Unit 3

Electronic Payment Systems

 Syllabus
Electronic Payment Systems
– Overview of Electronics payments
– Electronic Fund Transfer
– Digital Token based Electronics payment System
– Smart Cards
– Credit Cards
– Debit Cards
– Emerging financial Instruments Smartphone wallet
– Social / Mobile Peer to Peer Payment systems
– Digital Cash and Virtual Currencies, Online Banking
– Payment Gateway
– Electronic Billing Presentment and Payment
 Electronic Payments
• Method of making transactions or paying for goods and
services electronically without making use of cash or cheque.
• The electronic payment systems can be broadly classified into
two types namely
– Cash payment system
– Card payment system
• The RBI regulates the electronic payment systems in India.
• Electronic Clearing services allow banks and non-banking
institutions to debit or credit money instantly.
• NEFT, IMPS, and RTGS allow cashless fund transfers between
bank accounts.
 Electronic Fund Transfer(EFT)
• An electronic funds transfer (EFT), also known
as direct deposit, is the digital transfer of
money between bank accounts.
• The most common types of EFT payments are:
– Electronic Checks
– Direct Deposit.
– Phone Payments
– ATM Transactions
– Card Transactions
– Internet Transactions – With online transactions,
 Electronic Payment System
1. Electronic Cheque System
1. Aka E-Cheque.
2. It emulates real world chequeing system.
3. The payer issues a digital cheque to the payee for payment.
4. The payee deposit it in the bank to redeem the money.
5. Each transaction is carried on internet.
6. It is processed in two phases:-
- Phase 1: Purchasing Goods
- Phase 2: Depositing Cheques at the merchant’s bank
 Electronic Cheque(E-Cheque)
Phase 1: Purchasing Goods
- Step1- The consumer accesses the merchant server & the
merchant server presents its goods to the consumer.
- Step2- The consumer selects the goods & purchases them by
sending an electronic cheque to the merchant.
- Step3- The merchant may validate the electronic cheque
with its bank for payment authorization.
- Step4- Assuming the cheque is validated, the merchant
closes the transaction with the consumer.
 Electronic Cheque(E-Cheque)
Phase 2: Depositing Cheques at the merchant’s Bank
- Step1- The merchant forwards the electronic cheque to its bank
electronically. This action takes place at the discretion of
the merchant.
- Step2- The merchant bank forwards the E-cheque to the clearing
house for being cashed.
- Step3- The clearing house works with the consumer’s bank,
clears the cheque and transfers money to the merchants
bank, which updates the merchant’s account
- Step4- At a later time, the consumer’s bank updates the
consumer with the withdrawal information.
 Electronic Payment System
1. Electronic Cash
1. Aka E-Cash, Electronic Cash, Digital Money or digital Cash.
2. It provides the means to transfer money between parties
over a network such as internet.
3. In E-Cash transactions take place in three distinct &
independent phases:-
1. Obtaining Electronic cash.
2. Purchasing with Electronic Cash
3. Redeeming cash by the merchant.
 Electronic Payment System(Cont.)
Phase 1: Obtaining Electronic Cash:-
Step 1:- The Consumer requests his or her bank to transfer money to the e-mint
(Smart card chip which may be integrated with a SD card. It contains the
balance for a customer)

Step 2:- The customer bank transfers money from the customers account to the e-
mint.

Step 3:- The e-mint sends E-Cash to the consumer. The consumer saves the E-Cash
on a hard drive or a smart card.
 Electronic Payment System(Cont.)
Phase 2: Purchasing with electronic cash:-

Step 1:- The consumer selects the goods and transfers the
electronic cash to the merchant.

Step 2:- The merchant provides the goods to the consumer.

 Electronic Payment System(Cont.)
Phase 3: Redeeming cash by the Merchant:-
Step 1:- The merchant transfer the electronic cash into E-mint.

Step 2:- The e-mint transfers E-Cash to the merchant’s bank for crediting the
merchant’s account
 Electronic Payment System(Cont.)
2. Electronic Wallet:-
- Smart card embedded chip.

- It provides multiple payment options such as debit or credit

card payment type for various currencies.

- Mostly used by commercial & technological organizations

- It reduces physical cash & cheques handling of banks.

- It protects the relationship of bank and card holder.

