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Payment systems. Aalto University , autumn 2013. Outline. Money transfer Card payments Anonymous payments and BitCoin. MOney transfer. Common payment systems. Cash Electronic credit transfer, e- lasku Direct debit Check Credit card Cash transfer Mobile payment

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payment systems

Payment systems

Aalto University, autumn 2013

outline
Outline
  • Money transfer
  • Card payments
  • Anonymous payments and BitCoin
common payment systems
Common payment systems
  • Cash
  • Electronic credit transfer, e-lasku
  • Direct debit
  • Check
  • Credit card
  • Cash transfer
  • Mobile payment
  • Anonymous payment

Which are regulated?

electronic credit transfer
Electronic credit transfer
  • Also called bank transfer, wire transfer
  • Payment process (e.g. UK CHAPS):
    • Clearing: if the payment is between two banks, the sending bank sends the information to a central processor, which keeps track of payments
    • Settlement: transfer of funds between the central-bank reserve accounts of the two banks at the end of the day for the balance of all transactions that day ( risk to central bank or receiving bank if a sending bank goes bust)
  • Float: money between debit from the sender’s bank account and credit to the receiver’s account  banks gain interest on float  payments in some systems take days without any technical reason
  • Finality varies for sender, banks and receiver
    • Most electronic transfers immediately final to sender and bank, not receiver
    • Old direct debit in Finland is final for sender; SEPA direct debit is reversible

Sender

Sending bank

Central processor

Receiving bank

Receiver

float

Timeline

Sender makes payment

Clearing

Settlementbetween banks

Funds available

to receiver

check

[classhelper.org]

Check
  • Check payment:
    • Payer writes the check
    • Clearing: payee deposits the check, bank collects payment, paying bank inspect the check for authenticity and sufficient funds
    • Settlement: transfer of funds between banks
  • Float: in some countries, funds are available immediately after deposit, before clearing and settlement  payee effectively gets an interest-free loan

/negative) float

Timeline

Clearing

Settlementbetween banks

Payee depositscheck

Payer writes check

Funds available

to payee

credit card
Credit card
  • Credit card issuer takes a ~2-5% transaction fee from seller
    • Buyer protection: card issuer takes some of the risk
    • Initial 30–60 days of interest-free credit for buyer
    • Kickbacks to some card holders
  • Transaction final after 90 days clearer rules on finality than in bank transfer (one of the reasons why businesses like credit cards)

negative float

Timeline

Transaction

final

Funds available

to seller

Creditcard

purchase

Buyer may

pay balance

Interest-free

cash transfers
Cash transfers
  • Western Union, MoneyGram: money transfer for people without bank accounts
    • Sender pays cash at one branch office; receiver gets the cash at another branch office (no bank account needed)
    • Used mostly by migrants to send money to 3rd-world countries
    • Receiver must have id card or answer test question
  • Example:

NAME: MICHAEL SMITHADDRESS: 144 EAST STREET LAGOS TEST QUESTION: WHAT IS THE DOGS NAMEANSWER: SPOT

  • Hawala: informal network of agents based on Islamic law or honor system
    • This and other informal systems conflict with money laundering legislation
issues with float
Issues with float
  • Victim receives a check or credit card details; ships goods before payment clears
  • Victim receives a check; funds available before the check clears; victim makes an irreversible payment (e.g. refunds all or part of the money)

Timeline

Victim shipsgoods

Check found

to be false or

no funds

 deposit reversed

Victim depositscheck

Scammerwrites

false check

Funds available

to victim

Timeline

Check found

to be false or

no funds

 deposit reversed

Victim depositscheck

Scammerwrites

false check

Funds available

to victim

Victim returns

(part of)

the money

Funds available

to scammer

issues with float1
Issues with float
  • Victim receives a reversible payment; victim makes an irreversible payment

Timeline

Muleasked to

repay

Criminal

(e.gphisher)

makes a

money transfer

to mule

Funds available

to mule

Mule makes forward

payment

Funds available

to scammer

mag stripe b ank cards
Mag-stripe bank cards
  • Magnetic stripe containsprimary account number (PAN), name, expiration date, service code, PVKI, PVV, CVV1
  • PIN is a function of data on mag stripe and secret key in terminal  offline PIN verification at disconnected POS or ATM
  • Possible to copy data on the mag stripe
  • CVV1 is a cryptographic MAC of the PAN, name, expiration and service code (based on 3DES)
    • Offline terminal has a security module to store the card and PIN verification keys
  • CVV2to make online fraud harder
    • 3-4 digits printed on card but not on mag stripe
    • Required for web and phone (“card not present”) transactions
    • Not stored by merchant after online verification  safe from server hacking
    • Vulnerable to phishing
mag stripe visa pin verification
Mag-stripe Visa PIN verification
  • Input from magnetic stripe:
    • Primary account number (PAN) i.e. 15-digit card number
    • PIN verification key indicator (PVKI, one digit 1..6)
    • PIN verification value (PVV, 4 decimal characters)
  • Verifier must have
    • PIN verification key (PVK, 128-bit 3DES key)
    • PVKI is an index of PVK to enable PVK updates
  • Create security parameter (TSP):
    • Concatenate 11 rightmost digits of PAN, PVKI and PIN
    • The 16-digit concatenation is one hexadecimal DES block
  • PVV generation:
    • 3DES encryption of TSP with the key PVK
    • Decimalization of the encryption result to 4-digit PVV
  • Decimalization happens by taking the 4 leftmost digits 0..9 from the hexadecimal encrypted block
    • If less than 4 such digits, take 4 first digits A..F and map A=0,B=1,C=3...

