Electronic Commerce

Eighth Edition

Chapter 11
Payment Systems For Electronic
Commerce
 Learning Objectives

In this chapter, you will learn about:

• The basic functions of online payment systems
• The use of payment cards in electronic commerce
• The history and future of electronic cash
• How electronic wallets work
• The use of stored-value cards in electronic
commerce
• Internet technologies and the banking industry

Electronic Commerce, Eighth Edition 2

 Online Payment Basics

• E-commerce
– Exchange money for goods or services
– Important function: handling Internet payments
– B2B payment transactions
• Electronic funds transfers (EFTs)
• B2C payment transactions
– Evolving and competing for dominance
– Customer convenience, saves companies money
• Bill mailed by mail costs $1.00 to $1.50
• Internet billing cost: 50 cents

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 Online Payment Basics (cont’d.)

• Four basic means to purchase items in B2C

(traditional and electronic)
– Cash, checks, credit cards, debit cards
• 90% of all United States consumer payments
• Electronic transfer: small but growing
• Most popular: automated payments
• Credit cards
– Worldwide: 90% of online payments
– United States: 97% of online payments

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Electronic Commerce, Eighth Edition 5
 Online Payment Basics (cont’d.)
• Scrip
– Digital cash minted by a company
• Cannot be exchanged for cash
• Exchanged for goods or services by company issuing
scrip
– Like a gift certificate: good at more than one store
– Current scrip offerings (eScrip)
• Focus: not-for-profit fundraising market
• Merchant should offer customers payment options
– Safe, convenient, widely accepted
– Companies sell payment processing package service

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Electronic Commerce, Eighth Edition 7
 Payment Cards
• General term describing all types of plastic cards
consumers (businesses) use to make purchases
– Categories: credit cards, debit cards, charge cards
• Credit card (Visa, MasterCard)
– Spending limit based on user’s credit history
• Charge purchases against credit line
– Options for user billing cycle payments
• Pay off entire credit card balance; pay minimum
amount
• Card issuers charge unpaid balance interest
– Accepted worldwide, 30-day dispute period

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 Payment Cards (cont’d.)

• Credit card (cont’d.)

– Card not present transactions
• Cardholder not present during transaction
• Requires extra security
• Debit card
– Removes sales amount from cardholder’s bank
account
– Transfers sales amount to seller’s bank account
– Issued by cardholder’s bank
• Carries major credit card issuer name

Electronic Commerce, Eighth Edition 9

 Payment Cards (cont’d.)

• Charge card (American Express)

– No spending limit
– Entire balance due at end of billing period
– No line of credit or interest charges
– Examples: department store, oil company cards
• “Payment card”
– Refers to credit cards, debit cards, and charge cards

Electronic Commerce, Eighth Edition 10

 Payment Cards (cont’d.)

• Single-use cards
– Cards with disposable numbers
• Addresses concern of giving online vendors payment
card numbers
– Not used much anymore
• Problem: required consumers to behave differently

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 Advantages and Disadvantages of
Payment Cards
• Advantage for merchants
– Fraud protection (built-in security)
• Charge paid through issuer of payment card
• Advantage for U.S. consumers
– Liability of fraudulent card use: $50
• Card issuer frequently waives $50 charge if card stolen
• Good for merchants and consumers
– Worldwide acceptance
• Currency conversion handled by card issuer

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 Advantages and Disadvantages of
Payment Cards (cont’d.)
• Disadvantage for merchants
– Per-transaction fees, monthly processing fees
• Cost of doing business
– Goods and services prices are slightly higher
• As opposed to environment free of payments cards
– For payment:
• Merchant must first set up merchant account
• Disadvantage for consumers
– Annual fee

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 Payment Acceptance and Processing

