The trouble with credit cards online

Credit and cash are fundamental ideas, to the point that we can sort the multitude of electronic payment methods into two piles. Bitcoin is obviously in the “cash” pile, but let’s look at the other one first.

Credit card transactions are the dominant payment method that is used on the web today. If you’ve ever bought something from an online seller such as Amazon, you know how the arrangement goes. You type in your credit card details, you send it to Amazon, and then Amazon turns around with these credit card details and they talk to the “system”—a financial system involving processors, banks,  credit card companies, and other intermediaries.

On the other hand, if you use something like PayPal, what you see is an intermediary architecture. There’s a company that sits between you and the seller, so you send your credit card details to this intermediary, which approves the transaction and notifies the seller. The intermediary will settle its balance with the seller at the end of each day.

What you gain from this architecture is that you don’t have to give the seller your credit card details, which can be a security risk. You might not even have to give the seller your identity, which would improve your privacy as well. The downside is that you lose the simplicity of interacting directly with the seller. Both you and the seller might have to have an account with the same intermediary.

Today most of us are comfortable with giving out our credit card information when shopping online, or at least we’ve grudgingly accepted it. We’re also used to companies collecting data about our online shopping and browsing activity. But in the 1990s, the web was new, standards for

protocol-level encryption were just emerging, and these concerns made consumers deeply uncertain and hesitant. In particular, it was considered crazy to hand over your credit card details to online vendors of unknown repute over an insecure channel. In such an environment, there was a lot of interest in the intermediary architecture.

A company called FirstVirtual was an early payment intermediary, founded in 1994. Incidentally, they were one of the first companies to set up a purely virtual office with employees spread across the country and communicating over the Internet — hence the name.

FirstVirtual’s proposed system was a little like PayPal’s current system but preceded it by many years. As a user you’d enroll with them and provide your credit card details. When you want to buy something from a seller, the seller contacts FirstVirtual with the details of the requested payment, FirstVirtual confirms these details with you, and if you approve your credit card gets billed. But two details are interesting. First, all of this communication happened over email; web browsers back in the day were just beginning to universally support encryption protocols like HTTPS, and the multi-party nature of payment protocol added other complexities. (Other intermediaries took the approach of encoding information into URLs or using a custom encryption protocol on top of HTTP.) Second, the customer would have ninety days to dispute the charge, and the merchant would receive the money only after three months! Today the merchant does get paid immediately, but, there still is the risk that the customer will file a chargeback or dispute the credit card statement. If that happens, the merchant will have to return the payment to the credit card company.

In the mid ‘90s there was a competing approach to the intermediary architecture which we’ll call the SET architecture. SET also avoids the need for customers to send credit card information to  merchants, but it additionally avoids the user having to enroll with the intermediary. In SET, when you are ready to make a purchase, your browser passes your view of the transaction details to a shopping application on your computer which, together with your credit card details, encrypts it in such a way that only the intermediary can decrypt it, and no one else can (including the seller). Having encrypted your data it this way, you can send it to the seller knowing that it’s secure. The seller blindly forwards the encrypted data to the intermediary — along with their own view of the transaction details. The intermediary decrypts your data and approves the transaction only if your view matches the seller’s view.

SET was a standard developed by VISA and MasterCard, together with many technology heavyweights of the day: Netscape, IBM, Microsoft, Verisign, and RSA. It was an umbrella specification that unified several existing proposals.

One company that implemented SET was called CyberCash. It was an interesting company in many ways. In addition to credit card payment processing, they had a digital cash product called CyberCoin. This was a micropayment system — intended for small payments such as paying a few cents to read an online newspaper article. That meant that you’d probably never have more than $10 in your CyberCoin account at any time. Yet, amusingly, they were able to get U.S. government (FDIC) insurance for each account for up to $100,000.

There’s more. Back when CyberCash operated, there was a misguided — and now abandoned — U.S. government restriction on the export of cryptography, which was considered a weapon. That meant software that incorporated meaningful encryption couldn’t be offered for download to users in other countries. However, CyberCash was able to get a special exemption for their software from the Department of State. The government’s argument was that extracting the encryption technology out of CyberCash’s software would be harder than writing the crypto from scratch.

Finally, CyberCash has the dubious distinction of being one of the few companies affected by the Y2K bug — it caused their payment processing software to double-bill some customers. They later went bankrupt in 2001. Their intellectual property was acquired by Verisign who then turned around and sold it to PayPal where it lives today.

Why didn’t SET work? The fundamental problem has to do with certificates. A certificate is a way to securely associate a cryptographic identity, that is, a public key, with a real-life identity. It’s what a website needs to obtain, from companies like Verisign that are called certification authorities, in order to show up as secure in your browser (typically indicated by a lock icon). Putting security before usability, CyberCash and SET decided that not only would processors and merchants in their system have to get certificates, all users would have to get one as well. Getting a certificate is about as pleasant as doing your taxes, so the system was a disaster. Over the decades, mainstream users have said a firm and collective ‘no’ to any system that requires end-user certificates, and such proposals have now been relegated to academic papers. Bitcoin deftly sidesteps this hairy problem by avoiding real-life identities altogether. In Bitcoin, public keys themselves are the identities by which users are known, as we’ll see in Chapter 1.

In the mid 90s, when SET was being standardized, the World Wide Web Consortium was also looking at standardizing financial payments. They wanted to do it by extending the HTTP protocol instead so that users wouldn’t need extra software for transactions—they could just use their browser. In fact, they had a very general proposal for how you might extend the protocol, and one of the use cases that they had was doing payments. This never happened — the whole extension framework was never

deployed in any browsers. In 2015, almost two decades later, the W3C has announced that it wants to take another crack at it, and that Bitcoin will be part of that standardization this time around. Given all the past failures, however, I won’t be holding my breath.

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