What is electronic payment

• Electronic payment methods are the

payments made electronically rather than by
paper (cash, checks, vouchers, etc)

• Allows global reach, high speed, low

transaction cost and high automatibility
 Types of Electronic Payment
• B2B
– Small to large payments
• B2C
– Small to medium payments
– Credit card transactions
• Micropayments
– Very small payments
 Types of Electronic Payments (B2C)

• Electronic Payment Cards

– (credit, debit, charge)
• Smart Cards
– (phone cards, bank cards)
• P2P payments
– (paypal)
 Electronic payment cards
• Credit cards
– Most popular online payment
– Convenient for both merchant and customer
– Quicker payments 24/7
– Safest recommended method
 Players involved in credit card
• Acquirer: A bank that processes and settles a merchant's
credit card transactions with the help of a card issuer.
• Cardholder: The owner of a card that is used to make
credit card purchases.
• Card network: Visa, MasterCard or other networks that
act as an intermediary between an acquirer and an
issuer to authorize credit card transactions.
• Issuer: An financial institution, bank, credit union or
company that issues or helps issue cards to cardholders.
 Electronic payment cards (2)
• How credit card works
– Authorization: The first step in processing a credit card. After
a merchant swipes the card, the data is submitted to
merchant’s bank, called an acquirer, to request authorization
for the sale. The acquirer then routes the request to the card-
issuing bank, where it is authorized or denied, and the
merchant is allowed to process the sale.
– Batching :The second step in processing a credit card. At the
end of a day, the merchant reviews all the day’s sales to
ensure they were authorized and signed by the cardholder. It
then transmits all the sales at once, called a batch, to the
acquirer to receive payment.
 How credit card works
– Clearing :The third step in processing a credit card. After the
acquirer receives the batch, it sends it through the card
network, where each sale is routed to the appropriate issuing
bank. The issuing bank then subtracts its interchange fees,
which are shared with the card network, and transfers the
remaining amount through the network back to the acquirer.

– Funding: The fourth and final step in processing a credit card.

After receiving payment from the issuer, minus interchange
fees, the acquirer subtracts its discount fee and sends the
remainder to the merchant. The merchant is now paid for the
transaction, and the cardholder is billed.
 Types of credit cards
• Gold Credit Card:
– Cash withdrawal limit is higher
– Credit limit is higher
– Provides one Add-on card which can be given to either, spouse, children or parents of the credit
card holder
– Provides many privileges such as travel insurance, reward points, cash back offers etc.
• Platinum or Titanium Card:
– Protection against credit card loss and theft.
– Protection against online fraud transactions
– Protection against sickness and injury by an accident.
– There is no yearly fee
• Silver Credit Card:
– Lower membership fees
– The applicant need not be a high- salaried person to buy silver card.
• Rewards Credit Card:
– This card has rewards attached to it on based on usage of the card, for e.g. A card may offer 5%
discount on fuel
 Advantages of credit cards
• You can use them practically everywhere, especially overseas.
• They can boost your purchasing power because they can be used to buy goods and
services over the phone, through the mail and online.
• They provide financial backup in the event of an emergency, such as an unexpected
healthcare cost, job loss or auto repair.
• They allow you to purchase items and pay them off in monthly installments. They
offer discounts at stores and rewards. For instance, when you make purchases using
the credit card you can collect points; these points accumulate and can be used to
get free items, such as airline tickets.
• Some cards may offer cash back as an incentive to use the card.
• They can help build your credit history.
• They keep a record of your expenses, helping you to monitor your financial
activities.
• Credit cards allow you the right to dispute billing errors and defective merchandise.
• They allow you withhold payments.
 Disadvantages of credit cards
• Some consumers feel compelled to spend more money than
they have.
• Consumers may continuously roll over a balance for several
months.
• When you default on credit card payments, you are charged
with late fees and interest, increasing your debt load.
• Carrying a large amount of credit cards also isn't too favorable in
the eyes of lenders.
• Acquiring too much credit card debt can ruin your credit score.
• Studies have indicated credit card debt as a significant factor in
consumer bankruptcies.
• Credit card fraud is a possibility.
 Smart Card (1)
• A type of computer embedded chip card that stores and
transacts encrypted data between users.
• Smart card are used in healthcare, banking, entertainment
and transportation industries.
• Offers enhanced security, convenience and economic
benefits
 Smart Card (2)
• Smart Card for E-Commerce
– Advantages
• Carry personal Accounts
• Credit and buying preferences
• Cannot be easily duplicated
• High level of security
• Manage and control expenditures with automatic limits
and reporting
– Disadvantages
• Costs 2 to 7 times more than magnetic stripe cards
• Need a smart card reader
 Smart Card Applications
• Ticketless travel
• Authentication, ID
• Medical records
• Ecash
• Store loyalty programs
• Personal profiles
• Government
– Licenses
• Mall parking
 Smart Card Structure
Contacts:

