E- Commerce

Chapter V
E-Payment
Introduction:Any business transaction is complete when the money/payment is exchanged from buyer
to Seller. In physical/ traditional method of trading the payment of products/services are made
physically or directly from buyer to seller.
But according to change in technology nature of trade is changed & form of E-Commerce
is emerged. As like E-commerce i.e. exchange of products/services through electronic devices
same as payment is made with electronic devices.
It means E- Payment or Electronic payment is any digital financial payment transaction
involving currency/money transfer between two or more parties.
Electronic payments are far cheaper than the traditional method of mailing out paper
invoices and then processing payments received.
Meaning of E-Payment
The electronic payment is a collective phrase for the many different kinds of electronic
payment methods available (including online payment) and the processing of transactions and
their application within online merchants and ecommerce websites.
It is required for all online businesses to be able to accept and process in fast and secure
way. & it can be advantageous for business in form of
Increasing cash-flow in business
Secured & full payment received in bank account
No risk of bouncing cheques as well as any other clearing charges
Reduce administration as well as labour cost
& it is quickly received.
Electronic Payment System (EPS)
EPS stands for Electronic Payment System.
Electronic Payment is a financial Exchange that takes place online between buyers and
sellers. In this exchange some form of Digital Financial instrument (i.e. Credit Card, Debit
Card, Electronic Cheques or Digital Cash) which is backing by a bank or intermediary, or a
legal tender. It is needed for compensation for information, Products / services provided through
internet.
Meaning of Electronic Payment System (EPS)
EPS is a system which helps the user or customer to make online payments.
OR

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E- Commerce

EPS means a payment for buying & selling products /services offered through the
internet.
This System is mostly used by financial institution because
1) Decreasing Technology Cost:The payment is done through using networking technology like internet &
use of computer and internet is increasing a day by day due to which computers are now at chip
price & internet is becoming free almost everywhere in the world.
2) Reduced operational and processing cost:Due to reduced technology cost the processing cost of various trade
activities becomes very less. &also saving of both cost & time.
3) Increasing online commerce:The two above factors lead to many institutions go online & many others are
following them.

Advantages of EPS
1. Speed and convenience:Using EPS, consumers can find what they want to buy / purchase it quickly. Due to this system
customer having a freedom of purchase/ buying the products/services at 24X7 without going
anywhere.
2. Confidentiality The user expects a secure system of payment. The system must have a set
of special characteristics that the customer can depend upon.
3. Integrity The payment system requires integrity to ensure that, neither the purchase
amount nor the goods bought will be altered inappropriately.
4. Authentication Both buyer & the seller request assurance that the other is really who they
claimed to be.
5. Authorization It allows merchants to determine if the buyer actually has funds to pay for the
purchase. The merchant verifies that the customers bank account has sufficient balance to
honor the check amount. In case of credit card transaction, the merchant obtains the approval
from credit card clearing house for the amount of purchase.
6. Assurance The customer on his part wants to be sure that the merchant is competent &
worthy of his trust. This might involve some kind of business license, form other customers
or even security bonds for more complex transactions.
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E- Commerce

7. Privacy There might be situation where customer & merchant would want to ensure
privacy of the sell.
Disadvantage of EPS

Identity theft:The available security measures can prevent the sensitive information from being
exposed. But it is important to use virus protection or firewalls for user computer. It is important
to carry out money transactions over a secure server.
Cryptographic System:The transactions are encoded by means of numeric keys while the transaction details
travel across the net though electronic payments are resistant to forgery. The keys are vulnerable
to attack.
Payment system collision:Due to online payment customer can purchase/ buy anything from anywhere. It means he
can transact globally. But some timethe types of payment customer are used to depending on
may not be available in other countries, even when purchasing online from those countries in an
option. E payment can also struggle to match up the values of different currencies or different
types of bank account.

Payment Types:Payments are of two types according to flow of funds & they are
i)
Payments received from your customers and
ii)
Payments made to your suppliers
E-commerce helps in reducing these expenses by streamlining the cash collection
and payment operations.
While in the other hand automating the supply chain the receipt and payment
processing fuctions could be automated along with the rest of the supply chain.
The receipt of an actual produt or conformation of delivery to the customer could
automatically be deposited when they are received though the user of credit card software.

Receipt of Payments
Receipt Payments are from three sources: Retail customers
Wholesale Customers and
Various miscellaneous payments
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E- Commerce

Before the advent of online electronic payment methodologies all the payments wer
received generally in cash or cheques and periodically the organisation would make a
physical deposit at a bank
Modern electronic payment methods have made it simpler and transfer through the
use of wire transfer making the funds transfer, possible without a physical deposit.
Traditional Payments System:This payment system uses currency, coins, cheques, DD, Money order etc. Currency &
coins in this payment system can be used to mediate transactions by physical exchange. Even
though cash is legal tender for the payments of debts, it leaves on audit trails.Number of people
ask for written receipts to show proof of payments when they pay a debt or purchase goods with
cash.
Otherwise some people used alternatives of cash i.e. cheques/ DD that tell their
depository institution to transfer funds to the person/enterprise named on the cheque/DD. The
benefit and limitation are there in the cheque/ DD clearing process & its information.

