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    Electronic Payment Systems

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    Arvind Shukla
    Electronic payment systems are evolving rapidly, especially with the rise of e-commerce and internet banking. Developed countries primarily use credit cards, ACH transfers, and wire transfers for retail and business payments. Developing nations have an opportunity to leapfrog older payment methods by building internet banking infrastructure and adopting open payment standards. New technologies like electronic checks, online payment systems, and digital signatures are changing payment processes globally.

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    Electronic Payment Systems

    Uploaded by

    Arvind Shukla
    80 views27 pages
    Electronic payment systems are evolving rapidly, especially with the rise of e-commerce and internet banking. Developed countries primarily use credit cards, ACH transfers, and wire transfers for retail and business payments. Developing nations have an opportunity to leapfrog older payment methods by building internet banking infrastructure and adopting open payment standards. New technologies like electronic checks, online payment systems, and digital signatures are changing payment processes globally.

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    Electronic payment systems are evolving rapidly, especially with the rise of e-commerce and internet banking. Developed countries primarily use credit cards, ACH transfers, and wire transfers for retail and business payments. Developing nations have an opportunity to leapfrog older payment methods by building internet banking infrastructure and adopting open payment standards. New technologies like electronic checks, online payment systems, and digital signatures are changing payment processes globally.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    80 views27 pages

    Electronic Payment Systems

    Uploaded by

    Arvind Shukla
    Electronic payment systems are evolving rapidly, especially with the rise of e-commerce and internet banking. Developed countries primarily use credit cards, ACH transfers, and wire transfers for retail and business payments. Developing nations have an opportunity to leapfrog older payment methods by building internet banking infrastructure and adopting open payment standards. New technologies like electronic checks, online payment systems, and digital signatures are changing payment processes globally.

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    of 27

    Electronic Payment Systems

    Outline
    The Net Effect on Payment/E-Payment

    Impact on Developed Countries


    Starting point for Developing Nations

    New Opportunities

    Conventional Payment
    Mechanisms in United States

    Approx 80% of payments in Cash

    Non-Cash
    Payment
    Instrument
    Check

    Trans. Trans.
    Volume Value

    Average
    Value

    71%

    10%

    $1,179

    C/D Card

    25%

    0.1%

    $59

    C/D Transfer
    by ACH
    Wire Transfer

    2.5%

    2%

    $2,000

    0.1%

    86%

    $4.3m

    1999 Source BIS

    International Trade involves Wire Transfers,

    Letters of Credit etc.

    Retail Payments Net Evolution


    Cash evolving (very slowly) to Internet based

    systems such as Paypal


    Credit-Card based systems
    Ideal for Internet already a global payment method
    tradition of card-not-present
    Combined with Secure Socket Layer, it is used for
    almost all retail E-commerce high fraud rate

    Retail Check being eroded by Electronic Bill

    Payment, electronic home banking

    Trade Payments Net Evolution


    Check Payments migrating to Electronic Transfers

    in the U.S. via the Automated Clearing House


    (ACH) networks
    FSTC E-check and BIPS Projects

    ACH Transfers growing in importance


    European Initiatives: STEP1 (<50K)
    Global Initiatives : WATCH, CLS
    Internet access to these is coming
    Total trading Systems
    Bolero, Tradecard

    Other Aspects of Electronic


    Trading
    Electronic Trust building becoming more

    common
    Legislative Changes in E-Commerce in Europe,
    US and Asia enable this
    PKI Infrastructure being (slowly) built
    Verisign
    Identrus
    Wisekey

    In combination with E-paymentswill enable


    complete transactions on-line

    Conventional Payments in
    Developing Countries
    Generally less developed banking industry

    Credit Cards not widely available


    More reliance on paper

    Foreign Exchange transactions more

    problematic
    Being left out of new payment initiatives
    Currently
    1 +
    9

    32

    10

    New Opportunities
    On the Internet

    no-one knows you


    are a dog
    Internet banking
    infrastructure is
    cheap and easy to
    build.. Opportunity to
    leap-frog
    Open standards level
    the paying field
    Must work with new
    standards

    Merchant Cards 101

    Office of the State Controller

    Types of Cards
    Cards

    Smart Cards

    Credit Cards

    Bank Cards

    Settle via Associations

    Debit Cards

    Travel & Entertainment


    (Proprietary Cards)

    Settle directly

    PIN

    Online / Real-time

    EBT Cards

    Signature

    Offline / Batch

    Credit Cards (Pay later)


    Bank Cards e.g., Visa and MasterCard
    T&E Cards (Proprietary Cards) e.g. Discover, Diners Club, AmX

    Debit Cards (Pay now Against checking acct)


    Smart Cards (Prepay) Stored Value Embedded Chip
    EBT Card (Electronic Benefits Transfer) (Gov.-Issued debit card)
    Food Stamps (Funded directly by USDA)
    Cash Benefits (Not utilized in NC)

    Merchant Card Players


    3&6

    Acquiring
    Processor

    Interchange Network
    Visa USA
    9
    MasterCard Intl
    Card Associations

    8
    Card Issuing Bank

    11&12
    10

    4&5

    Merchant
    (Agency)
    Citizen
    (Taxpayer /
    Cardholder)

    13
    States
    Depository
    Bank
    Locals
    Depository
    Banks

    Proprietary Card Cos.


