24 Electronic payment types

Introduction
Ecommerce is the exchange of goods and services activated through an electronic
method.

From advertising to payment, everything except delivery of physical goods can be

done through electronic means with the adaptation of science and technology.
Consumers have a variety of choices to pay for their ecommerce transactions based
on their preference driven by convenience, availability, security etc.
Electronic payment is nothing but the financial exchange that takes place online
between buyers and sellers through some form of digital gadget.
Online stores accept a variety of forms of payment because they are ubiquitous,
convenient, and easy to use.
The most popular forms of payment on the Internet are payment cards, electronic
cash, mobile wallets, and stored-value cards.

Learning Objectives

By the end of this module one will be able to

 Understand what is meant by an electronic payment.
 Come to know about the processing of an electronic payment.
 Have in depth knowledge about the types of electronic payment.
 To elaborate the need for standardisation of electronic payment mechanisms.

What is an electronic payment?

One of the significant functions of electronic commerce sites is the handling of
payments over the Internet since e-commerce involves the exchange of some form
of money for goods or services.

An electronic payment is defined as paying for goods or services on the internet

using electronic devices such as computers, smartphones or tablets.
Electronic payment is a method in which a person can make online payments for
purchasing goods and services without physical transfer of cash and cheques,
irrespective of time and location through the internet directly to manage the e-
business environment.

E-payments come with various methods whereas the most popular forms of payment
on the Internet are payment cards, electronic cash, mobile wallets, and stored-value
cards.

Processing of an electronic payment

Electronic payments also known as e-payments are made instantly being convenient
and saves lots of time where every aspect of our lives happens at a fast pace.
The basics underlying in processing of an electronic payment are as follows.

Customer act
The processing of an electronic payment begins when a customer visits the
merchant’s site, adds the items to the shopping cart and click buy now.
The payment form is displayed in which certain information such as card number,
expiration date, CVV code, address are to be filled.
Depending on the payment method, the customer is either redirected to bank’s
website or a payment app else continues the payment on the website.

Authentication of the payment

The payment gateway ensures whether the payment information is valid and if
everything is fine then the process continues.
The payment gateway reports back the successful transaction and the customer
receives a payment confirmation.

Merchant’s account credited

An electronic payment provider receives the payment from a customer’s bank and
transfers it to the merchant’s account thus ending the payment process.

In general, electronic payments are a fast, cheap and secure means of payment with
lots of benefits for both merchants and consumers.
Moreover, electronic payments are highly effective for international transactions and
there is no need to worry about currency conversion.

Types of electronic payment

The electronic payment is classified into various types in which the notable ones are
 Electronic fund transfer
 Payment cards
 Electronic cash
 Electronic wallets
 Electronic cheques
 Stored value cards

The various types of electronic payment are described in detailed as follows

Electronic Fund Transfer (EFT)
Electronic funds transfer is one of the oldest electronic payment systems and is the
groundwork of the cash-less culture where paper bills, checks etc are eliminated.
EFT is used for transfer money from one bank account to another directly without the
involvement of paper money exchanged by hands.
EFT is one of the convenient payment methods to conduct business online.

Advantages and disadvantages of using EFT

 Increased efficiency
 Safe and secure
 Low administrative cost
 Transaction amount limited

Payment cards
In business, the term payment card is commonly used as a general term to describe
all types of plastic cards that the businesses and consumers use to make purchases.
The core categories of payment cards are credit cards, debit cards and charge
cards.
Credit card
Credit cards are by far the most prevalent method that consumers use to pay for
online purchases since the recent surveys have found that more than 90 percent of
worldwide consumer Internet purchases are paid for with credit cards.
Credit cards are the plastic cards that facilitates customers to carry transactions
through electronic data processing system and is issued by an agency such as
Master or Visa with a pre-determined spending limit to the holder of the card.

The spending limit is based on the user’s credit history such that a user can pay off
the entire credit card balance or pay a minimum amount each billing period.
Credit cards are extensively accepted by merchants around the world because it
provide assurances for both the consumer and the merchant.

There are two types of credit cards in use today

 Credit cards issued by credit card companies.
Credit cards issued by credit card companies such as MasterCard, Visa are
issued based on the customer's income level, credit history and total wealth
which the customer use to buy goods and services.
The limitations of credit cards is that it is not used for small payments and also,
due to security issues, these cards have a limit and cannot be used for
excessively large transactions.
 Credit cards issued by department stores.
Businesses extremely benefit from these cards and are cheaper to operate. They
are widely issued to and used by a broad range of customers since businesses
offer incentives to allure customers to open an account.

Debit card
A debit card resembles a credit card, but it works quite differently.
Debit cards are issued by a bank or a financial institution in which the card holder
has an account and the card enables consumers to access the account for a variety
of transactions.

