UNIT-II

Types of Electronic Payment Systems

• Electronic payment systems are proliferating in banking, retail, health

care, on-line markets, and even government—in fact, anywhere money
needs to change hands.

• Organizations are motivated by the need to deliver products and services

more cost effectively and to provide a higher quality of service to
customers.

• The emerging electronic payment technology labeled electronic funds transfer (EFT).

• EFT is defined as ―any transfer of funds initiated through an electronic

terminal, telephonic instrument, or computer or magnetic tape so as to order,
instruct, or authorize a financial institution

EFT can be segmented into three broad categories:

• Banking and financial payments

– Large-scale or wholesale payments (e.g., bank-to-bank transfer)

– Small-scale or retail payments (e.g., automated teller machines)

– Home banking (e.g., bill payment)

• Retailing payments

– Credit Cards (e.g., VISA or MasterCard)

– Private label credit/debit cards (e.g., J.C. Penney Card)

– Charge Cards (e.g., American Express

• On-line electronic commerce payments

– 1. Token-based payment systems

• Electronic cash (e.g., DigiCash)

• Electronic checks (e.g., NetCheque)

• Smart cards or debit cards (e.g., Mondex Electronic Currency Card))

– 2. Credit card-based payments systems

• Encrypted Credit Cards (e.g., World Wide Web form-based encryption)

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 • Third-party authorization numbers (e.g., First Virtual)

Digital Token-Based Electronic Payment Systems

Electronic tokens are three types:
1. Cash or Real-time

• Transactions are settled with exchange of electronic currency.

• Ex: on-line currency exchange is electronic cash (e-cash).

2. Debit or Prepaid

• Users pay in advance for the privilege of getting information.

• Ex: prepaid payment mechanisms are stored in smart cards and electronic
purses that store electronic money.

3. Credit or Postpaid

• The server authenticates the customers and verifies with the bank that funds
are adequate before purchase.

• Ex: postpaid mechanisms are credit/debit cards and electronic checks.

Properties of Electronic Cash:

• There are many ways that exist for implementing an e-cash system, all must
incorporate a few common features.

• Specifically, e-cash must have the following four properties:

1. Monetary value

2. Interoperability

3. Retrievability

4. Security

Electronic Cash in Action

• Electronic Cash is based on cryptographic systems called ―digital signatures‖.

• This method involves a pair of numeric keys: one for locking (encoding) and
the other for unlocking (decoding). (Through public key and private key).

Purchasing E-cash from Currency Servers

The purchase of e-cash from an on-line currency server (or bank) involves two steps:

• Establishment of an account and

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 • Maintaining enough money in the account to bank the purchase.

Some customers might prefer to purchase e-cash with paper currency, either
to maintain anonymity or because they don‘t have a bank account.

Using the Digital Currency

• Once the tokens are purchased, the e-cash software on the customer‘s PC
stores digital money undersigned by a bank.

• The users can spend the digital money at any shop accepting e-cash,
without having to open an account there or having to transmit credit card
numbers.

• As soon as the customer wants to make a payment, the software collects

the necessary amount from the stored tokens.

Electronic Checks

• It is another form of electronic tokens.

• In the given model shown in fig, buyers must register with third-party
account server before they are able to write electronic checks.

• The account server acts as a billing service.

• The advantages are:

1. They work in the same way as traditional checks.

2. These are suited for clearing micropayments

3. They create float & availability of float is an important for commerce

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 4. Financial risk is assumed by the accounting server & may result in easier acceptance

Smart Cards & Electronic Payment Systems

• Smart cards have been in existence since the early 1980s and hold promise
for secure transactions using existing infrastructure.

• Smart cards are credit and debit cards and other card products enhanced with
microprocessors capable of holding more information than the traditional
magnetic stripe.

• The smart card technology is widely used in countries such as France,

Germany, Japan, and Singapore to pay for public phone calls,
transportation, and shopper loyalty programs.

Smart cards are basically two types:

– Relationship-Based Smart Credit Cards

– Electronic Purses, which replace money, are also known as debit

cards and electronic money.

Relationship-Based Smart Credit Cards

– It is an enhancement of existing cards services &/ or the addition of

new services that a financial institution delivers to its customers via a
chip-based card or other device

– These services include access to multiple financial accounts, value-

added marketing programs, or other information card holders may

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 want to store on their card

– It includes access to multiple accounts, such as debit, credit, cash

access, bill payment & multiple access options at multiple
locations

Electronic Purses

• To replace cash and place a financial instrument are racing to introduce

―electronic purses‖, wallet-sized smart cards embedded with
programmable microchips that store sums of money for people to use
instead of cash for everything

• The electronic purse works in the following manner:

1. After purse is loaded with money at an ATM, it can be used to pay for candy
in a vending machine with a card reader.

2. It verifies card is authentic & it has enough money, the value is deducted from
balance on the card & added to an e-cash & remaining balance is displayed by
the vending machine.

