ELECTRONIC PAYMENT SYSTEM

Unit II
2.0 INTRODUCTION
Why people came up for online business? There are many reasons why we go for this type of business. For the seller or
merchants, they can operate their business profitably 24/7 and reach the market across the world - geographical boundary is
not a barrier anymore. It is not necessary for them to establish their shops physically in many places around the world which
means anyone even small businesses can have their business online. While at customers end, it is more convenient where one
can place his/her purchase orders in just a click of the mouse anytime of the day regardless of where one is standing. Another
reason is transactions are even faster that transactions are done in just a few minutes. Payment transactions for these online
businesses can be done either online or offline. However, nowadays the method of payment has become important and the
possibility for online payment acceptance provides convenience to the customers.
Electronics Commerce sites use electronic payment where electronic payment refers to paperless monetary transactions.
Electronic payment has revolutionized the business processing by reducing paper work, transaction costs, labor cost. Being user
friendly and less time consuming than manual processing, helps business organization to expand its market reach / expansion.

2.1 ONLINE PAYMENT SYSTEM

Online payment is when the customer or buyer makes his payment transactions for the goods or services purchased with the
use of the Internet to be online. This type of payment lowers the costs for businesses as the more payments made
electronically (online or offline) the less they spend for paper and postage. Also, it helps on improving customer retention as he
is more likely to return to the same e-commerce site where his or her information has already been entered and stored. With
online payment, it is not necessary for the payer to be in a long queue as payment is made in just a click of a mouse. Additionally
for example, almost all the banks have an online bill payment service where it is offered free of charge and is available all days of
the week or 24/7 shall I say. Nevertheless, the issue on security is a crucial element to the implementation as well as acceptance
of payment both for sellers or merchants (fraud) and buyers or customers (privacy or identity theft).

2.2 Online Payment Methods

For the purchases done online most likely he will also make his payments online.

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

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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 master card.

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 whereas in case of credit card there is no such
compulsion. 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.

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 / provide faster processing. Mondex and Visa Cash cards are examples of smart cards.

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E-Money
E-Money transactions refer to situation where payment is done over the network and 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 card, debit card or smart card are examples of emoney transactions.
Another popular example is e-cash. In case of e-cash, both customer and merchant both have to sign up with the bank or
company issuing e-cash.

Electronic Fund Transfer

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.

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2.4 Characteristics of online payment

Systems Applicability: Availability (point of sale coverage), payment size (e.g. micropayments, large sums) and destination (e.g.
merchants, private persons).
Ease to obtain: Ease / complexity of registration. Reliability/ease of use. Simplicity, ease and transparency of use by customers
and merchants.
Cost: Distribution of costs between merchants and users; cost structure (e.g. fixed transaction charge or proportion of sales
value).
Security: Customer confidence and economic sustainability, information transmission mechanisms from buyer to seller, security
of information stored on client and seller equipment.
Liability: Legislative protection and provisions, coverage of potential losses.
Anonymity: Protection of personal information; tradeoffs between anonymity and traceability for payment support.

2.5 Advantages of Online Payments

If a business sells products or services through a website, they are probably losing a significant amount of business if they are do
not accept payments online. Online shoppers have grown accustomed to paying for their purchases immediately and receiving
shipments quickly. Thanks to security features such as card number encryption and fraud protection, people can buy online with
a high degree of confidence.

Instant Gratification: For the customer, instant gratification is the primary motivation for shopping online. Online payment
enables a customer to pay for a product immediately, confident that it will ship quickly. If a customer mails his payment, he
must wait for you to receive it and for the funds to clear, adding greatly to the amount of time that he waits for the product.
Faced with this delay, a prospective customer is likely to look for a merchant who accepts online payments.

Merchant Security: When a customer pays for a product online, the customer's payment method is authorized and the money
is placed in the business account immediately. This eliminates some financial risk on your part, as you no longer need to worry
about the fees associated with bounced checks.

