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The user buys a claim on the merchant issuer with traditional money and receives digital money in return
When the user buys goods or services from the merchant-issuer, special point of sale (POS) devices record the transactions with the merchant
The POS device reduces the value of the digital money recorded on the card by the amount of the purchase
Although consumers make purchases with digital money, the system is linked to the payment system by the merchant-issuer’s relationship with its bank
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SVCs that consumers can use at many different businesses over a large geographic area are an open system
They work in the same manner as bank-issued closed-system SVCs
One difference is that a greater variety of businesses over a relatively larger geographic area accept them
Another is that there can be third party sellers of digital money
This means bypassing banks in transactions
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There is a second type of open system
Digital money systems can operate independently of banks and outside traditional payments systems
The user buys digital money from issuers using traditional money
She “spends” it at a merchant, who then sends the digital money to the issuer
It is redeemed with some form of traditional money such as a check on a bank balance
In this system, the digital money does not pass through the traditional payments clearing system, but circulates outside it
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In expansive open systems, digital money circulates among users before being used with merchants, in much the same manner as traditional cash
Users have their own special computer equipment allowing them to transfer digital money from one user’s card to another
This “peer-to-peer” transfer does not clear the traditional payment system (in contrast to peer-to-peer transfers involving paper checks)
The only points of contact between traditional payment systems and digital money is the initial purchase of digital money from the issuer with the use of traditional money and redemption of digital money by merchants
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Smart cards are a technology for carrying digital money
Memory cards: data storage space and password/PIN access
Shared key cards: contain a secret key and can exchange data with other cards sharing the key
Signature transporting cards: contain digital “blank checks” that can be used in transactions
They are large pregenerated random number sequences that can be assigned a denomination and
signed
These are $1.50-$3.50 for the chips and production
Signature creating cards: can generate the random number sequences to use as checks
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Most digital money systems are aiming at universal accessibility
This will depend on the widespread public acceptance of electronic cash
To reach this level of acceptance will require a considerable investment by the financial services industry and by merchants
It is expected that these costs will be transferred to the end-user
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Digital money and electronic payment
I. What is digital money?
• Why use it?
• Ecash and Stored value cards
II. Electronic payment systems
• What types of transaction schemes are being used?
• How can payments be settled?
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Electronically based payment systems have been around since the 1960s
Banks use electronic funds transfer (EFT) to exchange “money”
It is a transfer of debt from one bank to another
Much of the money held by banks is in the form of debts owed by them or to them
The evidence for this debt is in the bank’s computers
EFT systems manage the information concerning these monetary debts
They allow rapid and efficient transmission of data about these debts between banks and the updating of
the debt records
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EFT systems and retailer point of sales systems combine as EFTPOS (Electronic Funds Transfer at Point-of-Sale)
The amount of the buyer’s purchase is entered into a POS terminal using a plastic card
The data relating to this purchase are sent to the appropriate bank using a telecommunication link
This bank then deducts the funds from the buyer’s account and transfers the amount to the seller’s account
The buyer’s bank credits the seller’s account and takes on a debt to the seller
The system immediately changes the information concerning indebtedness and starts charging interest
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General Issues in the banking environment
Banking regime is a highly complex and interrelated global system
Multiple forces affect the evolution of banking:
Consumer spending habits
Interest rates/cost of money
Federal Reserve policy
Regulatory regime
In general, the large and stable banks are losing ground to more non-traditional companies and services
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Different components of the banking process are electronic to differing degrees
Risk is an impediment, but not a driver
The elimination of risk through security is not sufficient to promote home banking
Banking is regulated by many different agencies (state governments, Federal Reserve, Office of the Comptroller of the Currency, FDIC)
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How can payments be settled?
Debit/Credit
This refers to the way banks deal with transactions
Credit: The bank pays the creditor before receiving payment from the purchaser
Debit: The bank receives funds from purchaser before paying creditor
This is a “pre-paid” system
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Immediate/Delayed Settlement
Here there is a time lag between the clearing of the payment and its settlement
There is a time lag between the payer and the intermediary (the bank)
When you pay off your credit card
There is also a lag between the receiver and the intermediary
When the merchant gets paid
The purchaser benefits from the “float”
The bank charges interest to cover the costs of assuming risk for completing the transaction
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Gross/Net
This is a relationship between clearing and settlement
Gross payment is a one-to-one relation
Each transaction has its own settlement
Net payment is many-to-one
Transactions are “batched”
Net payment systems have lower operational costs (fewer settlements) but higher risks
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Anonymous/Identified
To what extent must the parties be identified in the transactions and settlements?
