CHAPTER ONE 1

INTRODUCTION

Payment is the transfer of money. Since the dawn of human civilization, payments
were made through different mediums. Ancient people used to barter each others
good; like when someone skilled in weaving might trade his basket so hell have
something to put in one of his other basket. The transaction was usually completed by
two people and the amounts were determined almost solely on what they agreed
would be fair to exchange. Then various commodities were used to exchange; later
developed as coins. In Nepal, Lichhavi/Thakuri kingdom struck first copper coins
around 400-750 B.C. But the problem was that one couldnt always carry bags of
commodities which are vulnerable to theft etc. and trade when one wanted, which led
to paper money. Payment system has been developing with the advancement in
technology, and continues till there are buyers and sellers. It plays crucial role in
effective and efficient circulation of money in the economy thus giving boost to trade
and business Financial institutions accept, collect, and process a variety of payment
instruments, and participate in clearing and settlement systems. In some cases
financial institutions perform all of these tasks, but increasingly, independent and
trusted third parties play an important role as financial risks are altered if independent
third parties are involved. Payment System may be of two forms based on volume of
amount and transaction, Retail Payment System (B2C & C2B) and Wholesale
Payment System (B2B). Total resource cost of making payments typically absorbs at
least 3 percent of GDP in most of the economies. At retail level, most transactions use
physical cash and cheques for other big purchases. Wholesale payment differs in
transaction volume and value.
Retail Payment System
No. of Transaction

Wholesale Payment
Systems

Average Value per Transaction

Fig. 1: Payment System (Volume based)

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1.1 Background of the Study

Technological developments particularly in the area of Telecommunications and

Information Technology have revolutionizing the way business is done. Electronic
commerce is now thought to hold the promise of a new commercial revolution by
offering an inexpensive and direct way to exchange information and to sell or buy
products and services. This revolution in the market place has set in motion a
revolution in the banking sector for the provision of a payment system that is
compatible with the demands of the electronic marketplace. The advances in IT have
certainly introduced new delivery channels in the Nepalese banking industry which
has resulted in new payment mechanisms designed to aid electronic commerce. This
paper sought to evaluate the perceptions of banking customers regarding the effect of
technological innovations on banking services in Nepal.

Electronic Payment in general is payment to businesses, bank or public services

from citizens or businesses, which are executed through a telecommunications or
electronic networks using modern technology.
Electronic Payment Card, a medium of electronic payment, had their origin in store,
Retailers would often extend credit to favored customers, allowing them to charge
their purchases and settle up at the end of the month with a single payment. Later, the
financial system developed the third party credit card. The first payment or charge
card was developed in 1949/50 as Diners Club Card followed by Bank of America in
1958. In 1966, BankAmerica Service established under Bank of America franchised
Bank AmeriCard brand nation nationwide now known as Visa. In the same year group
of credit issuing Banks formed National Credit Card System Interbank Card
Association (ICA) and now widely popular as MasterCard. Later, Banks entered this
business with third-party cards of their own. However the cards were not widely
accepted because of the restrictions on inter banking. The banks came up with a
solution, the four party card payment systems, which involve two banks in each
transaction, the cardholders bank (the issuer of the card) and the retailers bank. The
retailer hands over the credit card slips to its own bank for payment, less a discount,
typically about 2-3%. The retailers bank then passes the slips on to a clearing system.
The clearing system presents each slip for payment to the bank that issued the card on
which it was written. The issuing bank then collects fund from the cardholders

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account. The clearing, system called an interchange, is very much like that used for
cheques. It nets claims of one bank on another to minimize the amounts needed to
settle accounts. Most of the interchanges have been consolidated into one of two
international interchangesVisa and MasterCard.

The payment card business in Nepal started with the arrival of Joint Venture bank.
The Credit Card was first introduced by Nepal Arab Bank Ltd. (now NABIL Bank) in
1990s. Himalayan Bank Ltd first introduced ATM. 1Since then PCI has undergone
considerable change, electronic payment has gained increasing popularity, especially
in the cities. There are about 0.7 million ATM/debit cardholders and 35 k credit card
users, with 850 ATMs and 3000 POS machines. Kumari Bank was first Nepali
financial institution to introduce Internet banking in 2002 AD. In 2004 AD, Laxmi
bank started SMS Banking. Kumari Bank introduced Mobile Cash. Jyoti Bikash Bank
has also introduced Payment Card, Internet and SMS banking since 2065 BS.

Electronic payment system requires intensive use of internet connectivity and modern
tools (Electronic Data exchange: ACD/ATM, EFTPOS and Payment Card) with
traditional approach of accounting, such, Transaction authorization and settlement,
merchant.

1
Based on survey reports on Banks

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1.2 Introduction to the Organization under Study

Jyoti Bikas Bank Ltd (JBBL) is a national level Development Bank licensed by Nepal
Rastra Bank and has started its operation from 24 July, 2008. JBBL is established
with a primary focus on financing in Hydropower and infrastructure for development
and prosporous Nepal, while providing banking facilities to general public. JBBL
aims to serve wide range of customers with its unique customer policy.

Vision:

JBBL seeks to become leading and dedicated bank with unique identity.

Strategy:

1. Growth through enhancement of paid up capital.

2. Maximum utilization of the technical expertise of the Bank for project finance.
3. Focus on creating wider customer base.
4. Introduce electronic banking to up-grade banking service to the customers.
5. Enhance network through new branch and ATM service.
6. Diversification of lending portfolio.
7. Research and Development of new innovative products and services to cater the
need of the market.

Capital Structure:

Authorized Capital: Rs. 740.00 million

Paid up Capital: Rs. 740.00 million

Board of Directors

Mr. Prachar Man Singh Pradhan Chairman

Mr. Dhurba Raj Bhattarai Director

Mr. Binod Kumar Dhakal Director

Mr. Ram Kumar Shrestha Director

Mr. Hari Prasad Acharya Director

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1.3 Objective of the Organization

The main objectives of the organization under study (JBBL) are as follows:

1. Growth through enhancement of paid up capital.

2. Maximum utilization of the technical expertise of the Bank for project
finance.
3. Focus on creating wider customer base.
4. Introduce electronic banking to up-grade banking service to the customers.
5. Enhance network through new branch and ATM service.
6. Diversification of lending portfolio.
7. Research and Development of new innovative products and services to cater
the need of the market.