Microprocessor

Contacts
Card
(Upside-down) Epoxy

Contacts (8)
 Smart Cards
• Contact card
A smart card containing a small gold plate on the
face that when inserted in a smart card reader
makes contact and passes data to and from the
embedded microchip
• Contactless (proximity) card
A smart card with an embedded antenna, by
means of which data and applications are passed
to and from a card reader unit or other device
without contact between the card and the card
reader
12-19
 Smart Cards
• Smart cards, containing microprocessors, are able to
hold more information than cards based on the
traditional magnetic strips. They help the cardholder to
perform operations, especially of financial nature. Most
of these methods are known as stored value cards or
electronic purse system. Units of prepayment or
currency value are electronically stored on an IC
(integrated circuit) chip embedded in these cards.
• There are two types of smart cards, (i) relationship-
based smart credit card and (ii) electronic purses.
 Relationship-based smart credit card
• As you must be aware, smart credit card is based on
some kind of relationship between a cardholder
and an organization, such as between Delhi Metro
and its commuters or between the users of toll
bridges or highways, and the company that has
built them. Financial institutions also give
enhancement on existing card services or provide
new services to their customers through the smart
card.
Relationship-based smart credit card offers consumers the
following options:
• On a smart credit card a customer can access many
accounts, such as credit, debit, investments or stored
value for e-cash,
• There are multifarious uses of smart credit card, such
as payment of bills, access to cash, or funds transfer for
selected accounts, etc.
• Smart credit cards provide access to ATMs, a screen
phone, a PC, or interactive TVs anywhere and at all
times.
 Smart Cards
• Smart card reader
Activates and reads the contents of the chip on a
smart card, usually passing the information on to a
host system
• Smart card operating system
Special system that handles file management,
security, input/output (I/O), and command execution
and provides an application programming interface
(API) for a smart card

12-23
 Advantages of smart cards
• Stored many types of information
• Not easily duplicated
• Not occupy much space
• Portable
• Low cost to issuers and users
• Included high security
 P2P Payments
• Person to person payments are newest and
fastest growing e-payment schemes.
• Able to transmit funds to anyone with an
email address
– ex) Paypal
• Free to send money to anyone

• State of the art security technology

 Electronic Cheques
• Electronic cheque (e-cheque) is a form of e-
token. E-cheque is planned to accept individuals
or a group who prefers to pay on credit or
through some method, but not through cash.
Electronic cheque has all the same features as a
paper cheque. It functions as a message to the
sender's bank to transfer funds, the message is
given to the receiver, who in turn, endorses the
cheque and presents it to the bank to obtain
funds.
 Benefits of electronic Cheques
• Well suited for clearing micro payments.
Conventional cryptography of e-cheques makes
them easier to process than systems based on
public key cryptography (like digital cash).
• They can serve corporate markets. Firms can
use them in more cost-effective manner.
• Since Electronic cheques use conventional
encryption than Public and private keys as in e-
Cash, Electronic cheques are much faster.
Step - 1: Purchasing goods
• The consumer accesses the merchant server and
the merchant server presents its goods to the
consumer.
• The consumer selects the goods and purchases
them by sending an electronic cheque to the
merchant.
• The merchant may validate the electronic cheque
with its bank for payment authorization.
• Assuming the cheque is validated, the merchant
closes the transaction with the consumer.
Step - 2: Depositing cheques at the merchant's bank
• The merchant electronically forwards the cheque to
the bank.
• The merchant bank forwards the e-cheque to the
clearing house for cashing.
• The clearing house with the consumer bank, clears
the cheque and transfers money to the merchant's
bank, which updates the merchant account.
• The consumer's bank updates the consumer with the
withdrawal information.
 Advantages of E-Cheques
• It is similar to traditional cheques.
• E-cheques are much faster than e-cash, as they use
conventional encryption unlike public and private keys
used in e-cash.
• The risk is taken care of by the accounting server, which
will guarantee that the cheque would be honoured.

The following two systems provide electronic cheques for

online payment:
• Financial Services Technology Corporation (FSTC)
• Cyber Cash
 Two general approaches for initiating a person-to-person
payment:

• In the first method, based on the successful Paypal approach, users establish
secure accounts with a trusted third-party vendor, designating their bank
account or credit card information to be used to transfer and accept funds.
Using the third party's website or mobile application, individuals can complete
the process of sending or receiving funds. Users are generally identified by their
email address and can send funds to anyone who is a member of the network.

