CH-5

ELECTRONIC PAYMENT SYSTEMS

Meaning:

It is an online financial transaction between buyers and seller. It refers to paperless

monetary transactions. The success of e-commerce depends upon effective
electronic payment systems.

Electronic payment system can be classified into

 Prepaid payment system : The user pays in advance for purchase of goods and
services .
 Post paid payment system : The user purchase goods and consume it before
paying.

 E-Payment Process

An electronic payment process typically involves the following steps:

1. Electronic payments involve a buyer and a seller. A buyer (payer or customer) is

who makes a payment. A seller (payee or merchant) receives a payment.
2. E-payment process involves financial institution (or bank) that interact with both
buyer and seller.
3. Buyers provide payment information (like bank a/c num or credit card num ) from
where payment should be withdraw, and sellers give information about where
payments should be deposited.
4. The buyer checks out the payment information (like credit card or debit card num )
into a form.
5. The buyer checks out the products from sellers website and goes to the payment
section.
6. The payment information moves to the online transaction server where the
payment is authorized , depending on whether the card num is valid and the
customer has sufficient amount to cover the purchase.
7. The buyer is then inf that the transaction has been prosessed.

 Phases in E- payment

1. Registration: This phase involves the registration of the buyer and seller with their
corresponding banks respectively.
2. Invoicing : This phase involves the payment by invoice. The buyer obtains an
invoice for payment from the seller.
3. Payment selection and processing : This phase involves the selection of payment
type (card based , E- cash , E- cheque, etc..)
4. Payment Authorization and confirmation : This phase involves the payment
authorization and payment confirmations to the seller and buyer respectively.

Basic Requirement of Successful E- payment System;

1. Security: Secure e-payment is crucial to e-commerce. The various security

issues that may arise from the choice of standards, technologies, protocols and
platforms associated with EPSs.

2. Reliability: Since most of the commerce is now conducted over the internet, so
the payment infrastructure should be shielded from systematic or single point of
failure.

3. Scalability: Since the commercial user of the internet grows, so the requirement
of payment servers also grows.

4. Anonymity: Anonymity is no one knowing who you are, but seeing what you
do. The option of anonymous, untraceable payments must remain.
 5. Acceptability: E-payment system should be available and accessible to wide
range of users. A user of one server must be able to transact business with users of
other servers.

6. Customer base: The acceptability of a payment mechanism is affected by the

size of the customer base, ie. the number of users able to make payments using the
mechanism.

7. Flexibility: E-payment system should be flexible enough to accept alternate

forms of payment instead of restricting the user to only single form of currency.

8. Convertibility: Since the various mode of e-payment are emerging, it is

important for payment infrastructure to convert the fund represented by one
mechanism into another mechanism

9. Efficiency: Efficiency refers to the costs per transaction involved in digital

payment and it should be small enough that it is insignificant even for transaction
amount on the order of pennies.

10. Ease of integration: Applications must be modified to use the payment

infrastructure in order to make a payment service available to users.

 NEED OF ELECTRONIC PAYMENT SYSTEM

1.Increased Speed and Convenience: E-payment offers convenience in

transaction as compared to traditional payment methods such as cash or cheque.

2.Increased Sales: With widespread of Internet banking and online shopping, the
cash payment has significantly decreased .
 3.Time saving : E-payment facilitates major savings in time and effort. With e
payment, the amount of time required on bill management or payment has been
significantly reduced.

4.Reduced Costs: It reduces cost for both businesses and individuals. For
business, it saves operational and processing costs mainly due to reduction in
technological costs.

5.Variety of payment options: Electronic payment systems allow merchants,

governments, and financial institutions to offer a wide range of payment options to
their customers.

6.Highly Effective Security: E-payments are secure mode of payment. The

payment providers offer safety and security tools in order to make the transaction
as reliable as possible

7.Improved Customer Support: EP'S shorten the order processing and delivery
time. which results in improved customer support and higher efficiency in both
business to business (B2B) and business to consumer (B2C) models

8. User-friendly: E-payment system is user-friendly at all and it does not require

any specialized knowledge of encryption or data transfer protocol.