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1.4 Structure of Organization

1.4.1. Hierarchy of the Management

Company
Legal/Share
Secretary

Account/Settle Office
ment Assistants

Cheque
Clearing
Technical
Research Team
(for Hydro -
Treasury Teller
power
BOD development)

Remmittance
CEO CEO Secretary

Risk Mgmt

Relationship
Credit
Mgmt

Credit
Administration

Acquisition,
Develpoment,
Management Promotion
Committe
Transfer/
HRM
Recruitment

HRIS

Networking
/Support

IT/Card System

Card Back
Office

Marketing

Customer
Card front
Service
Office
Department

Inspectiong/Int Customer
ernal Audit Service

Figure 2: Hierarchy of the Management

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1.4.2. Hierarchy of Decision Making Process

Unstructured Decisions

Semi- Structured
Decisions

Structured Decisions

Fig. 3: Hierarchy of Decision Making Process

The strategic decisions are always the unstructured decisions which are made by top
level management (Board of Directors). These types of decisions are made once or
twice a year which needs more relevant information. The decisions are support
strategies for competitive advantages.

The semi-structured decisions are not made on regular basis but it has to be taken
once or twice a month. CEO of the organization makes such decisions. These
decisions require more relevant information for making business decisions
Information Technology assists store managers and other professional to make better
decisions and attempt to gain a competitive advantage.

The operational decision making support the business processes and operations which
is the responsibility of the lower level staffs. The daily dealing of the information
systems supports in the business processes and operations.

1.5 Objectives of the Study

This study has been conducted to explore the meaning, importance, objective of the
Electronic payment system and also explore the lacunae of this system. Electronic
payment system has evolved through the need of time, to facilitate trade and simplify
payments. The purpose of the study is to explain and understand the Electronic

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Payment Systems with a focus on Payment Card, and how to effectively manage
information, and to assess the issue of user acceptance in the existing electronic retail
payments. The study also describes and briefly analyses recent and potential future
trends in electronic payments, and the challenges faced by participants in this
business. It is also in response to the growing need to develop non-cash payment
products and clearing systems in order to reduce the over - dependence on cash
payments. The objectives are outlined below:
To recognize the need of electronic payment system
To briefly define the main concepts of PCI
The recent and future trends in electronic payment system
The existing technology in Nepal

1.6 Methodology of the Study

This study is based on doctrinal method. Similarly analytical and descriptive methods
have been applied while researcher deems its necessity. Data and information has
been collected primary data through field visit from the conducting interview as well
as through observation and sources of information is collected from books, internet
journals, news, research reports, and various web sites are main source of this study.
This study used the class note as sources through reviewing of teaching by my
supervisor and training on Card concept entitled Card Payment System and
information I gathered during the 3 months tenure as an internee.

1.6.1 Organization Selection

Banks are the best platform of testing ones skill, even more so for an IT student. I was
chosen and got to work as an intern at Jyoti Bikas Bank Ltd. I was assigned to IT
Support and later to Card department.

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1.6.2 Placement/Duration/Activities
The first two week I was assigned to the support section. My supervisor gave me the
basic training on the installation and troubleshooting of the office software and
hardware like installing and removing printers, sharing, formatting. Later next week
he showed me the important basics of network in an organization structure. I was
briefly toured in the main room of the bank i.e. server room. The main server of the
bank, Dell PowerEdge2900, included mounted web server, ATM server, SMS
banking server and backup server dedicated to the real time processing of the banking
transaction and electronic data transfer. The networking in JBBL was well organized
and was entirely looked upon by Mr. Prabir Man Singh Pradhan.
I was introduced to the Card Department after two weeks & to the concept of credit
and debit card, about ATM, its management, ATM card, POS usages in later part of
my tenure. The major tasks in Card Department are Card Issuance, monitoring,
settlement, reconciliation and dispute management.

1.6.3 Work Procedure / Tools used

The project conducted such sort of activities to collect data from the purposed
organization i.e. work in the field of Card Department; processing Card, monitoring
daily transaction, settlement of daily transaction, reconciliation and dispute cases.
Information were gathered with need of Front office Card Management to keep track
of Card holders and report generation and tried to make effective customer database.
Use Case, ER Diagram and Flowchart Diagram were used to show Card processes.

1.6.4 Project Schedule

September October November
Weeks I II III IV I II III IV I II III IV
Network & Support
Card Centre(Front Office)
Card Centre(Back Office)
Internet banking

Table 1

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1.7 Limitations of the Study

This paper is prepared for the partial fulfillment of the requirement for the degree of
Bachelor in information Management (BIM) program. The main limitation of this
study is the time constraint and availability of materials in context of electronic
payment solution in the Nepalese scenario. Besides these the researcher has faces
money constraint as well as the human resource constraint while conducting this
study.

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 CHAPTER TWO

2. Analysis of EPS

2.1 Analysis of existing system

Diverse payment systems is in operation the country, ranging from the paper based
systems where the instruments are physically exchanged and settlements worked out
manually to the most sophisticated electronic fund transfer system which are secured
and settle transactions on a gross, real time basis. They cater to both low value retail
payments and large value payments relating to the settlement of inter-bank money
market, Government securities and Forex transactions.

The retail payment systems in the country comprise both paper based as well as
electronic systems. They typically handle transactions which are low in value, but
very large in number, relating to individuals, firms and corporate. These transactions
relate mainly to settlement of obligations arising from purchase of goods and services.
In Nepal there are 10+ cheques clearing houses located regionally as well as at district
levels. These clearing houses clear and settle transactions relating to various types of
paper based instruments like cheques, drafts, payment orders etc. Nepal Rastra Bank
manages all these clearing houses which still run with 100% manual system.

The other types of electronic clearing systems functioning in the retail payments area
in the country are currently limited to internet banking transactions for within bank
transactions whereas through ATM & POS terminals using plastic cards for intra bank
transactions. Till today, independent agency, operated by shared / standalone system
facilitate cash withdrawals and purchase transactions. Those operators are operating
entire systems at their own and are not governed by any regulations from Central
Banks. There is no central mechanism formulated by the central bank regarding
Electronic Systems (EFT), all these electronic fund transfer systems settle on different
mechanism as per rules set by respective operator.

