Electronic Payments

Introduction
 Handling payments over the internet is an
important function of e-Commerce sites.
 E-Payments can be convenient for
customers & can save companies money.
 The most popular electronic transfers are
automated payments of loans, insurance
payments, & mortgage payments made
from consumers’ accounts.
 Contd…
 Credit cards are by far the most popular
method that consumers use to pay for
online purchases.
 E-Payment systems are becoming central
to e-commerce as companies look for
ways to serve customers faster & at lower
cost.
 Contd…
 E-payment systems are proliferating in
banking, retail, healthcare, online markets,
and even in Government.
 Organizations are motivated by the need
to deliver products & services more cost-
effectively & to provide a higher quality of
service to customers.
Digital Token-based E-payment System

 ‘Electronic Tokens’ are designed as

electronic analogs of various forms of
payment backed by a bank over networks.
 Electronic tokens are of 3 types:
1. Cash or Real time
2. Debit or Prepaid
3. Credit or Postpaid
 Contd…
 Cash or Real time:
Transactions are settled with the
exchange of electronic currency.
 An example of online currency exchange is
electronic cash (e-cash).
 Contd…
 Debit or Prepaid:
Users pay in advance for the privilege of
getting information.
 Examples of prepaid mechanisms are
Smart Cards & electronic purses that store
electronic money.
 Contd…
 Credit or Postpaid:
The server authenticates the customers &
verifies with the bank that funds are
adequate before purchase.
 Examples of postpaid mechanisms are
credit cards & electronic checks.
 Dimensions of Payment instruments

The four dimensions that bring different

viewpoints to the payment instruments
of e-Commerce are:
(i) The nature of transaction for which the
instrument is designed.
(ii) The means of settlement used
(iii) Approach to security, anonymity &
authentication.
(iv) The question of risk.
 Electronic Cash (e-cash)
 Electronic cash (e-cash) combines
computerized convenience with security &
privacy that improve on paper cash.
 Properties of e-cash:
- Monetary value
- Interoperability
- Retrievability and
- Security
 Contd…
Monetary Value
E-Cash must have monetary value; it must
be backed by either cash (currency), a
bank – authorized credit or a bank
certified cashier’s check.
 Contd…
Interoperability
e-Cash must be interoperable- that is
exchangeable as payment for other e-
cash, goods or services, deposits in
banking accounts.
 Contd…
Retrievability
e-Cash must be storable & retrievable.
Remote storage & retrieval would allow
users to exchange e-cash from home or
office or while travelling.
 Contd…
Security
- e-cash should not be easy to copy or
tamper with while being exchanged;
- This includes preventing or detecting
duplication and double-spending.
Purchasing e-Cash from Currency servers

The purchase of e-Cash from an online

currency server (or bank) involves two
steps:
i. Establishment of an account
ii. Maintaining enough money in the
account to back the purchase.
 Digital currency usage

 The e-cash software on the customer’s PC

stores digital money, once the tokens are
purchased.
 Whenever the customer wants to make
the payment, the software collects the
necessary amount from the stored tokens.
 Contd…
Under the payment mode, two types of
transactions are possible:
a. Bilateral
b. Trilateral
 Contd…
Transactions involving cash are bilateral or
two-party (buyer & seller) transactions,
whereby the merchant checks the veracity
of the note’s digital signature by using the
bank’s public key.
If satisfied with the payment, the merchant
stores the digital currency on his machine
& deposits it later in the bank to redeem
the face value of the note.
 Contd…
 Transactions involving financial
instruments other than cash are usually
trilateral or third-party (buyer, seller &
bank) transactions, whereby the notes are
sent to the merchant, who immediately
sends them directly to the digital bank.
 Contd…
 The bank verifies the validity of these
notes & that they have not been spent
before.
The account of the merchant is credited.
 In this case, every note can be used only
once.
 Smart Cards

Smart Cards are debit and credit

cards enhanced with microprocessors
capable of holding more information
than the traditional magnetic stripe.
 Contd…
 The chip, at its current state of
development, can store significantly
greater amounts of data, estimated to be
80 times more than a magnetic stripe.
 Contd…
Smart Cards are basically of two types:
1. Relationship-based smart cards
2. Electronic purses
Relationship-based Smart cards

