ELECTRONIC PAYMENT SYSTEM

An e-commerce payment system facilitates the acceptance of electronic payment for online
transactions. e-commerce payment systems have become increasingly popular due to the widespread
use of the internet-based shopping and banking. The ease of purchasing and selling products over the
Internet has helped the growth of electronic commerce and electronic payments services are a
convenient and efficient way to do financial transactions. Electronic payment has revolutionized the
business processing by reducing paper work, transaction costs, labour cost. Being user friendly and
less time consuming than manual processing, helps business organization to expand its market reach
/ expansion.

Electronic Payment is a financial exchange that takes place online between buyers and sellers. The
content of this exchange is usually some form of digital financial instrument (such as encrypted
credit card numbers, electronic cheques or digital cash) that is backed by a bank or an intermediary,
or by a legal tender. The various factors that have lead the financial institutions to make use of
electronic payments are:

1. Decreasing technology cost:

The technology used in the networks is decreasing day by day, which is evident from the fact that
computers are now dirt-cheap and Internet is becoming free almost everywhere in the world.

2. Reduced operational and processing cost:

Due to reduced technology cost the processing cost of various commerce activities becomes very
less. A very simple reason to prove this is the fact that in electronic transactions we save both paper
and time.

3. Increasing online commerce

Increase the online shopping .

Comparision of electronic payment system on Internet with conventional payment mechanism.

1. Lack of Convenience:
Traditional payment systems require the consumer to either send paper cheques by snail-mail or
require him/her to physically come over and sign papers before performing a transaction. This
may lead to annoying circumstances sometimes.
2. Lack of Security:
This is because the consumer has to send all confidential data on a paper, which is not encrypted,
that too by post where it may be read by anyone.
3. Lack of Coverage
When we talk in terms of current businesses, they span many countries or states. These business
houses need faster transactions everywhere. This is not possible without the bank having branch
near all of the companies offices. This statement is self-explanatory.
4. Lack of Eligibility
Not all potential buyers may have a bank account.
5. Lack of support for micro-transactions:
Many transactions done on the Internet are of very low cost though they involve data flow
between two entities in two countries. The same if done on paper may not be feasible at all.

Electronic payments involve a payer and a payee. A payer (buyer or customer), is an entity who
makes a payment. A payee (seller or merchant), is an entity who receives a payment. The main
purpose of an electronic payment protocols is to transfer monetary value from the payer to the payee.
The process also involves a financial institution (bank or mint).
Typically, financial institution participates in payment protocols in two roles: as an issuer
(interacting with the payer) and as an acquirer (interacting with the payee). The issuer is responsible
for validating the payer during account registrations and holds the payer’s account and assets. The
acquirer holds the payee’s account and assets. The payee deposits the payments received during a
transaction with the acquirer. The acquirer and the issuer then proceed to perform an inter-banking
transaction for clearance of funds. It is possible for the issuer and the acquirer to be from the same
financial institution.

TYPES OF PAYMENT MODE ON INTERNET

There are various ways available to pay online. Various modes of e-payment are as follows:

 Payment Cards (Credit card, Debit card, Charge card)

 Electronic Cash(E-Cash) / Digital Cash
 Electronic Cheque
 E-Wallet
 Smart Card
 Electronic Fund Transfer (EFT)
 CREDIT CARD

Payment using credit card is one of most common mode of electronic payment. Credit card is small
plastic card with a unique number attached with an account. It has also 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.
 The card holder - Customer
 The merchant - seller of product who can accept credit card payments.
 The card issuer bank - card holder's bank
 The acquirer bank - the merchant's bank
 The card brand - for example , visa or mastercard.

Credit cards are issued based on the customer's income level, credit history, and total wealth. The
customer uses these cards to buy goods and services or get cash from the participating financial
institutions. The customer is supposed to pay his or her debts during the payment period; otherwise
interest will accumulate.

DEBIT CARD
Debit card, 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 debit card and credit card is that in case of payment through debit card,
amount gets deducted from card's bank account immediately and there should be sufficient balance
in bank account for the transaction to get completed. Debit cards free customer to carry cash,
cheques and even merchants accepts debit card more readily. Having restriction on amount being in
bank account also helps customer to keep a check on his/her spending. It removes the amount of the
charge from the cardholder’s account and transfers it to the seller’s bank.
The difference between credit cards and debit cards is that in order to pay with a debit card you need
to know your personal identification number (PIN) and need a hardware device that is able to read
the information that is stored in the magnetic strip on the back.

