E-COMMERCE PAYMENT SYSTEMS

Electronic payment is an integral part of electronic commerce. 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 checks, or digital
cash) that is backed by a bank or an intermediary, or by legal tender.

Three factors that are stimulating interest in electronic payments among

financial institutions:

 decreasing technology costs,

 reduced operational and processing costs, and
 increasing online commerce.

The desire to reduce costs is one major reason for the increase in electronic
payments. Cash and checks are very expensive to process, and banks are
seeking less costly alternatives. Banks and retailers want to wean customers
away from paper transactions because the processing overhead is both labor
intensive and costly. Electronic payment has revolutionized the business
processing by reducing paper work, transaction costs, labour cost, being user
friendly and less time consuming than manual processing, helps business
organization to expand its market.

Designing Electronic Payment Systems

 Privacy. A user expects to trust in a secure system.

 Security. A secure system verifies the identity of two-party transactions
through “user authentication” and reserves flexibility to restrict
information/services through access control.
 Intuitive interfaces. The payment interface must be easy to use.
 Database integration. With home banking, for example, a customer
wants to play with all his accounts. To date, separate accounts have been
stored on separate databases. The challenge before banks is to tie these
databases together and to allow customers access to any of them while
keeping the data up-to-date and error free.
 Brokers. A “network banker”-someone to broker goods and services,
settle conflicts, and facilitate financial transactions electronically-must be
in place.

Some modes of electronic payment systems

1. Credit card
2. prepaid card
3. debit card payments
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 4. Smart card
5. E-wallet / digital wallet
6. Electronic cash (e.g E-cash, e-money, digital cash, cybercash)
7. Bank transfer payments. E.g Electronic funds transfer (EFT) between
banks and financial institutions
8. Mobile payments

Credit Card

A Credit card is small plastic card with a unique number attached with an
account. It has a magnetic strip embedded in it which is used to read credit card
via card readers. When a customer purchases a product via credit card, credit
card issuer bank pays on behalf of the customer and customer has a certain
time period after which he/she can pay the credit card bill. It is usually credit
card monthly payment cycle. The following are the actors in the credit card
system.

 The card holder - Customer

 The merchant - seller of product who can accept credit card payments.
 The card issuer bank - card holder's bank
 The acquirer bank - the merchant's bank
 The card brand - for example , visa or mastercard.

Summary of Credit card payment process

Step Description

Bank issues and activates a credit card to customer on his/her

Step 1
request.

Customer presents credit card information to merchant’s web

site or to merchant at the point of sale of the product/service.
Step 2
The Merchant electronically forwards the customers details to
the acquirer bank.

The acquirer bank validates customer's identity by asking for

Step 3 approval from the customer’s bank. Credit card information is
sent through card brand company for authentication.

Step 4 The customer’s bank sends approval of transaction to the

acquirer bank through Card brand company. Acquirer bank

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 sends the “approval message” to the Merchant to proceed with
the transaction.

Merchant completes the sale, produces a sales slip and submits

Step 5 it to acquirer bank for payment. The acquirer bank credits the
Merchant’s account

The acquirer sends transaction information on to the “card

network” or credit card association. The card network has the
Step 6 job of routing transaction information to the correct credit card
issuer. The issuer bank settles the payment with the acquirer
bank.

Secured credit cards

A secured credit card is a type of credit card secured by a deposit account

owned by the cardholder. Typically, the cardholder must deposit between 100%
and 200% of the total amount of credit desired.

Although the deposit is in the hands of the credit card issuer as security in the
event of default by the consumer, the deposit will not be debited simply for
missing one or two payments. Usually the deposit is only used as an offset when
the account is closed, either at the request of the customer or due to severe
delinquency.

Secured credit cards are an option to allow a person with a poor credit history or
no credit history to have a credit card which might not otherwise be available.
They are often offered as a means of rebuilding one’s credit.

Credit card numbering

The numbers found on credit cards have a certain amount of internal structure,
and share a common numbering scheme. The card number’s prefix, called the
Bank Identification Number, is the sequence of digits at the beginning of the
number that determine the bank to which a credit card number belongs. This is
the first six digits for MasterCard and Visa cards. The next nine digits are the
individual account number, and the final digit is a validity check code. In
addition to the main credit card number, credit cards also carry issue and
expiration dates (given to the nearest month), as well as extra codes such as
issue numbers and security codes. Not all credit cards have the same sets of
extra codes nor do they use the same number of digits.

