Figure 15.1Conventional Cryptography

KEYKEY

ENCRYPTENCRYPT DECRYPTDECRYPTSIGNER RECIPIENT

PLAINTEXT CIPHERTEXT PLAINTEXT

Figure 15.2Asymmetric Cryptography

ENCRYPTENCRYPT DECRYPTDECRYPTSIGNER RECIPIENT

PLAINTEXT CIPHERTEXT PLAINTEXT

PUBLIC KEYPUBLIC KEY PRIVATE KEY PRIVATE KEY

Figure 15.3Message Digest

HASHFUNCTION

HASHFUNCTION

HASHFUNCTION

HASHFUNCTION

DIGESTDIGEST

DIGESTDIGEST

DIGESTDIGEST

PLAINTEXT PLAINTEXT PLAINTEXT

+SAME?

Figure 15.4

Message DigestMessage Digest

Message DigestMessage Digest

Message DigestMessage Digest

PUBLIC KEYPUBLIC KEY PRIVATE KEY PRIVATE KEY

Digitally SignedDocumentPlaintext

Plaintext

Plaintext

Encrypt Decrypt

Signature

Verify?

On

e-way H

ashF

un

ction

On

e-way

Hash

Fu

nctio

n

Step 1

Step 2 Step 3 Step 5

Step 6

Step 4

Step 1: Signer uses one-way hash function to create message digest from plaintext.

Step 2: Singer encrypts message digest with private key to create signature.

Step 3: Signer sends plaintext and signature to recipient.

Step 4: Recipient uses one-way has function to create message digest from plaintext.

Step 5: Recipient decrypts signature with public key to create message digest.

Step 6: Recipient compares message digest generated by one-way hash function to message digest generated by public key.

SignerSigner

Figure 15.5Certificate Authority

PUBLIC KEY

PRIVATE KEY

Certificate AuthorityCertificate Authority

PUBLIC KEY

CA Certificate

RequestCertificate

Issue

Plaintext Plaintext

Sign(Private Key)

Signature+

Signature+

Verify?

Step 1

Step 2

Step 3

Step 5

Step 6

Step 4

This is signer’s public key

Isl Certificate Authority

Step 1: Signer creates its own public key and private key.

Step 2: Signer requests certificate from certification authority (CA).

Step 3: CA issues a certificate of signer’s public key, signed by CA’s private key.

Step 4: Singer uses one-way hash function to create message digest from plaintext (Step 1 from Diagram 14.4) and encrypts message digest with private key to create signature (Step 2 from Diagram 15.4).

Step 5: Signer sends plaintext and signature to recipient (Step 3 form Diagram 15.4).

Step 6: Recipient uses one-way hash function to create message digest from plaintext (Step 4 from Diagram 15.4), decrypts signature with public key to create message digest (Step 5 from Diagram 15.4), and compares the two message digests (Step 6 from Diagram 15.4).

Figure 15.6SSL

CACA

WebMerchantWebMerchant

ConsumerConsumer

1

2

3

4

Root CACert installedin browserCA cert for

MerchantSig

Merchant Cert to ConsumerBrowser

Symmetric key encryptedwith Merchant public keyto encrypt communications

Figure 19.1Sight Draft for Documentary Collection

At Sight Any City, Ks. May 2, 1997

Pay to the order of Seller

Ten Thousand and no/100 U.S. DollarsThrough Banco di Roma

Buer Seller Any City, Italy

Exporter

Figure 19.3Issuing the Letter of Credit

Issuing BankIssuing Bank Beneficiary’s Bank

Beneficiary’s Bank

Applicant/Purchaser

Applicant/Purchaser

Beneficiary/Seller

Beneficiary/Seller

1. Contract Callingfor Payment by Letter of Credit

2. Appliesfor Letter of Credit

3. Issues Letter of Credit

4. Informs SellerLetter of CreditHas Been Issued

5. Goods

Figure 19.4Payment by Letter of Credit

Issuing BankIssuing Bank Beneficiary’s Bank

Beneficiary’s Bank

Applicant/Purchaser

Applicant/Purchaser

Beneficiary/Seller

Beneficiary/Seller1. Shipment of Goods

5. Reimbursement

3. Documents Evidencing Shipment

2. DocumentsEvidencingShipment

4. Payment

6. Payment

Figure 27.1Direct Presentment

Payor BankPayor Bank

Payee Payee Payee Payee

Step 2 Step 3

Step 1

Step 1: Payee provides goods and services to payor; payor gives check to payee.

Step 2: Payee presents check to payor bank; payor bank gives cash topayee.

Step 3: Payor bank removes funds from payor’s account.

Figure 27.2Clearinghouse Collection

Bank 1Bank 1 Bank 2Bank 2ClearinghouseClearinghouse

Bank 1 CustomerBank 1 Customer Bank 2 CustomerBank 2 Customer

Step 1Step 4

Step 3

Step 2

Step 3

Step 2

Step 1 Step 4

Step 1: Customers deposit checks at their banks. Their banks credit their accounts.

Step 2: Banks send to the clearinghouse checks they have received for deposit. Clearinghouse credits banks for those checks.

Step 3: Clearinghouse sends to banks checks drawn on them. Clearinghouse debits banks for those checks.

Step 4: Banks debit customer accounts for checks received from clearinghouse.

