Chapter 5
E-commerce Payment Systems
What is Online Electronic Payment
An electronic payment system (EPS) also known as
electronic currency, broadly speaking, refer to a
transaction in the online exchange of funds;
is a system of financial exchange between buyers and
sellers in the online environment that is facilitated by a
digital financial instrument (such as encrypted credit card
numbers, electronic checks, or digital cash) backed by a
bank, an intermediary, or by legal tender.
What is Online Electronic Payment (contd.)
Electronic Payment System is the basis for online
payments, and online payments system development is a
higher form of electronic payment.
It means electronic payment may, at any time, through
the Internet directly to the transfer, settlement and form
e-business environment.
Electronic Payments Benefits
Electronic payments can benefit our business by:
extending our customer base;
boosting (increasing) cash flow;
reducing costs;
enhancing customer service
improving your competitive advantage.
Five reasons why Electronic payments improve
customer service
Choice – like our competitors, we can offer a wide range of
payment options
Convenience – they remove the need for invoices(bill) cheques,
cash
Credit – they may allow purchases that would otherwise be
delayed
Concessions – small discounts to encourage online purchases
improve the perception of value
Competitive Edge - if we don’t offer the full range of payment
options but your competitors do, what does this say about your
business?
Five reasons why Electronic payments increase
profitability
Convenience – removing administrative resources
required by invoices, cheques and cash
Immediacy – credit cards enable instant purchasing
(without delay)
Improved cash flow – payment at the time of purchase
reduces the pressures caused by 30-day invoicing
Growth – open additional payment channels via the
phone, mail order and Internet and increase your customer
base. More customers mean more revenue(income).
Competitive advantage – match and beat the services of
your competitors and gain the edge
Electronic Payment Methods
Innovations affecting consumers, include credit and debit
cards, automated teller machines (ATMs), stored value
cards, and e-banking.
Innovations enabling online commerce are e-cash, e-
checks, smart cards, and encrypted credit cards. These
payment methods are not too popular in developing
countries. They are employed by a few large companies in
specific secured channels on a transaction basis.
Innovations affecting companies pertain to payment
mechanisms that banks provide their clients, including inter-
bank transfers through automated clearing houses allowing
payment by direct deposit.
Available payment methods
Credit Card
Debit Card
Smart Card
E-Money
Electronic Fund Transfer (EFT)
Credit Card
Payment using credit card is one of most common
mode of electronic payment.
Credit card is small plastic card with a unique number
attached with an account.
It has also 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.
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.
Credit card payment process
Step Description
Step 1 Bank issues and activates a credit card to customer on his/her request.
Customer presents credit card information to merchant site or to
Step 2
merchant from whom he/she want to purchase a product/service.
Merchant validates customer's identity by asking for approval from card
Step 3
brand company.
Card brand company authenticates the credit card and paid the
Step 4
transaction by credit. Merchant keeps the sales slip.
Merchant submits the sales slip to acquirer banks and gets the service
Step 5
chargers paid to him/her.
Acquirer bank requests the card brand company to clear the credit
Step 6
amount and gets the payment.
Now card brand company asks to clear amount from the issuer bank and
Debit Card
Debit card, like credit 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 there is no such compulsion.
Debit cards free customer to carry cash, cheques and even
merchants accepts debit card more readily.
Having restriction on amount being in bank account also
helps customer to keep a check on his/her spending.
Smart Card
Smart card is again similar to credit card and debit card in
apperance but it has a small microprocessor chip embedded
in it.
It has the capacity to store customer work related/personal
information.
Smart card is also used to store money which is reduced as
per usage.
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.
E-Money
E-Money transactions refers to situation where payment is
done over the network and amount gets transferred from one
financial body to another financial body without any
involvement of a middleman.
E-money transactions are faster, convenient and saves a lot
of time.
Online payments done via credit card, debit card or smart
card are examples of e-money transactions.
Another popular example is e-cash. In case of e-cash, both
customer and merchant both have to sign up with the bank
or company issuing e-cash.
E-Cash (Electronic-cash) Internet Payment
Online payments via debit cards, credit cards or smart
card are the examples of e-money transactions.
E Cash is transferred directly from customer’s desktop
to the merchant’s site.
HOW TYPICAL E-CASH SYSTEM WORKS?
E-cash and e-payment systems
E-cash and e-payment systems also have the advantage of
cash, mainly as follows:
Anonymity (facelessness);
Not shadowing (investigation);
Savings on transaction costs;
Savings on transmission costs;
Less risk;
Pay flexibility;
Prevent forgery and repeatability
Electronic check (E_cheque) Internet Payment
System
E-CHEQUE
E-Cheque is the result of co-
operation between several banks,
government entities, technology
companies and e-commerce
organizations.
These can be used for small and
large organizations
E-CHEQUE WORKING
BENEFITS TO SELLERS
Online payment risk assessment
Charge-backs – the risk of refunds on our merchant
account;
Forecast turnover figures – higher turnover can generate
higher exposure;
Average transaction size – if we sell very high value items
(diamonds, cars) this will influence the risk analysis of our
business;
Time from payment to order fulfillment – The longer it
takes to dispatch goods to a customer, the greater the risk of
an order cancellation;
Length of trading record – a start-up company presents
more risk than a well established business;
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
Forged or copied instruments
Doubtful charges
Insufficient funds in customer‘s account
Unauthorized redistribution of purchased items
SECURITY ISSUES
1. Confidential 4. Authenticity
2. Integrity 5. Encryption
3. Availability 6. Audit ability
7. Non – Rejection