 Traditional cards are fast evolving into

smart cards as consumers demand
payment & financial services products that
are user-friendly, convenient & reliable.
 A relationship-based smart card is an
enhancement of existing card services &
addition of new services that a financial
institution delivers to its customers via a
chip-based device.
 Contd…
 New services may include access to
multiple financial accounts, value-added
marketing programs, or other information
which cardholders may want to store on
their card.
 Contd…
 Enhanced credit cards store cardholder
information including name, birth date,
personal shopping preferences & actual
purchase records.
 This information will enable merchants to
accurately track consumer behavior &
develop promotional programs designed to
increase shopper loyalty.
 Contd…
 Relationship-based products offer access
to multiple accounts, such as debit, credit,
investments or stored value for e-cash.
 A variety of functions such as cash access,
bill payments, balance inquiry, or funds
transfer for selected accounts are also
offered.
 Contd…
 Banks are also attempting to customize
services on smart cards, offering a menu
of services similar to those that come up
through ATMs.
 Banks may link up with healthcare
providers, telephone companies, retailers,
& airlines to offer frequent shopping, flyer
programs & other services.
Electronic purses

 Many banks, credit card companies, &

even Government institutions are racing to
introduce ‘electronic purses’.
 ‘Electronic purses’ are wallet-sized smart
cards embedded with programmable
microchips that store sums of money for
people to use instead of cash for
everything from buying food, to making
photocopies, to paying subway fares.
 Contd…
Electronic purse works in the following
manner:
Step 1: After the purse is loaded with
money at an ATM, it can be used to pay
for any product in a vending machine
equipped with a card reader.
 Contd…
Step 2: The vending machine need only verify
that the card is authentic & there is enough
money available for the product purchased.
Step 3: In one second, the value of the purchase
is deducted from the balance on the card &
added to an e-cash box in the vending machine.
The remaining balance on the card is displayed
by the vending machine or can be checked at an
ATM.
 Contd…
Step 4: Electronic purses would virtually
eliminate fumbling for change or small
bills in a busy store or rush hour toll booth
& waiting for a credit card purchase to be
approved.
Step 5: This allows customers to pay for
rides & calls with a prepaid card that
remembers each transaction.
 Contd…
 When the balance on an electronic purse
is depleted, the purse can be recharged
with more money.
 As for the vendor, the receipts can be
collected periodically in person – or, more
likely, by telephone & transferred to a
bank account.
 Online Banking

 Online banking is the practice of

making bank transactions or paying
bills via Internet.
 Only internet browser is required for
online services and no additional
software to get its access.
 Contd…
 Online banking allows customers to
conduct financial transactions on a secure
website.
 The convenience factor of the customer is
high through online banking as the
customer does not have to wait for the
bank statement to arrive in the mail.
 One can check the balance at any time by
just logging into their account.
 Home Banking
 Facility
to securely access funds,
account information, and other
banking services through a PC over
Internet.
 Home banking services have grown
enormously as home computers
become more affordable and easier to
use.
 Contd…
 Home banking is the self-service banking
for consumers and small business owners
enabling users to perform many routine
functions at home through an internet
connection.
 Online banking process

 Verify that the website login details are

secure.
 The bank’s website is to be verified by an
internet security company.
 The login and password information of the
customer are to be protected.
 The customer has to logout immediately
once the transaction is completed.
 Advantages
 Online banking is convenient. It allows you
to perform transactions, pay bills and
check balances any time.
 It is cost-effective. Thousands of
customers can be dealt with at once. No
need to have too many cashiers or clerks.
 For customers, the account information is
available round the clock, regardless of
their location.
 Contd…
 The customer is not required to visit any
bank branch for any bank related
information.
 It is fast and efficient. Transactions are
typically performed and executed at a
faster pace than an ATM.
 Disadvantages

 If the bank’s server is down, you can’t use

it.
 There’s always a possibility of a cracker
gaining access to your account.
 Many banks don’t show how to use online
banking services very well.
 Without an Internet connection, it is not
possible to access the account.