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Chapter 8
Electronic Payment Systems
and Security
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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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=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
Learning Objectives (cont.)
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Security requirements
EAuthentication: A way to verify the buyers identity
before payments are made
EIntegrity: Ensuring that information will not be
accidentally or maliciously altered or destroyed,
usually during transmission
EEncryption: A process of making messages
indecipherable except by those who have an
authorized decryption key
ENon-repudiation: Merchants need protection
against the customers unjustifiable denial of placed
orders, and customers need protection against the
merchants unjustifiable denial of past payment
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Security Schemes
=The key security schemes adopted for
electronic payment systems are :
EEncryption
EDigital signature
EMessage digest
EUse of certificates and certifying authorities
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Security Schemes
=Secret Key Cryptography (symmetric / Private)
E the same key is used by a sender (for encryption)
and by receiver (for decryption)
E Data Encryption Standard (DES) algorithm is used
for Data encryption.
E The problem with single key is that it needs to be
transmitted to a counterpart.
Scrambled
Message
Original
Message
Sender
Internet
Scrambled
Message
Key
sender
(= Key
receiver
)
Encryption
Original
Message
Receiver
Key
receiver
Decryption

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Security Schemes
=Public Key Cryptography (Asymmetric)
EUse two different keys.
EThe public key is known to all authorized users.
The private key is known to its owner.
E The private key is generated at the owners
computer and is not sent to anyone.
EThe message is encrypted by the receiver's
public key and it is only be decrypted with the
receivers private key.
EThe RSA(Rivest, Shamir, and Adelman)
algorithm is used for this purpose.
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=Public Key Cryptography

Sender
Original
Message
Scrambled
Message
Scrambled
Message
Public Key
receiver

Original
Message
Receiver
Private Key
receiver
Internet
Security Schemes (cont.)
Message
Sender
Original
Message
Scrambled
Message
Scrambled
Message
Private Key
sender

Original
Message
Receiver
Public Key
sender
Internet
Digital
Signature
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=Digital Signature
A digital signature is
attached by a sender
to a message
encrypted in the
receivers public key
The receiver is the only
one that can read the
message and at the same
time he is assured that
the message was indeed
sent by the sender
Sender encrypts
a message with
his private key
Any receiver with
senders public key
can read it
Security Schemes (cont.)
EAnalogous to handwritten signature
EIt is used for the authentication of senders.
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=Certificate
Name : Richard
key-Exchange Key :
Signature Key :
Serial # : 29483756
Other Data : 10236283025273
Expires : 6/18/96
Signed : CAs Signature
Security Schemes (cont.)
EIdentifying the holder of a public key (Key-
Exchange)
EIssued by a trusted certificate authority (CA)
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=Certificate Authority - e.g. VeriSign
RCA
BCA
GCA
CCA MCA PCA
RCA : Root Certificate Authority
BCA : Brand Certificate Authority
GCA : Geo-political Certificate Authority
CCA : Cardholder Certificate Authority
MCA : Merchant Certificate Authority
PCA : Payment Gateway
Certificate Authority
Hierarchy of Certificate Authorities
Certificate authority needs to be verified by a government or well trusted entity ( e.g., post office)
Security Schemes (cont.)
EPublic or private, comes in levels (hierarchy)
EA trusted third party services
EIssuer of digital certificates
EVerifying that a public key indeed belongs to a
certain individual
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Security Schemes (cont.)
=Digital Envelop
EProcess of encrypting a secret key with the receivers
public key
EThe DES key is encrypted in this manner, because
the DES key should be opened first to decrypt the
message contents with the key.
=Time Stamp
ECryptographically unforgeable digital attestation that
a document was in existence at a particular time.
EA CA may keep these evidence at the CAs computer
upon the request of customer.
Secure Socket Layer (SSL) Protocol
1. The message is hashed to a prefixed length of message digest.
2. The message digest is encrypted with the senders private
signature key, and a digital signature is created.
3. The composition of message, digital signature, and Senders
certificate is encrypted with the symmetric key which is
generated at senders 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 receivers public
key which was sent to the sender in advance. The result is a
digital envelope.
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=Senders Computer
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Senders Computer
Senders Private
Signature Key
Senders
Certificate
+
+
Message
+
Digital Signature
C
Receivers
Certificate
Encrypt
Symmetric
Key
Encrypted
Message
C
Receivers
Key-Exchange Key
Encrypt
Digital
Envelope
C
Message
Message Digest
C
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5. The encrypted message and digital envelope are transmitted to
receivers computer via the Internet.
6. The digital envelope is decrypted with receivers private
exchange key.
7. Using the restored symmetric key, the encrypted message can
be restored to the message, digital signature, and senders
certificate.
8. To confirm the integrity, the digital signature is decrypted by
senders 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.
=Receivers Computer
Secure Socket Layer (SSL) Protocol
(cont.)
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Receivers Computer
Decrypt
Symmetric
Key
Encrypted
Message
C
Senders
Certificate
+
+
Message
compare
1
Digital
Envelope
Receivers Private
Key-Exchange Key