Anonymous work well for small transactions but are riskier
There is more need for authentication with large transactions
Fixed/Fraction
What is the fee structure of the transaction?
Fixed fees cover the fixed costs of the transaction
Fractional fees more efficient for risk fees and short term credit (microtransactions)
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Types of Services: What do people do?
Bill payment
Purchasing instruments
Transfer of money
Borrow money
Seek information (Inquiries, Statements)
Cheat, steal, and defraud!
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Bill Payment
Becoming one of the most frequently performed activities on home computers
Drivers include: need for more time, decreasing costs of software and hardware, bank promotion
Generally a replacement for writing a check to pay a bill
This is being extended to mortgage and loan payments as well
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Bill Payment: institutions generally charge by the transaction (or a flat fee for a fixed number of transactions)
Banking institutions, clearinghouses/brokers
Checkfree http://www.checkfree.com
e-Bills are delivered right to your computer
Involves 100s of companies
e-Bills give you a real-time payment history who you paid, when you paid them and for how much
You schedule to pay e-Bills at a specific time each month or make payments whenever you want
e-Bill payments are guaranteed
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Purchases
Focus of most discussions about Internet and other electronic commerce
Payments for purchases tend to be made by
Credit card
Debit card
Stored value card
Electronic money
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Stored-Value Cards
Value is actually stored in computer chips embedded in a card
SVCs are considered more secure than credit or other bank cards
Requires specialized hardware at the vendor’s point of sale
Mondex (recently purchased by MasterCard) is one of the largest manufacturers
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Experiments have included road tolls and university financial aid
Advantages to merchant include:
Increased security (both from fraudulent customers and from fraudulent employees)
Lower transaction costs
No online authorization required
Avoids costs associated with cash and check handling
Can be efficient for microtransactions
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Credit Cards
Consumer is issued credit card by issuer (generally a bank or its agent)
Merchant has an account with an “acquiring” institution (which allows it to accept credit cards)
Acquiring Institutions: Citicorp, NaBanco, First Data, Bank One, GE Capital, First USA, EDS, Discover, American Express
The processing agent actually generates the authorization and processes the charges:
First Data, Global Payment Systems, VisaNet/Vital, Wells-CES , Nova, Checkfree
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How can these transactions be carried out over the web?
1. Customer sends his ID or encrypted credit card number to the shop
Shop sends request for payment to the Credit card company, which confirms customer by e-mail
After the confirmation, payment is made and customer is billed, typically conventionally
Card number itself never goes through the net unencrypted
Security X Peer-to-peer -
Low fees - Untraceability -
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2. Person “A” issues an electronic check
He sends it to person “B” and informs the bank of his check
Person “B” asks for payment from the Bank
After the confirmation, the bank transfers money from person A’s account to person B’s account
Security X Peer-to-peer X
Low fees X Untraceability -
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Checks are closer to cash than to credit cards, because peer-to-peer transfers are possible
Micro-payments are possible but banks are reluctant to process them (high cost of check clearance)
CyberCash, NetCheck, and others offer digital checks which are transferable between individuals
A customer opens an account in a netbank andissues an electronic check to pay a bill
The recipient of this digital check sends it to the netbank to confirm and cash it
Security is guaranteed by encryption and the bank's confirmation process with the issuer of the check (although the check can be traced across users)
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3. Person “A” asks the bank to issue digital cash
The bank issues digital cash and reduces the account by that amount
“A” sends it to person “B”
“B” asks the bank for payment
After confirming that the digital cash is not double-spent, the bank increases “B’s” account by that
amount
Note that the bank cannot know who sent that digital cash to person “B “
Security X Peer-to-peer X
Low fees X Untraceability X
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First, an Internet user opens an account with real money at a netbank
The customer asks the bank to issue a certain amount of digital cash for use on the Internet
The bank issues this digital cash using encryption and deducts the funds from the established account
When an individual uses digital cash, the encrypted data that defines the actual electronic currency is given to the merchant
The merchant in turn sends this data to the bank to confirm it
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If the bank confirms that the digital cash is real, the bank credits the merchant's bank account by that amount
It can also issue the merchant a sum of digital cash in the same amount
Only the bank can confirm that this data - or, digital cash - is legitimate and actually issued by the bank
Only the bank can verify that this that this data has not been used elsewhere, or double-spent
The bank cannot know who used the digital cash, as long as customers of the bank do not use it twice
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Digital cash will make transactions more efficient
It will make transactions less expensive because the cost of transferring digital cash is low
Traditional money transfer requires branches, clerks, ATMs, and specific electronic transaction systems
Overhead is paid for by from fees for money transfers and credit card payments
Ecash uses the net network and the computers of its users, so the cost of digital cash transfer is close to zero
With the transaction completed on the net, the transfer fee and bank tips are zero