Nepal Bankers Association (NBA), along with Nepal Rastra Bank (NRB) and other
financial institutions, has established Nepal Clearing House Ltd (NCHL).
The clearing house will commence an Automatic Check Truncation and Clearing
Systems to be evolved into a nation-wide payments system, said Sachin Joshi,
president of NBA and CEO of NIC Bank.

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NBA has 60 per cent, SCT 15 per cent, NRB 10 per cent and the remaining shares
will be distributed between Nepal Development Banks Association and Nepal
Finance Companies Association in the Clearing House Ltd.

The process of the hardware and software bidding has already started for the clearing
house that will help clear cheque automatically from anywhere in Nepal. The system
will come into effect from the next fiscal year, Joshi said adding that it would be
developed as a national payment system.

At a time when banks are aggressively opening branches, the system would help
increase accessibility of people to banking channels. The new distribution channel
like branchless banking is needed to cater to customers as the cost of branches would
not be affordable.

2.1.1 Description of Electronic Payment System

EFT: Electronic payment system came with the development of EFT technology.
EFT is a technology that allows the transfer of funds from the bank account of the one
person or organization to the merchants. An electric fund transfer is a financial
application of EDI (Electronic Data Interchange), which sends payment information
via secured private networks between banks and the association. Consequently, the
online remittance of funds appeared to be the next logical step in a progressive move
towards the Electronic Fund Transfer and banking, a process that had begun long
before the Internet itself. There is however, a crucial distinction between the pre-
internet EFT and the online payment system being used and developed in the
conjunction with e-commerce. The former take place almost exclusively over
proprietary network, which the latter occur over a publicly accessible electronic
medium so, several security measures are taken on public space like assigning
encryption, hash functions and digital signatures.

ATM
ATM is a combined computer terminal, with cash vault and record-keeping
system in one unit, permitting customers to enter the banks book keeping
system with a plastic card containing a PIN. It can also be accessed by
punching a special code number into the computer terminal linked to the
banks computerized records. Mostly located outside of banks, it can also be found at

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airports, shopping malls, places far from bank offices, offering several retail banking
services to customers. Although its use is not limited to dispensing cash, other
services like making deposits, fund transfer, between accounts and bill payments are
also facilitated.

EFT/POS
EFT/POS is an online system that involves the use of plastic cards in
terminal on merchants premises and enables customer to transfer funds
instantaneously from their bank accounts to merchant accounts when
making purchases. A POS device record and transmit card transaction electronically
for authorization and processing. It uses a debit or credit card to activate and EFT
process.

Payment Card

A payment card is a mode of payment, a substitute of cash and cash equivalent backed
by account thats either owned by cardholder or offered as credit by the card issuing
company.

Data on track 1 & 2

Figure 4: Payment Card

1. Banks Name/Magnetic Stripe

2. PAN/Signature Stripe
3. Cardholder s Name
4. Expiration Date
5. Card Brand Logo
6. EMV Chip

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The most common types of payment cards are:

Charge Card
Credit Card
Debit Card
Prepaid Card
ATM/POS Card
Smart Card
A charge card is a plastic card that provides alternative payment to cash when
making purchases in which the issuer and the cardholders enter into an agreement
that the debt incurred on the charge account will be paid in full and by due date or
be subject to late fees and restrictions on card use. The card have a short-term,
fixed-period, credit arrangement.
A credit card is a payment card set against a special-purpose account associated
with a line of credit issued only after an account has been approved by the credit
card provider (issuer) based on the credit history, after which cardholders can use
it to make payments at online market (E-Commerce) and purchases at merchants
accepting the card. The credit fund granted can be settled in full by the end of a
specific period or in part. Interest may be charged on the transaction amounts from
the date of each transaction or only the extended credit where the credit has not
been settled in full. The card contains cardholders name and account number other
identification information such as CVV2, signature or picture. The two major bank
card association Visa and MasterCard accounts for majority of credit and debit
cards in use.
Debit card also called electronic cheque is most popular form of payment card,
also called self-service banking operates like bank teller. The funds are withdrawn
directly from either the bank account or from the remaining balance on the card.
Debit card can be used for cash withdrawal and deposit, as well as purchase.
When you present your card, money is transferred from your account to the
merchants account that day. The usage is of card is not only limited to online
transaction (PIN-based) offline transaction (signature-based) can also be made.
Prepaid card is a type of card also called gift card or recharge card that does not
need any bank account. The user pays the card issuing company and makes a
purchase. The ATM/POS Card allows the deposit customer easy access to their

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 bank accounts. Using an ATM, a depositor can withdraw cash, and also make
payments on POS, and internet. Their usefulness has been enhanced enormously
by connecting them to interbank networks that allow card holders of one bank to
use their card at the ATMs of other banks.
EMV Card is a plastic card with embedded memory chips or a microprocessor so
as to serve as storage devices for much greater information with inbuilt transaction
processing capability. Also called Smart card, the card can be used throughout
several applications like banking, including personal information, healthcare,
transportation, entertainment and loyalty programs, like frequent buyer program.
The key feature of the card is that it improves security and convenience of
transactions. As information on the card is encrypted that is compared to a secret
key contained on the users processor, forgery of the card is degraded.

2.1.2 Objective and Function of the EPS

2.1.2.1 Objective of the System

Electronic payment system has evolved through the need of time, to facilitate trade
and simplify payments. It is also in response to the growing need and competence to
develop non-cash payment products and clearing systems in order to reduce the over -
dependence on cash payments. Electronic payment system provides payment
instruments, mechanisms and processes that can safely and cost effectively support
the transfer of monetary value between entities. The objectives of the system can be
outlined as follows.
1. Expected savings on time and efficient delivery mechanism.
2. Transfer of monetary values through secured mechanisms.
3. Transparency in the accounting system of enterprises, through book keeping.
4. Customer is consistently served even in rural areas where transportation is a
lag.
5. Wide acceptance (online payments, Debit Cards, POS, ATM, phone etc.)
6. Minimized circulation and transmission of physical monetary values.