Decrypt
Message Digest
Digital Signature
Senders Public
Signature Key

Decrypt
Message Digest

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Secure Electronic Transaction Protocol
=Initially designed for Visa and MasterCard in 1997.
=SET defines the message format, certificate format
and procedure of message exchange.
=In SET protocol, there are four entities:
ECard holder, merchant, CA, and payment gateways.
=The role of payment gateway is to connect the
internet and proprietary networks of bank.
=The software Digital Wallet or Electronic Wallet is
necessary to keep the customers certificate in his
or her personal computer or IC Card.
Entities of SET Protocol in Cyber Shopping
IC Card
Reader
Customer x
Customer y
With Digital Wallets
Certificate
Authority
Electronic Shopping Mall
Merchant A Merchant B
Credit Card
Brand
Protocol
X.25
Payment Gateway
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SET Vs. SSL
Secure Electronic Transaction (SET)
Secure Socket Layer (SSL)
Complex Simple
SET is tailored to the credit card
payment to the merchants.
SSL is a protocol for general-
purpose secure message
exchanges (encryption).
SET protocol hides the customers
credit card information from
merchants, and also hides the
order information to banks, to
protect privacy. This scheme is
called dual signature.
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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SSL Vs. SET: Who Will Win?
=A part of SSL (Secure Socket Layer) is available on
customers browsers
Eit is basically an encryption mechanism for order taking, queries and
other applications
Eit does not protect against all security hazards
Eit is mature, simple, and widely use
=SET ( Secure Electronic Transaction) is a very
comprehensive security protocol
Eit provides for privacy, authenticity, integrity, and, or repudiation
Eit is used very infrequently due to its complexity and the need for a
special card reader by the user
Eit may be abandoned if it is not simplified/improved
E SET use digital wallet.
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Electronic Credit Card System
on the Internet
=The Players

ECardholder
EMerchant (seller)

EIssuer (your bank)

EAcquirer (merchants financial institution,
acquires the sales slips)