Modern Payment System:According to time & the increasing the technological use the payment system is also
changed & make better & secure than traditional payment system. This payment system is
modern by using internet technology & new reader machine technology like
ATM/DEBIT/CREDIT CARD Swipe machines.
And this all types of payments can be done with the help of Electronic media
therefore these payments is also called as E- payment. & there types are

Types of E-Payment
Digital Cash/E-cash
Cash is the most widely used form of payment in todays life. The digital equivalent of cash
is called as E-cash. In digital cash system cash exist in the form of validated tokens represented
by a string of digits. E-cash is purchased from an on-line currency server (bank). This involves
2 steps
a. Establishment of an a/c
b. Maintaining enough money to back the purchase.
The bank issues a string of digits & debits the a/c with amount equal to value of currency
issued. The customer uses e-cash software on his computer to generate a random number,
which serves as a note. In exchange for the amount debited from customer a/c the bank
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E- Commerce

digitally signs the note for the amount requested & transmits the note back to the customer. The
user can spend the digital money at any shop that accepts e-cash without transmitting his credit
card number. As soon as user wants to spend some e-cash, the software transmits the proper
amount of tokens to the merchant, who then submits them to bank for issuing back. The bank
has to ensure that each token is used only once & hence each token which comes for
redemption (issuing money back) is recorded in database. If same token is encountered again,
bank informs the merchant that it is worthless.
Customer generates note with required value & assigns Random No.
Customer Bank
Customer
Bank validate note with its stamp
Customer Sends no.

Merchant

Verifies no. &

Random NumberMerchants Bank
Credits in merchants a/c. & number will get added in spent list.
D.B. of spent notes

Advantages of digital cash1. Provides an opportunity for individuals to act as micromerchants, offering their products
on net for exchange in e-cash. The e-cash could then used as normal cash for other
purchases on net.
2. Cost of electronic transaction is small & merchants can charge for small amounts of
information without incurring huge transaction fees.
3. Small denomination digital tokens are called microcash& transactions using microcash
are called microtransactions. Microcash can be used for items as stock quote or a report.
Disadvantages of Digital Cash
1. Human needs tend to require money in tangible form & hard cash still remains one of
most widely accepted forms of money.
2. Enormous currency functions in international finance pose another hazard. In event of
sudden devaluation, it is a debatable issue as to who holds the ability, the buyer or seller?
Due to value of currency fluctuates very often.
2. Credit Cards
If user wants to purchase commodities, he/she sends credit card details to service
provider involved & credit card organization handles the pay.
Credit card payments can be broken in 3 categories-

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E- Commerce

a. Payment using simple credit cards easiest method of pay where information
regarding card is transmitted over public network such as a telephone lines or net.
But low level of security.
b. Payments using encrypted credit cards Encryption is process of encoding inf. To
prevent it from being read by unauthorized parties. Card details should be
encrypted before sending them out which would prevent illegal access.
c. Payment using 3rd party verification Provides a solution to security & verification
problems involved in payments using cards. It is always beneficial. 3 rd party is
independent of customer & merchant & doesnt have any personal gain in the
transaction. The customer acquires a Third Party a/c that provides a complete
customer profile & is backed by with credit card of customer.

3. Wallet - It is a helper application, which is being used for web browsers & passes
encrypted card numbers through merchant to its own processor i.e. server for
authentication & approval of the sale. Certain other products issue a virtual pin to the
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E- Commerce

customer who then uses it in place of credit card number. After receiving a sells
information from the merchant the virtual PIN is converted into credit card a/c no. to
clear purchase.
4.
for
cad
that
a
an

Smart cards Smart cards have been in

existence since early 1980s & promise
secure transaction over the net. A smart
can be considered as a portable device
contains some non-volatile memory and
microprocessor. It contains some kind of
encrypted key that is compared to a
secret key contained on the users
processor.
Some Smart cards have
provision to allow users to
enter a Personal
Identification
Number (PIN) code and these are being relatively common with billions of cards
expected to use worldwide. These Smart Card will hold Cash, ID Information, house an
office keys, subway tokens, all types of preference files and other information.
They are pre-paid credit cards that include & embedded microprocessor with a memory
chip or only a memory chip with non-programmable logic. These smart cards can be used
for Internet based purchases & can also double
up as electronic purses that can be used for
everyday purchases at stores.
While the microprocessor can add,
delete, and otherwise manipulate information on
the card, a memory chip card can undertake only
predefined operations.
Smart card are receiving renewed
attention as a mode of online payment They are essentially credit card sized Plastic Cards
with the memory Chips and in some cases with microprocessors embedded in them so as
to serve as storage devices for much greater information than credit Cards with inbuilt
transactions processing capability.

