Chapter 1: Introduction

Overview

There are several payment markets that can be identified, each using specific forms of money. The business-to-consumer (B2C) payment is used in commercial activities where the merchant is paid directly by the consumer for goods or services. This type of payment is also called retail payment. The direct payment between persons is called person-to-person (P2P) or even consumer-to-consumer (C2C). Administration-to-consumer (A2C) payment addresses the payment of taxes toward the government. Finally, the payment intervening between companies buying and those offering products and services is referred to as business-to-business (B2B) payment. A payment instrument refers to a form of money. A payment mechanism or payment method refers to the way a payment instrument is used to complete a payment transaction. Certainly, the range of payment instruments and payment mechanisms for B2C payments is different from the set of instruments available for other types of payments. This book analyzes only electronic payment instruments for B2C payments.

The concrete implementation of these instruments depends on the payment behavior of the consumer, the channels of interaction between the consumer's device and the merchant's device during payment, and the type of devices used to store the electronic payment instrument and to perform the corresponding payment mechanism.

The implementation of payment instruments is dependent on the consumer's payment behavior. Thus, payment instruments are designed to address consumers with credit, debit, or prepaid payment behavior. The value of the transactions performed with credit cards is paid later, at the end of a certain period. When using debit cards, the value of the transactions is paid now, at the moment when a transaction takes place. The prepaid instruments require that the consumers make the provision of funds before engaging any payment transaction. Thus, an electronic purse is a prepaid instrument since the consumer has to transfer money from his or her account kept with the bank in the record of funds kept by the electronic purse in order to be able to pay. We limit the presentation of payment instruments to the range of debit and credit, since at present they show the biggest market potential in the area of retail payments.

The channel of interaction established during the payment between the consumer's device and the merchant's device determines the forms of payment instruments. In a face-to-face payment the consumer and the merchant, represented by their devices, are physically present at the place were the transaction is made. Paying with a magnetic stripe debit card at a point of sale (POS) terminal is a face-to-face payment where the consumer's device is a magnetic stripe card and the merchant's device is the POS terminal equipped with a magnetic stripe reader. In a remote payment both the consumer and the merchant are represented by their devices, which need a telecommunication network to complete the payment protocol, indifferent to their physical location. Using a payment application that runs on the consumer's personal computer (PC) and that communicates with the peer payment application running on the merchant's Web site is a remote payment that relies on the Internet. Remote payment also includes paying for an item at a vending machine with a mobile phone, since the payment protocol involves interaction between the two entities over a wireless communication network, even though the two entities are physically located at the same place. Debit and credit payment cards can be used in both face-to-face and remote interactions (provided that adequate communication channels are available for remote payment). For example, a dual mobile phone handset, which has a supplementary card reader for a chip card, can serve as a personal terminal that allows the consumer to pay with a debit or credit chip card and transport the financial data over wireless communication networks. There are many other types of intelligent platforms that allow for remote chip card payments, provided they are equipped with a chip card reader ”namely, personal computers, workstations, personal digital assistants (PDAs), and TV set-top boxes.

We are concerned with two types of devices, both with plastic support, for the implementation of debit cards and credit cards: magnetic stripe cards where the financial information concerning the consumer and the issuer is carried in a magnetic stripe attached on the backside of the card, and chip cards where the information is stored in the permanent memory of a microprocessor chip embedded in the card.

The considerations mentioned above delimit the boundaries of our goal in this book. We will concentrate on the analysis and design of debit and credit payment cards, in both face-to-face and remote interactions, with implementations in magnetic stripe and chip card devices.

The book is logically organized into three major parts that reflect the evolution of debit and credit cards from implementations with magnetic stripe to chip and from face-to-face interaction towards remote interaction. This organization follows the actual trend in the retail financial industry, which spends considerable resources on chip migration and on the use of chip cards from various access devices over different interaction channels.