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 Figure 5: Function of Payment

2.1.2.2 Function of Payment

The customer inserts/swipes his bankcard in the ATM/EFTPOS and requests a

withdrawal.
The ATM dials a toll-free number to contact the appropriate network such as
Star Plus or Cirrus, SCT, VISA which then contacts the customer's
financial institution.
The customer's funds are verified by his financial institution.
If funds are verified, the transaction is approved and the customer receives
cash from the ATM.
The withdrawal amount and the surcharge are debited from the customer's
account.
The transaction is processed through the Federal
Reserve's automated clearing house.
Both the surcharge and the withdrawal amount are electronically deposited in
the ATM owner's account.

2.1.3 The parties involved in the payment card industry are:

1. Payment Association
2. Card Issuing Company
3. Card Holder/Member
4. Card accepting Company/Acquirer
5. Card accepting Location/Merchant

Card association/gateway
Payment association is an arbiter that acts as a gateway between acquirers and issuers
for authorizing and funding transactions. The EFT network implements the mechanics
of the electronic transaction throughout the world and within the shared network. The

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agency sets transaction terms for all members, rates and fees for consumers, payment
products that then use to offer credit, debit, prepaid and cash-access program to their
customers. In some cases there can be a separate entity called the payment gateway.

SCT * established in 2001, is a first of its kind initiative in Nepal provides an

integrated shared services network (SCT-Network) for ATMs and POS Terminals
managed through a national switch. The company has established a data center and
central transaction switching software to manage the network. The switch has been
connected to ATMs / POS / Bank Host Systems and International gateways (Visa,
MasterCard & AMEX). The company uses the software Oasis from Canada to
implement the connection with international Brands. Till today a total of 864 ATMs
around Nepal are under SCT-Network and 1341 POS terminals around selected
merchants (partnered with Alpine Card Services, a premier merchant service
providing company and Himalayan Bank Ltd). SCT also issues card to its member
bank under its Debit Card Program at a low price compared to the international card
scheme. SCT is also providing ecommerce solution for paying utility bills under a
partnership with D-sys. The company plans to establish Automated Clearing House
in conglomeration with NRB and others.

Issuing Bank
An issuing bank is a bank that offers payment card to customers, of the associated
brand namely Visa, MasterCard, and SCT and so on. Businesses and FIs (BFI) may
choose to introduce card programs and services not only to generate more revenue
and offer current customers more, but also to attract new customers. The issuing bank
assumes primary liability for the customer to pay off debts they incur with their card.
In case of credit card the issuing bank extends a line of credit to the consumer.
Liability for non-payment is then shared by the issuing bank and acquiring bank
according to rules established by the card association brand.

Acquiring Company

An acquirer Bank or FI accepts credit or debit card payments for products or services
on behalf of a merchant. The term acquirer indicates that the bank accepts or acquires
transaction performed using a card. The acquiring bank contract is informally referred

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to as a merchant account. The arrangement is in fact a line of credit and not a bank
account. Under the contract, the acquiring bank exchanges funds with issuing banks
on behalf of the merchant, and pays the merchant for the net balance of their daily
payment card activity: gross sales, minus reversals, interchange fees, and acquirer
fees. Interchange fees are fixed by the card association.

Cardholder:

A cardholder is an authorized user of payment cards, who uses the card for making
payments, fund transfer, cash withdrawal and deposits.

Merchant:

A merchant is any business entity that is authorized to accept Payment Cards for the
payment of goods and services. The merchant is provided EDC/EFT POS device
(Electronic Data Capture/ Electronic Fund Transfer Point of Sale) by the merchant
bank or third party processor. The merchant always ought not to be a Brick-and-
mortar, the Internet based portal must have and online payment gateway to enable
their business for ecommerce.

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2.1.4 Flow of Transaction Start Read
card

Receipt Payment

Merchant

Enter PIN

Session Retry
Invalid
Start session
PIN

Customer
input

Customer

Prepare
session Encrypted
message

Acquirer

Y
Payment
Log
Gateway
message
N
Verified

Issuer

End

Fig 6: Flow chart of Transaction

A session is started when a customer inserts or presents card for payment in a

merchant outlet. The customer enters a PIN to authorize the transaction, and is then
allowed to perform one or more transaction, choosing from a menu of possible types
of transaction in each case. A transaction starts when the customer chooses a
transaction type from a menu of options. The merchants bank/acquirer requests
authorization from issuer through EFT network. The customers BFI verifies funds

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and debits, credits respective account. The network authorizes the transaction. In case
the customers PIN is invalid, the Invalid PIN extension will be performed and then
an attempt will be made to continue the transaction. If the customers card is retained
due to too many invalid PINs, the transaction will be aborted. The EFT determines the
net debit and credit positions of the participating BFIs and settles their positions
through settlement bank. The merchant receives the transaction amount, net of
applicable fees and other expenses assessed by the acquirer and other intermediaries
to the transaction. At the end of the business day, the issuer and acquirer establish a
net settlement of all the transfers between them using settlement bank. All the
messages, requests and responses are recorded in the ATMs journal log and EDC.

Fig 7: Use Case of ATM System

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ER Diagram of Transaction system:

Time
Terminal
ID Trm.Name
Card PIN
Status
Account
Customer
BANK Action
(pdx)

Customer
Transaction DB
Contact
s

ATM/POS Verification NETWORK

Card reader PIN pad

Fig 8: ER Diagram

Workflow Diagram of Transaction Verification

Fig 9: Workflow Diagram

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2.1.5 Initial Exploration

2.1.5.1 Preparing and Summary of the Interview

Researcher has developed the questionnaire and conduct interview with the five staff
of JBBL. The following questions are asked to the employees:

1. What kind of the electronic payment product arte offered by JBBL?

2. Where is it used and why do your organization choose payment card?

3. Do you think that customers are satisfied by current service provided by your
organization?

4. How payment card is beneficial to user?

5. What sorts of defects are found on electronic payment system?

Most of the interviewee has provided same sorts of response of the questions asked to
them. In response of the question mentioned above by the respondent is summarized
in this way by the researcher.

JBBL has provided SCT Debit card to their customer. Payment is mostly withdrawn
in cash ATM machine. And it is preferential for the customer because they need not
go to the bank and bear hassle to withdrawal their deposit. Each and every
interviewee said that their customers are satisfied with their services, but increasingly
they are aware of new form of payment like mobile cash etc. main benefit of the
electronic payment is that it is convenient and secured, other being status symbol and
wide acceptance. Electronic payment is technology oriented business, requiring
dedicated hardware and software, which are expensive.

