Digital Payment systems

Digital Payment Systems

Digital payment systems transfer value from a payer to a beneficiary. This overview covers how payment systems work, the security and practical considerations they involve, and electronic equivalents of familiar payment methods.

1. What a Payment System Does

A payment system is a mechanism for transferring value so that a payer can meet an obligation to a beneficiary. Its components include:

• Payment instruments: Cash, cheques, drafts, payment cards, and electronic payment methods.
• Rules and procedures: Processes that govern how payments are made and handled.
• Institutions: Organizations, such as banks, that facilitate payments.
• Legal and regulatory frameworks: Systems that authorize and oversee transfers or resolve issues among participants.

Unlike barter or cash payments, electronic payments must establish that a payment is genuine and has been processed correctly. Cash functions as a payment instrument because people recognize that it has value; electronic systems must establish the validity of a transfer through other means.

2. Criteria for Assessing Electronic Payment Systems

Several considerations are important when assessing an electronic payment system:

• Security and technology
  • Authenticity: Confirm the identities of the parties involved.
  • Non-repudiation: Provide evidence that a payment was sent or received, so a party cannot simply deny it.
  • Integrity: Ensure that payment details, such as the amount, are not altered in transit.
  • Confidentiality: Protect sensitive payment information from unauthorized access.
• Economic practicality: Transaction costs should be affordable for users and merchants.
• Mobility or transferability: The recipient should be able to use and transfer the value.
• Financial risk: The system should address fraud, intrusions, and other incidents that could cause financial harm.
• Social considerations
  • Anonymity: Some payment methods, especially cash, do not directly reveal the payer’s identity. An electronic equivalent may need to support this where appropriate.
  • User-friendliness: The system should be convenient to use.
• Regulation and dispute resolution: An authority or process should be available to address problems with electronic transactions.

3. Payment Cards

Payment cards include:

• Credit cards: Allow spending up to a limit based on the cardholder’s credit.
• Debit cards: Draw money directly from the cardholder’s bank account.
• Charge cards: Have no fixed spending limit, with the balance due at the end of the billing period.

Advantages: Payment cards are widely accepted and have established security features. Disadvantages: Merchants may pay transaction fees and monthly processing fees.

Typical Card-Payment Process

1. The customer presents or uses the card.
2. The merchant sends the card details for authentication.
3. The issuer checks whether the payment is authorized and whether sufficient credit or funds are available.
4. A hold may be placed for the purchase amount.
5. The transaction is later settled, transferring the funds to the merchant.

The lecture distinguishes between two types of card systems:

• Closed-loop systems: The card issuer pays the merchant directly, without an intermediary. American Express and Discover are examples.
• Open-loop systems: Multiple parties are involved, often including banks and processing networks. Visa and MasterCard are examples.

An online merchant generally needs a merchant account to accept card payments and may need to provide business, banking, and credit-history information.

4. Security in Online Card Payments

Transport Layer Security (TLS) can protect information sent over the internet. However, card details may still be exposed to the merchant or payment-processing service that receives them, creating a risk of misuse by a party handling the information.

The lecture also discusses Secure Electronic Transaction (SET), a protocol developed with contributions from Visa, MasterCard, IBM, and others. Although intended to improve payment security, SET was computationally costly and slow. The lecture notes that it is no longer in practical use. Payment gateways and other trusted third-party services are presented as a more common approach.

5. Peer-to-Peer Payments

Peer-to-peer (P2P) systems let users transfer funds to other individuals over the internet or by mobile phone. The lecture describes two broad approaches:

• Use a trusted third party, such as PayPal.
• Use web or mobile services provided by a bank.

In the PayPal-style example, the sender initiates a payment and the recipient is notified, for example by email. The recipient can then transfer the funds to a bank account or request a cheque.

6. Electronic Cheques

Electronic cheques are digital counterparts of paper cheques. The customer uses software to provide stored account information and authorize a payment. The payment details are encrypted and sent to the relevant bank, which processes the transfer to the merchant.

CyberCash is mentioned as an example associated with electronic cheque payments.

7. Digital Cash

Digital cash consists of computer files representing money. Cryptographic techniques and the bank’s digital signature help establish its authenticity.

The lecture describes digital cash along two dimensions:

• Identifiable or anonymous
  • Identifiable digital money uses a bank-issued serial number.
  • Anonymous money can use a blinding process: the customer obscures identifying information before the bank signs the digital token. This allows the bank to validate the token without learning the customer’s identity in the same way.
• Online or offline
  • Online money is validated with the bank participating in the transaction.
  • Offline money can be exchanged between users without the bank checking each transaction in real time.

A key risk with anonymous offline digital cash is double spending: a user might copy a digital token and attempt to spend it more than once. The lecture emphasizes the need for mechanisms to prevent this.

Smart cards such as Mondex and Visa cards are cited as examples associated with digital-cash-like functions.

8. Electronic Wallets

An electronic wallet can store payment details, such as card numbers or electronic cash, along with the owner’s identification and contact information. Its main convenience is allowing users to enter information once and reuse it when shopping.

• Server-side wallets store customer information on a remote server operated by a merchant or wallet provider.
• Client-side wallets store information on the customer’s own computer.

9. Smart Cards

Smart cards contain computer chips and can be used for banking, transport, healthcare, identification, retail payments, phone services, and loyalty programs.

A reader communicates with the card and may request a PIN. The lecture says that bank machines can load cash onto cards and merchants can download cash from them. Smart cards may also offer purchasers some anonymity.

10. Business-to-Business Payments

Business-to-business (B2B) payment options mentioned include:

• Electronic funds transfers through the SWIFT network.
• Electronic bill payment.
• B2B payment gateways.

Speakers and Sources Featured

The lecture is presented by one instructor or narrator; no other speakers are identifiable in the subtitles.

Payment systems, organizations, and examples named include the Reserve Bank of India (RBI), banks, Visa, MasterCard, American Express, Discover, IBM, PayPal, CyberCash, Mondex, and the SWIFT network.