Chapter 8

Electronic Payment Systems

and Security

© Prentice Hall, 2000 1

 Learning Objectives

 Describe typical electronic payment systems for EC

 Identify the security requirements for safe electronic
payments
 Describe the typical security schemes used to meet
the security requirements
 Identify the players and procedures of the
electronic credit card system on the Internet
 Discuss the relationship between SSL and SET
protocols

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 Learning Objectives (cont.)

 Discuss the relationship between electronic fund

transfer and debit card
 Describe the characteristics of a stored value
card
 Classify and describe the types of IC cards used
for payments
 Discuss the characteristics of electronic check
systems

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 SSL Vs. SET: Who Will Win?
 A part of SSL (Secure Socket Layer) is available on
customers’ browsers
 it is basically an encryption mechanism for order taking, queries
and other applications
 it does not protect against all security hazards
 it is mature, simple, and widely use
 SET ( Secure Electronic Transaction) is a very
comprehensive security protocol
 it provides for privacy, authenticity, integrity, and, or repudiation
 it is used very infrequently due to its complexity and the need
for a special card reader by the user
 it may be abandoned if it is not simplified/improved

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Payments, Protocols and Related Issues

 SET Protocol is for Credit Card Payments

 Electronic Cash and Micropayments

 Electronic Fund Transfer on the Internet

 Stored Value Cards and Electronic Cash

 Electronic Check Systems

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Payments, Protocols and Related Issues (cont.)
 Security requirements
 Authentication: A way to verify the buyer’s identity
before payments are made
 Integrity: Ensuring that information will not be
accidentally or maliciously altered or destroyed,
usually during transmission
 Encryption: A process of making messages
indecipherable except by those who have an
authorized decryption key
 Non-repudiation: Merchants need protection
against the customer’s unjustifiable denial of placed
orders, and customers need protection against the
merchants’ unjustifiable denial of past payment
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 Security Schemes
 Secret Key Cryptography (symmetric)

Keysender (= Keyreceiver) Keyreceiver

Original Scrambled Scrambled Original

Internet
Message Message Message Message
Sender Decryption Receiver
Encryption

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 Security Schemes (cont.)
 Public Key Cryptography
Public Keyreceiver Private Keyreceiver

Original Scrambled Scrambled Original

Message Message
Internet Message
Message Message

Sender Receiver

Private Keysender Public Keysender

Digital Original Scrambled Scrambled Original

Internet
Signature Message Message Message Message

Sender Receiver
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 Security Schemes (cont.)
 Digital Signature
 Analogous to handwritten signature

Sender encrypts Any receiver with

a message with senders public key
her private key can read it

The receiver is the only

A digital signature is
one that can read the
attached by a sender
message and at the same
to a message
time he is assured that
encrypted in the
the message was indeed
receiver’s public key
sent by the sender
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 Security Schemes (cont.)
 Certificate
 Identifying the holder of a public key (Key-
Exchange)
 Issued by a trusted certificate authority (CA)

Name : “Richard”
key-Exchange Key :
Signature Key :
Serial # : 29483756
Other Data : 10236283025273
Expires : 6/18/96
Signed : CA’s Signature

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 Security Schemes (cont.)
 Certificate Authority - e.g. VeriSign
 Public or private, comes in levels (hierarchy)
 A trusted third party services
 Issuer of digital certificates
 Verifying that a public key indeed belongs to a certain individual

RCA : Root Certificate Authority

RCA
BCA : Brand Certificate Authority
BCA GCA : Geo-political Certificate Authority
CCA : Cardholder Certificate Authority
GCA MCA : Merchant Certificate Authority
PCA : Payment Gateway
CCA MCA PCA Certificate Authority
Hierarchy of Certificate Authorities
Certificate authority needs to be verified by a government or well trusted entity ( e.g., post office)
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 Electronic Credit Card System
on the Internet

 The Players
 Cardholder
 Merchant (seller)
 Issuer (your bank)
 Acquirer (merchant’s financial institution,
acquires the sales slips)
 Brand (VISA, Master Card)