Credit Card-Based Electronic Payment Systems

Payment cards are all types of plastic cards that consumers use to make purchases:

– Credit cards

• Such as a Visa or a MasterCard, has a preset spending limit

based on the user‘s credit limit.

– Debit cards

• Removes the amount of the charge from the cardholder‘s

account and transfers it to the seller‘s bank.

– Charge cards

• Such as one from American Express, carries no preset spending limit.

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Advantages:
Payment cards provide fraud protection. They have worldwide acceptance (nearly!). They are

good for online transactions.

Disadvantages:

– Payment card service companies charge merchants per-

transaction fees and monthly processing fees.

Payment Acceptance and Processing

• Open loop (such as VISA) and closed loop (such as American Express)
systems will accept and process payment cards.

• A merchant bank or acquiring bank is a bank that does business with

merchants who want to accept payment cards.

Software packaged with your electronic commerce software can handle payment card processing
automatically.

• Electronic cash is a general term that describes the attempts of several

companies to create value storage and exchange system that operates online
in much the same way that government-issued currency operates in the
physical world.

• Concerns about electronic payment methods include:

– Privacy

– Security

– Independence

– Portability

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 – Convenience

Electronic Cash Issues

• Primary advantage is with purchase of items less than £5

• Credit card transaction fees make small purchases unprofitable

• Facilitates Micropayments – eg for items costing less than £1

• Must be anonymous, just like regular currency

• Safeguards must be in place to prevent counterfeiting

• Must be independent and freely transferable regardless of nationality

or storage mechanism

Electronic cash Storage

Electronic Cash Storage

• Two methods

– On-line
Individual does not have possession personally of electronic
•
cash Trusted third party, e.g. e-banking, bank holds customers‘
• cash accounts
–
– Off-line
Customer holds cash on smart card or electronic

wallet Fraud and double spending require tamper-

proof encryption

Risks in Electronic Payment systems

• Customer's risks

– Stolen credentials or password

– Dishonest merchant

– Disputes over transaction

– Inappropriate use of transaction details

• Merchant‘s risk

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 – Forged or copied instruments

– Disputed charges

– Insufficient funds in customer‘s account

– Unauthorized redistribution of purchased items

• Main issue: Secure payment

scheme Electronic payments Issues

• Secure transfer across internet

• High reliability: no single failure point

• Atomic transactions

• Anonymity of buyer

• Economic and computational efficiency: allow micropayments

• Flexibility: across different methods

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 • Scalability in number of servers and users Designing Electronic Payment systems

It includes several factors:

• Privacy. A user expects to trust in a secure system; just as a telephone is a safe

• Security. A secure system verifies the identity of two-party transactions

through ―user authentication‖ & reserves flexibility to restrict
information/services through access control

• Intuitive interfaces. The payment interface must be as easy to use as a telephone.

• Database integration. With home banking, for ex, a customer wants to play
with all his accounts.

• Brokers. A ―network banker‖-someone to broker goods & services, settle conflicts, &
‗inancial transactions electronically-must be in place

• Pricing. One fundamental issue is how to price payment system services.

For e.g., from cash to bank payments, from paper-based to e-cash. The
problem is potential waste of resources.

• Standards. Without standards, the welding of different payment users

into different networks & different systems is impossible.

Electronic Data Interchange

• Electronic Data Interchange (EDI) - interposes communication of business

information in standardized electronic form

• Prior to EDI, business depended on postal and phone systems that

restricted communication to those few hours of the workday that overlap
between time zones

Why EDI

• Reduction in transaction costs

• Foster closer relationships between trading

partners EDI & Electronic Commerce

• Electronic commerce includes EDI & much more

• EDI forges boundary less relationships by improving interchange of

information between trading partners, suppliers, & customers

EDI & Electronic Commerce

• Electronic commerce includes EDI & much more

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 • EDI forges boundary less relationships by improving interchange of
information between trading partners, suppliers, & customers

Benefits of EDI

• Cost & time savings, Speed, Accuracy, Security, System Integration,

Just-In-Time Support.