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2.1.5.2 Data processing, storing, retrieval system

The flow of information and money between parties is known as the interchange, and
it consists of a few steps:

Payment
Agency
Is a member of is a member of

May or may not

be the same as
Acquirer Issuer

provides
Issues
processing
card to
services to

Merchant Cardholder
Uses card to
buy from

Fig 10: Authorization process

Authorization

An authorization is process whereby issuers approve or decline individual card

transaction. A critical function of the acquirer is facilitating the authorization for a
transaction. When a card is a swiped or processed at the merchants terminal, a
request for authorization, along with the cardholders information and the transaction
amount, is transmitted to the merchant acquirer. The acquirer then forwards the
encrypted request to the network or switching system, which, in turn, queries the
cardholders issuing bank. The issuer either approves or rejects the transaction based
in credit or funds availability. If the transaction is approved, the issuing bank confirms
the transaction with an authorization code, and the amount is set aside from the
available funds in the cardholders account. The authorization code is sent through the
network to the acquiring merchant and then onto the merchants terminal. Payment
card requires authorization of every transaction and the debits or credits (according to
nature of Card) are reflected in the cardholders account immediately also called
Authorization hold. Once the transaction is authorized, the next step involves store of

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the transaction in a batch, which the merchant sends to the acquirer later to receive the
payment (usually at the end of the day).

Clearing and Settlement

Payment Agency

Fees
Fees
Services Services

Interchange Fees

Acquiring Bank Issuing Bank

Fees Services Services Fees

Merchant / Payee Goods Customer / Payer

Payment

Fig 11: Clearing and Settlement

Clearing and settlement are the finals two stages of the Card transaction process. The
process of exchanging financial transaction and settlement details between acquirer
and the issuer is called Clearing and Settlement. The acquirer sends the transactions
in the batch through the card association, which debits the issuers for payment and
credits the acquirer for the transactions.
Clearing is the process through which a card issuer exchanges transaction
information with a processing bank.
Settlement is a process through which a card issuer exchanges funds with a
processing bank to complete a cleared transaction.
Visa Net/ SCT collects these transaction and sends the transaction to the issuer bank,
which afterwards reimburse the payment to the acquirer bank and collects it from the
issuer bank. The issuer bank collects settlement file through VAP/ web and posts the
transaction to the cardholders account in case of the credit card or validates the

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transaction against the transaction against the transaction debited to cardholders bank
account in case of Debit Card.
Both issuers and processors settlement bank have certain rights and obligation when
clearing and settling transactions. Merchants should understand what each bank does
during the final stages of the transaction process as it directly affects the funding of
their account.
Processors responsibilities: All processors are responsible for the following:
Ensuring that presented transaction information is accurate, complete, and in
compliance with applicable industry rules.
Editing, monitoring, and reconciling messages sent and received in their
internal system reports, consisting of data generated by other issuers and
processors, as well as of data generated by Payment agency.

Issuer responsibilities: All card issuers are responsible for the following:
Receiving all first presentment messages as presented by the processing bank.
Ensuring that all necessary data is passed to the cardholder, or is readily
accessible for research and monitoring purposes.
Editing, monitoring, and reconciling messages sent and received on their
internal system reports, consisting of incoming data received by, and outgoing
data sent to, Visa, MasterCard or SCT. This requirement ensures that issuers
and processors reconcile all the rejected and accepted messages.
The issuer must ensure that its cardholders dispute is substantiated and
request that it provides documents in support of the customers claim, including
a sales receipt, a written complaint, as well as any other piece of
documentation that may be appropriate to support a particular chargeback,
second presentment (re-presentment), or arbitration chargeback. A failure to
do so may result in Visas or MasterCards system rejecting the chargeback as
invalid.
In summary, clearing is the movement of the data from the processor to payment
agency, and from there to the issuer. Settlement is the process used to exchange funds
between processors and issuers for the net value of the transactions cleared for a given
processing day. The electronic infrastructure that processes the exchange of

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transaction information and money between issuing and processing banks is called
interchange.

Funding
Once the acquirer has been paid, the merchant receives payment. The amount the
merchant receives is equal to the transaction amount minus the discount rate, which is
the fee the merchant pays the acquirer for processing the transaction.
The entire process, from authorization to funding, usually takes about 3 days.

Chargebacks & Dispute

The action of reversal when there's an error in processing is said to be chargebacks, a
transaction that is returned as a financial liability to a merchant bank by issuing bank,
usually because of a disputed transaction. Customer Dispute arises due to various
reasons such as:
A card refund is the return of funds to the consumer, voluntarily initiated by the
merchant.
A card reversal is where the merchant cancels a transaction after it has been
authorized, but before settlement (as of the transaction has never taken place).
A card charge back is a dispute between the merchant and the card holder over
the validity of the transaction. The card holder request the return of funds to the
consumer through the issuing bank for a number of reasons including: goods not
received goods not as advertised or faulty or when the cardholder denies all
knowledge of the transaction.
And others like Processing Error, Fraudulent processing, Authorization

In the event of a chargeback or reversal of transaction, the issuer returns the

transaction to the acquirer for resolution. The acquirer then forwards the chargeback
to the merchant, who must either accept the chargeback or contest it. Card
associations consider a participating merchant to be a risk if more than 1% of
payments received result in charge back. Visa and MasterCard levy fines against
acquiring banks that retain merchants with high chargeback frequency. To defray the
cost of any fines received, the acquiring banks are inclined (but not required) to pass
such fines on to the merchant.

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Reconciliation and Monitoring
Since, all card transactions are automatic, while determining the transactions accounts
and setup, careful measures should be taken in choosing the correct accounts for the
transactions (payables, receivables, and commission). All the account need to be
settled internally. Monitoring of daily transaction is very important. The several
factors in monitoring and managing the effective operation are:
Card Operation Management
o Card monitoring
Daily MIS reports
Transaction Alerts
Settlement Alerts
Payment and overdue reports
Ageing reports
Dispute transaction processing / settlement
Risk parameter & Alerts for suspicious transactions
Acquirer transactions
o System Monitoring: This is the major component of the Card Business,
without which one cannot think of running the business. System
consists of:
Hardware servers
Card management systems
EFT Switch
Host Security Module (HSM)
Card Embossing Machine
Network Access Controller
Point of Sales Terminal
PIN mailer Printer
HOST Interface/ Delivery Channel Interface
o ATMs Monitoring
Centralized ATM monitoring system
Efficient Cash Management
Well trained ATM custodians
Adequate stock of ATM stationary
Regular reconciliation of ATM cash

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 Prompt handling of ATM disputes
Proper management / storage of ATM data
Prompt support service
o Help desk or Customer service unit

2.1.5.3 Technical analysis

JBBL use Pumori PDX, a listening software that communicates with the banks central
data base system upon the request from the switching system of processor. The PDX
acts as a host to the switch.