• Internet payment card process easier than physical

store process
• EMV standard
– Single standard handling payment card transactions
– Visa, MasterCard, MasterCard International
• United States online stores, mail order stores
– Must ship merchandise within 30 days of charging
payment
• Violation penalties are significant
• Most do not charge payment card accounts until
merchandise shipped
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 Payment Acceptance and Processing
(cont’d.)
• General steps in payment card transactions
– Merchant receives payment card information
– Merchant authenticates payment
– Merchant ensures funds are available and puts hold
on credit line or funds to cover charge
– Settlement occurs (few days after purchase); funds
travel between banks and are placed into merchant’s
account

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 Payment Acceptance and Processing
(cont’d.)
• Open and closed loop systems
– Closed loop systems
• Card issuer pays merchant directly
• Does not use intermediary
• American Express, Discover Card
– Open loop systems (three or more parties)
• Third party (intermediary bank) processes transaction
• Visa, MasterCard: not issued directly to consumers
• Credit card associations: operated by association
member banks
• Customer issuing banks: member banks
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 Payment Acceptance and Processing
(cont’d.)
• Merchant accounts (acquiring bank)
– Bank doing business with sellers (Internet, non-
Internet) wanting to accept payment cards
– Merchant account
• Required for online merchant to process payment cards
– Acceptance by bank of merchant account
• Merchant must provide business information
• Risk of business type assessed
– Bank collects credit card receipts on merchant’s behalf
• Credits value in merchant’s account

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 Payment Acceptance and Processing
(cont’d.)
• Merchant accounts (cont’d.)
– Chargeback
• Cardholder successfully contests charge
• Merchant bank must retrieve money from merchant
account
• Merchant may have to cover chargeback potential
– Problem facing online businesses
• Level of online transaction fraud
• Fewer than 5 percent of credit card transactions
completed online; accounts for 60 percent of total credit
card dollar amount fraud

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 Payment Acceptance and Processing
(cont’d.)
• Processing payment cards online
– Payment processing service providers
• Companies offering payment card processing
– Example: InternetSecure
• Supports Visa and MasterCard payments for Canadian
and U.S. accounts
• Provides risk management and fraud detection
• Handles online merchants transactions
• Uses existing bank-approved payment card processing
infrastructure, secure links, and firewalls

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 Payment Acceptance and Processing
(cont’d.)
• Processing payment cards online (cont’d.)
– First Data
• Provides merchant payment card processing services with
ICVERIFY and WebAuthorize programs
• ICVERIFY: for small retailers using Microsoft Windows
electronic cash registers, point-of-sale terminal systems
• WebAuthorize: for large enterprise-class merchant sites
– ICVERIFY, WebAuthorize connect directly to:
• Network of banks: Automated Clearing House (ACH)
• Credit card authorization companies
• Connect to ACH through highly secure, private leased
telephone lines

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Electronic Commerce, Eighth Edition 21
 Payment Acceptance and Processing
(cont’d.)
• Processing payment cards online (cont’d.)
– Merchant Warehouse’s PayFlow Link system
• Online payment system developed by CyberCash
• Now operated by VeriSign
– InfoSpace’s Authorize.Net
• Online, realtime payment card processing service
• Merchants link to system by inserting small HTML code
block into transaction page
• Order encrypted, transferred to Authorize.Net server
• Server relays transaction to bank network
• Customers not aware of third-party supplier (usually)
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 Electronic Cash

• Electronic cash (e-cash, digital cash)

– Describes any value storage and exchange system
created by private (nongovernmental) entity
• Does not use paper documents or coins
• Can serve as substitute for government-issued physical
currency
• Readily exchanged for physical cash on demand
• Problem
– No standard among all electronic cash issuers
– Not universally accepted

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 Electronic Cash (cont’d.)

