E-COMMERCE & WEB DESIGNING

UNIT-II : E-PAYMENT SYSTEM

Models and methods of e.payments (Debit Card, Credit Card, Smart Cards, e-money), Digital Signatures
(Procedure, Working And Legal Position), Payment Gateways, Online Banking (Meaning, Concepts,
Importance), Risks Involved in e-payments.

E-PAYMENT SYSTEM ( ELECTRONIC FUNDS TRANSFER )

Electronic payment systems are central to on-line business process as companies look for ways to serve
customers faster and at lower cost. Emerging innovations in the payment for goods and services in electronic
commerce promise to offer a wide range of new business opportunities.
Electronic payment systems and e-commerce are highly linked given that on-line consumers must pay
for products and services. Clearly, payment is an integral part of the mercantile process and prompt payment is
crucial. If the claims and debits of the various participants (consumers, companies and banks) are not balanced
because of payment delay, then the entire business chain is disrupted. Hence an important aspect of e-commerce
is prompt and secure payment, clearing, and settlement of credit or debit claims.
Electronic commerce brings a wide range of new worldwide business opportunities.
o There is no doubt that electronic payment systems are becoming more and more common
and will play an important role in the business world.
o Electronic payment always involves a payer and a payee who exchange money for goods
or services.
o At least one financial institution like a bank will act as the issuer (used by the payer) and the
acquirer (used by the payee).
Advantages of EPS:
1. Very easy to make the transactions through online
2. Fast transaction processing.
3. Flexible in use.
4. Low cost transactions.
5. Reduces the time, expenses
6. Global accessible to customers and businesses.

Disadvantages of EPS:
1. High risks and security challenges
2. Digital signatures can be produced by anybody who knows the secret cryptographic key.
3. Number of problems are faced due to financial aspects, if the transaction is not success in time.

TYPES OF ELECTRONIC PAYMENT SYSTEMS

Electronic payment systems are proliferating in banking, retail, health care, on-line markets, and even
government—in fact, anywhere money needs to change hands.
Organizations are motivated by the need to deliver products and services more cost effectively and to provide
a higher quality of service to customers.
The emerging electronic payment technology labeled electronic funds transfer (EFT / EPS).
EFT/EPS is defined as Any transfer of funds initiated through an electronic terminal telephonic
instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution.

EPS can be segmented into three broad categories:

1. Banking and financial payments
2. Retailing payments
3. On-line electronic commerce payments

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1. Banking and financial payments
Large-scale or wholesale payments (e.g., bank-to-bank transfer)
Small-scale or retail payments (e.g., automated teller machines Home
banking (e.g., bill payment)
2. Retailing payments
Credit Cards (e.g., VISA or MasterCard)
Private label credit/debit cards (e.g., J.C. Penney Card) Charge
Cards (e.g., American Express)
3. On-line electronic commerce payments
a) Token-based payment systems
Electronic cash (e.g., DigiCash)
Electronic checks (e.g.,
NetCheque)
Smart cards or debit cards (e.g., Mondex Electronic Currency Card)
b) Credit card-based payments systems
Encrypted Credit Cards (e.g., World Wide Web form-based
encryption) Third-party authorization numbers (e.g., First Virtual)

EPS PAYMENT METHODS

Now a days, all the transactions may be done using with Electronic payment systems. We have different types of
payment methods to done the payments. The main objectives of EPS are to increase efficiency, improve
security, and enhance customer convenience and ease of use.
Here, the list of payment methods supporting electronic payments and e-commerce over the internet.
E-commerce application systems must provide payment processing and transaction service to buyers and
sellers.
A payment system, as a part of E-commerce application system, is a system which support secured
payment processes by providing reliable, secured, and efficient transaction services between sellers and buyers.

Basic functions of a E-payment system

The basic functions of E-payment system are:
1. Provide secured and confidential transaction processes.
2. Conduct authentication and authorization for all involved parties.
3. Ensure the integrity of payment instructions for goods and services.
4. Global access and international useful.