• Reduced paper-based systems, i.e. record maintenance, space, paper, postage costs

• Improved problem resolution & customer service

• Expanded customer/supplier base or suppliers with no EDI program

lose business EDI layered architecture

• Semantic (or application) layer

• Standards translation layer

• Packing (or transport) layer

• Physical network infrastructure layer

EDI semantic layer:

• Describes the business application

• Procurement example

– Requests for quotes

– Price quotes

– Purchase orders

– Acknowledgments

– Invoices

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 • Specific to company & software

used Standards translation:

• Specifies business form structure so that information can be exchanged

• Two competing standards

– American National Standards Institute(ANSI)X12

– EDIFACT developed by UN/ECE, Working Party for the

Facilitation of International Trade Procedures

EDI transport layer

• How the business form is sent, e.g. post, UPS, fax

• Increasingly, e-mail is the carrier

• Differentiating EDI from e-mail

– Emphasis on automation

– EDI has certain legal status

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E COMMERCE

Physical network infrastructure layer

• Dial-up lines, Internet, value-added network, etc.

EDI in Action

• The fig shows the information flow when paper documents are
shuffled between organizations via the mailroom

• When the buyer sends a purchase order, then relevant data extracted &
recorded on a hard copy.

• This hard copy is forwarded to several steps, at last manually entered into
system by the data entry operators

• This process is somewhat overhead in labor costs & time delays.

EDI in Action

• Information flow with EDI are as follows:

1. Buyer sends purchase order to seller computer

2. Seller sends purchase order confirmation to buyer

3. Seller sends booking request to transport company

4. Transport company sends booking confirmation to seller

5. Seller sends advance ship notice to buyer

6. Transport company sends status to seller

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 7. Buyer sends Receipt advice to seller

8. Seller sends invoice to buyer

9. Buyer sends payment to seller EDI as a fast, inexpensive & safe method

Benefits of EDI

• Cost & time savings, Speed, Accuracy, Security, System Integration,

Just-In-Time Support.

• Reduced paper-based systems, i.e. record maintenance, space, paper, postage costs

• Improved problem resolution & customer service

• Expanded customer/supplier base or suppliers with no EDI program

lose business EDI Applications in Business

Four different scenarios in industries that use EDI extensively:

1. International or cross-border trade

2. Electronic funds transfer

3. Health care EDI for insurance claims processing

4. Manufacturing & retail procurement

5. International or cross-border trade

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 • EDI has always been very closely linked with international trade.

• Trade efficiency, which allows faster, simpler, broader & less costly transactions

Role of EDI in international trade

• EDI facilitates the smooth flow of information

• It reduces paper work

• EDI benefits for international trade are

1. Reduced transaction expenditures

2. Quicker movement of imported & exported goods

3. Improved customer service through ―track & trace‖ programs

4. Faster customs clearance & reduced opportunities for corruption, a huge problem in trade

2. Interbank Electronic Funds Transfer (EFT)

• EFTS is credit transfers between banks where funds flow directly from the
payer‘s bank to the payee‘s bank.

• The two biggest funds transfer services in the United States are the Federal
Reserve‘s system, Fed wire, & the Clearing House Interbank Payments
System (CHIPS) of the New York clearing house

Automated Clearinghouse (ACH) Transfers

• ACH transfers are used to process high volumes of relatively small-dollar

payments for settlement in one or two business days

• It provides services: preauthorized debits, such as repetitive bill payments; &

consumer- initiated payments.

3. Health care EDI for insurance EDI

• Providing good & affordable health care is a universal problem

• EDI is becoming a permanent fixture in both insurance & health care

industries as medical provider, patients, & payers

• Electronic claim processing is quick & reduces the administrative costs of health care.

• Using EDI software, service providers prepare the forms & submit
claims via communication lines to the value-added network service
provider

• The company then edits sorts & distributes forms to the payer. If necessary,
the insurance company can electronically route transactions to a third-party

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 for price evaluation

• Claims submission also receives reports regarding claim status & request
for additional information

4. Manufacturing & retail procurement using EDI

• These are heavy users of EDI

• In manufacturing, EDI is used to support just-in-time.

• In retailing, EDI is used to support quick

response Just-In-Time & EDI

• Companies using JIT & EDI calculates how many parts are needed each day
based on the production schedule & electronically transmit orders.

• Delivery has to be responsive, or it will cost too much in money & time.

• Getting data to suppliers quickly

• A major benefit of JIT & EDI is a streamlined cash flow.

Quick Response & EDI

• For the customer, QR means better service & availability of a wider range of products

• For the retailer & supplier, QR may mean survival in a competitive marketplace

• Much focus of QR is in reduction of lead times using event-driven EDI.