9. Record Keeping and Analytics: E-payments generate digital records

automatically. facilitating easy tracking and management of transaction histories.

 METHODS OF E-PAYMENT SYSTEMS

 Credit Cards

Credit card is a small plastic card having a magnetic strip issued by a bank or a non
banking financial company (NBFC) which allows holder to purchase goods or
services on credit .
 Credit Card Payment Process
 The card holder-customer who own the card and make credit card purchases
 The merchant-seller of product who can accept credit card payments.
 The card issuer bank card holder's bank
 The acquirer bank-the merchant's bank
 The card brand-intermediary between issue and acquirer bank to authorize credit
card transaction, for example, visa or Mastercard

Below is the step by step process in credit card transaction

1. The customer chooses products to purchase on the merchant's ecommerce site.

2. Merchant calculates the amount of purchase and asks buyer for payment.

3. The customer presents the credit card information to the merchant's ecommerc
site

4. Merchant sends request to acquiring bank for authorization.

5. The acquiring bank sends a message via card Brand Company to the issuer bank
asking for authorization.

6. If the card holder has enough credit in their account to cover the purchase, the
issuer bank authorizes the transaction and sends the message to card brand
company.

7. Card Brand Company pays the transaction by credit. Merchant keeps the sales
slip.

8. Merchant submits the sales slip to acquirer banks and gets the service charges
paid to him/her.

9. Acquirer bank requests the card brand company to clear the credit amount and
gets the payment.
 10. Now the card brand company ask to clear the amount from the issuer bank and
the amount gets transferred to the card brand company.

 Debit Cards

A debit card (or bank card) is a plastic electronic card issued by a bank which
allows bank clients access to their account to withdraw cash or pay for goods and
services.

The other benefits of using debit cards are as follows:

 Debit card is very easy to carry and handle.

 You can access your account any time, anywhere without depending on the
personnel of the bank.
 No intermediaries so the operation is fast which saves precious time.
 It provides safety and comfort in finance-related activities.
 Less complicated, as consumers are required only to enter PIN.
 Banks can issue debit card to any individual without assessing their credit
worthiness.
 You do not need to carry huge amount of cash. Hence, it minimizes risk of loss due
to theft, damage, etc.
 You can also use debit card as an ATM card to meet your cash-related needs
anytime and anywhere.
 If your card is stolen, your money is still safe since the thief would need your PIN
number to access card.

 Electronic Cash (Digital Cash)

Electronic cash (e-cash) is a form of an electronic payment system of which certain

amount of money is stored on a client device (PC or mobile device) and made
accessible internet transaction.
 E-cash concept:

The user first must have an e-cash software program and an e-cash bank account
from which e-cash can be withdrawn or deposited.

1. Consumer buys e-cash from bank

2. Bank sends e-cash bits to consumer (after charging that amount plus fee)

3. Consumer sends e-cash to merchant

4. Merchant checks with bank that e-cash is valid (check for forgery or fraud)

5. Bank verifies that e-cash is valid

6. Parties complete transaction: e.g., merchant present e-cash to issuing back for
deposit once goods or services are delivered.

Purchasing and using of E-Cash

1. The consumer opens an account with e-cash currency servers (bank or a private
vendor such as PayPal)
2. Then consumer requests a transfer of funds from website of currency server into
the e-cash system.

3. The currency server then generates and validates e-cash coins (after charging
that amount plus fee) which the consumer is able to use on the internet.

4. The consumer sends e-cash to any merchant who will accept this form of
payment using the software provided by the e-cash service provider.