Figure 12: Issuing banks interface of data exchange

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2.1.6 User Need Assessment

Payment card is a technology intensive product. So, customers are reluctant to use it
for the first time. Research have shown that if card is used within 3 months from the
issuance, it remains active else inactive. So, it is very important to have a target
customer base for any BFIs for which sound marketing must be in place. Product
differentiation, its features and services must be identified. A card product has to be
designed to make customer avail and use the card. The several factors to consider in
marketing are: development of competitive products, identify target customer base,
pricing, promotion, co-branding and affinity. Cobranding is a tie up between
profitable organizations like tie up of card issuer with an airlines company. While
affinity is a tie up with non-profitable organization like WWF, Zoo management, etc.
This not only influences customer to use of new technology but also increases
customer base and reputation of the company.
The success or failure of the card payment system depends not only in technical issues
but also on users acceptance. The user acceptance depends on advertisement, market
position, user preferences etc. So when someone discuss about the characteristics of e-
payment, that must not be limited to technical issues but largely on user acceptance
related issues also. So customer acceptance is very important for front office card
management. The cards point of interaction (ATM, service outlet, merchant), where
the cards are accepted, and transactions risk must be clearly defined to the customer.
The customer service must handle queries and complains like:

Acceptance location Processing error

Card activation Transaction limits & Charges incurred
Expiration/Renewal
Lost/Stolen situation
Fraudulent use
Dispense faults

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Security

Security is the main concern of online transaction and is one of the most crucial issues
which decide the general acceptance of any online payment methods. Centralized
monitoring system must be in place to protect against any security risks. Physical
security of the card center along with network security must be sound and updated.
SSL and TLS are used to encrypt payment transaction messages sent between the
merchant and the issuer and its network association over the internet. SSL uses
authentication based on asymmetric cryptography issued by trusted third party. In
general, the authentication of merchant takes place and after the authentication
process, all the messages are encrypted using symmetric cryptography like DES. The
actual cryptography algorithms used are negotiated at connection setup. The merchant
verifies the card details at the time of purchase through an existing network. Thus,
EFT transactions are quiet safe compared to physical cash payment. Security standard
used by Visa and MasterCard called SET (secured Electronic Transaction) suggests a
hierarchy of Certification Authority (CA), a strong public key encryption, a strong
card binding mechanism and a dual signature scheme to link order payment details
together. But these security measures can be a burden to the payment system as it
demands a large number of computationally expensive signatures and messages to
complete a single transaction. One other measure taken by SCT is PVV (PIN
Verification Value), which requires PIN for every payment and financial transaction.
There are also emerging technologies like Biometric to ensure a safe and reliable
service to only authentic user. Other security measures like IPSEC, VPN is setup for
extra security form BFIs side. However the card user must be cautious about the
usages and its whereabouts. The technologies and policy issues provide reliable
services to the users.

Message encrypted with DES with a

secret KEY

Fig 13: A Digital envelope encrypted with DES

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Security mechanisms implemented in Internet Banking are:

Use of device that creates ID for one session only

Login to that device using account id and password

It creates a temporary ID to login to the banks server
User should login from that newly generated ID

Some of the duties that the banks must do to prevent e-banking frauds:

Information Security Controls

Up-to-date knowledge of ongoing attack sources, scenarios, and
techniques
Up-to-date equipments and network maps
Ability to show rapid response to react to newly discovered
vulnerabilities.

Some of the duties that the banks must do to prevent e-banking frauds:

Internal Controls
Dual Control
One person can a mistake, other can find the error
The possibility of two persons making the same mistake at the
same time is negligible.
Control of Suspicious Activities
Controlling the withdrawal up to some limit
If an account is dormant for years and the transaction is
unexpected, the account holder must be informed

E-Banking users must consider these things while transacting electronically

Never give your cards, account no. to anybody

Update your antivirus program regularly
Dont use public computer for e-transactions
Dont give your information in the websites which you dont know
Before visiting any sites, check the certificate; and dont continue
unless you feel it is from trusted site
Use passwords which are difficult to guess
Regularly check your account status; if you feel something is
wrong, then let this know to your bank

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2.1.7 Deficiencies with the current system
Fraud
Usage of resources of another person without his/her consent which impacts
financially of none financially is a fraudulent behavior. As in other financial
transaction there are various forms of frauds through cards. Frauds may be friendly,
skimming, phishing etc. The fraud may be different in nature. Some are:
Multiple Fraudulent Transactions
Card Theft
Information Theft
Fake ATMs
Operational
Cloning
Multiple Fraudulent Transaction generally occurs while on POS, when a merchant
makes multiple imprints of the card using the manual imprinter. The card might be
swiped twice or the sales receipt copied for later use. The cardholder must ask
merchant to perform the transaction in front of his\her presence to make sure cards
has not been swiped more than once. But this kind of fraudulent transaction is subject
to be apprehending, as these business run on goodwill and customer satisfaction.
Stolen or lost card are usable until the cardholder notifies the issuer of the card is
lost. Commonly, the lost cards are used to conduct huge amount of financial
transaction or purchases. As most issuers have 24 hours telephone number to
encourage prompt report. Cloning is the act of copying the contents of a cards
magnetic stripe onto a duplicate card to access the fund available in the cards account.
Cloning process involves use of cheap device places as a genuine Card Reader which
copies digital information stored in the magnetic stripe. There have been some cases
where a kind of hook is placed carefully in the Card reader slot capturing the Card,
which is later claimed by the thief and use it. Information Theft varies in nature;
simplest to most advanced type of fraud comes under this category. Card information
is stored in number of formats, Name of cardholder, account number, Expiration date,
and CVV code are encoded in magnetic stripe. The main areas of fraudulent
transaction are through internet and MOTO (mail order telephone order) as card is not
present and the merchant rely on information presented indirectly. Information theft
can be categorized into Skimming and Phishing.