    American Express
    Discover, etc.
    Merchant Card Processor not involved with
    Proprietary Card settlements.
    Only involved with Authorizations

    Authorization and Transmission Day 1

    Funds Settlement Day 2 or later

    Types of Capture
    Card Capture
    Card-Present
    Cards Accepted
    Credit Cards
    Debit with PIN
    Capture Method
    Point of Sale (POS)
    Card is swiped or keyed
    Lower risk
    Lower fees

    Card Not-Present
    Cards Accepted
    Credit Cards
    Debit with Visa / MC Logo *
    Capture Methods
    Mail Or Tel Order (MOTO)
    Internet Order
    Higher risk
    Higher fees
    * PIN-less debit cards without logo may be allowed
    in future for governments - for Card Not-Present.
    . Generally require a signature.

    Credit Card Milestones

    1920 Proprietary charge cards (Oil companies - courtesy cards)


    1950 Travel and Entertainment (T&E) Card Dinners Club Card
    1966 Credit cards with revolving credit BankAmericard being the first
    1980s Debit cards and ATM cards
    1980s NC Wildlife Resources Commission was first State agency to accept credit cards,
    with fees paid from non-State funds
    1990s Universities began accepting cards, with fees paid from institutional trust funds
    (non-State funds)
    1995 OSC revised State Cash Management Plan to authorize credit card acceptance by
    State agencies if approved by OSC.
    1999 SB 222 enacted, giving OSC responsibility for EFT (including cards)
    2000 OSC entered in a Master Services Agreement with STMS
    2000 State Fair tickets could be purchased online using credit cards
    2000 DMV drivers license could be renewed online using credit cards
    2005 OSC initiated expansion of Electronic Commerce Program
    2006 OSC re-selected STMS as vendor through RFP process

    Electronic Funds Transfer 101

    Office of the State Controller

    Two Types of EFT


    EFT is a generic term

    Describing two
    different methods of
    transferring funds
    electronically

    EFT
    Wire Transfer

    ACH

    Both performed through Federal

    Reserve Bank System


    (Except for in-bank or on-us transactions)

    Common mistake to call an ACH payment a wire transfer


    Each are handled by different departments at a bank

    Wire Transfer
    Wire Transfer
    Fed Wire

    Between two banks

    Book Transfer

    Within same bank

    Foreign Wire

    Foreign bank

    Movement of funds is real time effected immediately

    FRB open for fed wires up to 6:00 p.m.


    Book Transfers are memo posted up until midnight
    ZBA (Zero Balance Account) sweeps are book transfers
    Fed Wire Affects banks Reserve Accounts maintained at the FRB
    Sending banks account at the FRB gets debited
    Receiving banks account at the FRB gets credited
    Foreign exchange and Euro dollars through Clearing House for Inter-bank
    Payments System (CHIPS) 54 New York Banks

    Wire Transfer Utilization


    When appropriate to use
    Time sensitive - Funds need to be moved same day initiated
    Large dollar amounts
    Examples
    Debt Service Payments (preserve States credit rating)
    Funding ACH payments (e.g. payroll direct deposit)
    Funding investments (e.g., at custodian bank)
    Adjusting balances (between depository banks)
    Remitting ESC payments (to US Treasury)
    DOR accepts wire transfers from corporate taxpayers on an
    exception basis only

    Initiating Wire Transfers


    Banks provide corporate customers ability to initiate their

    own wires via online banking access


    Templates are used
    Repetitive Transfers Pre-established ABA# and acct.#
    Non-Repetitive - Open wire to anywhere
    State Treasurer initiates all wire transfers for agencies
    Via Wachovia Connection and BOA Direct
    As requested by agencies via Core Banking $ystem
    Results in debit to agencys disbursing / STIF acct.

    Agency Logs in

    Disb. Acct.
    at DST

    Online Wire System

    DSTs Bank

    Payees Bank

    ACH

    ACH Network A batch-process, store and forward for future settlement

    Two types of ACH (Automated Clearing House)


    ACH
    ACH Credits

    Direct Deposits
    Always initiated by sender
    Senders account is debited
    and receivers account is
    credited
    Inbound & Outbound

    ACH Debits

    Electronic Drafts
    Initiated by sender or receiver
    If by sender Sender authorizes a
    third party to initiate transaction
    If by receiver Receiver initiates
    transaction
    Also referred to as Direct Payments

    ACH Utilization
    When appropriate to use
    Large number of payments in a single file (batch)
    At least one day is available between initiation and settlement
    Any size dollar amounts

    Examples
    Outbound Payroll direct deposit (ACH credits)
    Outbound Vendor payments (ACH credits)
    Inbound Taxpayer payments (ACH credits or debits)

    ACH Transactions can have Addendum Records


    Remittance data attached
    Can be interfaced with A/R system
    DOR requires taxpayers to use TXP format

    Governing Org.