• Small purchases not profitable for merchants

– Bank fees greater than profits
• Factors in favor of electronic cash
– Potentially significant market for electronic cash
• Market for Internet small purchases (below $10)
– Most of world’s population does not have credit cards
• Electronic cash: solution to paying for online purchases
• Idea of electronic cash refuses to die
– Despite failures

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 Micropayments and Small Payments

• Micropayments
– Internet payments for items
• Costing few cents to a dollar
• Micropayments barriers
– Not implemented very well on the Web yet
– Human psychology
• People prefer to buy small value items in fixed price
chunks
• Example: mobile phone has fixed monthly payment
plans

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 Micropayments and Small Payments
(cont’d.)
• Small payments
– All payments of less than $10
• Companies that have developed micropayment
systems
– Millicent, DigiCash, Yaga, BitPass
• All have failed
– No company has gained broad acceptance of its
system despite industry observers seeing such a need
– No company devoted solely to offering micropayment
services

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Privacy and Security of Electronic Cash

• Electronic payment methods concerns

– Privacy and security, independence, portability,
convenience
– Privacy and security: most important to consumers
• Transactions vulnerable
• Electronic currency: copied, reused, forged
• Unique security problems of electronic cash
– Possible to spend only once
• Not counterfeit; used in two different transactions
– Anonymous use
• Prevents sellers from collecting information
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Privacy and Security of Electronic Cash
(cont’d.)
• Electronic cash companies
– eCharge, InternetCash, Valista
• Advantages of electronic cash
– Independent
• Unrelated to any network or storage device
• Ideally pass transparently across international borders;
converted automatically to recipient country’s currency
– Portable
• Freely transferable between any two parties
• Credit and debit cards: not portable or transferable
• Important characteristic of cash: convenience
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 Holding Electronic Cash: Online and
Offline Cash
• Online cash storage
– Consumer has no personal possession of electronic
cash
• Trusted third party (online bank) involved in all
transfers, holds consumers’ cash accounts
• Online system payment
– Merchants contact consumer’s bank
• Helps prevent fraud (confirm valid cash)
• Resembles process of checking with consumer’s bank
to ensure valid credit card and matching name

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 Holding Electronic Cash: Online and
Offline Cash (cont’d.)
• Offline cash storage
– Virtual equivalent of money kept in wallet
– Customer holds it
• No third party involved in transaction
– Protection against fraud concern
• Hardware or software safeguards needed
– Double-spending
• Spending electronic cash twice
• Too late to prevent fraudulent act by time same
electronic currency clears bank for second time
• Prevent double-spending: use encryption techniques
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 Advantages and Disadvantages of
Electronic Cash
• Traditional brick-and-mortar billing methods
– Costly
• Generate invoices, stuff envelopes, buy and affix
postage to envelopes, send invoices to customers
– Accounts payable department
• Keeps track of incoming payments, posts accounts in
database, ensures current customer data
• Online stores have the same payment collection
inefficiencies
– Online customers use credit cards to pay for
purchases
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 Advantages and Disadvantages of
Electronic Cash (cont’d.)
• Online auction customers use conventional payment
methods
– Checks, money orders
• Electronic cash system
– Less popular than other payment methods
– Provides unique advantages and disadvantages
• Advantages of electronic cash transactions
– More efficient (less costly)
• Efficiency fosters more business (lower prices)
– Occurs on existing infrastructure (Internet)
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 Advantages and Disadvantages of
Electronic Cash (cont’d.)
• Advantages of electronic cash transactions (cont’d.)
– Internet spans globe
• Distance transaction travels does not affect cost
– Does not require one party to obtain authorization
• Disadvantages of electronic cash transactions
– No audit trail
– Money laundering
• Technique criminals use to convert money illegally
obtained into spendable cash
• Purchase goods, services with ill-gotten electronic cash
• Goods sold for physical cash on open market
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 Advantages and Disadvantages of
Electronic Cash (cont’d.)
• Disadvantages of electronic cash transactions
(cont’d.)
– Susceptible to forgery
– Other potentially damaging digital economic factors
• Expansion of money supply when banks loan electronic
cash on consumer and merchant traditional bank
accounts
• Electronic cash has not yet become a global
success
– Will require wide acceptance and solution to problem
of multiple electronic cash standards
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 How Electronic Cash Works

• Consumer opens account with electronic cash

issuer
– Presents proof of identity
• Consumer withdraws electronic cash using issuer’s
Web site
– Presents proof of identity
• Digital certificate issued by certification authority
• Combination of credit card number and verifiable bank
account

