Unit 3: E-Payments

Electronic Payment System – an Overview

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 cheque or digital cash) that is backed by a bank or an
intermediary, or by a legal tender.

An e-commerce payment system facilitates the acceptance of electronic payment for offline
transfer, also known as a subcomponent of electronic data interchange, e-commerce payment
systems have become increasingly popular due to the widespread use of the internet-based
shopping and banking.

E-Payment is a system that provides tools for payment of services or goods carried on the
internet. E-payment system provides the ease of transaction processing in e-commerce between
consumers and sellers. Using the E-payment System has many benefits for payers, payees, E-
commerce, banks, organizations and governments. These benefits can lead to widespread
electronic payment systems in the world. An efficient and reliable e-payment system enables
faster payouts, better tracking, transparent transactions, reduced time use, cost savings and
increased trust between sellers and buyers.

The development and adoption of technology in the e-payment system involve financial
transactions, assimilated users and quality e-payment technology tend to shape their own
perceptions and expectations. Electronic payment systems are now commonly used such as
transactions via ATM machines, use of credit or debit cards, through online banking and mobile
banking. E-payment provides significant cost savings on paper-based payments.

E-Payment Process

An electronic payment process typically involves the following steps:

1. Electronic payments involve a buyer and a seller. A buyer is who makes a payment. A
seller receives a payment.
2. E-payment process involves financial institution that interact with both buyer and seller.
3. Buyers provide payment information from where payments should be withdrawn and
sellers give information about where payments should be deposited.
4. The buyer enters the credit card number into a form. The information entered into the
secure server is encrypted using security technologies.
5. The payment information moves to the online transaction server where the payment is
authorized depending on whether the credit card number is valid and the customer has
sufficient credit to cover the purchase.
6. If the credit card information is valid and funds are available, the information is
transmitted to the financial institution that receives payments owed to the buyer and a
deposit is made to the seller’s bank account.
7. The buyer is then informed that the transaction has been processed.
 Phases in E-payment

An electronic payment typically involves the following phases.

1. Registration: This phase involves the registration of the payer and the payee with the
issuer and acquirer respectively. Most electronic payments designed require respectively.
Most electronic payments designed require registration of payers and payees with their
corresponding banks so that there is a link between their identities and their accounts held
at the bank.

2. Invoicing: In this phase, the payee obtains an invoice for payment from the payee. This is
accomplished by either browsing and selecting products for purchase from the
merchant’s (Payee’s) website in case of purchases made through the internet or obtaining
an electronic invoice using other electronic communication media like e-mail. The
importance of this phase is that it sets the mandatory and optional data variables that
should be included in a payment protocol.

3. Payment selection and processing: In this phase, the payer selects a type of payment,
(card based, e-cash, e-cheque, etc.) based on the type of payment the payee accepts.
Based on the selection, the payer then sends the relevant payment details like account
number, unique identifiers of the payer to the payee along with accepted amount based on
the invoice.

4. Payment authorization and confirmation: In this phase, the acquirer on receiving

payment details from the payee authorizes the payment and issues a receipt containing
the success or failure of the payment to the payee. The payee based on the message may
also issue a receipt of payment to the payer.

Benefits of using electronic payments

1. Easy and convenient.

2. Private and secure.
3. Saves money – paperless transactions.
4. Save time – no more waiting for the bill in the mail or waiting in the line to pay.
5. Available worldwide via internet.
6. Streamlined auditing and accountancy processes.
7. Automated invoicing and accounting systems.
8. Service is available 24/7.
9. Viewable billing and payment history.
10. Printable copy of the E-statement from the web.

B2B Payments

 B2B is fastest grossing sector of e-Commerce payment.

 It is generally used in commercial payments.
  It is also called as retail payment.
 It involves high willingness to pay.
 The seller company is paid directly by buyer’s company for goods and services.
 These payments are much larger than B2C.
 It involves complex business accounting system.
 It allows sellers to conduct fearless business with anonymous parties.
 It reduces the credit risk.
 It provides reports of goods delivery, invoices and collection etc.

B2C Payments

 It is also used in commercial activities.

 The buyer pays directly to merchant for goods and services.
 It is also called as retail payment.
 It is generally used in small to medium sized enterprises.
 It does not involve pre-existing relationship.
 It does not involve high willingness to pay.
 It involves the online payment by any potential customer to company.
 It may be a purchase of single book online.

Types of e-Payment Schemes

E-commerce sites use electronic payment, where electronic payment refers to paperless monetary
transactions. Electronic payment has revolutionized the business processing by reducing the
paperwork, transaction costs, and labor cost. Being user friendly and less time-consuming than
manual processing, it helps business organization to expand its market reach/expansion. Listed
below are some of the modes of electronic payments.