[For details see IBM]

chip and pin bank cards
Chip-and-PIN bank cards
  • EMV standard (Europay, Mastercard, Visa)
  • Smart card chip (ICC) on the bank card
    • Tamperproof ICC stores a cryptographic signature key
    • Card also contains a certificate
  • Three levels of secure transactions:
  • Static data authentication (SDA):
    • Certificate verification only; no longer used in Finland
  • Dynamic data authentication (DDA):
    • Card signs a random challenge sent by terminal
  • Combined DDA and application cryptogram (CDA):
    • Card signs transaction details incl. random challenge
  • Card holder authenticated with PIN or signature
    • PIN usually sent to the card, which answers yes/no
anonymous digital cash
Anonymous digital cash
  • David Chaum 1982, later DigiCash product — never really used but an influential idea
  • Participants: bank, buyer Alice, merchant Bob
  • Anonymous:
    • Bank cannot link issued and deposited coins, not even with Bob’s help
  • Not transferable: must be deposited to bank after one use
  • Uses blind signatures: bank signs coins without seeing their contents  cannot link events of coin issuing and use

1. Bank issues coin

3. Bob deposits coin

Bank

Alice

buyer

Bob

merchant

2. Alice spends coin

anonymous digital cash1
Anonymous digital cash
  • Idea 1: blind signature:

Bank has an RSA signature key pair key (e,d,n) for signing 1€ coins (and different keys for 10€, 100€,...)

    • Alice creates a coin from random “serial number” SN and redundant padding required for RSA signature;

Alice generates a random number R, computes coin ⋅ Re mod n, and sends this to the bank

    • Bank computes (coin ⋅ Re)d mod n = coind ⋅ R mod n and sends this to Alice
    • Alice divides with R to get the signed coin coind mod n

 Bank has signed the coin without seeing it and cannot link the coin to Alice

  • Alice can pay 1€ to Bob by giving him the coin
    • Bob deposits coin to bank; bank checks signature and only accepts the same coin once
  • Double-spending: Customers are anonymous; if someone pays the same coin to two merchants, who was it?
anonymous digital cash2
Anonymous digital cash
  • Idea 2: double-spending detection
    • Alice must set SN = h( h(N) | h(N xor “Alice”) ) where N random
    • After Alice has given the coin to Bob, Bob asks Alice to reveal one of h(N), N xor “Alice” or N,h(N xor “Alice”)

 If Alice spends the coin twice, she reveals her name with 50% probability

  • Make each 1€ coin of k separately signed sub-coins  detection probability p = 1-2-k
    • Coins will be quite large: k=128 with 2048-bit RSA signatures makes 32kB/coin
  • Problem: What forces Alice to create SN this way? How can bank check the contents of the message signed blindly?
anonymous digital cash3
Anonymous digital cash
  • Idea 3: cut and choose
    • Alice creates kpairs of sub-coins for signing
    • Bank asks Alice to reveal Nfor one sub-coin in each pair and signs the other one  cheating detection probability p = 1-2-k
  • Alice can make anonymous payments but will be caught with probability p = 1-2-k if she tries to create an invalid coin or spend the same coin twice
bitcoin1
BitCoin
  • Transferable digital money
    • Based on cryptographic signatures and hash functions
  • P2P system, no central bank or trusted issuer
  • “Fair”, competitive system for the initial issue
  • Amount of money in circulation capped
    • Max 21 million BTC
    • Coins can be subdivided to 0.00000001 BTC
  • Created in 2008 by pseudonym Satoshi Nakamoto
bitcoin transaction
BitCoin transaction
  • Direct transactions between public key pairs:
    • Transaction record contains (1) inputs, (2) outputs
    • Input info: (a) pointer to the previous transactions i.e. when did the payers receive this money, (b) payer signature(s)
    • Outputinfo: (a) payee public key hashes, (b) transfer amounts
    • Total inputs from previous transactions must be ≥ outputs
  • History of signed transactions proves who has the money now
  • Questions:
    • How to bundle received small outputs, or get change for a large input? What if the outputs ≤ inputs?
    • Who stores the history and checks the signatures?