 DIGITAL TOKEN-BASED E-PAYMENT
• A token based payment system is one in which tokens are
purchased from authorized vendors may be used as credit in the
purchase of goods and services. E-token is equivalent to cash
that is backed by a bank.
• Digital token payment is of 3 types:
1. Cash or real time: Transactions are settled with the
exchange of electronic currency. Example- E-cash.
2. Debit or prepaid: Users pay in advance. Example-Smart
Cards.
3. Credit or postpaid: The server authenticates the
customers and verifies with the bank that funds are
adequate before purchase.
 Electronic Payment System
Using Payment Card Online:
- Payment cards are electronic cards that contain information that
can be used for payment purposes.
- It can have 3 forms-
a. Credit Cards- A credit card provides the holder with credit to make purchases up to a
limit fixed by the card issuer. Card holder are charged high interest i.e, the annual
percentage rate on their unpaid balance. For ex credit cards with Visa, MasterCard, etc
types of payment option.
b. Smart Cards- A smart card is a plastic card with a small, built in microcomputer chip and
integrated circuit that can store and process a lot of data. Smart cards serve as credit or
ATM cards, fuel cards, mobile phone SIMs, authorization cards for pay television,
household utility pre-payment cards, etc.
c. Debit Card- The money for purchased item comes directly out of the holder’s checking
account. The actual transfer of funds from the holder’s account to the merchant’s takes
place within 1 to 2 days. For ex- MasterCard, Visa, etc.
 Processing Credit Card Online
It involves two major phases-
1. Authorization- It determines whether a buyer’s card is active and whether
the customer has sufficient funds.
2. Settlement- It includes the transfer of money from the buyer’s to the
merchant’s account.
There are 3 basic configurations:-
a. Own the payment software- A merchant can purchase a payment processing
module and integrate it with its other EC software
b. Use a Point-of-sale(POS) system operated by an acquirer. Merchant can
redirect card holders to a POS run by the acquirer.
c. Use a POS operated by a payment service provider. Merchant can redirect
customer to servers operated by third party known as payment service
providers(PSP’s)
 Key Participants in Card Processing
1. Acquiring Bank- Offers Internet Merchant Account.
2. Credit Card Association- Financial Institutions providing credit &
debit card services to bank e.g., Visa & Master Card.
3. Customer- Individual possessing the payment card.
4. Issuing Bank- Financial Institute that provides the payment card to
customer.
5. Merchant- Company that sells products or services
6. Payment Processing Service- Connectivity service between
merchants, customers and financial institutes. e.g., Paypal
7. Processor- Data center that processes credit card transactions and
settle funds to merchants.
Card Processing Process
 Emerging financial Instruments
Smartphone wallet
• Smartphone wallet: It is perfect for individuals seeking bank-like
services, even without a traditional bank account.
• Individuals can store their payment information, make purchases,
transfer funds, and perform various financial transactions with just
a few taps on their screens.
• Digital payment solutions are accessible through smartphones and
other mobile devices, transforming the traditional banking
landscape by offering convenience, accessibility, and security to
more competition and changing client expectations.
• Some key impacts of mobile wallets:
– Increases Convenience and Accessibility
– Reduced Transaction Costs
– Enhanced Security
 Social / Mobile Peer to Peer Payment systems

• Peer-to-peer payments, or P2P payments, let you

send money directly to another person. P2P payment
systems — also known as money transfer apps, like
Paytm, Phonepe, Vodaphone Mpesa, Airtel, etc.
• With P2P payments, users can quickly send funds
while keeping their bank account details private.
• All that’s required to send a payment is the
recipient’s email address or phone number;
• you can use one of those pieces of information to
add someone as a contact within the app.
 Payment Gateway
• Payment gateways are interfaces used to collect consumer
payment information.
• In physical stores, payment gateways consist of the point-of-sale
(POS) terminals used to accept credit card information by card or
by smartphone.
• In online stores, payment gateways are the “checkout” portals
used to enter credit card information or credentials for services.
• Payment gateways are distinct from payment processors, which
use customer information to collect payments on behalf of the
merchant.
• There are also payment gateways to facilitate payment in
cryptocurrencies like Bitcoin
 Electronic Payment System
Electronic Bill Presentment & Payment(EBPP)
• Aka E-billing
• Taking the bill information and hosting it on a
presentment web server.
• A customer can access the bill with a browser,
review it and pay it electronically.
• After payment is received, it must be posted
against the biller’s account receivable system.
 Types of E-Billing
1. Online Banking- The customer signs up for a banks online bill-
pay service and makes his or her payments from a single web-
site.

2. Biller’s Direct- The customer makes payments at each biller’s

website either with a credit card or customer account.

3. Bill Consolidator- The customer enrolls to receive & pay bills for
multiple billers. The customer’s enrollment information is
forwarded to every biller that the customer wishes to activate.
 E-Commerce Security
- Preventing and responding to cyber attacks & intrusion
- The major security issues are:-
- Authentication: Verification through credentials like password,
smartcard, signature, etc.

- Authorization: Access control information associated with resources

being accessed.

- Auditing: Collecting information about accessing particular resources,

using particular privileges or performing other security actions.
 E-Commerce Security
- Confidentiality(Privacy): Private or sensitive information should not be
disclosed to unauthorized individuals, entities or computer software.

- Integrity: Ability to protect data form being altered or destroyed in an un

authorized or accidental manner.

- Availability: An online site is available if a person or program can access

gain to the pages, data or services provided by the site when they are
needed.

- Non-repudiation: The ability to limit parties from refuting that a legitimate

transaction took place. One of the keys to non-repudiation is a signature.