5. The consumer encrypts the message and endorses the coins using the merchant's
public key.

6. The merchant is then able to turn e-cash into real funds by presenting the e-cash
to the currency server with a request for an equivalent amount of real funds to be
credited to the merchant's bank account
 E-Cash Benefits

 Electronic cash transactions are more efficient and less costly than other methods.
 The distance that an electronic transaction must travel does not affect cost. The
fixed cost of hardware to handle electronic cash is nearly zero.
 Electronic cash does not require that one party have any special authorization.
 The electronic cash must be protected from both theft and alteration
 More efficient, eventually meaning lower prices
 Anybody can use it, unlike credit cards, and does not require special authorization.

 Smart Cards

A Smart Card is similar to credit and debit card in appearance but it has a small
built-in microprocessor chip and memory which is used for identification or
financial transactions.

Advantages of Smart Cards :

 It is generally safe and secure.

 It provides safety and comfort in finance-related activities.
 It is convenient to carry and easy to use.
 It performs payment of bills and other bank transactions easily and speedily.
 It is tamper resistant.
 Apart from storing information, it is capable of processing.
 It can communicate with computing devices through a smart card reader.

 E-Cheque (Digital Cheque)

 E-Cheque (Digital Cheque) is also a form of payment made via the internet. It is an
electronic version or representation of a paper cheque and designed to perform the
same function as a traditional paper cheque.

 Working of E-Cheque System

The e-Cheque system consists of two main components, the e-cheque client and
the e cheque server. The client component is used by e-cheque clients
(payer/payee) to perform different operations

The process of payment via e-cheque looks like this:

1. The payee receives the e-Cheque over email or web, verifies the payer's digital
signature, writes out a deposit and digitally signs it.

2. The payee presents a cheque to a payment system or a bank he work with for
paying bank).

3. The payee's bank verifies the payer's and payee's digital signatures, and then
forwards the cheque for clearing and settlement.

4. The payer's bank verifies the payer's digital signature and debits the payer's
account.

5.The paying bank charges e cheque processing fees from payer's account

Features of E-cheque

1. It has more security features than a paper cheque.

2. It is easy to set up.
3. It is less expensive than credit cards.
4. It saves time.
5. It has legal binding promise to pay.
6. It is governed by the same laws that apply to paper cheques
7. It includes very less human intervention
8. It better protect your business and customers
9. It helps banks to do paperless and efficient transactions

 ELECTRONIC FUND TRANSFER

Electronic Funds. Transfer (EFT) is a system of transferring money from one bank
account directly to another without any paper money changing hands

Types of Electronic Fund Transfers

 Direct Deposits: Employers use EFT to deposit employees salaries directly into
ther bank accounts, eliminating the need for paper cheques
 Direct Payments: Consumers authorize companies or organizations to withdraw
fonds directly from their bank accounts to pay bills or make recurring payments,
such as utility bills, loan payments, or subscriptions.
 Wire Transfers: These involve transferring funds between different financial
institutions or banks domestically or internationally
 ATM Transactions: When you withdraw or deposit money at an ATM, it
involves an electronic transfer between your bank account and the ATM machine.
 Online and Mobile Banking Transfers: Customers can transfer funds between
their own accounts or to other accounts using online banking portals or mobile
apps provided by their banks.

Process of Electronic Fund Transfer

 Initiations: The EFT process begins with the initiation of the transaction. This can
be done by individuals, businesses, or financial institutions using various channels
such as online banking, mobile apps, Automated Clearing House (ACH) systems,
person at a bank branch

 Authorization: The initiator authorizes the transfer, by providing песеssary

information such as the recipient's account number, amount to be transferred, and
any other required details

 Transmission: The authorization details are transmitted through secure networks

and channels, such as ACH networks, card networks teg. Visa, Mastercard),
SWIFT (for international transfers), or proprietary banking systems

 Processing ; Financial institutions process the transaction based on the information

received, verifying the availability of funds and initiating the transfer to the
recipient's account

 Confirmation: Once the transfer is completed, both the sender and receiver
receive confirmation of the transaction, usually in the form of transaction receipts,
online notifications, or bank statements.

