e payment sys

20-763 ELECTRONIC PAYMENT SYSTEMS

SPRING 2004

COPYRIGHT © 2004 MICHAEL I. SHAMOS

Electronic Payment Systems20-763

Lecture 12

Peer-to-Peer Payments,Electronic Banking


SPRING 2004


Outline

• Peer-to-peer payments– PayPal– eCount.com

• Electronic banking• Aggregation, screen-scraping• B2B payments


SPRING 2004


Peer-to-Peer (P2P) Concepts

• P2P– payments not involving a bank– payments “directly” between payor and payee– classic example: cash– email payments, transfers between digital wallets– purchasing online content– micropayments

• Distinguish between P2P payments and P2P technology– Napster, Gnutella

• Someday we may use P2P technology for P2P payments


SPRING 2004


PayPal

• > 40,000,000 accounts• RTGS payment system• Credit card hub• Bookkeeping & accounting system• Low-value foreign exchange system


SPRING 2004


PayPal Structure

PayPal Private Bank

X.COM’s BANKINTERACTS WITHBANKING SYSTEMTHROUGH ACH

ONLY MAINTAINS LEDGERS

NO MOVEMENT OF REALMONEY WITHIN PAYPAL

User User’s Bank

USER INTERACTSWITH PAYPALTHROUGH BROWSER

BETWEEN TWO PAYPALUSERS, TRANSACTIONSARE PURELY BOOK ENTRIES

IF REAL MONEY MUSTMOVE, PAYPAL SENDSINSTRUCTIONS TO ITSBANK

USER MAINTAINS NORMALRELATIONS WITH HIS BANK

eBay

PUBLIC COMPANY


SPRING 2004


PayPal

• It’s a big disk drive!

- $100

+ $100


SPRING 2004


PayPal

ACCOUNTHOLDER A

ACCOUNTHOLDER A’S

BANK

ACCOUNTHOLDER X

PAYPAL

ACCOUNT A

. . .

ACCOUNT X

ACCOUNTHOLDER X’S

BANK

ACHPROCESSOR

ACCOUNTHOLDER A’S

CREDIT CARD

INTERNET EMAIL

PAYPAL’SBANK

1. A PAYS X VIA PAYPAL (A HAS ENOUGH IN PAYPAL ACCOUNT)

6. PAYPAL NOTIFIES X OF PAYMENT. X CHOOSES PAYMENT METHOD

2. OR: PAYPAL CHARGES X’S CREDIT CARD

3. OR: PAYPAL INITIATES ACH DEBIT

4. FUNDS ARE DEPOSITED IN PAYPAL’S BANK

7. OR: PAYPAL INITIATES ACH CREDIT

5. PAYPAL CREDITS X’S PAYPAL ACCOUNT

8. OR: PAYPAL MAILS CHECK TO X


SPRING 2004


PayPal Concepts

• Merchants pay low fees; individuals pay nothing• Interest paid on deposits• Mass (bulk) payments possible• Business model: fees + float• FDIC pass-through insurance

– Against bankruptcy of PayPal– Different protection for fraud

• Mobile payments supported


SPRING 2004


PayPal Fees

SOURCE: PAYPAL


SPRING 2004


PayPal and Foreign Exchange

PayPal U.S.

U.S. User U.S.User’s Bank

PayPal U.K. U.K.PayPal Bank

U.S. PayPal £ Acct

U.K.User’s Bank

U.K. User

$ £ U.S.

PayPal Bank U.K. PayPal $ Acct

eBay

PayPal Worldwide

38 countries

PayPal available

PayPal available + Local Bank Acct. Withdrawal

Currencies: USD, CAD, GBP, EUR, JPY

SOURCE: PAYPAL


SPRING 2004


PayPal Statistics

• Average ticket (2003): $54• 69% of payments auction-related• Payment volume ~USD 15B/year• Profit: ~230M/year, about 1.5% of volume• Growth, payment volume (2002-2003): 68%• Growth, number of users (2002-2003): 49% • What would happen if PayPal could be used for

everything?


SPRING 2004


PayPal Concepts

• Merchants pay low fees; individuals pay nothing• Interest paid on deposits• Mass (bulk) payments• Business model: fees + float• Mobile payments possible• What would happen if PayPal could be used for

everything?