Consumer Confidence: A potential customer may be slightly nervous about the prospect of purchasing from you if he has no
prior experience with your company -- especially if he has had problems with online purchases in the past. The fraud protection
that many debit and credit card providers offer may alleviate his concerns, as he will know that he can make a claim with his
bank if he does not receive the product or service he purchased.

Recurring Payments: Accepting payments online removes the difficulty associated with making recurring payments via check
or money order. If you have a subscription-based service, you can store customers' payment information and collect payments
automatically each subscription term rather than sending reminders that payments are due.

Paying With Credit: For a customer to pay for a product via check or money order, he must have the funds available to pay for
the item in full immediately. Credit cards allow consumers to pay for large items in installments; accepting payments online can
dramatically increase your sales if some of the products you sell are costly.

Affiliate Marketing: Accepting payments online allows your business to launch an affiliate program. With an affiliate program,
online publishers can earn money by referring customers to you in exchange for a portion of the revenue when sales are made.
Although an affiliate program can cause a slight reduction in profits, it can also greatly increase sales.

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Simplify Dispute Management: With an electronic payment system, companies enjoy improved data accuracy and
automated disbursement, receipt and payment processing to streamline vendor dispute management.

Increased Compliance: An electronic payment system makes it easier to track and monitor data to ensure adherence to
complex compliance regulations and all business rules.

2.6 Disadvantages of Online Payments

Higher Costs: One of the downsides to accepting electronic transactions is that youll have to pay fees for these services.
Depending on how you process your transactions, you might be charged various processing fees, which can cut into your profits.
Talk with your bank or whoever sets up your electronic transactions to learn if you will have a gateway fee, processing fees and
transaction fees, and what they will be. Different vendors have different rates. Some require setup fees, a minimum number of
transactions each month or a minimum payment. In addition to payment transactions, you will have costs to set up and operate
online sales, either through your own website or through a third party. Factor these increased costs into your budget to
determine if you need to raise your prices, and what impact this will have on your sales.

Delayed Access to Cash: When you take payment in cash, you immediately have that money to work with. With electronic
payments, you might not have access to your money for several days to a week. Depending on how tight your cash flow is, you
might need to arrange longer payment terms with your vendors and suppliers if you want to take electronic payments. If you
cant ship products or deliver services until you receive payments, you might lose customers if the lag time is more than a day or
two.

Increased Security Risks: The more electronic information you send and receive, the higher your risk of fraud, computer
hacking or credit card number theft. That's why many banks, card processors and online sales vendors provide secure payment
systems. If you sell online, for example, you might have to undertake an annual verification of your credit card processing
software and practices to retain your account. Talk to all of your transaction partners to learn what will happen in the event of a
security breach, and what your liability might be in the event of one.

Additional Work: If youre not comfortable using computers -- especially website-based programs -- using electronic
transactions will require that you hire someone you can trust to help you set up and maintain your ordering and payment
systems. This will increase your costs. If you try to do it yourself, youll need to frequently check your various accounts, which
can cover online order-taking, credit card processing, credit card payments, e-checks, PayPal payments, shopping cart and bank
accounts. The time you devote to these duties can take away from other important duties, such as growing your business.

2.7 E-CASH SYSTEM

In this section, a bank (or a consortium of banks) mints electronic currency(e-cash). Such currency is simply a series of nits that
the issuing bank can verify to be valid. This currency is kept secure (unforgeable) by the use o of cryptographic techniques. After
being used some e-cash, a buyer can transfer it to a seller in exchange of goods. Upon receiving e-cash, the seller can veirify its
authenticity by sending it to the issuing bank for verification. E-cash issuing banks make money by charging either buyers or
sellers a transaction fee for the use of their e-cash. E-cash is similar to paper currency and has the benefit of being anonymous
and easily transmitted electronically. It still entails the risk of theft or loss, however, and so requires significant security by the
buyer when sorting e-cash. The following is a generic mercantile protocol based on the use of e-cash:

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