Methods of E-payment
E-commerce uses electronic payment. Here, electronic payment refers to paperless monetary transactions.
Electronic payment has revolutionized the business processing by reducing the paperwork, transaction costs, and
labor cost. Being user friendly and less time-consuming than manual processing, it helps business organization to
expand its market reach/expansion.
The E-Payment methods are mainly
1. Credit Card
2. Debit Card
3. Smart Card
4. E-Money
5. Electronic Fund Transfer (EFT)
6. E-Checks
7. E-Wallet
8. Net Banking
9. Mobile Banking

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1. Credit Card
Credit card is small plastic card with a unique number attached with an account. It has a magnetic strip
embedded in it which is used to read credit card via card readers. When a customer purchases a product
via credit card, credit card issuer bank pays on behalf of the customer and customer has a certain time
period after which he/she can pay the credit card bill. It is usually credit card monthly payment cycle.
Following are the actors in the credit card system.
1. The card holder −Customer
2. The merchant − seller of product who can accept credit card payments.
3. The card issuer bank −card holder's bank
4. The acquirer bank −the merchant's bank
5. The card brand −for example , visa or MasterCard.
Credit card payment process
Step 1 Bank issues and activates a credit card to the customer on his/her request.

Step 2 Thecustomer presents the creditcard information to the merchant site or to the
merchant from whom he/she wants to purchase a product/service.
Step 3 Merchantvalidates thecustomer's identity by asking for approval from the
card brand company.
Step 4 Card brandcompany authenticates the creditcard and pays the transaction by
credit. Merchant keeps the sales slip.
Step 5 Merchant submits the alesslip to acquirer banks and gets the service charges paid to
him/her.
Step 6 Acquirer bank requests the cardbrand company to clear thec redit amount and
gets the payment.
Step 7 Now the card brand company asks to clear the amount from the issuer bank and
the amount gets transferred to the card brandcompany

2. Debit card
Debit card is also called as Electronic purse, Debit card is just like credit card, is a small plastic card
with a unique number mapped with the bank account number. It is required to have a bank account
before getting a debit card from the bank.
The major difference between a debit card and a credit card is that in case of payment through
debit card, the amount gets deducted from the card's bank account immediately and there should be
sufficient balance in the bank account for the transaction to get completed; whereas in case of a credit
card transaction, there is no such compulsion.
Debit cards free the customer to carry cash and cheques. Even merchants accept a debit card
readily. Having a restriction on the amount that can be withdrawn in a day using a debit card helps the
customer to keep checks on his/her spending.

3. Smart Card
Smart cards have been in existence since the early 1980s and hold promise for secure transactions using
existing infrastructure.
Smart card is similar to a credit card or a debit card in appearance, but it has a small
microprocessor chip embedded in it. It has the capacity to store a customer’s work-related and/or
personal information. Smart cards are also used to store money and the amount gets deducted after
every transaction.
Smart cards can only be accessed using a PIN that every customer is assigned with. Smart cards
are secure, as they store information in encrypted format and are less expensive/provide faster
processing. Mondex and Visa Cash cards are examples of smart cards.

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The smart card technology is widely used in countries such as France, Germany, Japan, and
Singapore to pay for public phone calls, transportation, and shopper loyalty programs.

4. E-Money
E-Money transactions refer to situation where payment is done over the network and the amount gets
transferred from one financial body to another financial body without any involvement of a middleman.
E-money transactions are faster, convenient, and save a lot of time.
Online payments done via credit cards, debit cards, or smart cards are examples of e-money
transactions. Another popular example is e-cash. In case of e-cash, both customer and merchant have to
sign up with the bank or company issuing e-cash.

5. Electronic Fund Transfer

EFT is a very popular electronic payment method to transfer money from one bank account to another
bank account. Accounts can be in the same bank or different banks. Fund transfer can be done using
ATM (Automated Teller Machine) or using a computer.
Nowadays, internet-based EFT is getting popular. In this case, a customer uses the website
provided by the bank, logs into the bank's website and registers another bank account. He/she then
places a request to transfer certain amount to that account. Customer's bank transfers the amount to other
account if it is in the same bank, otherwise the transfer request is forwarded to an ACH (Automated
Clearing House) to transfer the amount to other account and the amount is deducted from the customer's
account. Once the amount is transferred to other account, the customer is notified of the fund transfer by
the bank.