The amount of the sale is removed from the cardholder’s bank account and
transferred to the seller’s bank account immediately for a transaction in an on-line
debit card.

The difference between credit cards and debit cards is that in order to pay with a
debit card one need to know the personal identification number (PIN) and a
hardware device is mandatory to read the information that is stored in the magnetic
strip on the back.

Many ATM cards have the features of a debit card and obtaining it is much easier
than obtaining a credit card.
The benefit for the customer is the easiness of use and convenience as well as the
cards keep the customer under his or her budget because they do not allow the
customer to go beyond his or her resources.

The merchant is not charged any fees as well as payment processing is fast when a
customer uses debit card to pay for purchase hence they prefer debit card for
payment by their customers.
Debit card purchases can have less protection than credit card purchases for
products that are never delivered or flawed since the returning of goods or cancelling
services purchased with a debit card is treated as if the purchases were made with
cash or cheque.

Charge Cards
A charge card is issued by companies such as American Express and carries no
spending limit but the entire amount charged to the card is due at the end of the
billing period.

In the United States, many retailers, such as department stores and oil companies
that own gas stations, issue their own charge cards since most of the consumers
have concerns about providing their payment card numbers to vendors online.

Advantages and disadvantages of using payment cards

Payment cards have several features that make them a widespread choice for both
consumers and merchants in online and offline transactions.
Payment cards provide fraud protection because when a merchant accepts payment
cards for online payment, the merchant can authenticate and authorize purchases
using a payment card processing network.

The greatest pro of using payment cards is their worldwide acceptance that is they
can be used anywhere in the world and the currency conversion, if required, is
handled by the card issuer.
One of the significant disadvantages is that the payment card service companies
charge merchants per-transaction fees and monthly processing fees.

Electronic cash or E-cash

Electronic cash or e-cash is a general term that describes any value storage and
exchange system created by a private entity other than government that doesn’t use
paper documents or physical cash and that can aid as an ancillary for government-
issued physical currency.

E-cash can be defined in simple words as the money available in an electronic

account to carry out electronic business transaction on the internet.
Electronic cash can be readily exchanged for physical cash on demand but on the
other hand because electronic cash is issued by private entities, there is a need for
common standards among all electronic cash issuers so that one issuer’s electronic
cash can be accepted by another issuer.

Unfortunately this need has not yet been met since each issuer has their own
standards hence electronic cash is not universally accepted.
Mondex, is a good example of e-cash.
E-cash card has two types namely a stand-alone card containing e-cash and a
combination card that incorporates both e-cash and debit .

Process involved in E-cash payment

The process involved in e-cash payment are
The user first must possess a cash software program and a bank account.
The software allows the user to download “electronic coins” to his or her desktop.
From the bank account, the user can withdraw or deposit e-cash with the help of
computer.

The beneficiaries of the e-cash send the money to their bank account similar to the
physical cash deposit.

Advantages and disadvantages of using e-cash

Electronic cash involves lower transaction cost and it does not need any special
authorization like credit cards.
Electronic cash is secure, convenient and adds control to everyday customer cash
transactions as it operates on a smart card, which includes an embedded
microprocessor chip which stores cash value and the security features that make
electronic transactions secure as well as keeps track of the e-cash transactions..
Most of the world’s population does not have credit cards due to minimum income
requirements or past debt problems or simply because they are too young and for all
of these people, electronic cash provides the solution to pay for online purchases.

Electronic wallets or E-wallets

As consumers are becoming more enthusiastic about online shopping, they have
begun to tire of repeatedly entering detailed shipping and payment information each
time they make online purchases therefore to address these concerns, many
electronic commerce sites include a feature that allows a customer to store their
name, address, and credit card information on the site.
However, consumers must enter their information at each site with whom they want
to do business which is overcome by the significant feature of entering the
information only once that can be used in all ecommerce sites using the E-wallet .
Electronic wallet is like physical wallet which can hold credit cards, e-cash, owner’s
identification, address and provides that information at an electronic commerce site’s
checkout counter as well as has the memory for storing the balance of an account in
a financial institution.

Electronic wallets make online shopping a convenient one for frequent online
shoppers because they store personal and financial information such as credit cards,
passwords, PINs, and much more along with the ability to keep track of billing and
shipping information so that it can be entered with one click at participating
merchants' sites.

E-wallets can act as payment cards when they are used to store credit card
information or as e-money when they store electronic currency.
A well-known example of an e-wallet on the market is Microsoft Wallet and Yahoo
Wallet .

The elimination of re-entering personal information on the forms, results in higher

speed and efficiency for online shoppers.

Classification of E-Wallet
Electronic wallet is classified into two categories namely
 Server side electronic wallet - stores customer’s information on a remote
server which may belong to a merchant or wallet publisher.
  Customer side electronic wallet - stores customer’s information on user’s
system.