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 How Electronic Cash Works (cont’d.)
• After consumer identity is verified:
– Electronic cash amount is issued
• Amount deducted from consumer’s account
• Issuer may charge small processing fee
• Consumer stores electronic cash
– In electronic wallet
– On his or her computer
– On stored-value card
• Consumer can authorize issuer to make third-party
payments
– From electronic cash account
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 Providing Security for Electronic Cash

• Significant electronic cash problem

– Potential for double-spending
• Main deterrent
– Threat of detection and prosecution
• Keys to creating tamperproof electronic cash that
can be traced back to origins
– Cryptographic algorithms
– Two-part lock
• Provides anonymous security
• Signals someone is attempting to double-spend cash

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 Providing Security for Electronic Cash
(cont’d.)
• When second transaction occurs
– Complicated process reveals:
• Attempted second use
• Identity of original electronic cash holder
• Electronic cash used correctly
– Maintains user’s anonymity
• Double-lock procedure
– Protects anonymity of electronic cash users
– Simultaneously provides built-in safeguards to
prevent double-spending
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Electronic Commerce, Eighth Edition 39
 Providing Security for Electronic Cash
(cont’d.)
• Double-spending
– Neither detected nor prevented with truly anonymous
electronic cash
• Anonymous electronic cash
– Cannot be traced back to person who spent it
• Tracing electronic cash
– Attach serial number to each electronic cash
transaction
• Cash positively associated with particular consumer
• Does not solve double-spending problem

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 Providing Security for Electronic Cash
(cont’d.)
• Single issuing bank can detect when two deposits of
same electronic cash are about to occur
– Impossible to ascertain fault (consumer or merchant)
• Electronic cash contains serial numbers
– No longer anonymous
• One reason to acquire electronic cash
– Raises privacy issues
• The use of serial numbers to track consumers’
spending habits

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 Providing Security for Electronic Cash
(cont’d.)
• Creating truly anonymous electronic cash
– Bank issues electronic cash with embedded serial
numbers
• Bank digitally signs electronic cash while removing
association of cash with particular customer

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 Electronic Cash Systems
• Electronic cash
– More successful in Europe and Japan
• Consumers prefer to use cash (does not work well for
online transactions)
• Electronic cash fills important need
– Not successful in United States
• Consumers have payment cards and checking
accounts
• KDD Communications (KCOM)
– Internet subsidiary: Japan’s largest phone company
– Offers electronic cash through NetCoin Center

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 Electronic Cash Systems (cont’d.)

• Reasons for failure of United States electronic cash

systems
– Electronic cash systems implementation
• Required to download and install complicated client-
side software that ran in conjunction with browser
– Number of competing technologies
• No standards developed
• Array of proprietary electronic cash alternatives
– No interoperable software
• That runs transparently on variety of hardware
configurations and different software systems
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 Electronic Cash Systems (cont’d.)

• CheckFree
– Largest online bill processor (in the world)
– Payment processing services since 1981 to:
• Large corporations, individual Internet users
– 2007 Fiserv bought CheckFree ($4.4 billion)
• Offers online bill processing under CheckFree brand

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 Electronic Cash Systems (cont’d.)

• Clickshare
– Electronic cash system for magazines and newspaper
publishers
– Uses technology called micropayment-only system
– An ISP supporting Clickshare automatically registers
users
– When users click links leading to Clickshare sites
• They can make purchases without registering again
• Clickshare keeps track of transactions and bills user’s
ISP

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 Electronic Cash Systems (cont’d.)

