PAYMENT MECHANISM FOR E-COMMERCE

INTRODUCTION

Ecommerce, or electronic commerce, refers to the buying and selling of goods and
services over the internet. It involves a range of online transactions, including online
shopping; electronic payments; B2B sales etc. Ecommerce has transformed the way
businesses operate, providing a platform for companies of all sizes to reach a wider
audience and operate on a global scale. It also offers several advantages over traditional
brick-and-mortar stores, such as 24/7 availability, global reach, and lower operating costs.

Digital disruption is redefining industries and changing the manner businesses functions and
bringing paradigm shift in e-business too. Every industry is assessing options and adopting
ways to generate value in the technology-driven world. Thus, online payment is a
fundamental feature that e-commerce platforms have started to offer. E-commerce sites use
electronic payment for paperless monetary transactions. This is done through cash-substitutes
such as debit and credit cards, internet banking, e-wallets etc. Electronic payment techniques
are used by e-commerce enterprises to collect payment for their products and services.

ELECTRONIC PAYMENT

An online payment system works by connecting a digital storefront to the payment

processing network of your choice using a payment gateway. This processing network further
works with the bank to clear funds.

Payment gateways are the “middle man,” handling business between merchants and
customers serving in a position that steadily withdraws the funds for a transaction from
customers and deposits them into merchant's bank account. It is a tunnel that connects the
recipient’s bank account with a sender’s bank account in the platform where money need to
transfer. PG is an application software that authorizes to accomplish an online transaction
through different payment modes like net banking, credit card, debit card, UPI or the many
online wallets that are available these days

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.
 As ecommerce has expanded at a rapid rate, the methods by which people pay for goods
and services online have diversified. Customer preferences around ecommerce payment
methods vary considerably in different parts of the world, and the field is constantly
evolving. Globally, credit and debit cards and digital wallets are the most popular
ecommerce payment methods, but other payment methods, like bank transfers and cash on
delivery (COD), remain popular in certain regions. The use of mobile payments is also
growing, particularly in markets with high smartphone penetration.

Thus, it is increasingly important for businesses to offer a range of payment options to

accommodate customers’ preferences and needs, as businesses benefit from accepting
multiple payment methods. One study shows that small businesses that offer a variety of
payment options increased their revenue by nearly 30%.

TYPES OF PAYMENT METHODS

 Credit/debit cards
Credit and debit cards are the most common payment methods for ecommerce
transactions. They allow customers to make payments quickly and conveniently.
 Digital wallets
Digital wallets, such as PayPal, Apple Pay, and Google Pay, have become increasingly
popular. They allow customers to store payment information securely and make payments
with just a few clicks.
 Bank transfers
Bank transfers, also known as electronic funds transfers (EFTs) , allow customers to
transfer money from their bank account to the business’s bank account.

Prepaid cards
Prepaid cards are a type of debit card that is loaded with a specific amount of money,
which a customer can use to pay for online purchases, just as they would with a regular
debit card. Pre-paid instruments can be of 3 types (as classified by the RBI guidelines)

1. Closed system payment instruments: ex gift voucher

2. Semi-closed system payment instruments: ex Sodexo
3. Open system payment instruments: ex debit card

KEY PLAYERS
Payee/ Merchant: An online business operating in any vertical (travel, retail, ecommerce,
gaming, Forex, buying, shopping, etc.), offering a product or service to customers.

Customer: Customer also called a cardholder, who wants to access the products or services
that the merchant is selling, and initiates the transaction.

Issuing bank: The issuing bank is the customer’s bank that issues the card holder’s credit or
debit card on behalf of the card schemes (Visa, MasterCard).

Acquirer: This also acknowledged as the acquiring bank, the acquirer is the financial
institution that maintains the merchant’s bank account (known as the merchant's account).
The acquiring bank passes the merchant's transactions to the issuing bank to obtain payment.

Payment systems, both traditional and electronic in India are regulated by the Payment and
Settlement Systems Act, 2007 (“PSS Act”).

Note: if question about players comes then include regulations also

A. UNDERPINNING LAWS OF PAYMENT SYSTEM\

Decoding PSS Act, 2007: PSS Act which stands for Payment and Settlement System Act,
2007 regulates the payment system in India both traditional and electronic. The “payment
system” is defined within the ambit of Section 2(i) of PSS Act. Upon delving into the bare
provision of the said section, it can be laid down that it means any system that validate the
payment between the payer and beneficiary is known as payment system. However, stock
exchange is not covered within the meaning of payment system. It only involves clearing or
settlement of the payment.

Decoding the explaining of Section 2(i) of PSS Act is of prime importance. It says that the
“payment system” includes the following:

 Credit Card Operation

 Debit Card Operation
 Smart Card Operations
 Money Transfer Operations
 Any other similar operations.
PSS Act, 2007 also empowers the Reserve Bank of India (hereinafter referred as RBI) to
govern the payment system operations in the country. The legal backing of the same is given
under Section 3 of the Act. RBI is the designated authority to govern the payment system
under this Act.

Depending on the nature of the service or project involved, there may be various different
rules and regulations, including those created by the RBI, that regulate a system that involves
the 'clearing, payment, or settlement' of a payment.