Benefits of EFT

 Efficiency: Instantaneous transfer of funds reduces processing time, allowing

quick payments and transactions

 Cost-Effective: Eliminates costs associated with paper cheques, postage, and

manual percessing
 Convenience: Provides 24/7 access for transactions, reducing the need for physical
bank visits

 Accuracy: Minimizes human error associated with manual handling of paper-

based Transactions

 Security: Utilizes encryption and authentication measures to safeguard sensitive

financial data

 Environmentally Friendly: Reduces paper usage, contributing to environmental

sustainability

 SECURE ELECTRONIC TRANSACTION PROTOCOL FOR CREDIT

CARD PAYMENT

Secure Electronic Transaction or SET is a system that ensures the security and
integrity of electronic transactions done using credit cards in a scenario. SET is
basically a security protocol applied to those payments.

 Working of Secure Electronic Transaction (SET) Protocol

Step 1: Customer Open an Account

Step 2: Customer Receive a Certificate
Step 3: Merchant Receives a Certificate
Step 4: Customer Place an Order
Step 5: Merchant is verified
Step 6 : The Order and Payment Details Are Sent
Step 7: Merchant Requests Payment Authorization
 Step 8: Payment Gateway Authorizes the Payment

Step 9: Merchant Confirm the Order

Step 10: Merchant Provides a Goods and Services

 DIGITAL ECONOMY

CA A digital economy is a form of economy in which the economic activities are

performed by using various digital computing technologies of hardware and
software.

Concepts of Digital Economy

 E-Business Infrastructure:
 E-Business

Importance of Digital Economy

 More Information
 Proximity
 Global presence
 Security
 Helps reach more customers
 Reduces costs
 Improves efficiency
 Generates new jobs
 Leads to innovation
 Rise in E-commerce
 Transparency
 Advantages of Digital Economy:

 Increased productivity: The digital economy has increased the productivity of

businesses as they can now use technology to automate their operations and
processes.
 Increased competitiveness : Businesses today are able to use the internet to reach
new markets and customers
 Increased employment opportunities: The digital economy has generated new
job opportunities as new businesses are springing up.
 Better quality of life: The digital economy has made it possible for people to
work from anywhere in the world. This has improved the quality of life of people
as they can now balance their work and personal life.
 Reduced costs: Digitization has helped businesses replace manual tasks with
automated processes
 Faster transactions: The digital economy has made it possible for businesses to
conduct transactions faster as they can now use online payment methods.
 Improved efficiency: Digitisation of processes has helped businesses become
more efficient by removing error prone manual tasks.
 Innovation: The digitization of businesses and business processes leads to
innovation with respect to not just offerings but also the way businesses operate
 More personalization: As more data is collected about customers, businesses ate
now able to offer them more personalized products and services.

Drawbacks of the Digital Economy

 Cybercrime: The increased use of technology has also led to an increase in

cybercrime. This is because criminals can now use technology to commit crimes
like identity theft, fraud, and money laundering.
 Data security: With businesses collecting more and more data about their
customer, there is a risk of this data being leaked or stolen. This can lead to a loss
of that between businesses and their customers.
 Unemployment: The digitization of the economy has led to job losses in some
sectors as businesses have replaced human workers with technology. This has
increased unemployment in these sectors.
 Privacy concerns: As businesses collect more data about their customers, there are
concerns about the misuse of this data.
 Heavy investments: The digitization of businesses requires heavy investments in
technology. This is a challenge for small businesses which might not have the
resources to invest in technology.
 Monopoly: The digitization of the economy has led to the rise of a few big
companies which have become very powerful. This has created a monopoly in
some sectors.
 Addictive nature: The digital economy is very addictive in nature. This is because
it is designed to keep people hooked on their devices.
 Potential environmental impact: The increased use of technology in the digital
economy has led to an increase in the number of e-waste and heavy carbon
footprint