SPRING 2004


Total PayPal Payment Volume

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Pa

ym

en

t V

olu

me

($

M)

Q100 Q200 Q300 Q400 Q101 Q201 Q301 Q401 Q102 Q202 Q302 Q402 Q103

SOURCE: PAYPAL

2003 TOTAL > 14 BILLION


SPRING 2004


PayPal Growth by Number of Users

0

5,000

10,000

15,000

20,000

25,000

30,000

Us

ers

(0

00

)

Q100 Q200 Q300 Q400 Q101 Q201 Q301 Q401 Q102 Q202 Q302 Q402 Q103

APRIL, 2004 > 41 MILLION

SOURCE: PAYPAL


SPRING 2004


Email Payments Market

SOURCE: CELENT.COM

http://www.celent.com/PressReleases/20010510/emailpay.htm


SPRING 2004


Ecount.com

SOURCE: LAUDON & TRAVER


SPRING 2004


eBanking: an Integrated Activity

10

2030

40

50

$$$

$ $

Management

Cash

forecasts

AR APbalances payments

investment/debt

hedging

generalledger

OperationsAccounting

Brokers

Banks VendorsCustomers

eBanking B2BB2C

eTrading

ERP

eCRMProduction Mgmt

SOURCE: SELKIRK


SPRING 2004


Electronic Banking Opportunities

• Financial supply chain (FSC)• Consumer marketing (statement has hyperlinks!)• Data-rich environment• Customized financial services & relationship• Moving toward fee for services instead of floats and

spreads• Greater security through digital signatures• Risk reduction through speed• Computer-initiated services means more services


SPRING 2004


Banking Services

• Consumer– Payments, eCheques– Savings– Loan services– Aggregation of accounts– Securities

• Both– Bill presentment– Reporting

• Terrorism, laundering

– 24/7 generates business

• Business– Payments– Cash management– Credit– Financial instruments– Factoring– Trade financing– Insurance– Foreign exchange– Accounting– Integration with

business systems

Australia Integrated eBanking Framework

Receipts

SOURCE: VICTORIA DEPT OFTREASURY AND FINANCE (AU)

Financial Markets

• Human Services• Justice• Taxes• Tolls

• Salaries• Suppliers• Service Providers• Transfer Payments

Bank Service and Transaction Mgmt

Cash Management

Single Acct for Govt OR

Single Acct for Dept

TCV

Departmental Accounting

Public Ledger and Central Agencies

Payments

Revenue Expenditure

• EFT• cards• cheq• cash

Value Transfer Value

Transfer

Information Flows

Fund Flows

• Commonwlth• Educat, NRE• Parliam, AG

Bank

• internet• electronic• Maxi• teleph• mail• counter

• EFT• cards• cheq• cash

• internet• electronic• teleph• mail

Outer Budget Balances

E-CommerceE-Business

Government Outputs: Budget Sector

http://www.go.vic.gov.au/Documents/EpaymentsMan.ppt


SPRING 2004


Internet Banking Services 2001

Offer in 2001 Offer in 2004

Account Balances 52% 91%

Account Transfers 52% 90%

E-Bill Payment 41% 84%

E-Bill Presentment 10% 64%

P2P Payments 17% 61%

Brokerage Accounts 9% 56%

Account Aggregation 3% 42%

SOURCE: GRANT THORNTON 2001

% of Banks Surveyed


SPRING 2004


Financial Aggregation• Idea: allow access to all assets through a single portal

SOURCE: VERTICAL ONE

Aggregation ProcessAggregation Process

FI

FI with3rd Party

Non-FI with

3rd Party

Aggregator/

Portal

Contractual

Non-Contractual• Knowledge/Permission• No Knowledge/ Permission

Arrangement

Data Feed

Screen Scraping

Screen Scraping

Methodology

Brokerages

Banks

lnsurers

Mortgage Originators

Non-Financial

Info

What’s Aggregated

SOURCE: BANKING INDUSTRY TECHNOLOGY SECRETARIAT

FI = Financial institution


SPRING 2004


Screen Scraping

Obtaining data from screen display commands

Client Web server Legacy database

Terminalscreen data

Screen scraper

Existing application

HTML data

HTMLdata

Legacy system(mainframe)

SOURCE: WIM GEVERS


SPRING 2004


Screen Scraping• Some systems produce as their only output commands to

80 x 24 display terminals

• Sequences of characters telling the terminal to move its cursor and display data, e.g. ^M0238Feb. ^M024416, ^M02482004displays “Feb. 16, 2004” in row 2, starting at col. 38

• Screen scraping involves virtual simulation of the display terminal to retrieve the data

• Vendors

– Teamstudio screensurfer

Move to row 02, column 38 and display “Feb. ”


SPRING 2004


Financial Aggregation Issues

• Account consolidation– Different accounts in one bank– Different accounts in different banks