in: references to previous transactions

out: public key hashes, amounts BTC

Payers’ signatures

h

0.1 BTC

PK1

PK2

0.01 BTC

transaction history
Transaction history

Unreclaimed0.34 BTC

Transaction F

in: references to transactions D and E

out: 0.34 BTC to PK9

PK7 signature

Transaction E

in: reference totransaction C

out: 0.01 BTC to PK7

0.015 BTC to PK8

PK6 signature

Transaction A

in: references to previous transactions

out: 0.2 BTC to PK4

PK1 signature

Transaction D

in: references totransactions A, B and C

out: 0.33 BTC to PK7

PK4 and PK5 signatures

Transaction B

in: references to previous transactions

out: 0.1 BTC to PK4

PK2 signatures

Transaction C

in: references to previous transactions

out: 0.03 BTC to PK5;0.03 BTC to PK6

PK3 signature

PK9

PK8

Unreclaimed0.015 BTC

To transaction fees0.005 BTC

double spending
Double spending

PK3

Transaction C

in: reference totransaction A

out: 0.01 BTC to PK4

PK2 signature

Transaction B

in: reference totransaction A

out: 0.33 BTC to PK3

PK2 signature

Transaction A

in: references to previous transactions

out: 0.1 BTC to PK2

PK1 signature

?

PK2

PK4

How to prevent double spending?

public transaction log
Public transaction log
  • Public transaction log of all past transactions:
    • All transactions ever made incl. signatures
    • Updated every 10 minutes, on the average
    • Used to check for double spending
  • Block chain: public chain of log entries, updated every 10 minutes
    • Block contains hash of the previous block and Merkle hash of new transactions
  • The latest block is, in effect, a hash of all transactions ever
  • Log size grows over time
  • Q: Who can be trusted to maintain the log? A: global P2P network

Block k-2

hash of block k-3,

Merkle hash tree of new transactions,time, nonce,and other info

Block k-1

hash of block k-2,

Merkle hash tree of new transactions,time, nonce and other info

Block k

hash of block k-1,

Merkle hash tree of new transactions,time, nonce,and other info

h

h

h

mining
Mining
  • Anyone can add blocks to the block chain
    • To do so, you must perform proof of work i.e. solve a cryptographic puzzle the requires brute-force search adjustable difficulty
    • Find a nonce (any number) such that the SHA-256 hash of the block is smaller than a target valueh( block header(nonce) ) ≤ target value
    • The first to find a solution gets a reward and everyone moves to search for the next block
    • The difficulty of the next block is adjusted to keep the predicted block generation time at 10 minutes
  • Issuing coins
    • The reward for generating a new block is new BTC (currently 25) – this is how the coins are initially issued!
    • Transactions may also include a small transaction fee to encourage mining
security of the block chain
Security of the block chain
  • Double spending detection depends on the block chain not branching
    • Client software always chooses the longest branch
    • After receiving the payment, sellers publish the transaction to the P2P network and wait for 6 new blocks to include it
  • If someone controls more than 50% of the global hash rate, they can double spend

Block k

Block k+1

Block k+2

Block k+1

Block k+2

Block k+4

Block k+3

bitcoin philosophy
BitCoin philosophy
  • Anonymous transactions like cash money
  • Digital equivalent of gold:
    • Limited supply on earth
    • Cannot be controlled or inflated by a government
    • Opposition to current monetary policy, especially quantitative easing
  • Potential problems:
    • Exchange rate volatility
    • Unlike gold; competing currencies easy to create
    • Favorite currency for drug trade and other crime
    • Tax authorities will be interested
    • Max transaction rate ~21M BTC / hour, 60-minute latency
    • Security based on wasting energy in CPUs
    • Market bubble?
possible security issues
Possible security issues
  • No way to reverse transaction without the payee’s cooperation
  • Block chain branching, double spending
    • Should to wait 60 minutes or more to confirm a transaction
  • Software bugs
  • Bank robbery by hackers
  • Malware attacks against wallets
  • Government attempts to control
    • Silk Road raided by FBI in Oct 2013
  • Competing digital currencies easy to create
reading material
Reading material
  • Ross Anderson: Security Engineering, 2nd ed., chapter 10
  • Interesting reading online:
    • Scam baiting sites have stories about advance-fee fraud (e.g. http://www.419eater.com) but not always nice
    • University of Cambridge Security Group: http://www.cl.cam.ac.uk/research/security/banking/
    • BitCoin wiki: https://en.bitcoin.it/wiki/Main_Page
exercises
Exercises
  • What are the main threats in
    • online card transactions?
    • POS transactions?
    • ATM cash withdrawals?

What differences are there in the way credit cards and bank debit cards address these threats?

  • Could you (technically) use bank cards or credit cards
    • as door keys?
    • as bus tickets?
    • for strong identification of persons on the Internet?

(This question may require quite a bit of research.)

  • How could a malicious merchant perform a man-in-the-middle attack against chip-and-PIN transactions?
  • When a fraudulent bank transaction occurs, who will suffer the losses? Find out about the regulation and contractual rules on such liability.
  • Bank security is largely based on anomaly detection and risk mitigation. In what ways could a bank reduce the risk of fraud in mag-stipe or chip-and-PIN payments?
  • Even though DigiCash coins are unlinkable, what ways are there for the merchant or bank (or them together) to find out what Alice buys?
  • Find a BitCoin block explorer web site with the full transaction record and browse around. Find the latest blocks and transactions, and the first block ever. See how the mining difficulty has changed over time.