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This low cost for transactions enables micro-payments, like 10 cents or 50 cents, to be possible
This may encourage a new distribution system and fee structure for music, video, and software
This is “super distribution”
This ability to finally handle micro-payments might also provide a solution for the payment of fees to authors and publishers for use of copyrighted materials in electronic form
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Also, digital cash is also borderless
The cost of transfer within a state is almost equal to the cost of transfer across different states
The cost of international money transfers, now much higher than transfers within a given state, will be reduced dramatically
It may take more than a week to send a small amount of money to a foreign bank
If a given foreign bank accepts digital cash, this delay is significantly reduced (as are the costs)
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Digital cash payments potentially can be used by anyone with access to the net and to an netbank
While credit card payments are limited to authorized stores, digital cash makes person-to-person payments possible
Even very small businesses and individuals can use digital cash for all sorts of transactions
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Secure Electronic Transactions Standard (SET)
Jointly developed by Visa and Mastercard; supported by GTE, Microsoft, Netscape, Verisign, IBM, and others
SET is a standard that allows secure credit card transactions on the net
Using digital signatures, SET enables merchants to verify that buyers are who they claim to be
It protects buyers by providing a mechanism for their credit card number to be transferred directly to the credit card issuer for verification
It allows billing without the merchant being able to see the number
110http://www.byte.com/art/9706/img/067csd2.htm
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Microtransactions
Concept has generated much interest on the Internet
Micropayments are financial transactions for less than $1.00
They are prevalent offline and typically executed using cash
Online they are rare, because payment methods are too costly for merchants to process small transaction amounts
The costs of processing the transaction must be lower than the cost of the goods and services
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Microtransactions are dependent upon low transaction costs
Generally considered most promising for sale of “soft” goods such as information, software, and entertainment
Question: Will consumers want to pay for such information?
If so, how much?
How can the transaction costs be made low enough for the merchant?
Strategies could include: batching, giving up verification, giving up retractability
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Peppercoin http://www.peppercoin.com
It uses mathematical probability to efficiently and profitably process small transactions
Does not use transaction aggregation
Using mathematical probability requires far less overhead than traditional transaction-aggregation techniques
It reduces merchant transaction costs to a few pennies per transaction
They can increase revenue through the sale of low-priced content
Consumers have a single Peppercoin account across multiple merchants
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PepperCoins are:
Cryptographically secure: it uses RSA digital signatures
Universal and easy-to-use: any consumer can pay any merchant using PepperCoins
No subscriptions are needed
Sealed and tamper-proof: it functions like pocket change and cannot be altered
They can be sent across any channel, including e-mail and text messages
Connectivity independent: merchants do not have to check with the bank or payment service provider when receiving a Peppercoin
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Paypal (an eBay Company) http://www.paypal.com
It enables individuals or businesses with an email address to securely, easily and quickly send and receive payments online
It uses the existing financial infrastructure of bank accounts and credit cards
It has a proprietary fraud prevention system to provide a safe, global, real-time payment solutions
It has 40 million account members in 38 countries
Buyers and sellers on eBay, online retailers, online businesses, and offline businesses transact with PayPal
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Verisign Payflow (was Cybercash) http://www.verisign.com/products/payment.html
Payflow Pro accepts credit cards, purchase cards level 2 and 3 (for supported processors) and electronic checks online
It can be used to process orders received offline via telephone, fax, e-mail or in person
Integrates with shopping carts
Merchant purchases and installs software
Sets up account with credit card companies and bank
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How it works
Install Payflow Pro API client software on server
It establishes SSL connection between storefront and VeriSign’s payment processing servers
Customer makes a purchase on storefront
Storefront passes transaction data to Payflow Pro client
The client passes the information to VeriSign
Payflow payment processing cycle begins
VeriSign securely routes customer information to a network of banks, processors and other financial institutions
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When the transaction is approved, approval information is sent to VeriSign
VeriSign sends you and the customer email confirmation that the transaction was approved
The entire approval process takes less than three seconds (on average )
The client sends acknowledgement to VeriSign that you have received the approval information
You decide to accept or reject the transaction
Once you accept, your acquiring bank credits your Internet Merchant Account
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Transfers and Information
Examples:
Stock brokers: Etrade, e.Schwab
Mutual fund companies: Vanguard, AIM
Annuities: TIAA/CREF
Banks/S&Ls/Credit Unions: IU Credit Union
Microsoft, Intuit, and CheckFree have
developed a standard for exchange of financial information over the Internet (Open Financial Exchange)
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Summary
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