• In QR, EDI documents include purchase orders, shipping notices,

invoices, inventory position, catalogs, & order status

EDI: Legal, Security, & Privacy Issues

Legal Status of EDI Messages

• To understand the legal framework, let‘s take a look on three modes of

communication types: Instantaneous communication, delayed communication
via the U.S. Postal Service (USPS), & delayed communication via non-USPS
couriers;

1. Instantaneous.If the parties are face to face or use an instantaneous

communication medium such as the telephone

2. Delayed (USPS). The ―mailbox rule‖ provides that an acceptance

communicated via USPS mail is effectively when dispatched

3. Delayed (non-USPS). Acceptances transmitted via telegram, mailgram, &

electronic messages, are communicated & operable upon receipt.

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Digital Signatures & EDI

• Digital signatures might be time-stamped or digitally notarized to establish dates & time

• If digital signatures are to replace handwritten signatures, they must have the
same legal status as handwritten signatures.

• It provides a means for a third party to verify that notarized object is authentic.

EDI & Electronic Commerce

• New types of EDI are traditional EDI &

open EDI Traditional EDI

• It replaces the paper forms with almost strict one-to-one mappings

between parts of a paper form to fields of electronic forms called
transaction sets.

• It covers two basic business areas:

1. Trade data Interchange (TDI) encompasses transactions such as purchase

orders, invoice & acknowledgements.

2. Electronic Funds Transfer (EFT) is the automatic transfer of funds among

banks & other organizations

• It is divided into 2 camps: old EDI & new EDI.

• Old EDI is a term created by those working on the next generation of EDI
standards in order to differentiate between the present & the future.

Old EDI

• Automating the exchange of information pertinent to business activity

• It is referred as the current EDI-standardization process where it allows every

company to choose its own, unique, proprietary version

New EDI

• It is refocusing of the standardization process.

• In this, the structure of the interchanges is determined by the programmer

who writes a program.

• It removes long standardization process.

Open EDI

• It is a business procedure that enables e-commerce to occur between

organizations where the interaction is of short duration.

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 • It is process of doing EDI without the upfront trading partner agreement that
is currently signed by the trading partners

• The goal is to sustain ad hoc business or short-term trading relationships

using simpler legal codes.

• It is a law of contract within the context of e-commerce where

transactions are not repeated over long period of time.

Standardization & EDI

Standards translation

• Specifies business form structure so that information can be exchanged

• Two competing standards

– American National Standards Institute (ANSI) X12

– EDIFACT developed by UN/ECE, Working Party for the

Facilitation of International Trade Procedures

Structure of EDI transactions

– Transaction set is equivalent to a business document, such as a purchase order

– Data Segments are logical groups of data elements that

together convey information

– Data elements are individual fields, such as purchase order no.

Comparison of EDIFACT & X.12 Standards

• These are comprised of strings of data elements called segments.

• A transaction set is a set of segments ordered as specified by the standard.

• ANSI standards require each element to have a very specific name, such as
order date or invoice date.

• EDIFACT segments, allow for multiuse elements, such as date.

• EDIFACT has fewer data elements & segments & only one beginning
segment (header), but it has more composites.

• It is an ever-evolving

platform EDI Software

Implementation

• EDI software has 4 layers:

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 1. Business application

2. Internal format conversion

3. EDI Translator

4. EDI envelope for document messaging

• These 4 layers package the information & send it over the value-added
network to the target business, which then reverses the process to obtain
the original information

EDI Business Application Layer

1. It creates a document, an invoice.

2. Sends to EDI translator, reformats the invoice into an EDI standard.

3. If there are on the same type of computer, the data move faster

EDI Envelope for Message Transport

The X.400 & X.435 Envelopes

• The X.400 standard was meant to the universal answer to e-mail interconnectivity

• It promises much & to date, delivers little.

• The work on X.400 began in1980

• It is the open standard for mail interchange

• The standard exists in 3 versions: 1984, 1988, & 1992.

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EDI Software Implementation

• The X.435 inserts a special field in an X.400 envelope to identify an EDI message

• It includes data encryption; integrity; notification of message delivery &

nondelivery; & nonrepudiation of delivery

• It is secure, reliable way to send EDI & accompanying files within the same message.

• Purchase orders, invoices, drawings, e-mail- all could be sent with

end-to-end acknowledgment of message receipt.

Value-Added Networks (VANs)

• A VAN is a communication network that typically exchanges EDI

messages among trading partners.

• It provides services, including holding messages in ―electronic mailboxes‖,

interfacing with other VANs

• Disadvantage is EDI-enabling VANs is that they are slow & high-priced,

charging by the no. of characters transmitted

Internet-Based EDI

Several factors make internet useful for EDI:

• Flat-pricing that is not dependent on the amount of information transferred

• Cheap access with low cost of connection- often a flat monthly fee for leased
line 0r dial- up access

• Common mail standards & proven networking & interoperable systems

• Security--public-key encryption techniques are being incorporated in

various electronic mail systems

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