6. Electronic Checks
It is another form of electronic tokens. Buyers must register with third-party account server before they
are able to write electronic checks. The account server acts as a billing service.

Advantages of Electronic Checks

1. They work in the same way as traditional checks.
2. These are suited for clearing micropayments.
3. They create float & availability of float is an important for commerce.
4. Financial risk is assumed by the accounting server & may result in easier acceptance.

7. E-Wallet
As an alternative for credit/debit cards, e-prepaid cards are introduced.
They usually come in different stored values and the customer has to choose from them. Prepaid cards
have virtual currency stored in them.
E-Wallet is a prepaid account that allows the customer to store multiple credit cards, debit card and
bank account numbers in a secure environment. This eliminates the need to key in account information
every time while making payments. Once the customer has registered and created E-Wallet profile,
he/she can make payments faster.

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8. Netbanking
This is another popular way of making e-commerce payments. It is a simple way of paying for online
purchases directly from the customer’s bank. It uses a similar method to the debit card of paying
money that is already there in the customer’s bank. Net banking does not require the user to have a card
for payment purposes but the user needs to register with his/her bank for the net banking facility. While
completing the purchase the customer just needs to put in their net banking id and pin.

9. Mobile Payment
One of the latest ways of making online payments are through mobile phones. Instead of using a credit
card or cash, all the customer has to do is send a payment request to his/her service provider via text
message; the customer’s mobile account or credit card is charged for the purchase. To set up the mobile
payment system, the customer just has to download a software from his/her service provider’s website
and then link the credit card or mobile billing information to the software.

DIGITAL SIGNATURES
A digital signature is a mathematical scheme for demonstrating the authenticity of a digital message or
document. A valid digital signature gives a recipient reason to believe that the message was created by a known
sender, such that the sender cannot deny having sent the message (authentication and non-repudiation) and that
the message was not altered in transit (integrity). Digital signatures are commonly used for software distribution,
financial transactions, and in other cases where it is important to detect forgery or tampering.
Digital signatures are often used to implement electronic signatures, a broader term that refers to any
electronic data that carries the intent of a signature, but not all electronic signatures use digital signatures. In
some countries, including the United States, India, Brazil, and members of the European Union,
electronic signatures have legal significance.
A digital signature scheme typically consists of three algorithms;
 A key generation algorithm that selects a private key uniformly at random from a set of possible private
keys. The algorithm outputs the private key and a corresponding public key.
 A signing algorithm that, given a message and a private key, produces a signature.
 A signature verifying algorithm that, given a message, public key and a signature, either accepts or rejects
the message's claim to authenticity.

Procedure and working

1. In the document platform or application, the sender chooses the file to be digitally signed.
2. The sender’s computer calculates the file content’s unique hash value.
3. The digital signature is created by encrypting this hash value with the sender’s private key.
4. The receiver receives the original file as well as its digital signature.
5. The receiver opens the associated document application, which recognizes the digitally signed file.
6. The digital signature is then decrypted by the receiver’s computer using the sender’s public key.
7. After that, the receiver’s computer computes the hash of the original file and compares it to the
now- decrypted hash of the sender’s file.

Applications of digital signatures:

Authentication
Digital signatures can be used to authenticate the source of messages. When ownership of a digital signature
secret key is bound to a specific user, a valid signature shows that the message was sent by that user. The
importance of high confidence in sender authenticity is especially obvious in a financial context.
For example, suppose a bank's branch office sends instructions to the central office requesting a change
in the balance of an account. If the central office is not convinced that such a message is truly sent from an
authorized source, acting on such a request could be a grave mistake.

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Integrity
In many scenarios, the sender and receiver of a message may have a need for confidence that the message has not
been altered during transmission. Although encryption hides the contents of a message, it may be possible to
change an encrypted message without understanding it. (Some encryption algorithms, known as nonmalleable
ones, prevent this, but others do not.) However, if a message is digitally signed, any change in the message after
signature invalidates the signature. Furthermore, there is no efficient way to modify a message and its signature
to produce a new message with a valid signature, because this is still considered to be computationally infeasible
by most cryptographic hash functions.

