Payment Technologies for E-Commerce

When we look at the whole picture of e-commerce, there are many pieces in the puzzle, including the Internet communication infrastructure, various web and e-commerce application servers, client browsers, products/services, databases, security and firewalls, electronic payment (or e-payment), and many other components. To make an e-commerce web storefront work, one needs to put all these pieces of the puzzle together. The first thing that happens in cyberspace is that the customer goes through the web storefront, and looks for a product/service that is interesting to him (or her). It is clear that after the customer has searched web storefront and identified products or services, the immediate next step is making the payment for the purchase of the products/services that the customer has selected. Obviously, e-payment is essential to e-commerce transactions. Without a successful e-payment step, the e-commerce picture is not complete, and very often it will not work.

Since the creation of the World Wide Web (WWW), Internet-based electronic commerce has been transformed from a mere idea into reality. The Internet and similar networks provide new infrastructures for communications and commerce. These open networks interconnect computers across many different organizations with dramatically lower communications and distributed-applications development costs. This motivates businesses to transfer commercial activity from closed private networks to open networks like the Internet. Electronic commerce is classified into several forms. Business to business (B2B), business to consumer (B2C), and business to government (B2G) represent the most significant forms in terms of value.

The advance of technology is always inspired by the practical applications, and the emergence of automatic biometrics technology is rooted in the requirement for real-world security applications. Whether this new technology can last for a long time will be decided by how well it can solve security problems. Although biometric technology is at the development stage, it has been implemented in various applications and some of them work well. Along with the widespread application of biometrics technology, more funds and more attention are being given to this ascending technology [4.1–4.4, 4.20–4.22, 4.24, 4.32, 4.34].

A smart card is a plastic card with an embedded integrated circuit (IC). A smart card resembles a credit card, with the difference being a chip and (for most smart cards) its metal contacts. A host computer or smart card terminal runs the off-card application and communicates with the card’s embedded chip to exchange data and commands. The plastic card usually conforms to physical standards for bank/credit cards, and is a convenient and acceptable way of carrying the chip. Smart cards may contain a microprocessor, random access memory (RAM), read only memory (ROM), and electrically erasable programmable read-only memory (EEPROM). The first patent for a smart card was issued in 1974 to Roland Moreno of France.

Wireless e-commerce (or mobile commerce) is projected to become a US$12.4 billion market by 2005 in Asia-Pacific, excluding Japan, according to International Data Corp (IDC). Mobile commerce applications such as mobile banking, email, wireless gaming, and stock trading already are available in the marketplace. For example, NTT DoCoMo’s i-mode service in Japan, which provides email, web access, wireless banking, stock information service, flight information, online reservations, news and weather, yellow page service, fortune telling, online games, and digital content retrieval from its partners, in addition to regular cellular-phone functions. DoCoMo was formed in July 1992. It had sales of 4.6 trillion yens in fiscal 2000 year ended by March 31, 2001. It was reported that the subscriber number of the i-mode service exceeded 28 million as of October 2001. We see some countries, for example, Korea, where wireless subscription numbers exceed wired customers. A recent statistical report (October 2001) shows that China now has the largest hand-phone user base in the world, with a total of over 120 million users, or 10% penetration rate. In Hong Kong, over 5 million people out of a total of 7 million have a cellular phone. The penetration rates in European countries are also high. All this evidence shows that the growth of mobile commerce is phenomenal and its potential is huge.

In a broad sense, a software agent is a computer program that acts autonomously on behalf of a person or organization. Software-agent technology seems able to provide attractive solutions in the field of electronic commerce. An agent-based architecture for electronic commerce allows the creation of a virtual marketplace in which a number of autonomous or semi-autonomous agents trade goods and services. The introduction of software agents acting on behalf of end-consumers could reduce the effort required from users when conducting electronic commerce transactions, by automating a variety of activities. The personalized, continuously running autonomous nature of agents makes them well suited for mediating consumer behavior with respect to information filtering and retrieval, personalized evaluations, complex coordination, and time-based interactions. Agents are able to examine a large number of products before making a decision to buy or sell. This not only eliminates the need to manually collect information about products but also allows the negotiation of an optimal deal with the various sellers of a good.

A digital-cash system normally consists of clients, vendors, and a bank. Any legitimate client can obtain a valid digital coin¹ from a bank and anonymously send the coin to a vendor. The vendor later deposits the coin to the bank. Because of the anonymity of the client, the bank can validate the coin but cannot link the coin to the information used in the coin-issuing process. The bank and the vendor cannot trace transactions made by the client.

In electronic commerce, there is a need for a check-like payment system where funds are transferred from the payer’s bank account to the payee’s bank account at the time the transaction takes place. From the bank’s point of view, it would be desirable to use existing interbank funds-transfer networks as much as possible. This chapter will introduce the foundational concept of digital check and two important electronic-check systems: NetBill and NetCheque.

Until recently, there were two primary forms of credit card transactions:

The credit card is a popular payment method for the purchase of goods and services. Traditionally, credit cards are used by buyers to purchase merchandise from brick-and-mortar stores. Transactions are carried out face-to-face. Typically, the merchant first obtains authorization from the credit card company regarding the transaction. If the transaction is authorized, the buyer is asked to sign for the purchase, and a paper receipt stating the terms of the sale will be issued to the buyer. The merchant also verifies that the buyer’s signature matches the cardholder’s signature at the back of the card, and that the card has not expired.

Open data networks, such as the Internet and the wireless data networks, allow low-cost delivery of content (information) and services to a huge population (market). The production costs of content and services are often small and largely independent of the number of customers. Therefore, producers of content and services provided to many customers often want to charge very small amounts — if the payment system allows it (with reasonable overhead). Payment by credit cards, which is the common method for online consumer purchasing, involves substantial minimal fee per transaction, e.g., 20 cents, and therefore is not applicable for charging smaller amounts. This provides one definition of the micropayments, as charging amounts smaller (or close to) the minimal credit card transaction fees (of about 20 cents). There are other difficulties in using credit cards for low-value transactions, namely, substantial delay and user involvement, and the potential for disputes resulting in refunds, chargebacks, and substantial handling costs.

As e-commerce over the Internet is taking off, online payment (or e-payment) has become an essential piece of the e-commerce puzzle. To support e-commerce, a variety of industrial e-payment systems and solutions have been developed and deployed in many countries. These e-payment systems and solutions enable transactions for people to trade goods or services for money. It is not our desire to cover the entire e-payment industry in a single chapter. Rather, we prefer to select a few e-payment solutions and introduce them to the readers as real-life e-payment examples, or, to some extent, as e-payment case studies. In this chapter, we select three e-payment solutions for discussion, including Visa Cash, iPIN, and PayPal. For each of them, we describe design goals, features, functions, and security mechanisms. In addition, in the appendices of the chapter, based on the available information, we selectively present the architecture of these payment systems.

The rapid growth of online business transactions indicates that e-commerce over the Internet is an irreversible trend. Based on various reports from leading international consulting firms such as Forrester Research and International Data Corporation, it is predicted that B2B e-commerce will be worth as much as 7 trillion of US dollars in a few years, and B2C will also be worth over hundreds of billions of US dollars in the United States alone.