    ACH Players
    3

    2
    Originating
    Depository
    Financial
    Institution
    (ODFI)

    Trade Group

    ACH Operator
    (FRB)

    Receiving
    Depository
    Financial
    Institution
    (RDFI)

    1
    Originator
    (Company /
    Employer)

    Receiver
    (Company /
    Employee)
    Authorization / Enrollment

    Primary Differences
    Wire Transfers
    Item Cost - $6.75

    ACH
    Item Cost < 1 penny

    Same day funds

    Next day funds

    Transfer almost

    One day delay in

    instantaneous
    Use for critical
    payment (e.g. debt
    service)

    settlement
    Used for large batch
    files (e.g., payroll)
    Checks
    Cost - $.75

    Electronic Checks
    Loosely used term Refers to two different methods
    Electronic Checks

    Online Paper Check

    ACH Conversions

    Online Paper Check


    Developed by Financial Services Technology Consortium (FSTC) Not-forprofit group of CA banks
    Initiated using a PIN and digital signature
    Receiver prints out paper check for deposit
    ACH Conversions (most common method referred to)
    Transactions converted to ACH debits (e.g., ARC, POP, WEB, TEL)
    Services can be provided by third party processors
    Account verification determined upfront. Guarantees available.
    Examples of services provided through third-party CyberSource (POP)

    Telecheck:
    CheckFree:
    AmeriNet:
    Paymentech:

    Applies to consumer checks


    only, not business checks.

    Regulator Governance
    Regulation E, per Electronic Funds Transfer Act (EFTA)

    Issued by Federal Reserve Bank


    Covers ACH and debit cards (but not wires or credit cards)
    Consumer protection oriented
    Some protection afforded the consumer does not apply to corporate or
    government customers

    NACHA Operating Rules

    National Automatic Clearing House Association


    Applies to ACH transactions only
    Applicable to both consumer and corporate (including government)
    Uniform Commercial Code (UCC) Article 4A

    Applies to Wire Transfers Only


    Uniform Commercial Code (UCC) Articles 3 and 4 and Reg CC

    Applies to negotiable instruments (checks)


    Reg CC issued by Federal Reserve - Applies to checks not EFT
    Check 21 (Check image conversion) governed by Reg CC, not Reg E

    ACH Terminology
    Typical ACH Standard Entry Class Codes

    PPD Prearranged Payments and Deposits (Consumer payments)


    CCD - Cash Concentration or Disbursements (Corporate payments)
    CCD+ - Corporate payments with 180 character addenda record
    TXP Addendum format for Tax Payments (Used by DOR)

    Check Conversion Standard Entry Class Codes

    POP Point-of-Purchase / Face-to-face (e.g., Wal-Mart)


    ARC Accounts Receivable Conversion Non-face-to-face (e.g., Lockbox)
    Check Conversions not eligible for use with corporate or government checks
    Other Standard Entry Class Codes (Debit entries)

    WEB Internet-initiated entries against a consumer account


    TEL Telephone-initiated entries against a consumer account
    RCK Represented check (representment of a non-sufficient funds check)

    Daylight Overdraft
    Federal Reserve charges bank interest per minute for

    overdrafts in their Fed account


    Banks do not allow wire transfers to be made from
    account if available balance is not sufficient
    Over-the-counter deposits not posted until night
    ACH credits are posted in mornings (6:30 and 8:30)
    Could pose problems when need to wire funds out

    Some banks will assign an allowable daylight

    overdraft limit

    Based upon customers credit risk


    Based upon bank overdraft cap at the FRB
    States arrangements with banks are handled by DST

    EFT Milestones

    1972 SCOPE (Special Committee on Paperless Entries)


    1974 NACHA (National Automated Clearing House Association)
    1977 Retirement System began using Direct Deposit for retirees
    1979 Central Payroll began using Direct Deposit for employees
    1980s University Payroll Centers began using Direct Deposit - employees
    1984 GMTS (Governmental Moneys Transfer System) implemented by
    DST for paying local units of government (Replaced by STEPS)
    1988 DOT Payroll began using Direct Deposit for employees
    1992 STEPS (State Treasurers Electronic Payments System) implemented
    for local units (two-way street). (Ended 2003, except Retirement)
    1994 DOR implemented EFT for corporate tax collections
    1990s LEAs and community colleges implemented direct deposit for
    employees (costs being paid for by DST)
    1999 SB 222 enacted, giving OSC responsibility for EFT
    2002 Common Payment System implemented (DMV-IRP first)
    2005 OSC initiated expansion of Electronic Commerce Program

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