EIectronic Payment Systems:

Definition:
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 nternet 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. ncreasing online commerce:
The
above
two
factors
have
lead
many
instituti
ons to
go
online
and
many
others
are
followin
g them.
We began E-Commerce with ED, this was primarily for large business houses not for the common man.
Many new technologies, innovations have lead to use of E-Commerce for the common man also. We will
now briefly enumerate these innovations based on whom they affected:
1. Affecting the consumers:
Credit cards, Debit Cards, ATMs (Automated Teller Machines), Stored
value cards, E-Banking.
2. Enabling online commerce:
Digital Cash, E-Cash, Smart cards (or Electronic Purse) and encrypted
Credit cards.
3. Affecting Companies:
The
paymen
t
mechan
isms
that a
bank
provide
s to a
compan
y have
change
d
drastica
lly. The
Compa
ny can
now
directly
deposit
money
into its
employ
ee's
bank
account
. These
transfer
s are
done
through
Automa
ted
Transfe
r
Houses
.
There are also many 5robIems with the traditionaI 5ayment systems that are leading to its fade out.
Some of them are enumerated below:
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 nternet 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.
We will now focus attention on the various ways avaiIabIe to 5ay onIine these methods of payment are
still new even when seen as a technology. Each has its own benefits and shortcomings:
EIectronic Tokens:
An electronic token is a digital analog of various forms of payment
backed by a bank or financial institution. There are two types of tokens:
i. Real Time: (or Pre-paid tokens)
- These are exchanged between
buyer and seller, their users pre-
pay for tokens that serve as
currency. Transactions are
settled with the exchange of
these tokens. Examples of
these are DigiCash, Debit
Cards, Electronic purse etc.
ii. Post Paid Tokens are used
with fund transfer instructions
between the buyer and seller.
Examples Electronic cheques,
Credit card data etc.
EIectronic or DigitaI Cash:
This combines computerized
convenience with security and privacy
that improve upon paper cash. Cash is
still the dominant form of payment as:
The consumer still mistrusts the banks.
The non-cash transactions are
inefficiently cleared. n addition, due to
negative real interests rates on bank
deposits. Now we will enumerate some
qualities of cash:
a. Cash is a legal tender
i.e. payee is obligatory
to take it.
b. t is negotiable i.e. can
be given or traded to
someone else.
c. t is a bearer instrument
i.e. possession is proof
of ownership.
d. t can be held & used by
anyone, even those
without a bank
certificate.
e. t places no risk on part
of acceptor.
The following are the limitations of Debit and Credit Cards:
i. They are identification cards
owned by the issuer & restricted
to one user i.e. cannot be given
away.
ii. They are not legal tender
iii. Their usage requires an account
relationship and authorization
system.
Properties of Digital Cash
4 Must have a monetary value:
t must be backed by
cash (currency), bank
authorized credit or a
bank certified cashier's
check.
4 Must be interoperable or exchangeable as payment for
other digital cash, paper cash, goods or services, lines of
credit, bank notes or obligations, electronic benefit
transfers and the like.
4 Must be storable and retrievable:
Cash could be stored
on a remote computer's
memory, in smart cards,
or on other easily
transported standard or
special purpose
devices. Remote
storage or retrieval
would allow users to
exchange digital cash
from home or office or
while traveling.
4 Should not be easy to copy or tamper with while it is
being exchanged. This is achieved by using the following
technologies, these are nothing but new and very
efficient versions of the old art of cryptography.
Digital cash is based on cryptographic
systems called "Digital Signatures"
similar to the signatures used by banks
on paper cheques to authenticate a
customer.
Purchase of digital cash from an online
currency server (or bank) involves 2
steps:
Establishment of an account in
this step we are given a unique
digital number which also
becomes our digital signature.
As it is a number known only to
the customer and the bank,
forgery, which may be done in
paper cheques becomes very
difficult.
Maintenance of sufficient money
in the account is required to
back any purchase.
. Electronic Cheques
The electronic cheques are modeled on
paper checks, except that they are
initiated electronically. They use digital
signatures for signing and endorsing
and require the use of digital certificates
to authenticate the payer, the payer's
bank and bank account. They are
delivered either by direct transmission
using telephone lines or by public
networks such as the nternet.
Benefits of electronic Cheques:
4 Well suited for clearing
micro payments.
Conventional
cryptography of e-
cheques makes them
easier to process than
systems based on
public key cryptography
(like digital cash).
4 They can serve
corporate markets.
Firms can use them in
more cost-effective
manner.
4 They create float and
the availability of float is
an important
requirement of
Commerce.
E-BANKING
Banking as a business can be divided into five broad types:
1. Retail
2. Domestic wholesale
3. nternational Wholesale
4. nvestment
5. Trust
Of all these types, retail and investment banking are most affected by online technological innovations
and are the ones that stand to profit most from e-commerce.
Role of e-commerce in banking is multifaceted impacted by:
1. Changes in technology.
2. Rapid deregularization of many parts of finance.
3. Emergence of new banking institutions.
4. Basic economic restructuring.
E-Banking offers an inexpensive alternative to branching to expand a bank's customer base, and many
banks are using e-banking to increase services to their customers. Many banks have started websites on
the nternet and many plan to offer banking services over the nternet.
Smart Cards and other forms of electronic cash could be the key to consumer acceptance of home
banking, eventually allowing banks to reduce the number of their physical branches.
Four major categories of home banking are:
1. Proprietary bank dial-up services.
A home banking service in combination with a Computer and Modem lets
the bank become and electronic gateway to consumer's accounts,
enabling them to transfer funds or pay bills directly to creditor's accounts.
2. Off-the-shelf home finance Software:
This category is a key player in making relationships between current
customers and helping banks gain new customers. Example: Microsoft's
Money and Bank of America's MECA Software.
3. Online Service Based Banking:
This category allows banks to setup retail branches or subscriber based
online services such as Prodigy, CompuServe and America Online.
4. WWW Based Banking;
This allows banks to bypass subscriber
based online services and reach the
customer's browser directly through
worldwide web. Advantage of this model
is its flexibility to adapt to new online
transaction processing models
facilitated by e-commerce and
elimination of the constricting
intermediary.
E-Commerce and Retailing
Retailing is expected to change with the rapid development of new online sales and distribution channels
that literally can be used from anywhere, anytime from work, school, a hotel, car or airplane. As an
example of the Electronic retailing we can see Amazon which sells books online and Dell computers who
sell computers online. These retailers started as small players in a market, which did not trust them.
However, they have become major players after taking over some small retailers.
Almost every retailer is now re-evaluating every aspect of its operation from customer service to
advertising, merchandising to store design and logistics to order fulfillment and further more reacting to
the pressure of retailers, suppliers are assessing technology based solutions to drive down costs and
become more efficient producers of goods.
Online channels are impacting traditional retail business models with online retailing constraints of time
and space disappear.
EIectronic RetaiIing:

