Smart cards

A smart card is similar to a magnetic stripe card but contains a microprocessor chip. The first smart cards were prepaid telephone cards, which operated on stored prepaid values. They have moved on from this to be used for things such as library cards, credit cards, student cards, and electronic purses.

Today, there are three smart card types with different access methodologies.

Contact cards
With a contact smart card, the user inserts it into a reader in order to access the information on it. The data is then transferred once physical contact is made. The reader supplies power to the chip in the card through the contacts. These cards are used in financial applications such as store-value, debit, and credit cards because of their reliability and the high power available to the microchip processor. Contact cards are slower and require more servicing than contactless cards.

Contactless cards
Contactless cards communicate with the card reader using radio frequency technology. They are implanted with a radio antenna. No physical contact is required with the reader. Contactless smart cards are suitable for application in fast paced transactions. Proximity, close-coupled, and vicinity cards are sub-types of contactless cards. Vicinity cards are used in industrial tagging, car-park access, and library book tagging. Contactless cards cannot support encryption techniques and are expensive to manufacture.

Hybrid or combi cards
Hybrid or combi cards combine elements of contact and contactless cards. This is done in three different ways. Firstly, there is a hybrid card that has two chips. Each chip has either a contact or contactless interface. This method offers high security but is expensive to produce. The combi card has one chip, but with a contact and contactless interface. The combi card is cheaper than the hybrid card. There is a third type that uses an RF sleeve with an inbuilt antenna. This enables the card to contact the reader, thus making a contact card into a contactless one. This card type has low security.

Focus on Mondex
Mondex is a contact smart card that holds the equivalent of cash. It is an electronic purse. A Mondex card behaves exactly like cash and unlike other payment cards requires no signature, PIN, or transaction authorization. Cash is stored on an integrated circuit (IC) on the smart card. Cash can be securely transferred from one IC to another. Value is stored in a purse in the IC. The Application Carrier Device (ACD) holds the Mondex purse application. In a Mondex payment, value is transferred from one purse to another. Mondex transactions take place by inserting the card into a card reader.

Mondex cards offer a low cost, secure solution to unattended point of sale transactions, for example in parking meters or reality television voting. It is reliable and secure because no cash needs to be stored, low value transactions are efficient, and the Mondex cards are available to the majority of consumers. Mondex has been applied to different markets. For example, it is used in company cafeterias, where employees pay for meals using value on their Mondex cards. A Mondex card can hold a variety of currencies and be used in the respective countries. In Norway, the national lottery company and post office jointly offer Mondex card holders online gaming with winnings paid directly to customer’s cards.

Electronic Funds Transfer (EFT)

EFT operates on the basis of two systems. Both systems do not always occur at the same time or in the same place.

Clearing house system.

The clearing house system is where transactions between members of a clearing channel are recorded. The Clearing House Interbank Payment System (CHIPS) is an example of a clearing house.

Settlement
Settlement is the transferring of funds from a payer’s account to a payee’s account. This can only occur between banks. The central bank of each country usually acts as the primary settlement agent. Settlement can occur immediately on a gross basis or be delayed on a net basis.
Fedwire, CHIPS, and ACH are examples of EFT methods employed in the US.

Fedwire
Fedwire is a real-time gross settlement (RTGS) system guaranteed by the Federal Reserve of the US. More than 11,000 members are linked by online terminal, host-to-host computers, and other technology. It is the main payment system used for high value US payments.

Fedwire offers same day value, no settlement risk, finality, guaranteed payment, speed, and security. The only drawbacks are the cost, limited linkage, and restriction of transactions to credits.

In a typical Fedwire transaction between company A and company B, company B sends an invoice to company A, which sends a payment instruction to their bank (bank A). Bank A debits company A and sends a payment message to the Federal Reserve. The Federal Reserve debits bank A and credits bank B. Bank B credits company B’s account and sends the credit advice to company B.

CHIPS
CHIPS is an RTGS system. It is a computerized telecommunications network owned by New York Automated Clearing House. It links 56 banks, both domestic and foreign, that have offices in New York City. Payments on this system are generally international US dollar payments between countries. These payments include interbank movements, Eurodollar payments, and the settling of foreign exchange transactions.