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E- Commerce

They are of two typesi)Relational based smart cards These are chips that store cardholders
information including name, personal shopping preferences & actual purchase records.
Merchants can accurately trap consumer behavior & develop promotional programs
designed to increase shoppers loyalty.
The benefits of smart card relay on the device called smart card readers that
communicates with chips on a smart card. In addition to reading & writing to smart cards.
These devices can support a variety of key management methods. The card readers could
be in a form of a two-line character display that shows both a prompt & response entered
by the user. Card readers in the form of screen phones are also available, where the phone
prompts user through transaction-using menus patterned after those found on ATM.
ii)Electronic purses Although relationship based cards are flexible, they are
credit based & settlement occurs at the end of billing cycle. There still remains a need for
a financial instrument to replace cash. This particular need can be met by Electronic
purses, which are a wallet size cards with programmable microchips that stores sums of
money for customers instead of cash for all their purchases. The purse is loaded with
money at an ATM or through use of an inexpensive special phone. This card can then be
used for any purchase at the store i.e. equipped with a card reader.
5. Electronic Cheques They are another credit payment that lets customer use digital
online cheques to pay web merchants directly. It is also known as Internet Cherubs or
i- cheques.
The e-cheque method was deliberately created to word in much the same
way as conventional paper cheque. An account holder will issue an electronic document
that contains the name of the financial institution the payers account number, the name
of payee and amount of cheque. Most of the information is in uncoded form. Like a paper
cheques e-cheques also bear the digital equivalent of signature a computed number that
authenticates the cheque from the owner of the account. Digital chequing payment

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E- Commerce

system seeks to extend the functionality of existing chequing accounts for use as online
shopping payment tools.
Customers must register themselves with third party account server. The digital cheque is
accepted by the buyer & is transferred to the bank. The transfer of funds from customer
bank to the sellers bank takes place. Once a cheque is accepted purchase transactions
complete & require no authentification.
Advantages of Electronic Cheque System
1) They do not require consumers to reveal account information to other individual
when setting an auction.
2) They do not require consumers to continually send sensitive financial information
over the web.
3) They are less expensive than credit cards and
4) They are much faster than paper based traditional cheques.

EFT- Electronic Fund Transfer

Any transfer of funds initiated through an electronic terminal, telephone instrument or
computer so as to order, instruct or authorize a financial institution to debit or credit an
account.It is a very popular electronic payment method to transfer money from one bank
account to another bank account. Accounts can be in same bank or different bank. Fund transfer
can be done using ATM (Automated Teller Machine) or using computer.
Now a day, internet based EFT is getting popularity. In this case, customer uses
website provided by the bank. Customer logins to the bank's website and registers another bank
account. He/she then places a request to transfer certain amount to that account. Customer's
bank transfers amount to other account if it is in same bank otherwise transfer request is
forwarded to ACH (Automated Clearing House) to transfer amount to other account and amount
is deducted from customer's account. Once amount is transferred to other account, customer is
notified of the fund transfer by the bank on his/her registered mobile number through SMS /on
e-mail.
There are many benefits of using EFT through ecommerce for financial transactions;
some of them are as follows:
1. Payments through EFT are much safer as compared to that of the cheques.
2. There are no issues like lost or stolen cheques.
3. Payments through EFT are quicker as compared to that of the cheque
4. Payments through EFT are quite convenient and easy.
5. This is capable of eliminating the need to deposit and obtain the pay cheque or cash.
6. Payments of EFT facilitate online baking though ecommerce / Banking website.

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E- Commerce

7. Other benefits include lessen down of administration cost, greater security and
increased efficiency.
With so many advantages of EFT the need for paper bills is slowly reducing.
Due to these advantages the use of EFT has widely increased in the all sectors to which finance
is related to payments.
This technology used in the field of banking could be registered with the advent of MICR
(Magnetic Ink Character Recognition) cheques. These cheques were introduced with the
objective of ensuring faster clearing. The MICR technology is based on the system of coded
language. Each individual instrument (Cheques) carries an MICR code line. This MICR Code
line contains numbers & that number indicates:a) First 6 digit conveying the cheque number
b) The next 9 digit are broken into 3 parts of 3 digit each which are
i)
First three digit stands city code
ii)
Next three for bank code
iii) & last three signify the branch code.
c) To the right of these 9 digits are two digits with a reasonable gap between the two. These
two digits stand for the type of account i.e. whether saving, current or cash credit a/c etc.
This coding information in a single line enables quick sorting of cheques as per
their drawee branch and city. This helps the bankers to claim their money quickly from the
concerned bankers. Bank used reader sorters to ensures that the instruments are sorted on the
basis of the information (data) captured in the MICR Code line. The bankers use the same
MICR code line to encode the information mentioned in the cheques.
The collecting banker is required to sort these cheques as per the claims and
these duly sorted and processed instruments are exchanged through the clearing house to
reach the drawee bank. The process of clearing becomes quick due to the ability of the
bankers to present their claims fast on account of MICR Technology.