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Credit cards in ATMs

Many credit cards can also be used in an ATM to withdraw money against the
credit limit extended to the card but many card issuers charge interest on cash
advances before they do so on purchases. The interest on cash advances is
commonly charged from the date the withdrawal is made, rather than the
monthly billing date. Many card issuers levy a commission for cash withdrawals,
even if the ATM belongs to the same bank as the card issuer. Merchants do not
offer cash back on credit card transactions because they would pay a percentage
commission of the additional cash amount to their bank or merchant services
provider, thereby making it uneconomical.

Credit Card payment-online networks

We can break credit card payment on on-line networks into three basic
categories:

1. Payments using plain credit card details.

The easiest method of payment is the exchange of unencrypted credit

cards over a public network such as telephone lines or the Internet. The
low level of security inherent in the design of the Internet makes this
method problematic (any snooper can read a credit card number, and
programs can be created to scan the Internet traffic for credit card
numbers and send the numbers to its master). Authentication is also a
significant problem, and the vendor is usually responsible to ensure that
the person using the credit card is its owner. Without encryption there is
no way to do this.

2. Payments using encrypted credit card details.

It would make sense to encrypt your credit card details before sending
them out, but even then there are certain factors to consider. One would
be the cost of a credit card transaction itself. Such cost would prohibit
low-value payments (micro payments) by adding costs to the transactions.

3. Payments using third-party verification.

One solution to security and verification problems is the introduction of a

third party: a company that collects and approves payments from one
client to another. After a certain period of time, one credit card transaction
for the total accumulated amount is completed.

Encryption is instantiated when credit card information is entered into a browser

or other electronic commerce device and sent securely over the net-work from
buyer to seller as an encrypted message. This practice, however, does not meet
important requirements for an adequate financial system, such as non

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refutability, speed, safety, privacy, and security. To make a credit card
transaction truly secure and non-refutable, the following sequence of steps must
occur before actual goods, services, or funds flow:

1. A customer presents his or her credit card information (along with an

authenticity signature or other information such as mother’s maiden
name) securely to the merchant. The merchant validates the customer’s
identity as the owner of the credit card account.
2. The merchant relays the credit card charge information and signature to
its bank or on-line credit card processors.
3. The bank or processing party relays the information to the customer’s;
bank for authorization approval.
4. The customer’s bank returns the credit card data, charge authentication,
and authorization to the merchant.

In this scheme, each consumer and each vendor generates a public key and a
secret key. The public key is sent to the credit card company and put on its
public key server. The secret key is re-encrypted with a password, and the
unencrypted version is erased. To steal a credit card, a thief would have to get
access to both a consumer’s encrypted secret key and password. The credit card
company sends the consumer a credit card number and a credit limit. To buy
something from vendor X, the consumer sends vendor X the message, ‘It is now
time T. I am paying Y dollars to X for item Z,” then the consumer uses his or her
password to sign the message with the public key.

The vendor will then sign the message with its own secret key and send it to the
credit card company, which will bill the consumer for Y dollars and give the
same amount (less a fee) to X. Nobody can cheat this system. The consumer
can’t claim that he didn’t agree to the transaction, because he signed it (as in
everyday life). The vendor can’t invent fake charges, because he doesn’t have
access to the consumer’s key. He can’t submit the same charge twice, because
the consumer included the precise time in the message. To become useful,
credit Card systems will have to develop distributed key servers and card
checkers. Otherwise, a concentrated attack on these sites could bring the
system to a halt.

Debit Card

Debit card is a small plastic card with a unique number mapped with the bank
account number. It is required to have a bank account before getting a debit
card from the bank.

The major difference between debit card and credit card is that in case of
payment through debit card, amount gets deducted from card's bank account
immediately and there should be sufficient balance in bank account for the
transaction to get completed. Whereas in case of credit card, funds flow later for
settlement.
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Depending on the store or merchant, the customer may swipe or insert their
card into the terminal, or they may hand it to the merchant who will do so. The
transaction is authorized and processed and the customer verifies the
transaction either by entering a PIN or, occasionally, by signing a sales receipt.

In some countries the debit card is multipurpose, acting as the ATM card for
withdrawing cash and as a check guarantee card. Merchants can also offer
“cashback”/ ”cashout” facilities to customers, where a customer can withdraw
cash along with their purchase.

The use of debit cards has become wide-spread in many countries and has
overtaken the check, and in some instances cash transactions by volume. Like
credit cards, debit cards are used widely for telephone and Internet purchases.

Although many debit cards are of the Visa or MasterCard brand, there are many
other types of debit card, each accepted only within a particular country or
region.