Non-repudiation
Non-repudiation, or more specifically non-repudiation of origin, is an important aspect of digital signatures. By
this property, an entity that has signed some information cannot at a later time deny having signed it. Similarly,
access to the public key only does not enable a fraudulent party to fake a valid signature.

Legal issues of digital signature

The use of electronic signatures in electronic contracts is on the rise in India, due in part to the government’s
Digital India initiative which focuses on enhancing digital infrastructure and on transforming India into a
paperless economy. Companies doing business in India are also increasingly utilizing electronic signatures to
complete their transactions.
In India, electronic and certificate-based digital signatures are regulated by the Information Technology Act, 2000 (IT
Act) and the following rules made under this Act:
 Information Technology (Certifying Authorities) Rules, 2000;
 Digital Signature (End Entity) Rules, 2015; and
 Information Technology (Use of Electronic Records and Digital Signature) Rules, 2004.

The IT Act distinguishes between electronic signatures and certificate-based digital signatures, but both have
the same status as handwritten signatures under Indian law.
Digital signatures, which are considered a subset of electronic signatures, use an asymmetric crypto
system and hash function. They are preferred for certain government transactions such as e-filing with the
Ministry of Corporate Affairs, and goods and service tax filings.
Valid electronic signatures must include an electronic authentication technique or procedure specified in the
Second Schedule of the IT Act. The Second Schedule currently specifies the following e-KYC (Know Your
Customer) authentication techniques and procedures:
1. Aadhaar e-KYC
2. Other e-KYC services (e.g. e-KYC using Permanent Account Number (PAN)).
Under Indian law, reliable electronic and digital signatures carry a presumption of validity compared to
other “non-recognized” electronic signatures. However, in common with other jurisdictions, Indian law will not
consider an agreement invalid solely on the grounds that it was formed with such non-recognised electronic
signatures.
For an electronic signature to be considered reliable and presumptively valid under the IT Act:
1. It must be unique to the signatory;
2. at the time of signing, the signatory must have control over the data used to generate the
electronic signature;
3. any alteration to the affixed electronic signature, or to the document to which the signature is
affixed, must be detectable;
4. there should be an audit trail of steps taken during the signing process; and
5. The signer certificates must be issued by a certifying authority (CA) recognized by the Controller of
Certifying Authorities appointed under the IT Act. A list of licensed CAs is available at
http://www.cca.gov.in

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PAYMENT GATEWAY
An eCommerce payment gateway is an essential tool for processing the online payment. They process payment
information for different websites integrated with them. The payment gateway generates a link between the
customer and the bank.

Use of eCommerce payment gateway

 The quick and hassle-free checkout: One of the issues for an e-commerce business is cart
abandonment, which often happens at checkout.
 A complicated checkout process can be considered as the main reason behind it.
 According to a survey, more than 70% of customers abandon the cart without making the purchase. A good
payment gateway makes the process simple to capture most of the sales.
 E-commerce payment gateway makes the checkout process easy for customers. An eCommerce payment
gateway must make the checkout experience convenient and provide necessary payment methods for
customers to choose from.

Offers secure online payments

Payment gateway processes financial data and has encryption and security features to keep the customer’s data
safe.

Why Propose Multiple Online Payment Methods

 As the cart abandonment issue is one of the problems in the eCommerce business. And one of the reasons
is the lack of a preferred payment method.
 Customers prefer a payment method that suits their needs. If that digital payment method is unavailable,
they can and will abandon the cart and look for an alternative option.
 Enabling different payment methods makes a better customer experience and if one of the options failed
customers would not feel stuck. It gives the customer the freedom to explore other options and get the best
deal. Multiple payment methods provide a more seamless experience and increase online purchase orders.