• Screen scraping

– Combine brokerage, insurance with banking

• Web BillPay– Requires registration of vendors

• EIPP

CashEdge Account Aggregation

SOURCE: CASHEDGE


SPRING 2004


Treasury Workstation

TWS SCOPE

SOURCE: SELKIRK FINANCIAL TECHNOLOGIES

THE UNIVERSITY OF HONG KONG

JANUARY 2004COPYRIGHT

© 2004 MICHAEL I. SHAMOS

Online Customers Hold More Products with Wells Fargo

<20 20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

9%9% 9%9%

6%6% 6%6%

8%8%

10%10%

13%13% 13%13%14%14%

15%15%

12%12%11%11%

13%13%

SOURCE: WELLS FARGO, 1999

THE UNIVERSITY OF HONG KONG

JANUARY 2004COPYRIGHT

© 2004 MICHAEL I. SHAMOS

95% have Higher Balances

<20 20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

-2%-2%

32%32%

24%24%20%20%

25%25%

15%15%

28%28%24%24%

37%37%

20%20%

13%13%

6%6%

-11%-11%

Online vs. Offline Customers’ BalancesOnline vs. Offline Customers’ Balances% Difference% Difference



SPRING 2004


Attrition is Lower

Offline Attrition Online Attritionwithout bill pay

Online Attritionwith bill pay

(36%)

(54%)



SPRING 2004


27%

40%

64%

82%

SOURCE: SYNERGISTICS

18-34 35-49 50-64 65+AGE:

Consumers Strongly Prefer 24-hour Access To Banking


SPRING 2004


HSBC Hexagon System

HSBC Hexagon Payment

HSBC Trade Services


SPRING 2004


B2B Payment TypesExample

Like wire transfer

Like promissory note or purchase order

Like bank-accepted billof lading

Like a letter of credit or escrow payment

Purpose

Buyer trusts Seller to deliver

Seller trust Buyer to PAY

Seller doubts Buyerability to PAY

Buyer doubts seller ability to DELIVER

Payment Type

Payment Order

Payment Obligation

Certification

Conditional

• Payment Orders & Obligations can be future dated• Attributes can be combined, eg conditional certified payment obligation• Obligations can be discounted by seller’s bank & traded freely

SOURCE: DEBRA MITTERER

Seller’s bankBuyer’s bank

Initiation2

Initiation

2Initiation

confirmation

Initiation confirmation

4

SellerBuyer

Initiation confirmation

3

Initiation response

3

5Signed receipt

Agree on terms of purchase

1

Syntax validationNon repudiationTransaction status

e-paymentsPluse-paymentsPlusbank co-brandedbank co-branded

TrustAct Server

B2B Payments

Seller’s bank

Buyer’s bank

SellerBuyer

Credit

confirmation9’Debit

confirmation 8’

*Optional flow

6Confirm conditions*

7Funds transfer

8 Debit advice 9Credit advice

Confirm conditions*

6

e-paymentsPluse-paymentsPlusbank co-brandedbank co-branded

TrustAct Server

B2B Payments


SPRING 2004


Major Ideas

• P2P is cheap• P2P can be ubiquitous (email)• P2P is real-time• eBanking is unexplored territory

– Start: replicate paper statements

• Aggregation• B2B payments as part of a larger trade process


SPRING 2004


QA&


SPRING 2004


Banking Services

• Consumer– Payments, eCheques– Savings– Loan services– Aggregation of accounts– Securities

• Both– Bill presentment– Reporting

• Terrorism, laundering

– 24/7 generates business

• Business– Payments– Cash management– Credit– Financial instruments– Factoring– Trade financing– Insurance– Foreign exchange– Accounting– Integration with

business systems

OBI with B2B Payment

Requisitioner

Supplier

Payment Authority

BuyingOrganizationSupplier Search

Requisitioner Profile Mgmt.

Approval

Catalog Mgmt.

Price Info. Mgmt.

Order Entry & Inv. Mgmt.

1. Connect to BO's Web Server and Select a Hyperlink to SO's catalog.2. Authenticate Requisitioner using Digital Certificate3. OBI Order Request4. Add Administrative Information5. OBI Order6. Obtain Credit Authorization7. Issue Invoice and Receive Payment

a

b

SOURCE: JAE KYU LEE


SPRING 2004


Online Payment Revenue Growth

SOURCE: CELENT


SPRING 2004


Non-Card eCommerce Payments

SOURCE: CELENT

ACHPayPalCheckfree …