The major benefits to this type of card are convenience and security. Along with the convenience of
accessing account funds at anytime it also removes the hassles associated with having to write
checks as payment like showing ID and associated fees. Debit cards are also considered to be a safer
form of payment as a code is required to access the account funds, while checks can be easily stolen.
Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash.

Credit Card Debit Card

Where money Borrowing money from a bank or financial Funds taken from the money that you
comes from?: institution. (Spending "other's" money) have in your bank account. (Spending
your "own" money)

Can be used as: Credit card only Debit Card and Credit Card

Line of Credit: Carries Line of Credit No Line of Credit

PIN Number: No PIN number provided, but not is not

always asked to punch in.

Picture ID asked Yes No

for:

Interest: Pay additional interest drawn on the amount No

borrowed.

Credit History: Responsible credit card usage and payment can Does not affect credit history.
improve one's credit rating. Credit cards
typically report account activity to at least one
of the three major credit bureaus on a monthly
basis.

Legal Liability Strict. Consumer liability limit for credit card Lean. Consumer liability limit for debit
laws: fraud is $50 if the credit card company is card fraud is $50 if the bank is notified
notified within 60 days in written since the within two days of noticing the fraudulent
fraudulent charges. charges.

Risk involved: Low. High, as they are attached to a bank

account. A person does not need a pin
number to use a debit card and therefore
can easily drain a persons bank account,
causing extreme problems.
 Credit Card Debit Card

Fraud: Only problem is proving that someone else has With a debit card the persons has to figure
used the card. out how to get their money back and if
any checks bounced they are responsible
for those as well

Limit: Credit line, which can be increased/decreased Equals your account limit.
from the time of applying.

Overdraw Fees: Low.Some credit card companies allow to High "overdraft" fees. Possible to
overdraw amount over the maximum credit overdraw amount over the account limit
line with a fees

Connected to: Need not be connected to any bank account. Checking Account;Savings Account

Monthly bills: Yes No

Offers Protection: Yes. Example insurance on a rental car No

Alternate payment cash cheque & cash

type:

SMART CARD

Smart card is again similar to credit card and debit card in appearance but it has a small
microprocessor chip embedded in it. It has the capacity to store customer work related/personal
information. Smart card is also used to store money which is reduced as per usage. Smart card can be
accessed only using a PIN of customer. Smart cards are secure as they stores information in
encrypted format and are less expensive and provide faster processing. Mondex and Visa Cash cards
are examples of smart cards.
Smart cards have been extensively used in the telecommunications industry for years. Smart-card
technology can be used to hold information on health care, transportation, identification, retail,
loyalty programs and banking, to name a few. Smart cards enable information for different purposes
to be stored in one location. The microprocessor chip can process different types of information, and
therefore, various industries use them in different ways.

Smart cards can be disposable or rechargeable. A popular example of a disposable smart card is the
one issued by telephone companies. After using the pre-specified amount, the card can be discarded.
Some of the advantages of smart cards include the following:
• Stored many types of information
• Not easily duplicated
• Not occupy much space
• Portable
• Low cost to issuers and users
• Included high security

The disadvantages of smart cards are the lack of universal standards for their design and utilization.
On the other hand, smart card applications are expected to increase as a result of the resolution of
these disadvantages in the near future.

E-CASH

Similar to regular cash, e-cash enables transactions between customers without the need for banks or
other third parties. When used, e-cash is transferred directly and immediately to the participating
merchants and vending machines. Electronic cash is a secure and convenient alternative to bills and
coins. This payment system complements credit, debit, and charge cards and adds additional
convenience and control to everyday customer cash transactions. E-cash usually operates on a smart
card, which includes an embedded microprocessor chip. The microprocessor chip stores cash value
and the security features that make electronic transactions secure.
Mondex, a subsidiary of MasterCard (Mondex Canada Association) is a good example of e-cash.
E-cash is transferred directly from the customer's desktop to the merchant's site. Therefore, e-cash
transactions usually require no remote authorization or personal identification number (PIN) codes at
the point of sale. E-cash can be transferred over a telephone line or over the Web. The
microprocessor chip embedded onto the card keeps track of the e-cash transactions.

How a typical e-cash system works:

A customer or merchant signs up with one of the participating banks or financial institutions. The
customer receives specific software to install on his or her computer. The software allows the
customer to download “electronic coins” to his or her desktop. The software manages the electronic
coins. The initial purchase of coins is charged against the customer's bank account or against a credit
card. When buying goods or services from a web site that accepts e-cash, the customer simply clicks
the “Pay with e-cash” button. The merchant's software generates a payment request, describing the
item(s) purchased, price, and the time and date. The customer can then accept or reject this request.
When the customer accepts the payment request, the software residing on the customer's desktop
subtracts the payment amount from the balance and creates a payment that is sent to the bank or the
financial institution of the merchant, and then is deposited to the merchant's account. The attractive
feature of the entire process is its turnaround time which is a few seconds. The merchant is notified
and in turn ships the goods.
Two approaches to holding cash: online storage and offline storage.
 Online cash storage means that an online bank is involved in all transfers of electronic cash.
 Offline cash storage is the virtual equivalent of money you keep in your wallet. However, it
must prevent double or fraudulent spending.