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E- Commerce

Debit Card:A debit card (also known as a bank card or check card) is a plastic payment
card that provides the cardholder electronic access to their bank account(s) at a financial
institution. Some cards may bear a stored value with which a payment is made, while most relay
a message to the cardholder's bank to withdraw funds from a payer's designated bank account.
The card, where accepted, can be used instead of cash when making purchases. In some cases,
the primary account number is assigned exclusively for use on the Internet and there is no
physical card.
This is somewhat to that of a credit card the only difference is that there is no
credit facility available to the debit cardholder on his debit card. It means on debit card,payment
is done against the limitation of bank account available balance. With the help of debit card the
cardholder can withdraw and can pay for purchase of goods and services & for this his account
is instantaneously debited. Now many banks issue ATM cum Debit Cards.
Advantages of Debit Card:I. Debit card gives twins benefits of cash withdrawal and cashless purchase.
II. The facility of cash withdrawal is available 24X7 & 365 days in a year.
III. It offers its users the facility of convenient banking as withdrawals are possible from
anywhere through the ATMs of the bank or any other bank.
Limitation of Debit Card:I. Undistributed power supply is needed for cash withdrawals through ATMs
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E- Commerce

II.
III.

IV.
V.

Literacy in general and computer literacy in specific among debit card users is essential
for general use of debit cards.
Psychology of the people may limit working of debit cards. People on account of
illiteracy may carry fear of using debit cards. They very fear about the ability to use the
card keeps many away from the use of debit cards.
Debit cards do not have general acceptability. They are not widely accepted in all shops
and hence cannot be taken as substitutes to cash
Debit cardholders do not have any credit facility and are accepted only to the extent of
balances in the account of the debit card holder.

Steps in EPS

Payment Security:Security is an essential part of any transaction that takes place over the internet.
Customer will loose his/her faith in e-business if its security is compromised. Following are the
essential requirments for safe e-payments/transactions:

Confidential - Information should not be accessible to unauthorized person. It should not

be intercepted during transmission.

Integrity - Information should not be altered during its transmission over the network.
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E- Commerce

Availability - Information should be available wherever and whenever requirement

within time limit specified.

Authenticity - There should be a mechanism to authenticate user before giving him/her

access to required information.

Non-Repudiabiity - It is protection against denial of order or denial of payment. Once a

sender sends a message, the sender should not able to deny sending the message. Similary the
receipient of message should not be able to deny receipt.

Encryption - Information should be encrypted and decrypted only by authorized user.

Auditability - Data should be recorded in such a way that it can be audited for integrity
requirements.
Major security measures are following:

Encryption - It is a very effective and practical way to safeguard the data being
transmitted over the network. Sender of the information encrypt the data using a secret code and
specified receiver only can decrypt the data using the same or different secret code.

Digital Signature -Digital signature ensures the authenticity of the information. A digital
signature is a e-signature authentic authenticated through encryption and password.

Security Certificates - Security certificate is unique digital id used to verify identity of

an individual website or user.
Security Protocols in Internet
Following are the popular protocols used over the internet which ensures
security of transactions made over the internet.

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E- Commerce

Secure Socket Layer (SSL)

It is the most commonly used protocol and is widely used across the industry. It meets
following security requirements:

Authentication

Encryption

Integrity

Non-reputability
"https://" is to be used for HTTP urls with SSL, where as "http:/" is to be used for HTTP
urls without SSL.
Secure Hypertext Transfer Protocol (SHTTP)
SHTTP extends the HTTP internet protocol with public key encryption, authentication
and digital signature over the internet. Secure HTTP supports multiple security mechanism
providing security to end users. SHTTP works by negotiating encryption scheme types used
between client and server.
Secure Electronic Transaction
It is a secure protocol developed by MasterCard and Visa in collaboration.
Thereoritically, it is the best security protocol. It has following components:

Card Holder's Digital Wallet Software - Digital Wallet allows card holder to make
secure purchases online via point and click interface.

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E- Commerce

Merchant Software - This software helps merchants to communicate with potential

customers and financial institutions in secure manner.

Payment Gateway Server Software - Payment gateway provides automatic and

standard payment process. It supports the process for merchant's certificate request.

Certificate Authority Software -This software is used by financial institutions to issue

digital certificates to card holders and merchants and to enable them to register their account
agreements for secure electronic commerce.

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