• Clickshare (cont’d.)
– Tracks user on the Internet
• Significant value to advertisers, marketers
• Defeats anonymity
– Micropayment capability
• By-product of core functionality of tracking identified
users
• Tracks users with standard HTTP Web protocol
• Does not require cookies or software wallets

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 Electronic Cash Systems (cont’d.)
• PayPal
– Payment processing services to businesses,
individuals
– Earns profit from float
• Money deposited, not used immediately
– Charges transaction fee
• Businesses using service to collect payments
– Peer-to-peer (P2P) payment system
• Free payment clearing service for individuals
• Payments from one type of entity to another of the
same type

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 Electronic Cash Systems (cont’d.)
• PayPal (cont’d.)
– Eliminates writing and mailing checks or payment cards
– Send money instantly and securely to anyone with an
e-mail address
– Convenient for auction bidders to pay for purchases
– Convenient for auction sellers
• Eliminates risks posed by other online payment types
– Transactions clear instantly
– Redemption
• PayPal check
• Direct deposit to checking accounts

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Electronic Commerce, Eighth Edition 50
 Electronic Cash Systems (cont’d.)

• PayPal (cont’d.)
– Merchants and consumers first register for PayPal
account
• No minimum amount account balance
• Add money by authorizing checking accounts transfer,
using credit card
• Merchants need PayPal accounts to accept PayPal
payments

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 Electronic Cash Systems (cont’d.)

• PayPal (cont’d.)
– Competition from Billpoint
• Joint venture between eBay, Wells Fargo
• PayPal maintained first-mover advantage
– Remained most widely used eBay payment processing
system
• eBay purchased PayPal
– Other peer-to-peer payment business companies
• First Data Corporation offered electronic money orders
through BidPay site (closed in 2007)
• Citibank’s c2it payments service (closed in 2003)

Electronic Commerce, Eighth Edition 52

 Electronic Wallets

• Concerns of consumers when shopping online

– Entering detailed shipping and payment information
for each online purchase
– Filling out forms
• Solution
– Electronic commerce sites allows customer to store
name, address, credit card information on the site
– Problem
• Consumers must enter information at each site

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 Electronic Wallets (cont’d.)
• Electronic wallet (e-wallet)
– Holds credit card numbers, electronic cash, owner
identification, owner contact information
– Provides information at electronic commerce site
checkout counter
– Benefit: consumer enters information once
• More efficient shopping
• Server-side electronic wallet
– Stores customer’s information on remote server of
merchant or wallet publisher
– No download time or installation on user’s computer

Electronic Commerce, Eighth Edition 54

 Electronic Wallets (cont’d.)
• Server-side electronic wallet (cont’d.)
– Main weakness
• Security breach can reveal thousands of users’
personal information (credit card numbers)
• Servers must employ strong security measures to
minimize possibility of unauthorized disclosure
• Client-side electronic wallet
– Stores information on consumer’s computer
– Disadvantages
• Must download wallet software onto every computer
• Not portable

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 Electronic Wallets (cont’d.)

• Client-side electronic wallet (cont’d.)

– Advantage
• Sensitive information stored on user’s computer
– Sensitive information safer on client machine
• Attackers must launch many attacks on user computers
(more difficult to identify)
• Prevents easily identifiable wallet vendor’s servers from
attack

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 Electronic Wallets (cont’d.)

• Characteristics of useful wallets

– Wallet accessibility
• Populate data fields in any merchant’s forms for any
site consumer visits
– Electronic wallet manufacturer and merchants from
many sites must coordinate efforts
• Wallet recognizes consumer information going into
each field of given merchant’s forms

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 Electronic Wallets (cont’d.)

• Electronic wallets
– Store shipping and billing information
• Consumer’s first and last names, street address, city,
state, country, postal code
– Hold credit card names, numbers
• Offers consumer choice of credit cards at online
checkout
– Hold electronic cash from various providers

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 Electronic Wallets (cont’d.)

• Electronic wallet used by business companies

– Example: MasterCard
– Most abandoned efforts
• Current major browsers include feature to remember
names, addresses, other commonly requested
information
• Browsers provides one-click Web form field completion
– Two e-wallet arena survivors
• Microsoft Windows Live ID
• Yahoo! Wallet

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 Microsoft Windows Live ID

• Formerly called Passport, Microsoft .NET Passport

• Single sign-in service
– Includes server-side electronic wallet
• Operated by Microsoft
• All personal data entered into Windows Live ID
wallet
– Encrypted and password protected