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 Electronic Credit Card System
on the Internet (cont.)
 The process of using credit cards offline
A cardholder requests the issuance of a
card brand (like Visa and MasterCard)
to an issuer bank in which the
cardholder may have an account.
A plastic card is physically delivered
to the customer’s address by mail.
The cardholder shows the card to a
merchant to pay a requested
amount. Then the merchant asks
for approval from the brand
company.
The acquirer bank requests the
issuer bank to pay for the credit
amount.
© Prentice Hall, 2000
The authorization of card issuance
by the issuer bank, or its designated
brand company, may require
customer’s physical visit to an office.
The card can be in effect as the
cardholder calls the bank for
initiation and signs on the back of
the card.
Upon the approval, the merchant
requests payment to the merchant’s
acquirer bank, and pays fee for the
service. This process is called a
“capturing process”
13
Cardholder Merchant
credit
card Payment authorization,
payment data
Card Brand Company
account debit data payment data

payment data

amount transfer

Issuer Bank Acquirer Bank

Cardholder Merchant
Account Account

Credit Card Procedure (offline and online)

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 Secure Electronic Transaction (SET)
Protocol
 Sender’s Computer
1. The message is hashed to a prefixed length of message digest.
2. The message digest is encrypted with the sender’s private
signature key, and a digital signature is created.
3. The composition of message, digital signature, and Sender’s
certificate is encrypted with the symmetric key which is generated
at sender’s computer for every transaction. The result is an
encrypted message. SET protocol uses the DES algorithm
instead of RSA for encryption because DES can be executed
much faster than RSA.
4. The Symmetric key itself is encrypted with the receiver’s public
key which was sent to the sender in advance. The result is a
digital envelope.

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 Sender’s Computer
Sender’s Private
Message   Signature Key

Message Digest Digital Signature

+
Message

+ 
Encrypt

+ Symmetric
Key

Sender’s Encrypted
Certificate Message


Receiver’s
Encrypt
Certificate
Receiver’s Digital
Key-Exchange Key Envelope

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 Secure Electronic Transaction (SET)
Protocol (cont.)
 Receiver’s Computer
5. The encrypted message and digital envelope are transmitted to
receiver’s computer via the Internet.
6. The digital envelope is decrypted with receiver’s private exchange
key.
7. Using the restored symmetric key, the encrypted message can be
restored to the message, digital signature, and sender’s certificate.
8. To confirm the integrity, the digital signature is decrypted by
sender’s public key, obtaining the message digest.
9. The delivered message is hashed to generate message digest.
10. The message digests obtained by steps 8 and 9 respectively, are
compared by the receiver to confirm whether there was any change
during the transmission. This step confirms the integrity.

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 Receiver’s Computer
Receiver’s Private
Key-Exchange Key
Decrypt

Digital

Envelope

Message


Message Digest
Decrypt +
Symmetric
Key
+
Encrypted

Sender’s compare
Message Certificate


Decrypt
Sender’s Public
Digital Signature Message Digest
Signature Key
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 IC Card
Reader Customer y
Customer x
With Digital Wallets
Certificate
Authority

Electronic Shopping Mall

Merchant A Merchant B Payment Gateway

Protocol
X.25

Credit Card
Brand

Entities of SET Protocol in Cyber Shopping

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 SET Vs. SSL
Secure Electronic Transaction (SET) Secure Socket Layer (SSL)

Complex Simple

SET is tailored to the credit card SSL is a protocol for general-

payment to the merchants.
SET protocol hides the customer’s
credit card information from
merchants, and also hides the
order information to banks, to
protect privacy. This scheme is
called dual signature.
purpose secure message
exchanges (encryption).
SSL protocol may use a
certificate, but there is no
payment gateway. So, the
merchants need to receive both
the ordering information and
credit card information, because
the capturing process should be
initiated by the merchants.