Today electronic retailing is still far from being a competitive threat to more traditional store retailing but it
is becoming increasingly attractive as technology and application improve and retailers gain experience.
Some traditional retail outlets:
1. Shopping malls and departmental stores.
2. Super Centers
3. Factory outlets
4. Warehouses
5. Mail order and catalogue shopping
Electronic Retailing Channels are:
1. Television Retailing
The T.V. retail marketing and programming are divided into
segments that are televised live, with a show host who presents
the merchandise and conveys information relating to the product
including price, quality, features and benefits.
Success of T.V. shopping is the result of effective utilization of
electronic media for capturing the power and influence of
celebrity and the magic of showmanship and bringing them to
bear on a sale.
2. CD-ROM Based Shopping has the following advantages:
4 A CD-ROM catalogue has multimedia
capability and can enable a merchant to
add sound, photographs an a full motion
video to a product presentation.
4 t can be interactive enabling the
customer to select which category to
view.
4 Relatively inexpensive to produce and
distribute.
t has the following disadvantages:
4 Not all possible customers may have a
CD-ROM drive or software to see it.
4 t is a static device to catalogue a
company's products, but the list or style
of the products a company makes may
vary from time to time.
EIectronic PubIishing
Publishing is another area where the nternet has impacted. With all web sites having web pages that
show some content or other visitors, get hordes of web page based information on almost any topic. n
fact, the web has become a very big virtual information library. Taking advantage of this are some web
sites like the www.rocketlibrary.com. These web sites encourage people to write for them free and
encourage members to get e-books free. E-Books are nothing but electronic forms of paper books, these
books are a part of a wave of innovation, these include Palmtop computers, E-Book readers etc. These
readers and Palmtops can store thousands of books in a very small size as compared to paper books.
The big publishing houses are taking hue and are now offering some chapters or complete books online.
This has also lead to a new trend in which authors are now offering their books online without actually
going to publishing houses, eg. Stephen King is offering one chapter of his new book The Plant at a dollar
(www.stephenking.com).
All this has become due to the fact that nternet can handle micro-payments. Like retailing it may appear
that books may vanish one day due to these online publishers but it is not so as books are still a favorite
pastime of many, but e-books will become a supplement to the paper books this is for sure.
Online publishing can be viewed in two ways:-
4 Activity of disseminating information.
4 Activity of publishing for sale. n order to realize revenue from their information,
publishers package their product as a bundled commodity rather than disjointed
information.
There is a fundamental difference between information and commodity. A commodity such as digital book
needs to be sold in volume in order to generate revenue, so publishers must keep their material from
spreading freely all over the planet. On the other hand, value of information is not lost when it is sold
because the contents are not limited by their medium of expression.
Technical ssues:
1. How to improve and enforce copyright protection.
2. How to create compelling content using the available technology.
3. How to conduct financial transactions for individual articles
(Micropayments).
4. Publishers have to constantly innovate and challenge present concepts if
this form of commerce is to become widely accepted and popular.
The following factors are to be considered for a successful online publishing business:
1. Content
2. ncentive
3. Services
4. Quality
5. Price
6. Speed of delivery
7. Bundling of products
8. Diversity of choice

The foIIowing a55roaches are to be foIIowed for onIine 5ubIishing:
1. Online Archive Approach:
(ncludes bibliography databases and full text searches). This is new to the web and
appeals to corporate publishers and to some extent, commercial publishers (such as
academic or journal publishers) who have an existing digital archive that they want to
deliver over the web, as well as on paper, CD-ROM or other media.
2. The new medium approach:
(ncluding real-time news delivery, personalized news delivery and entertainment). t aims
to create new material for the web; to treat the web, as its own medium. This will appeal
mostly to commercial publishers, such as magazines, that view web as an alternative, not
a replacement for print publication. This approach is more controversial and more difficult
to implement, but also more exciting.
3. The Publishing ntermediation Approach:
This approach (including online directories) exploits new service opportunities for
intermediaries. The future is bright for the publishing intermediaries who offer case of
operation speed & details information because there will always be a need for a good
directory to help people locate goods, service & products.
4. The dynamics & Just-in-Time Publishing Approach:
n the approach, content
is assembled is real-
time and transmitted in
the format best suited to
the user's faster and
perfection. t is just in
time publishing i.e. the
stories, applets and
content flow into the
computer just as
consumer need and
then self-destruct after
usage.