Advantages:
• Electronic cash transactions are more efficient and less costly than other methods.
• The distance that an electronic transaction must travel does not affect cost.
• The fixed cost of hardware to handle electronic cash is nearly zero.
• Electronic cash does not require that one party have any special authorization.
Disadvantages:
• The concept of an Internet tax poses many problems and questions.
• Because true electronic cash is not traceable, money laundering is a problem.
• Electronic cash is susceptible to forgery.
• Electronic cash, so far, is a commercial flop.
E-CHEQUE
E-WALLET

An electronic wallet serves a function similar to a physical wallet:

 holds credit cards, electronic cash, owner identification, and owner contact information
 provides owner contact information at an electronic commerce site’s checkout counter

Some electronic wallets contain an address book. Electronic wallets make shopping more efficient.
Electronic wallets fall into two categories based on where they are stored:
 Server-side electronic wallet
 Client-side electronic wallet

Electronic wallets store shipping and billing information, including a consumer’s first and last
names, street address, city, state, country, and zip or postal code.
E.g. Microsoft .NET passport , Yahoo! Wallet

Electronic wallets being very useful for frequent online shoppers are commercially available for
pocket, palm-sized, handheld, and desktop PCs. They offer a secure, convenient, and portable tool
for online shopping. They store personal and financial information such as credit cards, passwords,
PINs, and much more.

Electronic Fund Transfer (EFT)

It is a very popular electronic payment method to transfer money from one bank account to another
bank account. Accounts can be in same bank or different bank. Fund transfer can be done using
ATM (Automated Teller Machine) or using computer.

Now a day, internet based EFT is getting popularity. In this case, customer uses website provided by
the bank. Customer logins to 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 amount to other
account if it is in same bank otherwise transfer request is forwarded to ACH (Automated Clearing
House) to transfer amount to other account and amount is deducted from customer's account. Once
amount is transferred to other account, customer is notified of the fund transfer by the bank.

EFT is used for transferring money from one bank account directly to another without any paper
money changing hands. The most popular application of EFT is that instead of getting a paycheck
and putting it into a bank account, the money is deposited to an account electronically.EFT is
considered to be a safe, reliable, and convenient way to conduct business.

The advantages of EFT contain the following:

 Simplified accounting
 Improved efficiency
 Reduced administrative costs
 Improved security

Electronic Data Interchange (EDI)

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business documents in a
standard electronic format between business partners.
Electronic data interchange (EDI) is a method for transferring data between different computer
systems or computer networks. It is commonly used by big companies for e-commerce purposes,
such as sending orders to warehouses or tracking their order. It is more than mere e-mail; for
instance, organizations might replace bills of lading and even cheques with appropriate EDI
messages.
Electronic Data Interchange is the computer-to-computer exchange of routine business data between
trading partners in standard data formats.

This definition contains 3 key concepts about EDI:

1. Computer-to-computer: EDI in its most efficient form flows directly out of a sender’s computer
system directly into a receiver’s computer system without any human intervention; however, it is
not always possible for EDI to flow in this most efficient manner.
2. Routing business data: EDI is used for routine business documents like Purchase Orders and
Invoices. It is not used for non-routine business documents like complicated contracts or
information meant for humans to read and analyze.
3. Standard data formats: A standard definition of the location and structure of the data is provided.
Unstructured text is not EDI.

Benefits of EDI:
 Speed – Data can move directly out of one computer system and into another with little to no
delay.
 Accuracy – Errors are reduced because data is not being re-keyed. Error rates from entering data
are between .5 – 3%. On large volumes of transactions, the possibility for the introduction of
errors is enormous.
 Simplicity – EDI standards specify how data will be formatted and where it can be found.
 Security – Much less likely to lose information transmitted through EDI than information sent via
mail. EDI can be accessed only by authorized users, and then there are audit trails and archives
 of data. EDI data cannot be easily changed by unauthorized users. It is also not subject to
viruses.
 Reduction in transaction cost of documentation.
 Better relationship between organizations.
 Response time is faster.
 Faster buy-sell cycle time.
 Reduced inventories and order lead time.

Working of EDI: