ELECTRONIC PAYMENT

SYSTEMS

ELECTRONIC PAYMENT SYSTEMS

Concept of e-Money
Electronic Payment system
Types of Electronic Payment System
Smart Cards
Stored Value Cards & Electronic Payment Systems
B2B Electronic payments
Infrastructure issues in EPS
Electronic Fund Transfer

ELECTRONIC MONEY

Electronic money is
broadly defined as an
electronic store of
monetary value on a
technical device that may
be widely used for making
payments to undertakings
other than the issuer
without necessarily
involving bank accounts in
the transactions, but
acting as a prepaid bearer
instrument.

Desirable Properties of Digital

Money
Universally accepted
Transferable electronically
Divisible
Non-forgeable, non-stealable
Private (no one except parties know the
amount)
Anonymous (no one can identify the payer)
Work off-line (no on-line verification needed)

No known system satisfies all.

sangita rawal

What Electronic Payment system is?

Electronic Payment is a financial exchange that takes
place online between buyers and sellers. The content
of this exchange is usually some form of digital
financial instrument (such as encrypted credit card
numbers, electronic cheques or digital cash) that is
backed by a bank or an intermediary, or by a legal
tender.
Electronic payment system is a system which helps
the customer or user to make online payment for
their shopping.

Evolution.

By the early 90s, MICR computerized cheque clearing operations at the 4

metropolitan centers i.e. Mumbai, Calcutta, Chennai and New Delhi had
stabilized.

However, the volumes in cheque clearing continued to reflect an upward

trend, creating considerable pressure on the existing work flow processes.

A closer analysis revealed that 'at par' items such as dividend and interest
warrants issued by various corporate were contributing significantly to the
volumes in clearing.

The existing system of paying interest / dividend to the beneficiaries through

paper instruments is also fraud prone with frequent reports of postal
interception and encashment, often resulting in the real beneficiaries not
getting their dues at all, or at other times getting delayed payments

Evolution.
It was decided that a system needed to be put in place
that would
(i) decrease the volumes of paper instruments in MICR
clearing and
(ii) improve customer service by ensuring prompt and
secure interest/dividend payments to the beneficiaries.

Such a system needed to be cost effective and serve

as an alternate method of effecting bulk, low value,
recurring payment transactions, thereby obviating the
need to issue and handle paper instruments

Conventional vs. Electronic Payment System

To get into the depth of electronic payment

process, it is better to understand the
processing of conventional or traditional
payment system.

A conventional process of payment and

settlement involves a buyer-to-seller transfer of
cash or payment information (i.e., cheque and
credit cards). The actual settlement of payment
takes place in the financial processing network.

Conventional Payment System

Conventional Payment System

Sellers
bank
Info flows
for
notational
changes
Buyers Bank

Seller

Payments

Goods &
Services

Buyer

Electronic Payment System

Types Of
EPS

E- Cash
A system that allows a person to pay for goods
or services by transmitting a number from one
computer to another.
Like the serial numbers on real currency notes,
the E-cash numbers are unique.
This is issued by a bank and represents a
specified sum of real money.
It is anonymous and reusable.

E-Cash Security
Complex cryptographic algorithms prevent
double spending
Anonymity is preserved unless double spending is
attempted

Serial numbers can allow tracing to prevent

money laundering

E-Cash Processing
1.

Consumer buys e-cash from Bank

2.

Bank sends e-cash bits to consumer

(after
charging that amount plus fee)

Bank

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

Smart Cards

Asmart card, is any pocket-sized card with embedded

integrated circuits which can process data
This implies that it can receive input which is processed
and delivered as an output

Smart Cards

This card also contains some kinds of an encrypted

key that is compared to a secret key contained on
the user's processor. Some smart cards have
provision to allow users to enter a personal
identification number (PIN) code.
Owing to their considerable flexibility, they have
been used for a wide range of functions like highway
toll payment, as prepaid telephone cards and as
stored value debit cards. However, with the recent
emergence of e-commerce, these devices are
increasingly being viewed as a particularly
appropriate method to execute online payment
system with considerably greater level of security
than credit cards.

Smart Card Processing

Smart Card Applications

Ticketless travel
Seoul bus system: 4M cards, 1B transactions since 1996
Planned the SF Bay Area system

Authentication, ID
Medical records
E cash
Store loyalty programs
Personal profiles
Government
Licenses

Mall parking

Stored value cards

The principal function of stored-value or smart cards is the portable storage

and retrieval of data.

Theseapplicationshave evolved from existing electronic funds transfer

mechanisms using debit cards, such asprepaid cardsand copy machine cards.
The embedded integratedcircuiton the card defines the capabilities of the
product, and possible components may include a microprocessor, no static
random access memory (RAM), read only memory (ROM), erasable
programmable read only memory (EPROM), other nonvolatile memory, and
special purpose coprocessors.

These characteristics make smart cards a viable medium for a digital currency
payment system. In making a payment through stored-value cards, the
following points can be noted: There are no backend settlements involved.

There is no audit trail for transactions.

Stored value cards

If a card is lost, the same result is achieved when actual cash is lost
its gone.

Developers are working on ways to deliver card-to-card funds

transfers.

Stored-value cards have met with high approval ratings among

consumers in Europe, and the United States. Stored-value smart
cards are capable of more than facilitating payments. They can offer
added-value information, including digital certificates for
identification purposes, and may authenticate a secure transaction.

It is worth noting that computer hardware manufacturers have

started to include smart card readers with their PCs and PC
keyboards.

Credit Cards

It is a Plastic Card having a Magnetic Number and code

on it.
It has Some fixed amount to spend.
Customer has to repay the spend amount after
sometime.

Customer Pays
by Credit Card

Merchant Processes
Credit Card Using
Software Provided

Principal Bank Sends

Transaction back to
Merchant Bank

Issuing Bank
Approves/Declines Sends
Transaction principal Bank

The Bank
that Issue
Credit Card
To your
Customer

ENTIRE
PROCES
S TAKES
5-15
SECOND
Electronically
submitted to
Principal Bank

Principal Bank
Sends Request to
Issuing Bank

Think of this, The

acquiring bank ,
the bank that
underwrites your
merchant account

Processing a Credit Card

Payment

DEBIT CARDS

Debit Cards
Adebit card(also known as abank
cardorcheck card) is a plastic card that
provides an alternative payment method
tocashwhen making purchases.
Functionally, it can be called an electronic check,
as the funds are withdrawn directly from either
thebank account, or from the remaining balance
on the card.
Debit cards may also allow for instant withdrawal
of cash, acting as theATM cardfor withdrawing
cash and as acheck guarantee card.

Credit & Debit Cards

Credit card
Used for the majority of Internet
purchases
Has a preset spending limit based
on the users credit history.
Currently most convenient method
Most expensive e-payment
mechanism
Advantage
Each month user can pay part or all
of the amount owed

Disadvantages
Does not work for small amount
(too expensive)
Does not work for large amount
(too expensive)

Debit card
Used for the majority of
general purchases
Has no spending limit
Currently most convenient
method
Most non-expensive epayment mechanism
Special feature helps to
withdraw from ATM as hard
cash
Advantages
Operates like cash or a
personal check
Disadvantages
Money is immediately
deducted from users
account balance

Risk in using Credit cards

Customer uses a stolen card or account number to

fraudulently purchase goods or service online.

Family members use bankcard to order goods/ services

online, but have not been authorized to do so.

Customer falsely claims that he or she did not receive a

shipment.

Hackers find the ways into an e-commerce merchants

payment processing system and then issue credits to hacker
card account numbers.

E-Wallet

E-WALLET

The E-wallet is another payment scheme that operates like a

carrier of e-cash and other information.

The aim is to give shoppers a single, simple, and secure way of

carrying currency electronically.

Trust is the basis of the e-wallet as a form of electronic payment.

The software provides security andencryptionfor the personal

information and for the actual transaction

Procedure for using an e-wallet

1. Decide

on an online site where you would like to shop.

2. Download

a wallet from the merchants website.

3. Fill

out personal information such as your credit card number, name,

address and phone number, and where merchandise should be shipped.

4. When

you are ready to buy, click on the wallet button, the buying
process is fully executed.

Electronic fund transfer

Electronic funds transfer (EFT), is simply the use of electronic means

to transfer funds directly from one account to another, rather than by
check or cash.

The EFT process cycle is spread over 3 days. Funds are made
available to the beneficiary on a T+1 basis

Electronic funds transfer can be used to:

have your paycheck deposited directly into your bank or credit union
checking account

withdraw money from your checking account from an ATM machine

transfer funds from your checking account to your mutual fund

account

Electronic fund transfer

instruct your bank or credit union to

automatically pay certain monthly bills from
your account;
make purchases using a check card rather than
cash;
use a smart card with a prepaid amount of
money embedded in it instead of cash;
use your computer and personal finance software
to coordinate your total personal financial
management.