The system supports the growing e-commerce needs of the business community through the use of Extensible Markup Language (XML). CHIPS offers same day value, minimal settlement risk, finality, speed, security, and the ability to transmit up to 9000 characters of data. The disadvantages are the high cost, its restriction to credit transactions, and the limitations of direct membership.

ACH
Automated Clearing House (ACH) system was developed as a means for transferring funds, at low cost and in high volume, between US domestic accounts. It is an alternative to checks. The National Automated Clearing House Association (NACHA) was established in 1974. It forms a link between regions for the ACHs and provides a nationwide electronic payment and collection network among US financial institutions. It offers a number of formats for ACH transactions.

The system can be used for debit and credit transactions. ACH credit transactions include payroll, pension, and annuity payments. ACH debit transactions include consumer bill payments, such as utility bills, phone bills, and insurance premiums.

ACH is cost effective, reliable, efficient, deals with both debits and credits, uses batch processing, has accelerated inflows, allows for processing of large amounts of information, and is more secure than paper transactions. The major disadvantages of the system are the delay in settlement, lack of guaranteed finality, start-up and on-going costs, and concerns over debit transactions.

SWIFT
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a global telecommunications network. It provides a strict message format for the exchange of financial information between financial institutions. Messages automatically pass through electronic links built between SWIFT and the local electronic clearing systems in different countries.

More recently, SWIFT has been applied to the transferring of the entire letter of credit process onto the Internet and providing Web-based functionality for business-to-business (B2B) transactions with SWIFTNet.

Payment system risks
There are payment system risks involved in the EFT systems. The daylight overdraft (when an account is overdrawn at the Federal Bank) is of concern to the Federal Reserve Bank. They have introduced charges curbing the limit a bank is overdrawn in any one day to address this risk. The second big risk was the delay in settlement in the ACH system. ACH has now introduced “ACH settlement day finality” to lower the risk.

eChecks

An eCheck is an electronic representation of a paper check. An eCheck uses public key cryptographic signatures and secure messaging over the Internet to make payments and perform other financial functions. They function using the same mechanisms as paper checks, but in an electronic format.

eCheck transactions take place in the following way:

• the payer “writes” the eCheck and “gives” the eCheck to the payee electronically
• the payee “deposits” the eCheck, receives credit, and the payee’s bank “clears” the eCheck to the paying bank.
• the paying bank validates the eCheck and then “charges” the check writer’s account for the check

eChecks offer safe bank transactions on the Internet, unlimited information carrying capacity, reduced fraud risk, and automatic verification of content and validity.

The eBill system is powered by eChecks. eBills are a paperless form of bill that are accessed on the Internet rather than delivered by traditional mail. eBills contain the exact same information as paper bills. Customers set up an eBill account with a website from which they can view, pay, and track the history of all bill payments. The system allows customers to set up recurring payments and reminders and guarantees payment direct from the account of their selection.

Mobile payments

A mobile payment is where two parties exchange financial value by means of a mobile device in return for goods or services. Mobile technologies include 2.5 and 3G data networks, and the Bluetooth, infrared, and radio frequency identification (RFID) wireless protocols. All mobile payments should be secure, interoperable, and easy to use.

Examples of where mobile purchases could be used effectively are

• mobile top-ups
• online shopping
• road-tolls
• fast-food drive-through
• service stations
• images or games

Mobile payments can be either Over the Air (OTA) or across wide-area networks (WAN). OTA payments usually operate on a browser-based transfer infrastructure, such as SMS or multimedia messaging (MMS). WAN uses a wireless network and proximity payments that transfer information over short distances. Proximity payments can be made using various technologies including Bluetooth, infrared, RFID, and contactless chips.

The mobile payment life cycle typically involves the following four phases. In phase one, the mobile payment mechanism is configured. This might be the installation of a payment device, such as a mobile wallet, on a mobile device. Phase two is the initiation of the payment by the consumer. Phase three is the authentication of the user, and phase four is the completion of the payment. This life cycle is similar to a typical credit card transaction.
Summary