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 Microsoft Windows Live ID (cont’d.)
• Four integrated services
– Single sign-in service (SSI)
• Allows user to sign in at participating Web site using
username and password
– Wallet service
• Provides electronic wallet functions (secure storage,
form completion of credit card, address information)
– Kids service
• Helps parents protect, control children’s online privacy
– Public profiles
• Allows consumers to create public page of information
about themselves
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 Yahoo! Wallet
• Server-side electronic wallet offered by Yahoo!
• Completes order forms automatically
– Identifying information, credit card payment
information
• Stores information
– Several major credit, charge cards, Visa and
MasterCard debit cards
• Accepted by:
– Thousands of Yahoo! Store merchants, Yahoo! Travel
– Yahoo! Services
• Premium e-mail storage, Web hosting fees

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 Yahoo! Wallet (cont’d.)

• Yahoo! Advantage
– Number of services and shops accommodate own
wallet
• Large number of merchants accept wallet
• Privacy concern
– Company issuing wallet has access to great deal of
information about individual using wallet

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 Stored-Value Cards

• Microchip smart card or magnetic strip plastic card

– Records currency balance
• Microchip versus magnetic strip
– Microchip stores more information
– Tiny microchip computer processor
• Performs calculations and storage operations on card
– Different microchip card reader needed
• Examples: prepaid phone, copy, subway, bus cards
• “Stored-value card” and “smart card” used
interchangeably
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 Magnetic Strip Cards

• Holds rechargeable value

• Passive magnetic strip cards cannot:
– Send or receive information
– Increment or decrement cash value stored
• Processing done on device into which card inserted
• Magnetic strip cards and smart cards store
electronic cash
– Smart card better suited for Internet payment
transactions
• Has processing capability

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 Smart Cards

• Stored-value card
– Plastic card with embedded microchip
• Credit, debit, charge cards store limited information
on magnetic strip
• Store information
– About 100 times more than magnetic strip plastic card
• Hold private user data
– Financial facts, encryption keys, account information,
credit card numbers, health insurance information,
medical records
Electronic Commerce, Eighth Edition 66
 Smart Cards (cont’d.)

• Safer than conventional credit cards

– Information encrypted on smart card
• Popular in Europe, parts of Asia
– Public telephone calls, cable television programs
– Hong Kong
• Retail counters, restaurant cash registers have smart
card readers
• Octopus is the public transportation smart card: can be
reloaded at transportation locations, 7-Eleven stores

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Electronic Commerce, Eighth Edition 68
 Smart Cards (cont’d.)
• Beginning to appear in United States
– San Francisco TransLink integrated ticketing system
for public transportation
– Smart Visa card (2000)
– Target Visa smart card (2002)
• Smart Card Alliance
– Advances smart card benefits
– Promotes widespread acceptance of multiple-
application smart card technology
– Promotes compatibility among smart cards, card
reader devices, applications

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 Internet Technologies and the Banking
Industry
• Paper checks
– Largest dollar volume of payments
– Processed through world’s banking system
• Other major payment forms
– Involve banks one way or another
• Banking industry Internet technologies
– Providing new tools
– Creating new threats

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 Check Processing

• Physical check processing (banks, clearinghouses)

– Person wrote check; retailer deposited check in bank
account
– Retailer’s bank sent paper check to clearinghouse
• Clearinghouse managed fund transfer (consumer’s bank
to retailer’s account)
– Paper check transported to consumer’s bank
– Send cancelled check to consumer
• Many banks stopped sending cancelled checks to
consumer
– Provide PDF images of processed checks
Electronic Commerce, Eighth Edition 71
 Check Processing (cont’d.)

• Disadvantage of paper checks

– Cost of transporting tons of paper checks
– Float
• Delay between the time person writes check and the
time check clears person’s bank
• Bank’s customer obtains free use of funds for few days
• Bank loses use of funds for same time period
• Can become significantly longer than a few days

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 Check Processing (cont’d.)