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 Electronic Fund Transfer (EFT)
on the Internet
Internet
Payer Payee

Cyber Bank Cyber Bank

Payment Payment
Gateway Gateway

Bank Bank
VAN VAN
Automated
Clearinghouse
An Architecture of Electronic Fund Transfer on the Internet
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 Debit Cards

 A delivery vehicle of cash in an electronic

form
 Mondex, VisaCash applied this approach
 Either anonymous or onymous
 CyberCash has commercialized a debit card
named CyberCoin as a medium of
micropayments on the Internet

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 Financial EDI
 It is an EDI used for financial transactions
 EDI is a standardized way of exchanging messages
between businesses
 EFT can be implemented using a Financial EDI system
 Safe Financial EDI needs to adopt a security
scheme used for the SSL protocol
 Extranet encrypts the packets exchanged between
senders and receivers using the public key
cryptography

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

 Shopping with Mondex

 Adding money to the card
 Payments in a new era of electronic
shopping
 Paying on the Internet

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 Electronic Money
 DigiCash
 The analogy of paper money or coins
 Expensive, as each payment transaction must be
reported to the bank and recorded
 Conflict with the role of central bank’s bill
issuance
 Legally, DigiCash is not supposed to issue more
than an electronic gift certificate even though it
may be accepted by a wide number of member
stores

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 Electronic Money (cont.)
 Stored Value Cards
 No issuance of money
 Debit card — a delivering vehicle of cash in an
electronic form
 Either anonymous or onymous
 Advantage of an anonymous card
 the card may be given from one person to another
 Also implemented on the Internet without
employment of an IC card

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 Electronic Money (cont.)
 Smart card-based e-cash
 Can be recharged at home through the Internet
 Can be used on the Internet as well as in a non-
Internet environment
 Ceiling of Stored Values
 To prevent the abuse of stored values in money
laundry
 S$500 in Singapore; HK$3,000 in Hong Kong
 Multiple Currencies
 Can be used for cross border payments

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 Contactless IC Cards
 Proximity Card
 Used to access buildings and for paying in buses
and other transportation systems
 Bus, subway and toll card in many cities
 Amplified Remote Sensing Card
 Good for a range of up to 100 feet, and can be
used for tolling moving vehicles at gates
 Pay toll without stopping (e.g. Highway 91 in
California)

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 Electronic Check Systems
Procedure of Financial Service Technology Consortium Prototype
Remittance Account
Payer Invoice Payee Receivable
E- Mail
WWW

Signature Signature “Card”

“Card” Remittance
Workstation Remittance
Check
Check
Signature
Signature E-mail
Certificate
Certificate
Mall statement Certificate
Certificate
E-Check line item Endorsement
Secure Envelope Certificate
Certificate
ACH
Secure Envelope
ECP

Payer’s Bank Clear Check Payee’s Bank Deposit check

Debit account Credit account
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 Electronic Check Systems (cont.)
 Electronic Checkbook
 Counterpart of electronic wallet
 To be integrated with the accounting information
system of business buyers and with the payment
server of sellers
 To save the electronic invoice and receipt of
payment in the buyers and sellers computers for
future retrieval
 Example : SafeCheck
 Used mainly in B2B

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 Payer’s Payee’s
checkbook check-receipt
agent Issue a check agent
Payer Receipt Payee
Checkbook,
report
screened result
Request of Internet
screening check present
issuance
control control
agent of agent of
payer’s clearing payee’s
bank bank
A/C A/C
DB DB
payer’s bank payee’s bank

© Prentice Hall, 2000

The Architecture of SafeCheck 32
 Integrating Payment Methods
 Two potential consolidations:
 The on-line electronic check is merging with EFT
 The electronic check with a designated settlement date is
merging with electronic credit cards
 Security First Network Bank (SFNB)
 First cyberbank
 Lower service charges to challenge the service fees of
traditional banks
 Visa
 VisaCash is a debit card
 ePay is an EFT service

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How Many Cards are Appropriate?

An onymous card
is necessary to
keep the certificates for
credit cards, EFT, and
electronic checkbooks
The stored value in
IC card can be delivered
in an anonymous mode

Malaysia’s Multimedia Supper Corridor project

pursues a One-Card system
Relationship Card by Visa is also attempting
a one card system

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 Five Security Tips
 Don’t reveal your online Passcode to anyone. If you think your
online Passcode has been compromised, change it immediately.
 Don’t walk away from your computer if you are in the middle of a
session.
 Once you have finished conducting your banking on the Internet,
always sign off before visiting other Internet sites.
 If anyone else is likely to use your computer, clear your cache or
turn off and re-initiate your browser in order to eliminate copies
of Web pages that have been stored in your hard drive.
 Bank of America strongly recommends that you use a browser
with 128-bit encryption to conduct secure financial transactions
over the Internet.

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

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