Figure 27.3Direct-Send Collection

S.F. Bank N.Y. Bank

S.F. Payor N.Y. Payee

S.F. Payee N.Y. Payor

Step 1

Step 1

Step 2

Step 2

Step 3

Step 4

Step 4

Step 1: Payees provide goods and services to payors. Payors give checks to payees. Because the process proceeds simultaneously on checks in each city, it can apply when a New York payor sends a check to a San Francisco payee and also when a San Francisco payor sends a check to a New York payee.

Step 2: Payees deposit checks (one in San Francisco and one in New York). Their banks credit their accounts.

Step 3: Each bank sends to the other the checks the first bank has received that are drawn on the other. Specifically, the San Francisco bank sends to New York the checks that the San Francisco bank has received that are drawn on the New York bank; the New York bank sends to San Francisco the checks that the New York bank has received that are drawn on the San Francisco bank. Funds are transferred to settle the difference in amount.

Step 4: Both banks remove funds from the payors’ accounts: the San Francisco bank from its customers and the New York bank from its customers.

Figure 27.4Federal- Reserve Collection

DepositoryBank

DepositoryBank

Payor Bank

FederalReserve

Bank

Payee PayorStep 1

Step 2Step 5

Step 3 Step 4

Step 1: Payee provides goods and services to payor; payor gives check to payee.

Step 2: Payee deposits check. Depositary bank credits payee’s account.

Step 3: Depositary bank sends check to the Federal Reserve bank. The Federal Reserve bank credits the depositary bank for the check.

Step 4: The Federal Reserve bank sends the check to the payor bank and debits it for the check.

Step 5: The payor bank debits the payor for the check.

Figure 28.1POS Conversion

Customer’sBank

Merchant’sBank

Customer MerchantStep 1

Step 2

Step 3

Step 4

Step 4Step 5

Step 1: The Customer gives a check to the Merchant. The Merchant runs the check through a reader (capturing the information on the MICR line of the check) and returns the paper check to the Customer.

Step 2: The Merchant sends to its bank a message including both the amount of the transaction and the data from the check about the Customer’s bank account.

Step 3: The Merchant’s Bank sends an ACH debit entry to the Customer’s Bank.

Step 4: The Customer’s Bank responds to that entry by removing funds from the Customer’s account and sending them to the Merchant’s Bank (through the ACH network).

Step 5: The Merchant’s Bank credits the Merchant’s account.

Figure 28.2ACH “Checks”

Customer’sBank

Merchant’sBank

Customer Merchant

Step 1

Step 3

Step 4

Step 4 Step 5

Step 1: The Customer sends payment information to the ACH Provider (probably through a link at the merchant’s website). The information should include the information from the MICR line of Customer’s check (the ABA routing number of the Customer’s Bank and the Customer’s account number at the bank).

Step 2: Based on the commitment to pay represented by that information, the Merchant completes the transaction. It might ship the goods at that time, or it might wait a few days to receive payment.

Step 3: The ACH Provider sends the ACH debit entry to the Customer’s Bank.

Step 4: The Customer’s Bank responds to that entry by removing funds form the Customer’s account and sending them to the Merchant’s Bank (through ACH network).

ACHProvider

ACHProvider

Step 2

Step 1

Figure 31.1Bill Aggregators

Customer

Aggregator Customer’sBank

Biller

BillerStep 1

Step 2

Step 3

Step 4

Step 1

Step 5

Step 1: Billers send bills to Aggregator (perhaps through intermediary service providers).

Step 2: Aggregator advises Customer of bills

Step 3: Customer views bills and authorizes payment.

Step 4: Aggregator directs Customer’s Bank to pay bills.

Step 5: Customer’s Bank pays Billers (directly or through a financial institution.

Figure 32.1Using Stored-Value Cards

Operator Merchant’s Bank

Customer Merchant

Step 1

Step 2

Step 3

Step 4

Step 1: Cardholder obtains card and stores value on it.

Step 2: Cardholder transfers transaction data to Merchant and receives goods or services.

Step 3: Merchant sends transaction data to Operator.

Step 4: Operator sends funds to account at Merchant's Bank. In accountable systems, Operator deducts funds from Cardholder’s shadow balance.

Figure 32.2Using Electronic Money

Issuer Merchant’s Bank

Customer Merchant

Step 1

Step 2

Step 3

Step 5

Step 1: Customer opens account and creates ecoins.

Step 2: Customer sends coins to Merchant.

Step 3: Merchant confirms authenticity of coins by communication with Issuer.

Step 4: Merchant releases product to Customer.

Step 5: Issuer sends funds to account at Merchant’s Bank.

Step 4

Figure 34.1Software Leasing

Financier

Licensor User

Payments over time

One-time payment

Software License

Figure 34.2Article 9 View of General Intangibles

Financier/Secured Party

Licensor/Account Debtor

User/Debtor

Promissory Note$

Software License

Figure 34.3Finance Licensing

FinancierLicensor User

Payments over time

One-time payment

SoftwareLicense Sublicense

Figure 38.1Account-Based Lending Systems

Step 1: Borrower deposits assets with Intermediary.

Step 2: Lender arranges with Intermediary to have control of assets.

Step 3: On default, Lender takes assets or directs Intermediary to dispose of them on Lender’s behalf.