Advantages and disadvantages of using E-wallet

Server side e-wallet
In server-side wallets the e-wallet software remain on a server and thus require no
download time or installation on a user’s computer.
Server side wallets can be accessed from any computer since it is portable.
Although server-side electronic wallets employ strong security measures that
minimize the possibility of unauthorized disclosure, security breach could reveal
millions of user’s personal information including credit card numbers to unauthorized
parties.

Client side e-wallet

Client-side electronic wallet stores consumer’s information on his or her own
computer therefore less possibility of security breach.
Client-side wallets need to download e-wallet software onto every computer used to
make purchases which is a major drawback of client-side wallets.
Client-side wallets are not portable therefore e-wallet is not available when a
purchase is made from a computer other than the computer on which the wallet
resides.

For a wallet to be useful at many online sites, the electronic wallet manufacturer and
merchants from many sites must coordinate their efforts so that a wallet can
recognize what consumer information goes into each field of a given merchant’s
forms.

Electronic cheques
Electronic cheques are also known as e-cheques and can be used in any
transactions where normal cheques are used because e-cheque uses the same
legal and business protocols associated with traditional paper cheques..
E-check is the outcome of collaboration among several banks, government entities,
technology companies and e-commerce organizations.

It is a new payment instrument that combines high-security, speed, convenience,

processing efficiency and helps to complete payments over the networks in a cost-
effective manner.
An e-check can be used by all organizations both large and small, even where other
electronic payment solutions are too risky or not apt.

E-Cheque Procedure
 The payer writes the e-cheque through a system, uses a digital signature and
sends it through the Internet.
 The payee receives it, verifies the signature and approves it.
 The approved cheque is then sent over internet to the payee’s bank for
deposit.
 The bank official authenticates the signatures and credits the deposit.
 The payee’s bank clears and settles the approved e-cheque by sending it on
to the payer’s bank.
  The signatures are again verified and the amount prescribed in the e-cheque
is debited from the payer’s account.
 The cryptographic certificates play a vital role in helping a payee to determine
the validity and identity of the signatures.

Advantages and disadvantages of using E-cheque

E-cheque is being opted for many online transactions due to many reasons but have
few disadvantages too.
 Secure and quick settlement of financial obligations.
 Fast check processing hence increased efficiency.
 Very low transaction cost hence cost effective.
 Transactions are based on internet hence network failure may lead to delay in
payment.
 Both payer and payee ought to have e-cheque facility.

Stored Value Cards

Nowadays, most people carry a number of plastic cards such as credit cards, debit
cards, charge cards, driving license, health insurance card, identification card etc.
A key to reduce all those cards into a single plastic card is called a stored-value card
which is an elaborate smart card with a microchip or a plastic card with a magnetic
strip that records the currency balance.

The stored value card with a microchip stores more information than a stored value
card with a magnetic strip.

Smart cards
Smart cards are stored value cards with a microchip which allows electronic money
to be stored in a secure medium with a built-in microprocessor and memory.
A smart card can simultaneously be an ID, a credit card, a cash card or a repository
of personal information such as telephone numbers or medical history as well as
enable the bearer the ability to access information and physical places without any
need for online connections.

Along with storing and periodically recharging the information, the money on the card
is saved in an encrypted form and is protected by a PIN to secure the smart card.
In order to pay via smart card the card must be introduced into a hardware terminal
that requires a special key from the issuing bank to start a money transfer in either
direction.

Smart cards have been extensively used in the telecommunications industry for
years to hold information on health care, transportation, identification, retail and
banking etc. in a single location.

Advantages and disadvantages of using stored value cards

Few advantages and disadvantages of stored value cards are listed below
 Store large amount of information with reduced space.
 Store many types of information
 Portability
 Highly secure
  Lack of universal standards for their design and utilization.

Standardization of electronic payment mechanisms

With more people than ever before trading goods and services across the world, The
standardization of electronic payment mechanisms is crucial to the success of e-
commerce.

While electronic payments are being more convenient and comfortable for a larger
audience, the framework behind the system is struggling to find a standardized
system of rules and regulations about how to handle, record and secure global
payments.
SET and SSL are two standards that protect the integrity of online transactions but
still the payment system is not fully standardised and is to be in near future.

Conclusion
The technology of the Internet and the development of electronic commerce have
grown up in running online business successfully where payment transactions are
done without face-to-face communication.
Electronic payment method is nothing but the mode of payments over an electronic
network such as the internet

The success of electronic payment is the one of the reasons behind the incredible
growth of e-commerce hence for the electronic payment systems to be successful
security and privacy dimensions perceived by consumers as well as sellers should
be well managed which in turn would improve the market confidence in the system.