The Hacker's Encyclopedia 1998

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DEVELOPMENT OF AN ELECTRONIC TOLL COLLECTION SYSTEM PHASE I: TECHNOLOGY INVESTIGATION AND CONCEPT DEVELOPOMENT Scope of Research Scope of Research This report summarizes the research conducted by the Advanced Transaction Systems Group (ATS). The research findings reported here relate to the regulatory and the operating requirements of the financial services provider that would have to be considered in the design of an electronic toll system. This objective is to satisfy a requirement in the Battelle proposal calling for; "an examination of the regulatory aspects that must be designed into the system so that it will be accepted by customers and financial institutions,as well as being accepted by local,state and federal authorities". This report will focus on the financial institution requirements for participation in an electronic fund transfer system (EFTS). Consumer implications will be mentioned where appropriate. Research Scenario In pursuing the examination of EFT regulatory implications for the design of the proposed Winko-matic electronic toll collection system (AVI) we assumed two possible operating states. They are the following; Operating State One. * To operate within an electronic fund transfer network owned and operated by a depository institution. Operating State Two. * Operate a third party system or private network with a financial relationship to a depository institution. Overview of EFTS Requiremants Participation in a payment system of the United States requires that the entrant abide by the laws established under various banking acts and interpreted under commercial law codes. Many of the rules and operating procedures for the U.S. payment system were developed at a time when the system was based on the clearing and settlement of paper credits and debits. Therefore, when the system moved from a paper based, manual and batch processing orientation into a system dominated by telecommunications and computer technology many of the operating rules were maintained and did not cause any significant operating problems. However, other rules presented problems and required that a new body of law be established for handling electronic financial transactions. For example, the most popular form of bill payment is made possible through the demand deposit account. Over the years, the body of law for the paper based checking account has institutionalized such features as; 1. return of cancelled checks to the customer, 2. stop payment features, 3. account security using signature verification, 4. practice of float management. With the appearance of electronic fund transfer systems banks are faced with the challenge of maintaining the features of the paper based system while at the same time trying to capture the benefits of online computer systems. For example, a debit card transaction is, in reality, an " electronic check". But how does one design features such as acceptable customer verification,stop payment orders,recording of the transaction and preservation of float management. In addition,a paperless payment system brings about new issues such as the use of electronic codes for signatures, reconciliation of disputed transactions, assdurance of customer privacy and security. Resolution of these issues were made possible by the passage the passage of THE ELECTRONIC FUND TRANSFER ACT OF 1978. Attention is called to the following definition of an "electronic fund transfer" as found in the Act. " any transfer of funds,other than a transaction originated by check,draft or similar paper instrument,or computer magnetic tape so as to order,instruct,or authorize a financial institution to debit or credit an account. Such terms includes, but is not limited to, point of sale transfers,automated teller machine transactions, direct deposits or withdrawal of funds, and transfer initiated by telephone." In addition to the 1978 Act, payment system transactions are covered by the following rregulations or guidelines; 1. Comptroller of the Currency:Consumer Protection Guidelines (Banking Circular # 66). 2. Federal Home Loan Bank Board:Remote Service Unit Regulations 1978. 3. Various state electronic fund transfer laws. ( About 15 states have enacted EFT laws ). 4. Other consumer protection laws. a. Truth in lending Act b. Fair Credit Billing Act c. Equal Credit Opportunity Act 4. Fair Credit Reporting Act. The 1978 Act was ammended with an all encompassing consumer protection piece of legislation called REGULATION E which is designed to cover combined EFT/credit transactiions. IN brief, REG E pertains to; "electronic fund transfers that also involve credit transactiions made under an agreement between a consumer and a financial institutiion to extend credit when the consumer's account is overdrawn (overdraft line) or to maintain a specified minimum balance" 5. The U.S. Uniform Commercial Code ( Law of Check Collectiions, Bank/customer Realtionships, and Credit Cards. Scenario State One-The Proprietary Bank Network Option The decision to integrate the electronic toll system into the EFT network of a depository institution requires a commitment be made to operate according to the rules and procedures of the financial service provider. That is, according to the EFT Act ofd 1978 and the other regulatory requirements of federal and state agencies. In addition,the EFT provider may have certain operating rules peculiar to the network and have a fee schedule that is sensitive to usage and reflective of level of service chosen. In brief, the EFT provider sets the operating and business environment for the network and there may be very little flexibility to recognize the unique needs of the toll road operator. Specifically,the following features would have to taken into account in the design of an electronic toll road system. 1. An deposit account would have to be established with the financial institution. This account would have to have the proper EFT access relationships established. 2. The customer would either select or have computer generated personal identfication number . 3. The use of the service for toll road services and transactions would have to explained by bank personnel. 4. The system would have to accommodate the need for account validation,customer verification and issuance of a reciept at the completion of the transaction. 5. Provision for account reconciliation procedures such as settlement of disputed transactions and reverse payments would have to be accounted for in the system design. 6. Customer statement account would need to carry special codes to designate toll road transactions. The direct participation in an EFT network does carry significant benefits that are worth considering. Perhapos the most important is the utility and the acceptability of the the bank card. Consumers are interested in a card that can be used for a wide range of financial services and is universally accepted by all merchants. Participation with an EFT network provider brings the benefits of possible relationships with Visa, Mastercard, American Express, Carte Blanche or a local debit card. A card that carries a high perceived value by the consumer will have a greater potential for high usage in the toll system. However, such participation may come at a premium price that may be to high and cannot be accepted. Abiding by the rules of the EFT network provider may significantly affect the design of the electronic toll system. The economics of the participation may also affect the business case for the venture. As a result, we may have to consider another EFT arrangement that allows for more flexibility in the design of the AVI system and shows the economic potential to the Authority and, most important,improves the business case for Winko-Matic. Scenario Two : The Private Network Option The greatest amount of system design flexibility is offered by what we call the private network option. Under this scenario, the network operator is responsible for developing and implementing the operating rules and procedures for the electronic toll system. In our case,the AVI system operating features would be developed by Winko- Matic based on the requirements of a public transit authority. Assume that the Authority is interested in increasing toll revenues and reducing operating costs by using an electronic toll collection system. The revenue objective can be met by a new pricing policy and offering better service. For example, the ability to offer time-of-day pricing alternative to the static fee schedule currently in place has the potential to increase revenues and improve traffic management. The user of the toll road would view this service as worthwhile and if shown to be cost effective the user would see it as having a high perceived value. The AVI system design would,therefore, have to satisfy the following requirements; 1. Increase revenues by means of new pricing alternatives. 2. Improve service by faster user throughput. 3. Reduce or eliminate revenue leakage. 4. Improve traffic management. 5. Offer more cost effective services to wholesale customers. 6. Reduce labor and physical plant costs. 7. Expand services to the retail customer. Any attempt at designing the AVI system demands that we determine the costs and benefits stream accruing to each of the parties involved. That is, the technical design of the AVI system is directly dependent on how much the user is willing to pay for the service and whether the Authority can achieve their revenue and cost reduction objectives. Therefore,the final design of the system can only be accomplished when a thorough economic analysis and solid business case can be made to the Authority. Summary of Findings Based on the analysis and research conducted thus far the ATS group submits for consideration the following findings; 1. Proprietary EFT network providers offer an attractive payment service option. 2. Participation in such bank networks place severe limits on the design of an electronic toll system. 3. A private or custom designed electronic toll system offers the greatest design flexibility. 4. The benefits and costs of the system features must be identified and quantified. 5. An economic analysis must be performed before a final system design is completed. 6. A decision cannot be made until a business case is presented to Winko-Matic.