EFT is done through:

Automated teller
machines(ATMs)

Direct Deposit and

Withdrawal Services

Automated teller
machines(ATMs)

Also called 24-hour tellers are electronic

terminals which give consumers the opportunity
to bank at almost any time.
To withdraw cash, make deposits or transfer
funds between accounts, a consumer needs an
ATM card and a personal identification number.
Some ATMs charge a usage fee for this service,
with a higher fee for consumers who do not have
an account at their institution.

Direct Deposit and Withdrawl

Services

Allow consumers to authorize specific deposits,

such as paychecks or social security checks, to
their accounts on a regular basis.
It is also possible to authorize the bank, for a fee,
to withdraw funds from your account to pay your
recurring bills, such as mortgage payment,
installment loan payments, insurance premiums,
and utility bills.

Direct Deposit and Withdrawl

Services

Pay by Phone Systems let consumers phone

their financial institutions with instructions to pay
certain bills or to transfer funds between
accounts.

Point-of-Sale Transfer Terminals allow

consumers to pay for retail purchase with a debit
card. This card looks like a credit card but with a
significant difference -- the money for the
purchase is transferred immediately from your
account to the store's account.

Direct Deposit and Withdrawl

Services

Personal Computer Banking Services offer

consumers the convenience of conducting many
banking transactions electronically using a
personal computer. Consumers can view their
account balances, request transfers between
accounts, and pay bills electronically from home.

Infrastructure Issues of EPS

Security

Transactional

Scalabilty

Interoperability

Economic
Issues

Transactional Issues
It refers to the actual exchange of currency
with
the
goods
or
services
being
transferred. Every transaction should exhibit
the following characteristics:
Atomicity
Transfer Of Funds
Complete Transfer
Consistency
Durability

Security Issues

It refers to the systems ability to protect all parties from

fraud, due to interception of online transmission and
storage. The payment system should be secure enough to
offer the following:

Fraud Protection
No Double Spending
No Counterfeiting
No Overspending
Non-Refutability
Privacy Control
Non- Traceability
Hardware Tamper Resistance

Interoperability
It refers to its ability to operate in multiple
online in multiple online as well offline
Payment environment. The various issues
involved under interoperability are:
Divisibility
Bi- Directional
Re-Spendibility
Acceptability
Multi- Currency Support
Portability

Scalability
It refers to the level of operations possible
within a certain payment system. The ability of
a system to handle load under peak hours. The
various issues involved under Scalability are:
Offline operations
Micro Payments
Low Costs
Efficiency
Macro Payments

Economy Issues
In order to become an accepted Economical
instrument, a digital payment system needs to
provide a trusted, reliable and economically
feasible service to a sufficiently large user
community. The system should have:
Large User Base
Low Risk
Reliability
Conservation
Ease Of Integration

Features

Online
Credit Card
Payment

Electronic
Cash

Electronic
Cheque

Smart Cards

Actual
Payment
Time

Paid later

Prepaid

Paid later

Prepaid

Transaction
information
transfer

The store and

bank checks
the status of
the credit
card

Free transfer.
No need to
leave the
name of
parties
involved

Electronic
checks or
payment
indication
must be
endorsed

The smart card

of both parties
make the
transfer

Online and
Online
offline
transactions
transactions

Online
transactions

Offline
transfers are
allowed

Offline
transfers are
allowed

Bank
Credit card
account
account
involvement makes the
payment

No
involvement

The bank
account
makes the
payment

The smart card

account makes
the payment

Users

Anyone

Anyone with
a bank
account

Anyone with a
bank or credit
card account

Any
legitimate
credit card
users

Features

Online
Credit Card
Payment

Electronic
Cash

Electronic
Cheque

Smart Cards

Mobility

Yes

No

No

Yes

Limit on
transfer

Depends on
Depends on
the limit of
how much is
the credit card prepaid

No limit

Depends on how
much money is
saved

Party to
which
payment is
made out

Distributing
Bank

Store

Store

Store

Consumer
s
transaction
risk

Most of the
risk is borne
by the
distributing
bank,
consumers
only have to
bear part of
the risk

Consumer is
at risk of the
electronic
cash getting
stolen, lost,
or misused

Consumer
bears most of
the risk, but
the consumer
can stop
check
payments at
any time

Consumer is at
risk of the smart
card getting
stolen, lost or
misused