Payment gateways
A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers.
Payment gateways are the consumer-facing interfaces used to collect payment information.
In physical stores, payment gateways consist of the point of sale (POS) terminals used to accept credit
card information by card or by Smartphone.
In online stores, payment gateways are the “checkout” portals used to enter credit card
information or credentials for services such as PayPal.
Payment gateways are distinct from payment processors, which use customer information to collect
payments on behalf of the merchant.
There are also payment gateways tofacilitate payment in cryptocurrencies, such as Bitcoin.

Working of payment gateway

STEP 1: After the customer places the order online and proceeds to make payment for the same, he/she
needs to enter credit/debit card details.
STEP 2: The card details are encrypted in a secure way with Secure Socket Layer (SSL) encryption to be sent
between the browser and the merchant’s web server.A payment gateway eliminates the merchant’s
Payment Card Industry Data Security Standard (PCI DSS) compliance obligations without
redirecting customers away from the website.
STEP 3: After this, the merchant forwards transaction details to their payment gateway, which is also an SSL
encrypted connection to the payment server hosted by the payment gateway.

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STEP 4: The payment gateway converts the message from XML to ISO 8583 or a variant message format
(format understood by EFT Switches) and then forwards the transaction information to the
payment processor used by the merchant’s acquiring bank.
STEP 5: The payment processor forwards the transaction information to the card association (I.e.:
Visa/MasterCard/American Express).
STEP 6: Next, the credit card issuing bank receives the authorization request, verifies the credit or debit
available and then sends a response back to the processor (via the process same as for the
authorization) with a response code (i.e., approved or denied). The response code also helps to
communicate the reason for the case of a failed transaction, for example, insufficient funds, and so
on.
STEP 7: The processor then forwards the authorization response to the payment gateway, and the payment
gateway receives the response and forwards it onto the interface used to process the payment. This
process is termed as Authorization or “Auth”. This entirely takes around 2-3 seconds in general.
STEP 8: The merchant then fulfills the order and the above process can be repeated but this time to “Clear”
the authorization by consummating the transaction.
Typically, the “Clear” is initiated only after the merchant has fulfilled the transaction (I.e. shipped
the order).
This results in the issuing bank ‘clearing’ the ‘auth’ (I.e. moves auth-hold to a debit) and prepares
them to settle with the merchant acquiring bank.
STEP 9: The merchant submits all their approved authorizations, in a “batch” (end of the day), to their
acquiring bank for settlement via its processor. This typically reduces or “Clears” the
corresponding “Auth” if it has not been explicitly “Cleared.”
STEP 10: The acquiring bank makes the batch settlement request of the credit card issuer.
STEP 11: The credit card issuer makes a settlement payment to the acquiring bank (the next day in most
cases).
STEP 12: The acquiring bank subsequently deposits the total of the approved funds in to the merchant’s
nominated account (the same day or next day).
This could be an account with the acquiring bank if the merchant does their banking with the same
bank or an account with another bank.

ONLINE BANKING
Meaning
Online banking, also known as internet banking, web banking or home banking, is an electronic payment system
that enables customers of a bank or other financial institution to conduct a range of financial transactions through
the financial institution's website.
Online banking significantly reduces the banks' operating cost by reducing reliance on a branch network,
and offers greater convenience to customers in time saving in coming to a branch and the convenience of being
able to perform banking transactions even when branches are closed. Internet banking provides personal and
corporate banking services offering features such as viewing account balances, obtaining statements, checking
recent transactions, transferring money between accounts, and making payments.

Concept
With online banking, consumers aren't required to visit a bank branch to complete most of their basic banking
transactions. They can do all of this at their own convenience, wherever they want—at home, at work, or on the
go.
Online banking requires a computer or other device, an Internet connection, and a bank or debit
card. In order to access the service, clients need to register for their bank's online banking service. In order to
register, they need to create a password. Once that's done, they can use the service to do all their banking.
Banking transactions offered online vary by the institution. Most banks generally offer basic services
such as transfers and bill payments. Some banks also allow customers to open up new

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accounts and apply for credit cards through online banking portals. Other functions may include ordering
checks, putting stop payments on checks, or reporting a change of address.
Checks can now be deposited online through a mobile app. The customer simply enters the amount before
taking a photo of the front and back of the check to complete the deposit.

