Electronic payment techniques
In this document
With the rising interest in e-commerce, electronic payment techniques have exploded in number. The most popular way is payment by credit card, probably because of its simplicity. The user just enters the relevant numbers, the merchant gets these validated and payment has been made. For extra security, the communication between user and merchant should be encrypted.
As alternatives to credit cards, electronic coupons and more recently various kinds of e-wallet have gained in popularity. Digital cash, which provides anonymity to the buyer, has been proposed often but seems to have less success in the marketplace.
Payment by credit card
Probably because of the World-Wide Web's origin in the USA, payment by credit card is the most popular and the easiest way to pay for goods and services on line. A user simply enters his credit card number, his name and the expiry date of the card, the merchant validates this information and upon approval from the credit card company, ships the good or provides access to the service. Approval can be done on-line in almost real time (US 5,724,424).
An important aspect here is security. Since normally transmissions are preformed in the clear, it is possible to tap the connection and obtain credit card information in this way. So most shops use encryption to protect credit card information (SSL being the most well known choice). An often neglected aspect is the secure storage of credit card information at the merchant computers. The famous hacker Kevin Mitnick once managed to access 20,000 credit card numbers stored at Internet provider Netcom.
An alternative to using encryption is to simply let the user indicate which credit card he wants to use without revealing the complete credit card number to the user (US 5,715,399). When the user is ready to place an order, he is presented with an overview of all the credit cards he used previously, identified only by the card name and last four digits on the card. This makes it possible for him to pick the card he wants to use but makes it impossible for an interceptor to determine the complete credit card number by tapping the line.
An interesting side-effect of payment by credit cards is that, since minors cannot get one, a payment by credit card serves as proof that one is an adult. This makes a credit card a natural choice for adult oriented services (of course an innocent looking name such as Interactive Services or Internet Entertainment Group needs to be used on the credit card statement).
This insight created a business opportunity for intermediaries such as Adultcheck. A user registers with Adultcheck and pays for the service using his credit card, which immediately proves he is an adult. Adultcheck then gives him a user code with which he can access protected adult content. The webmasters of those sites only needs to provide the Adultcheck login screen which is made available to them for free, so they can provide adults-only access to their website without any expenses. This is another example of selling complementary goods. Note that in this case, it is the provider who uses the free product, and the end-user who pays for the complementary product (the user code).
Although highly popular in the literature, digital cash is not used in practice. This is for the most part due to several competing technologies (all patented of course) and the unwillingness to develop a common standard. Another hot item is whether digital cash should be anonymous or not.
Digital cash is basically a string of numbers representing an amount of money. A customer sends this string to a merchant which sends it to the bank for verification. When the verification passes, the bank adds the indicated amount to the merchants account. A problem is that such strings can be easily duplicate allowing double spending. Therefore the bank must keep track of all the spent numbers and refuse a payment if it already appeared on the list. Digital cash is protected against forgery by using digital signatures. Since only the bank could have placed a digital signature on a piece of digital cash, third parties cannot make up their own (US 5,712913; US 5,781,631; US 5,878140).
Digital cash allows so-called micropayments, since there is no reason why the value of digital cash should be restricted to any predefined amount. This makes it possible for instance to charge 25 millicents for retrieving one article from a database. Paying such a small amount is no problem for a user, but if the database operator can get a large enough userbase he still makes a profit.
To encourage sales, it is known to provide electronic coupons, gift certificates and discount offers (US 5,855,007; US 6,175,823). This way, the recipients spend the coupon or certificate at that particular store, but since coupons often are not enough to pay for a complete item, they will need to spend additional money.
Coupons need to be secure against forgery and double spending. These problems are related to the problem of electronic cash (indeed, a coupon can be said to be a specific type of electronic cash).
Recently, digital cash has become popular again, this time in the form of so-called digital wallets. A digital wallet or e-wallet is an application running on the user's set-top box or personal computer, which manages the user's digital money. When the user goes to a merchant to buy a product, he simply activates the e-wallet application, which transmits the user's personal information and payment data to the merchant (US 5,815,657; US 6,125,352).
The simplest type of wallet is the site wallet. A user enters his billing, shipping and credit card data at a merchant site, so he can re-use that data at subsequent purchases. This of course works only at individual merchants or virtual malls.
An improvement is created by service providers who offer remote wallets. A user registers at a payment service provider, who in turn supplies the data to multiple merchant sites or virtual malls, so the user can buy items at all of them without having to register separately (US 6,092,053).