 Credit Card: Payment using credit card is one of most common mode of electronic
payment. Credit card is small plastic card with a unique number attached with an account.
It has also a magnetic strip embedded in it which is used to read credit card via card
readers. When a customer purchases a product via credit card, credit card issuer bank
pays on behalf of the customer and customer has a certain time period after which he/she
can pay the credit card bill. It is usually credit card monthly payment cycle. Following
are the actors in the credit card system.

 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 a debit card and a credit
card is that in case of payment through debit card, the amount gets deducted from the
card's bank account immediately and there should be sufficient balance in the bank
account for the transaction to get completed; whereas in case of a credit card transaction,
there is no such compulsion. Debit cards free the customer to carry cash and cheque.
Even merchants accept a debit card readily. Having a restriction on the amount that can
 be withdrawn in a day using a debit card helps the customer to keep a check on his/her
spending.

 Smart Card: Smart card is again similar to a credit card or a debit card in appearance,
but it has a small microprocessor chip embedded in it. It has the capacity to store a
customer’s work-related and/or personal information. Smart cards are also used to store
money and the amount gets deducted after every transaction. Smart cards can only be
accessed using a PIN that every customer is assigned with. Smart cards are secure, as
they store information in encrypted format and are less expensive/provides faster
processing. Mondex and Visa Cash cards are examples of smart cards.

 E-Money: E-Money transactions refer to situation where payment is done over the
network and the amount gets transferred from one financial body to another financial
body without any involvement of a middleman. E-money transactions are faster,
convenient, and saves a lot of time. Online payments done via credit cards, debit cards, or
smart cards are examples of emoney transactions. Another popular example is e-cash. In
case of e-cash, both customer and merchant have to sign up with the bank or company
issuing e-cash.

 Electronic Fund Transfer (EFT): t is a very popular electronic payment method to

transfer money from one bank account to another bank account. Accounts can be in the
same bank or different banks. Fund transfer can be done using ATM (Automated Teller
Machine) or using a computer.

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

 Digital Wallet: A digital wallet (or electronic wallet) is a financial transaction

application that runs on mobile devices. It securely stores your payment information and
passwords. These applications allow you to pay when you're shopping using your device
so that you don't need to carry your cards around. You enter and store your credit card,
debit card, or bank account information and can then use your device to pay for
purchases.

 Accumulating Balance: Digital accumulating balance payment systems are more like
utility bills. This system allows users to make multiple purchases, which will be totaled
up and billed for at the end of a time period. This is ideal for micro-transactions heavy
websites, where numerous cheap items are purchased frequently. The micro-payment
system uses a technology similar to the digital wallet, where the customer transfers some
money into the online stored value system and uses it to pay for digital products.
  Online stored value payment system: Online stored value systems allow customers to
make instantaneous payments to various merchants contingent on the value they have
stored in the system. One of the most prominent examples of an online stored value
system would be PayPal. PayPal works by linking the user’s online account with a credit,
debit or checking account that he/she currently possesses. When a transaction is
processed, PayPal automatically debits the user’s account and credits the merchant’s
account, without having to transfer any sensitive customer credit information.

 Digital cheque: e-Cheque is short for an electronic cheque. It’s a method of payment
between two parties that mimics a cheque - only it’s digital. It’s a way to send money
from a sender’s current account directly to the recipient. It contains the information that a
paper cheque would. Only it’s digital.

Normally, an e-cheque is processed as a payment request that the sender makes to their
bank. They include the payment amount and account details of the recipient. They then
authorize the payment via an e-signature. Each bank has a different way of doing this. It
could be a special code, telephone line or biometric signature.

 Agile Wallet: Agile Wallet means a system operated by or for Cybercash that enables
consumers to effect, and Internet Merchants to accept, payment transactions. It is a
platform to load and manage payment information for billers. It allows customers to enter
credit card and identifying information once, stored on a central server.

SET Protocol

Secure Electronic Transaction (SET) is a system and electronic protocol to ensure the integrity
and security of transactions conducted over the internet. E-commerce websites implemented this
early protocol to secure electronic payments made via debit and credit cards.

SET blocks out all personal details on the card, preventing hackers and data thieves from
accessing or stealing the cardholder's information. The merchant also cannot see these personal
details, which are transferred directly to the credit card company for user authentication and
verification.

SET is not a payment system or gateway, but a set of security protocols. It uses some aspects of a
Public Key Infrastructure (PKI) to address concerns around privacy, authenticity and security in
e-commerce applications.

The primary goal of SET is to protect credit/debit card transactions as they take place online. It
provides a secure and confidential transaction environment for everyone involved in the e-
commerce transaction, including the customer and merchant. It also authenticates users with the
help of digital certificates.