Importance
1. Security Assured
Since online banking is one of the major services offered by banks, it is also a highly secure platform.
Banks generally use encryption devices to ensure that all client information is protected and there is no
security breach. It ultimately provides you security from online frauds and account hacking.

2. Access No Problem
Even if it is the last day of your bill payment and you are minutes away from being levied a penalty, you
can rely on online banking. Online transactions can be performed anytime of the day from the
convenience of your home. Not just that, instead of being physically present for huge amount of
transactions, you can safely transfer funds at any time, completely hassle-free.

3. No Hidden Fees
Despite the convenience being provided, there are no hidden fees associated with making online
transactions. All you are charged is a nominal transaction convenience and the rest is managed by your
bank.

4. Convenience Guaranteed
While easy access is one of the many benefits of online banking, it also makes banking highly
convenient. The need of waiting in long queues at the bank is completely eliminated. Moreover, with
mobile banking option available for most banks, transfers and payments have become easier.
Transactions can be completed on the go, whether you are stuck in a traffic jam or in the midst of work.
This makes it even easier to check your balance before making cashless purchases to avoid
embarrassment if your account doesn’t have the balance to purchase everything on your shopping list.

5. Monitor Your Accounts Closely

Lastly, budgeting and managing your account is made simpler when you have access to e- banking and a
good budgeting application at your fingertips. Real time expenses can be monitored while making
purchases or estimating your monthly savings and expenses.
With all these benefits and many more adding to the list, it is difficult to opt out of using facilities like
online banking for smoother banking transactions.

Risks in Electronic Payment systems:

 Customer's risks
 Stolen credentials or password
 Dishonest merchant
 Disputes over transaction
 Inappropriate use of transaction details
 Merchant‘s risk
 Forged or copied instruments
 Disputed charges
 Insufficient funds in customer‘s account
 Unauthorized redistribution of purchased items

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Risks Involved in e-payments

E-payment also faces several risks. The risks are a major drawback to the E-payments. These risks cause many
financial losses for companies and Customers.
Fraud:
Fraud can be defined as the undesired activities taking place in an operational system. E-payments
companies and their customers suffer billions of dollars in fraud losses annually as it affects the entire e-
payments industry.
According to data from “ACI Worldwide” (The American Concrete Institute, formerly National
Association of Cement Users or NACU) is a non-profit technical society and standards developing
organization) the number of fraud attempts based on total population in 2015 increased to 1.49% compared
to 1.39% in 2014, i.e. one out of every 67 transactions was a fraudulent attempt in 2015 compared to one out
of every 72 transactions in 2014. Which represents a 7.1% increase during the year.
All this numbers show how it is very important to work against fraud attacks and how it is important to
have solutions for those attacks.

Tax Evasion:
Businesses are required by law to provide the government with records of their financial transactions so that
their tax compliance can be checked. E-payment, however, can thwart tax collection efforts. Until a
company discloses the numerous e-payments it has made or received during the tax period, the government
will not know the truth that may lead to tax evasion.

Payment Conflicts
Payment problems also occur because payments are not made manually, but through an automated system
that can cause errors. This is particularly important when payment is made on a daily basis to several
recipients. For example, if you do not review your pay slip at the end of will pay period; you could end up in
a dispute due to such technical issues or anomalies.

Impulse Buying
E-payment systems promote pulse transactions, particularly online, and consumers are likely to make a
decision to buy an item they find on sale online, as it will cost only a click to buy it via a credit card.
The buying of impulses leads to disorganized budgets and is one of the drawbacks of e-payment systems.

Dishonest providers and Merchants

Those who exploit and sell consumers 'personal data in order to be used by advertisers in ads often use this
data for fraud purposes

ELECTRONIC PAYMENTS ISSUES

 Secure transfer across internet
 High reliability: no single failure point
 Atomic transactions
 Anonymity of buyer
 Economic and computational efficiency: allow micro payments
 Flexibility: across different methods
 Scalability in number of servers and users

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