• Technologies helping banks reduce float

– 2004 U.S. law: Check Clearing for the 21st Century
Act (Check 21)
• Banks eliminate movement of physical checks entirely
• Check 21-compliant world
– Retailer scans customer's check
– Scanned image transmitted instantly
• Through clearing system
– Posts almost immediately to both accounts
• Eliminates transaction float

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 Phishing Attacks
• Phishing expedition
– Technique for committing fraud against online
businesses customers
– Launched against all online business types
– Particular concern to financial institutions
• Customers expect high degree of personal information
security
• Basic structure
– Attacker sends e-mail message
• Large number of recipients
• Account at targeted Web site

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 Phishing Attacks (cont’d.)
• Basic structure (cont’d.)
– E-mail message tells recipient account is compromised
• Recipient must log on to account to correct problem
– E-mail message includes link
• Appears to be Web site login page
• Actually disguised perpetrator’s Web site
– Recipient enters login name, password
• Perpetrator captures
• Uses to access recipient’s account
• Access personal information, make purchases, withdraw
funds

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Electronic Commerce, Eighth Edition 76
 Phishing Attacks (cont’d.)

• Spear phishing
– Phishing expedition that is carefully designed to target
particular person or organization
– Requires considerable research
– Increases chance of e-mail being opened
– Example: 2008 government stimulus checks
• Phishing e-mails appeared within one week of passage

Electronic Commerce, Eighth Edition 77

 Phishing Attacks (cont’d.)

• E-mail link disguises and tricks

– Example of Web server that ignores all characters
preceding “@”:
https://www.paypal.com@218.36.41.188/fl/login.html
– Example of disguised link:
https://www.paypal.com@218.36.41.188/fl/login.html
– Example of invisible phony site displayed due to
JavaScript code:
http://leasurelandscapes.com/snow/webscr.dll

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 Phishing Attacks (cont’d.)

• E-mail link disguises and tricks (cont’d.)

– Pop-up windows
• Look exactly like browser address bar
– Including Web site graphics of financial institutions
• Looks more convincing

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Electronic Commerce, Eighth Edition 80
 Organized Crime, Identity Theft, and
Phishing Attacks
• Organized crime (racketeering)
– Unlawful activities conducted by highly organized,
disciplined association for profit
– Differentiated from less organized terrorist groups
– Internet providing new criminal activity opportunities
• Generates spam, phishing, identity theft
– Identity theft
• Criminal act where perpetrator gathers victim’s
personal information
• Uses information to obtain credit
• Perpetrator runs up account charges and disappears

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Electronic Commerce, Eighth Edition 82
 Organized Crime, Identity Theft, and
Phishing Attacks (cont’d.)
• Large criminal organizations
– Efficient perpetrators of identity theft
• Exploit large amounts of personal information quickly
and efficiently
– Sell or trade information that is not of immediate use
• Other worldwide organized crime entities
– Zombie farm
• Large number of computers implanted with zombie
programs
– Pharming attack
• Hacker sells right to use zombie farm to organized
crime association
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 Organized Crime, Identity Theft, and
Phishing Attacks (cont’d.)
• Two elements in phishing
– Collectors: collect information
– Cashers: use information
– Require different skills
• Crime organizations facilitate transactions between
collectors and cashers
– Increases phishing activity efficiency, volume
• Each year
– More than a million people fall victim
– Financial losses exceed $500 million
Electronic Commerce, Eighth Edition 84
 Phishing Attack Countermeasures

• Change protocol
– Improve e-mail recipients’ ability to identify message
source
– Reduce phishing attack threat
• Educate Web site users
• Contract with consulting firms specializing in anti-
phishing work
• Monitor online chat rooms used by criminals

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 Summary
• Online stores payment forms
– Credit, debit, charge cards (payment cards)
• Ubiquitous, convenient, easy to use
– Electronic cash advantages and potential uses
• Making micropayments, stored online or offline
– Convenience of electronic wallets
– Stored-value cards
• Smart cards, magnetic strip cards
• Banks process most monetary transactions
– Use Internet technologies to process checks
• Concerns: phishing expeditions, identity theft

Electronic Commerce, Eighth Edition 86