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Skimming
Skimming is a fraud scam in which a cardholders account information is
electronically copied, or skimmed, off the cards magnetic stripe, often in the
process of an otherwise valid transaction. The skimmed information is used to
produce counterfeit payment cards that are, in turn, used for fraudulent transactions.
Skimming often occurs in card-present environments, such as restaurants and service
stations where transaction processing may occur out of sight of the cardholder. To
skim a card, fraudsters typically use a small portable device that may not be bigger
than a pager. They swipe the card through the device to copy the magnetic stripe. To
prevent skimming, the following measures are taken:
Anyone operating an electronic device not normally used in your day-to-day
business activities.
Anyone offering you money to record account information
Skimming is the replication of account information encoded on the magnetic stripe of
a valid card and its subsequent use of fraudulent transactions in which a valid
authorization occurs. The account information is captured from a valid card and then
re-encoded on a counterfeit card. The term skimming is also used to refer to
situation in which electronically transmitted or stored account data is replicated and
then re-encoded on counterfeit cards or used in some other way for a fraudulent
transaction. These are the sample of skimming technique.

Fig 14: The equipment as it appears installed over the normal ATM bank slot.

Fig 15: The PIN reading camera being installed on the ATM is housed in a leaflet
enclosure.

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Phising

Phising is the fraudulent process of attempting to acquire sensitive information such

as usernames, passwords and card details by faking as a trustworthy entity in an
electronic communication. Phiser is the term used for the one behind the scene, who
lures unsuspecting public in form of popular social websites, auction sites, online
payment processors or as an IT administrator. Phising is typically carried out by e-
mail or IM which directs user to fake website and exploit or catch the financial
information and passwords. Identity theft is a serious issue, as one acts as if they are
the legitimate customer.

The preventive measures of information theft are as follows.

Never disclose Card and PIN to anyone, change PIN if compromised.

When using ATM, be aware of anything unusual in the card reader slot.
Review statement; check each of your monthly Card transaction.
Keep the receipts and charge slips for verification with statement.
When doing e-commerce in web, ensure card is being used in secured
environment padlock icon on browsers status bar.
Never sent payment information or reply to any unsolicitated by e-mail, use
merchant sites that use encryption technology.

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2.2 Requirement Determination

2.2.1 Payment Instruments: There is a narrow payment instrument base that is

dominated by cash, with cheques as the most widely used non-cash instrument. Credit
instruments are minimally used, while direct debits are virtually non-existent. Existing
non -cash instruments are not standardized. They vary in content, format, physical
characteristics and security features, which undermine the introduction of automated
processing, and constrain the efficient detection and control of fraud and forgery.

2.2.2 Clearing and Settlement System: Clearing systems are manual, with the local
clearing cycle taking three days from the date of presenting the instrument to the
clearing house, and upcountry clearing taking more than seven days. In areas with no
clearing houses, it can take up to 30 days to clear an instrument. The payment and
settlement legs of securities transactions are not yet synchronized to provide for
Delivery Versus Payment (DVP), while foreign exchange transactions do not provide
for Payment versus Payment (PVP). There is no fast track clearing of high value
instruments in the payment system. In particular, the absence of high value clearing
for debit instruments, coupled with the absence of instrument value limits and bank
exposure caps, increases the risk of interbank exposure.

2.2.2.1 Paper Based Transfer System (PBTS): The PBTS will be used to process
paper-based retail debit and credit instruments, through the Automated Clearing
House (ACH). The system will give credit transfers same day finality and next day
finality for debit instruments. Participating banks will settle their obligations to each
other on a multilateral net basis, through their settlement accounts at the central bank,
which is the settlement agent. Paper-based processing technology like the Magnetic
Ink Character Recognition (MICR) or Optical Character Recognition (OCR) will be
used to automate and improve the efficiency of a Paper Based Transfer System.

2.2.2.2 Bulk Electronic Transfer System (BETS): In this system, payment initiation
and the exchange of payment instructions and related data will be in electronic form,
either through electronic media or along communication lines, through to the clearing
house. The BETS will be restricted to credit transfers (including standing orders), and
direct debits (preauthorized debits). Inputs into the system will only be in electronic
form, and the system will be designed to handle and process high volume, low to
medium value payments. Bilateral or multilateral settlement will be allowed and a

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settlement instruction will indicate the settlement date, and whether bilateral or
multilateral settlement is to be used.

2.2.2.3 Large Value Transfer System (LVTS): Large value, time critical credit
payments will be cleared through a Large Value Transfer System (LVTS), which may
be a Real Time Gross Settlement (RTGS) System or a Designated Net Settlement
(DNS).

2.2.2.4 Complementary Systems: In addition to the above systems, it is envisaged

that there will be a number of complementary systems, which include:

Payment Cards Processing Systems (PCPS): This is the systems that use
payment cards at points of sale will be built to facilitate authorizations,
clearance and settlement. ATM Network(s) built to facilitate verification,
authorization, clearance and settlement among users and their banks or
participants. The cleared net amounts will be transmitted to the settlement
agent for entries to be effected on their settlement accounts.

Electronic Banking and Internet Based Systems (EBIS): There is no reliable

data on the volume and value of electronic and Internet-based payment
transactions. Nevertheless, this payment area is set to grow. Institutions that
venture into this area, including the establishment of Internet service
providers, will be encouraged. The NPS Project will closely follow and
monitor developments in this area, with a view to developing an Electronic
Banking and Internet Based System (EBIS) at an appropriate time, when it is
both cost-effective and prudent.

2.2.3 Legal and Regulatory Framework: The legal and regulatory framework
relevant to payment system development is either outdated, inadequate or does not
conform to new payment practices and trends.

2.2.4 Payment Technology: The use of payment technologies, including Automatic

Teller Machines (ATMs), payment cards, SWIFT, Electronic Fund Transfer at Point
of Sale (EFTPOS), Electronic Commerce and Internet Banking is either at very
primitive stage.