A. INVOLVED PARTIES IN E-PAYMENT SYSTEM

The following are the essential service providers in the arena of electronic payment system:

a. PAYMENT PROCESSORS:
In accordance with the PSS Act, the processing of the payment is one of the core functions.
The Payment Processor is a functioning that basically involves clearing, paying and
settlement of payment system. These functions are regulated by RBI as well as various other
statutes.

b. INTERMEDIARIES:

Reserve Bank of India has defined Intermediary through notification in 2009 as “businesses
that collect funds from clients for payment to merchants via any electronic/online payment
option for products and services acquired, and then facilitate the transfer of these funds to
merchants in final settlement of the paying customers' obligations.”

Moreover, through the same notification the RBI has also issued certain specific directions
with regards to opening and operation of Accounts and settlements of Payments involving
intermediaries.

As per e-commerce laws, the RBI direction on intermediaries regulates the nature of account
that intermediaries can operate like the permitted credit or debits. It provides the specific time
limit within which the payment shall be transferred to the account of merchant.

Examples of intermediaries are Internet Service Provider, E-bay etc.

c. TECHNOLOGY PROVIDERS:
Technology Providers provide technologies or solutions to facilitate these transactions
between customer and merchants. Such technologies could either be of software or hardware.
Most of the time, payment gateways and intermediaries themselves double up and play the
role of technology providers.

A. DECODING PAYMENT INSTRUMENT

These instruments deals with the monetary value of the transaction and allows payment. The
traditional payment instruments were cheque, drafts and money order. With the advancement
of technology, the number of payment instruments accessible for usage has increased
dramatically, and in today's technology-driven world, it is critical that such payment
instruments allow for quick access to e-commerce transactions. The following are some of
the most prevalent e-commerce payment methods:

a. Credit/Debit Cards:
Decoding Credit Cards: In last two decades, Indians are using Credit Card in a fashionable
manner. The reason behind it is the increase of disposable income and ease of simply
carrying the card around. Only Banking and Non-Banking financial institutes are permitted to
issue such cards subjected to the guidelines of the Reserve Bank of India. For instance,
Pantaloons cannot issue a Credit Card for a customer because it is neither a Banking nor a
Non-Banking financial institutes.

By far the most prevalent method of internet payment is credit cards. Security issues limited
their acceptance as first, but they gained customer trust after security protections were added
to each transaction. One of the most important elements contributing to credit cards'
widespread adoption around the world is its applicability. However, it is not deemed
practicable for little payments or small firms due to the high fees involved.

Decoding Debit Cards: Debit cards are becoming more and more popular with each passing
day, and they are now the most widely used cashless payment option on the planet. Unlike
credit cards, debit card payments are made directly from the consumer's own bank account,
not through an intermediary account. As a result, users' debit accounts lack additional
protection, causing them to be concerned when dealing with payment disputes. When making
debit payments, however, only the account number is necessary; no card number or physical
card is required. Despite having a large user base in various countries, debit cards are not
generally used on merchant websites due to their inability to satisfy international customers.
 b. Pre-Paid Instruments:
Payment instrument that facilitates the purchase of goods and services including the fund
transfers, financial service and remittances, against the value stored within or on the
instrument. Magnetic stripe cards, smart cards, internet accounts, mobile accounts, online
wallets, paper vouchers, and any other instrument used to access a prepaid amount are all
acceptable.

The RBI supervises the issue of pre-paid instruments, including the types of businesses that
can issue them, capital requirements, anti-money laundering protections, and the purposes for
which they can be issued.

In accordance with the RBI Guidelines, Pre-paid instruments can be classified into the
following three types:

i. Closed system payment instruments: It are issued by a person to facilitate the purchase
of specific and limited products / services from the issuing person exclusively, and do
not allow for cash withdrawal or redemption. For Example: gift voucher
ii. Semi-closed system payment instruments: This can only be used to buy products and
services from a select group of clearly designated merchant locations/ businesses with
whom the issuer has a special contract. Such systems also do not allow cash
withdrawals or redemptions. For Example: sodexo, gift cards issued by ICICI Banks
iii. Open system payment instruments: It can be used to buy goods and services, including
financial services such as money transfers, as well as to withdraw cash. For Example:
debit card or credit card.

Thus, the first two system doesn’t allow to withdraw cash but the third system allows the
customers to withdraw cash.

A. CNP (CARD NOT PRESENT TRANSACTION):

When neither the cardholder nor the credit card is physically present at the time of the
transaction, it is known as a card-not-present (CNP) transaction. It's most typical for orders
that are placed over the phone, faxed, emailed, or mailed. Due to the rapid growth of E-
Commerce in India, an increasing number of businesses, whether service or product-based,
are requiring payment online or over the phone, resulting in 'Card Not Present' ("CNP")
transactions. In such scenario, it becomes difficult for the merchants to establish the identity
of the customers which could lead to situations in which payment and transaction are
completed without the knowledge or authorization of actual credit card holder. That’s why
we have second level authentication.