Online and offline debit transactions

There are currently two ways that debit card transactions are processed:
onlinedebit (also known as PIN debit) and offline debit (also known as
signature debit).

Online debit cards require electronic authorization of every transaction and

the debits are reflected in the user’s account immediately. The transaction may
be additionally secured with the personal identification number (PIN)
authentication system and some online cards require such authentication for
every transaction, essentially becoming enhanced automatic teller machine
(ATM) cards.

Overall, the online debit card is generally viewed as superior to the offline debit
card because of its more secure authentication system and live status, which
alleviates problems with processing lag on transactions that may have been
forgotten or not authorized by the owner of the card.

Offline debit (“signature debit” or “credit”)

Offline debit cards have the logos of major credit cards (e.g. Visa or MasterCard)
or major debit cards and are used at point of sale like a credit card. This type of
debit card may be subject to a daily limit, as well as a maximum limit equal to
the amount currently deposited in the current/checking account from which it
draws funds.

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Advantages of debit cards

Debit and check cards, as they have become widespread, have revealed
numerous advantages and disadvantages to the consumer and retailer alike.
Advantages are as follows:

 A consumer who is not credit worthy and may find it difficult or impossible
to obtain a credit card can more easily obtain a debit card, allowing
him/her to make transactions.
 Use of a debit card is limited to the existing funds in the account to which
it is linked, thereby preventing the consumer from racking up debt as a
result of its use, or being charged interest, late fees, or fees exclusive to
credit cards.
 Like credit cards, debit cards are accepted by merchants with less
identification and scrutiny than personal checks, thereby making
transactions quicker and less intrusive. Unlike personal checks, merchants
generally do not believe that a payment via a debit card may be later
dishonored.
 Unlike a credit card, which charges higher fees and interest rates when a
cash advance is obtained, a debit card may be used to obtain cash from
an ATM or a PIN-based transaction at no extra charge, other than a
foreign ATM fee.

Disadvantages of debit cards

 Many merchants mistakenly believe that amounts owed can be “taken”

from a customer’s account after a debit card (or number) has been
presented, without agreement as to date, payee name, and dollar and
cent amount, thus causing penalty fees for overdrafts, over-the-limit,
amounts not available causing further rejections or overdrafts, and
rejected transactions by some banks.
 Debit cards offer lower levels of security protection than credit cards. Theft
of the users PIN using skimming devices can be accomplished much easier
with a PIN input than with a signature-based credit transaction.
 When a transaction is made using a credit card, the bank’s money is being
spent, and therefore, the bank has a vested interest in claiming its money
where there is fraud or a dispute. The bank may fight to void the charges
of a consumer who is dissatisfied with a purchase, or who has otherwise
been treated unfairly by the merchant. But when a debit purchase is
made, the consumer has spent his/her own money, and the bank has little
if any motivation to collect the funds.

Smart Card
Smart cards are cards that look like credit cards, but store information on a
microprocessor chip instead of magnetic strips. A microchip can hold
significantly more information than a magnetic strip. Because of this capacity, a
single smart card can be used for many different purposes.
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Unlike magnetic strip cards which can be read by any magnetic reader, and are
therefore vulnerable to loss or theft, a smart card can be password-protected to
guarantee that it's only used by the owner.

Smart cards can run RSA encryption and can be programmed to generate a pair
of public/private keys. The public key is made publicly readable, but the private
key is stored on the card without anyone being able to copy it. Therefore, to use
the private key, the user must physically possess the card.

Smart card can be accessed only using a PIN of customer. Smart cards are
secure as they stores information in encrypted format and are less expensive,
provides faster processing. Mondex and Visa Cash cards are examples of smart
cards.

Digital Wallets

A digital wallet, or e-wallet, is another type of e-commerce payment system.

Much like a physical wallet, a digital wallet can store your personal
information and payment. However, digital wallets are stored within your PC.
Once the software is installed on your digital wallet, enter your personal
information, such as your name and billing address, then connect it to your
banking information so you can use it to withdraw funds from your account(s)
when making on-line purchases. When you're at the check-out page of an e-
commerce site, the digital wallet can automatically enter your personal and
banking information into the appropriate areas.

E-cash

An e-commerce system that uses e-cash refers to a system in which money is

only exchanged electronically. To use e-cash, link your personal bank account
to other payee accounts or set up an e-cash account using a centralized
system, such as PayPal, and link it to your personal bank account. To fund
your e-cash account, you can debit from your personal bank account or credit
card. To make payments using your e-cash account, you can make a deposit
to the other person's e-cash account if you have their banking information, or
request a transfer to their bank account.