2.2.5 Risk Management: Lack of amount limits for certain payment instruments and
exposure caps associated with certain banks may constrain cost-effective risk
management, and even potentially expose the clearing house to systemic risk.
Although a collateralized lending facility for banks with inadequate funds on their

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settlement accounts to meet clearing obligations exists at the central bank, a dynamic
collateral management system to mark and book securities for collateral lending to
commercial banks is non-existent.

2.2.6 Institutional Framework: The institutional framework is both narrow and

shallow. Important payment system institutions like credit rating agencies, factors,
autonomous clearing house(s) and third party processing organizations to process
payments initiated at EFTPOS (Electronic Fund Transfer at Point of Sale) points, do
not yet exist. Most of the commercial bank branches are situated in urban areas and
district capitals, leaving the upcountry and rural areas significantly under banked.

2.2.7 Physical Infrastructure: The existing power and communication infrastructure

is still inadequate to effectively and efficiently support the requirements of a modern
payment system.

2.2.8 Regional Co-operation: There is room for more co-operations at the regional
level. For instance, certain risk management measures, payment technologies and
electronic processes, and payment system laws should be harmonized to promote the
inter -operability of regional systems within SAARC.

2.3 Solutions to the Requirements

It is envisioned that by the year 2012, Nepal should have in place a developed and
modern Payment system that is effective, efficient, reliable, accessible and need -
driven. Payment System Development and Modernization Strategies to achieve the
mission and objectives of the payment system modernization project, the following
strategies are proposed. In order to redress the identified weaknesses in the payment
instrument base, the following strategies might be implemented:

Introduction and promotion of new payment instruments (e.g. direct debits) to

serve as significant and credible alternatives to cash and cheques. Direct
debits are particularly suitable for utility payments.
Retail payment instruments, which are basically low value, but high volume,
should emphasize convenience and speed so as to effectively serve the
personal and retail sectors.

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 Wholesale payment instruments, which are basically high value, but low
volume, should emphasize both speed and safety, leading to same-day finality
and irrevocability.
In order to encourage a risk-reduction propensity in the composition of the
payment instruments, credit instruments should be promoted.
Standing orders (regular and periodic credit transfers) and direct debits should
be promoted by both the banking industry and the utility companies.
Users should be sensitized on the different features and strong points of the
existing and new payment instruments.
Standards for payment instruments should be developed and promulgated as
both an efficiency enhancement and risk management measure.
Upgrade of Clearing and Settlement Systems for Nepals payment system.
Foreign Currency Clearing: As the number and activity of foreign-currency
denominated accounts increases, coupled with the need to reduce foreign
exchange outflows arising, foreign currency clearing will be introduced. The
clearing financial institutions will have to agree with their settlement agent on
how to treat the credit balances on their settlement accounts.
Management of Clearing Houses: In order to enhance the supervisory and
oversight role of the central bank over the payment system, and also to
encourage the development and consolidation of self-discipline within the
banking and financial services industry, it is proposed that the management of
clearing houses should be autonomous. These autonomous clearing house(s)
would then be run on a cost recovery basis, with full-time professional
managers and auditors. There should be a transition period of five years,
during which the central bank will gradually ease itself out of the
management of the clearing house(s).
Document Truncate ion: As a way of enhancing clearing and settlement
efficiency, cheque and other paper truncation should be introduced and
promoted. This truncation should be gradual, starting with partial truncation,
and then proceeding to full truncation. The laws must be amended to
accommodate the document truncation technology.
Physical Infrastructure needs to be upgraded if it is to efficiently and
effectively support modern payment system activities. Yet infrastructural

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 provision is one area where the Payment System Project does have little
influence. It therefore has to largely depend on the capacity, goodwill and
commitment of the major infrastructure providers that include Government,
power and communication companies.
Building Technical Skills in the Payment Area: Banks, other financial
institutions, communication companies and other stakeholders should draw up
and implement capacity building programmes that are intended to build core
Competencies in the critical and technical areas of payment system
development.

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 CHAPTER THREE

3.1 Conclusion

Payment & settlement system plays crucial role in effective and efficient circulation
of money in the economy thus giving boost to trade and business. It is recognized
worldwide that an efficient and secure payment system is an enabler of economic
activity. It provides the conduit essential for effecting payments and transmission of
monetary policy. From the foregoing, it is clear that the payment system must be
deliberately and systematically reformed, developed and modernized with a view to
building its capacity to meet the challenges and expectations of modern business and
economic management. Promotion of Automatic Teller Machine (ATM) Use/ ATM
Network, Use of Payment Cards, Internet Banking and Electronic Commerce should
be encouraged. Internet payment system providers should be encouraged to open and
operate business. We need more applicable system of exchange that is both cheap,
reliable and a technology that has wide public access. If people are encouraged and
persuaded, it has a great potential in Nepal especially in the remote parts of Nepal
where travelling and making payment is a major problem.

This report is just an attempt to express some of the basic things which I have
understood during my internship program like exposure to the working environment
of an organization, analysis of existing system to find out shortcomings and
opportunities involved and the provided solution of the existing problem. I have tried
my best to make my internship perfect and I am sure I shall be able to bring this
understanding of mine into practical use in the days to come. I hope that the db
solution which I gave to the organization by analyzing the existing system will help
them and make the record management system easy, systematic and perfect. I also
hope that my concept and understanding will be more through and more wide as I
grow learn and make a more thorough research in a longer duration.

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3.2 Lesson Learnt
I found internship as a wonderful opportunity for the practical exposure and to use my
learnt knowledge and skills during my four years Bachelor Degree in Information
Management and other vocational training. This internship has helped me to learn
from the different aspects of working mechanisms of the organizations. The lessons
learnt from this internship program are listed in few lines below.

The main thing learnt in the internship program is how to exist in the real world
situation and how to work in real world environment.

The importance of time i.e. working within the time constraint is important in the
real world.

The exposure to the practical environment has increased my experience and

confidence to deal with different kinds real world problems.

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Reference:

1. www.wikipedia.org
2. Electronic Payment Systems by Alexander Appiah & Fred Agyemag
3. The Development of E-Payments and Challenges for Central Banks in
SEACEN (The South East Asian Central Banks) Countries by The South East
Asian Central Banks (2008)
4. Payment Systems in Nepal Vision 2009 2012 by Ashish Sharma
5. Technological Innovations and Banking in Ghana by Jousha Abor
6. Training materials from Payment Card
7. JBBL Payment Card manual (2009)

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