EThe Card Brand (The bank card association of
issuers and acquires like VISA, Master Card)
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=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.
Electronic Credit Card System
on the Internet (cont.)
The authorization of card issuance
by the issuer bank, or its designated
brand company, may require
customers physical visit to an office.
A plastic card is physically delivered
to the customers address by mail.
The card can be in effect as the
cardholder calls the bank for
initiation and signs on the back of
the card.
The cardholder shows the card to a
merchant to pay a requested
amount. Then the merchant asks
for approval from the brand
company.
Upon the approval, the merchant
requests payment to the merchants
acquirer bank, and pays fee for the
service. This process is called a
capturing process
The acquirer bank requests the
issuer bank to pay for the credit
amount through brand company
Cardholder Merchant
credit
card
Card Brand Company
Payment authorization,
payment data
Issuer Bank
Cardholder
Account
Acquirer Bank
Merchant
Account
account debit data
payment data
Credit Card Procedure (offline and online)
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payment data
amount transfer
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Issue Credit Card
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Electronic Fund Transfer (EFT)
on the Internet
An Architecture of Electronic Fund Transfer on the Internet
I nternet
Payer
Cyber Bank
Bank
Cyber Bank
Payee
Automated
Clearinghouse
VAN
Bank
VAN
Payment
Gateway
Payment
Gateway
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Debit Cards (Check Card)
=Card that authorizes the EFT.
=The debit card allows you to spend only what
is in your bank account.
=Frees you from carrying cash, travelers
check, or a checkbook.
=Less protection than credit card purchases
for items that are never delivered or are
defective.
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Financial EDI
=It is an EDI used for financial transactions
EEDI is a standardized way of exchanging messages
between businesses
EEFT 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
EThe concept of e-cash is used in the non-Internet
environment
EPlastic cards with magnetic stripes (old technology)
EIncludes IC chips with programmable functions on
them which makes cards smart
ERecharge the card only at designated locations,
such as bank office or a kiosk.
EFuture: recharge at your PC through internet.
EMCB Smart Card
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Representation of E-Cash System
=To design an e-cash system, we need to
identify how to represent and move the e-
cash.
EElectronic money with a unique value and
identification number.
EStored value cards
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Electronic Money
=DigiCash
EThe analogy of paper money or coins
EBanks affiliated with DigiCash issue electronic
bills, each with a unique identification number.
EExpensive, as each payment transaction must
be reported to the bank and recorded
EConflict with the role of central banks bill
issuance
ELegally, 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. IT IS NOT POPULAR IN REAL WORLD.

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Stored Value Cards
ENo issuance of money
EDebit card a delivering vehicle of cash in an
electronic form
EEither anonymous or onymous
EAdvantage of an anonymous card
Ethe card may be given from one person to
another
EAlso implemented on the Internet without
employment of an IC card

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Closed Vs Open E-Cash System
=In Closed E-Cash System, the cash value in
the IC card can only be recharged from a
Banks account, and the used money, which
was collected in the memory of IC card
readers.
=The direct transfer between IC cards is
prohibited.
=In Open E-Cash System, allow direct transfer
of money value between IC Cards.
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=Smart card-based e-cash
ECan be recharged at home through the Internet
ECan be used on the Internet as well as in a non-
Internet environment
=Ceiling of Stored Values
ETo prevent the abuse of stored values in money
laundry
ES$500 in Singapore; HK$3,000 in Hong Kong
=Multiple Currencies
ECan be used for cross border payments
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Contactless IC Cards
=Proximity Card
ECan be read up to 1 foot from the reader.
EUsed to access buildings and for paying in buses
and other transportation systems
EBus, subway and toll card in many cities
=Amplified Remote Sensing Card
EGood for a range of up to 100 feet, and can be
used for tolling moving vehicles at gates
EPay toll without stopping (e.g. Highway 91 in
California)
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Electronic Check System
=Electronic implementation of paper check
system.
=Security schemes for e-check are basically
the same as those in SET. Only the usage
procedure are different.
=More important in B2B EC, a highly secured
system is needed, especially for large
payments.

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Electronic Check Systems (cont.)
ECounterpart of electronic wallet
ETo be integrated with the accounting information
system of business buyers and with the payment
server of sellers
ETo save the electronic invoice and receipt of
payment in the buyers and sellers computers for
future retrieval
EExample : SafeCheck

Payers
checkbook
agent
Payees
check-receipt
agent
Payer Payee
Issue a check
Receipt
A/C
DB
A/C
DB
control
agent of
payers
bank
control
agent of
payees
bank
clearing
Checkbook,
screened result
Request of
screening check
issuance
present
report
payers bank payees bank
Internet
The Architecture of SafeCheck
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Integrating Payment Methods
=Two potential consolidations:
EThe on-line electronic check is merging with EFT
EThe electronic check with a designated
settlement date is merging with electronic credit
cards
=Security First Network Bank (SFNB)
EFirst cyberbank
ELower service charges to challenge the service
fees of traditional banks
=Visa
EVisaCash is a debit card
EePay is an EFT service

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Five Security Tips
= Dont reveal your online Passcode to anyone. If you think
your online Passcode has been compromised, change it
immediately.
= Dont 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.
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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