E-Checks

Electronic checks are designed to accommodate the many individuals and

entities that might prefer to pay on credit or through some mechanism other
than cash. Electronic checks are modelled on paper checks, except that they are
initiated electronically, use digital signatures for signing and endorsing, and
require the use of digital certificates to authenticate the payer, the payer’s bank,
and bank account. The security/authentication aspects of digital checks are
supported via digital signatures using public-key cryptography.

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Electronic checks are delivered either by direct transmission using telephone
lines, or by public networks such as the Internet. Electronic check payments
(deposits) are gathered by banks and cleared through existing banking
channels, such as automated clearing houses (ACH) networks.

E-checks:

 contain the same information as paper checks contain

 are based on the same rich legal framework as paper checks
 can be linked with unlimited information and exchanged directly between
parties
 can be used in any and all remote transactions where paper checks are
used today
 enhance the functions and features provided by bank checking accounts
 expand on the usefulness of paper checks by providing value-added
information

Electronic checks have the following advantages:

Electronic checks work in the same way as traditional checks, thus simplifying
customer education. By retaining the basic characteristics and flexibility of paper
checks while enhancing the functionality, electronic checks can be easily
understood and readily adopted.

 Electronic checks are well suited for clearing micro payments; the
conventional cryptography of electronic checks makes them easier to
process than systems based on public-key cryptography (like digital cash).
The payee and the payee’s and payer’s banks can authenticate checks
through the use of publickey certificates. Digital signatures can also be
validated automatically. Electronic checks can serve corporate markets.
Firms can use electronic checks to complete payments over the networks
in a more cost-effective manner than present alternatives. Further, since
the contents of a check can be attached to the trading partner’s
remittance information, the electronic check will easily integrate with EDI
applications, such as ac-counts receivable.
 Electronic check technology links public networks to the financial
payments and bank clearing networks, leveraging the access of public net-
works with the existing financial payments infrastructure.

Why do we use e-checks?

 the ability to conduct bank transactions, yet are safe enough to use on the
Internet
 unlimited, but controlled, information carrying capability
 reduces fraud losses for all parties
 automatic verification of content and validity

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  traditional checking features such as stop payments and easy
reconciliation
 enhanced capabilities such as effective dating

The E-Check:

 can be used by all account holders, large and small, even where other
electronic payment solutions are too risky, or not appropriate
 is the most secure payment instrument available today
 provides rapid and secure settlement of financial obligations
 can be used with existing checking accounts.
 can be initiated from a variety of hardware platforms and software
applications

ELECTRONIC FUNDS TRANSFER (EFT)

Electronic Funds Transfer 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 banks. Fund transfer can be done using ATM
(Automated Teller Machine) or using computer.

One of the most common EFT’s is Direct Deposit. It is used by employers for
depositing their employees’ salary in a bank account. Other kind of EFT is the
automatic charge to your check or savings account. For example, when you are
paying a mortgage, the bank will discharge the monthly payment from a pre-
accorded bank account. The benefit is that you won’t have to go to the bank to
do it. It’s automatic. ATM’s are also used for EFT’s. Since an automatic teller
machine is much cheaper than a group of bank tellers, it has helped to bring
costs down and beneficiate the costumer.

Points of sale (also known as POS) are also part of this group. Those little blue
or dark blue machines in which you pass your card are doing an electronic fund
transfer from your account to the retail account.

For internet based EFT, 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.

EFT is considered to be a safe, reliable, and convenient way to conduct business.

The advantages of EFT contain the following:
• Simplified accounting
• Improved efficiency

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• Reduced administrative costs
• Improved security

The main advantage of an electronic funds transfer is time. Since all the
transaction is done automatically and electronically, the bank doesn’t need to
pay a person to do it, a person to drive the loans to the other bank, the cost of
the transport, the cost of the maintenance of the transport, insurance and the
gas of the transport. EFT’s have revolutionized modern banking.

Other benefit is immediate payment, which brings an up to date cash flow. You
won’t hear either about lost checks causes by the inefficiency of normal mail
(nowadays known as snail mail for its velocity compared to emails) and up to
date bookkeeping.

Mobile Payment

The newest e-commerce payment system is mobile payment, wherein a

consumer uses her cell phone to make purchases. Instead of using cash or
credit cards to buy something, the user simply sends a payment request via
text message. If the vendor has the mobile billing capability, the consumer's
mobile account or credit card is charged for the purchase. To set up a mobile
payment system, download a software package from your cell phone
company's website, then link your credit card or mobile billing information to
that software.

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