RBI issued a notification in February 2009 which mandated the use of additional
authentication system known as second level authentication for online transactions. Along
with OTP, we get IVR (Interactive Voice Response) to conform the transaction. Another
additional authentication is the use of the information which are not visible on the credit card
itself. There is a requirement of second level authentication is applicable to any transaction
whether the card is issued in India or there is no outflow of foreign exchange contemplated. It
involves a lot of difficulty for the merchants as well. Second level authentication prevents
merchant from the mechanism of repeat payment, for instance, in case of subscriptions. In
comparison to a simple click-through transaction, obtaining a second level authentication
takes more time and effort from a customer. An increase in transaction failures due to the fact
that the customer's bank may not always be able to process the authentication.

The following are examples of card-not-present transaction methods:

 Shopping carts on the internet

 Websites with "Buy" buttons
 Billing on a recurring or subscription basis
 Invoicing via electronic means
 Payment apps on smartphones or tablets that don't employ a card reader Orders taken
over the phone and manually typed
Even if the customer has a card, the electronic data (data on the magnetic strip or chip) was
not delivered with the transaction in each of the card-not-present scenarios listed above,
making the transaction "card-not-present."

Understanding CNP Fraud: Card-not-present fraud is a sort of credit card scam in which a
defrauder makes a remote purchase using someone else's compromised card information. It
can be difficult for businesses to verify the purchaser's identification because both the card
and the cardholder aren't physically present (and fraudsters frequently take additional
information like the CVV and billing address).
According to the Lexus Nexus True Cost of Fraud Study from 2020, every $1 of fraud costs
retailers and e-commerce merchants in the United States $3.36 every transaction. It's critical
to take preventative measures to prevent credit card theft, particularly with CNP transactions.

Card verification numbers (CVN), the three or four digits on the back of the card and
negative lists, often known as blacklists, are the two best and most commonly utilised ways
for verifying online transactions, according to a 2015 Merchant Risk Council (MRC) Global
Fraud Survey.

B. CONCLUSION: THE WAY FORWARD

From the articulations made above, it can be undeniably concluded that with the introduction
of e-commerce and the rise of the Internet, the payment process became more digitized, with
the availability of numerous online payment methods such as electronic cash, debit cards,
credit cards, contactless payment, mobile wallets, and so on. Furthermore, mobile payment
services are growing in popularity day by day and are demonstrating a change by moving
toward a promising future of speculative opportunities in tandem with technology
advancements. However, the adoption and deployment of various emerging technologies in
the present and near future bring new opportunities and problems for the implementation and
design of secure online payment systems.
Steps showing e-payment system^
ADVANTAGES

 Reaching more clients from all over the world, this result in more sales.
 More effective and efficient transactions — It’s because transactions are made in seconds
(with one-click), without wasting customer’s time. It comes with speed and simplicity.
 Convenience. Customers can pay for items on an e-commerce website at anytime and
anywhere. They just need an internet connected device.
 Lower transaction cost and decreased technology costs.
 Expenses control for customers, as they can always check their virtual account where they
can find the transaction history.
 Payment gateways and payment providers offer highly effective security and anti-fraud
tools to make transactions reliable.

REGULATIONS

Over the last few years, India has witnessed huge disruptions in the fintech landscape. One
key trend that has consistently powered this is the emergence of non-bank intermediaries that
offer online payment solutions for digital transactions in the e-commerce space. To safeguard
customers’ interests and ensure intermediaries facilitate the collection of customer payments
and remit those, without undue delay, to the merchants, Reserve Bank of India introduced the
regulatory framework for payment intermediaries in 2009. This included in itself,
Intermediary Directions of 2009 (Directions for opening and operation of Accounts and
settlement of payments for electronic payment transactions involving intermediaries) as
well.

The Intermediary Directions were issued under the Payment and Settlement Systems Act,
2007. which regulates payment systems in India. Under the Payment Systems Act, an entity
that wishes to operate a payment system is required to obtain prior authorisation from the
RBI.

RBI, under the “Vision Statement on Payment and Settlement Systems in India: 2019-
2021”, expressed its intention to revamp the existing regulations for intermediaries and
introduce comprehensive guidelines to regulate various facets of payment related activities
carried out by payment gateway service providers and payment aggregators. Towards this
objective, the RBI released a discussion paper on the “Guidelines for Payment Gateways
and Payment Aggregators” in September 2019, seeking public comments on the same.

Based on the feedback received, RBI issued the “Guidelines on Regulation of Payment
Aggregators and Payment Gateways” in March 2020. Under the Guidelines, the RBI
categorises intermediaries into payment aggregators and payment gateways.

The aggregators are intermediaries that help merchants make available payment methods (for
electronic payments) to customers; collect payments from customers, pool funds received etc.
On the other hand, gateways are intermediaries that provide technology infrastructure to route
and facilitate the processing of online payments. Under the new guidelines, any non-bank
entity that wishes to operate as an aggregator will be required to obtain RBI authorisation to
operate a payment system under the Payment Systems Act. However, entities that propose to
function as gateways do not require any RBI authorisation. The Guidelines also govern the
operations of existing intermediaries (to the extent that their activities constitute those of an
aggregator), as well as e-commerce marketplace entities that perform aggregator functions.