• In the second method, customers use an online interface or mobile application

(developed by their bank or financial institution) to designate the amount of
funds to be transferred. The recipient is designated by their email address or
phone number. Once the transfer has been initiated by the sender, the recipient
then receives a notification to use the online interface to input his or her bank
account information and routing number to accept the transfer of funds. In this
method, recipients do not need to have an account with the financial
institution of the sender in order to receive a money transfer
 Electronic Payments (Micropayments)

• Allows very small charges for goods and services

• Very small payments usually below $10
– Ex) Digital music
• Credit cards or EFT are too expensive
– Credit card charges 2 to 3 percent of purchase price
• Difficult to allocate payment
– Hard to split between issuing bank, paying bank, card processor,
and etc)
• New business model made possible by innovation of IT
 Accepting Electronic Payments (B2C)

• Merchant Account
– Payment processing opened through a bank

• Third Party Processor

– Payment processor that accepts credit cards on
behalf of your company
 Merchant Account
• Advantages
– Increase credibility
– Flexibility
• Able to sell any kind of products and services
• Own shopping cart

• Disadvantages
– Difficult to obtain
– Expensive
• Large set up fee, application fee, gateway fee, monthly statement fee and
monthly minimum fee
 Third Party Processor
• Advantages
– Easy to obtain
– Small set up fee, no monthly fees, no gateway fees
– Accepts most credit card, debit card, checks
– Less administrative work
• Disadvantages
– Don’t have public acceptance
• Must use their shopping cart system
– Gives less confidence to purchaser
– Higher transaction fees
 Types of Electronic payments (B2B)

• Electronic cheques
• Purchasing cards
• Electronic letters of credit
• Electronic Funds Transfer
– Transfer of funds
• Ex) ATM, Internet banking
• Electronic Benefits Transfer
– Transfer of benefits
• Ex) Debit card for food stamps
 Electronic Fund Transfer
• Electronic funds transfer is one of the oldest electronic payment systems.
EFT is the groundwork of the cash-less and check-less culture where and
paper bills, checks, envelopes, stamps are eliminated. EFT is used for
transferring money from one bank account directly to another without
any paper money changing hands.
The most popular application of EFT is that instead of getting a paycheck and
putting it into a bank account, the money is deposited to an account
electronically.
The advantages of EFT contain the following:
• Simplified accounting
• Improved efficiency
• Reduced administrative costs
• Improved security
Banks Automated Clearing System (BACs)

• This payment system is ideally suited for

business-to-business (B2B) transactions
between regular and repeated customers.
Usually there is a dedicated software linked in
with the banks systems.
– It is used for example to pay over 70% of salaries of the UK
workforce.
– ACH is a network that connects the banks and financial
institutions in the US for money clearance between them.
– BACs can be integrated with the e-commerce B2B systems
to allow automated accounts settlement between
companies.
E-Banking
 The Role of Banks in the New Economy

• Internet and mobile devices have brought new rules to

economy and shaped the way to do business
• Banks has also evolved according to the new economy and
took their places in this new world to add value to their
customer
• The new ways to do business are :
– e-commerce
– m-commerce
 Technology Commencement in Banking
• In 70’s, banks started to establish centralized data processing
centers.
• Essentially the roles of these data processing centers are:
– collect the handwritten documents from branches
– compile the documents
– manual data entry by the operators
– generate reports for the bank staff and the central bank
– execute some banking transactions
 Branch Automation

• In 80’s, banks started technology investments for the

branches.
• The first step is offline branches.
• Terminals connected to local branch computer
• Second step is online branches connected centrally. Most of
the transactions started to be performed in the central
mainframe.
 Product Based Banking
• In the mid-1980s, banks accepted product based banking and competed
with their products.
• Banks developed new products for their customers.
– Credit card
– Debit cards
• Beside branch, banks brought new channels to give better service to their
customers.
– ATM
Alternative Delivery Channels
Anytime, anywhere banking
» Telephone Banking
» Internet Banking
» Mobile Banking
 Internet Banking
• More and more banks are coming to realize that internet is a part of banks'
alternative delivery channel strategies activities concentrated in the business-to-
consumer segment, focused on retaining clients
• In Internet banking, security is a primary concern. Security concerns have been
addressed from every angle within the architecture of the Internet banking
application.
Sample Internet Banking Architecture
 Mobile Banking
• Current Mobile Banking Applications:
– SMS Banking
– WAP Banking
 SMS Banking
• Basic banking inquiry transactions(balance inquiry, funds, exchange rate
inquiry…) are performed by the cooperation of bank and the GSM
operator
• Security is the main problem

Leased line
GSM Operator
GSM Bank SMS
Application
Network Server
Gateway

GSM
Bank
Operator
SMS DB
SMS
DB Bank Host
 WAP Banking
• Wireless application protocol (WAP) is an application
environment and set of communication protocols for wireless
devices designed to enable manufacturer-, vendor-, and
technology-independent access to the Internet and advanced
telephony services.
• WAP is a global standard and is not controlled by any single
company
• Various banking transactions offered in WAP environment by
banks.
• Similar architecture with SMS banking
 Secure EPS Infrastructure
• Authentication
• Public key cryptography
• Digital Signatures
– Useful in e-cheques, business contracts and othe
legal documents
– Functions of DS includes authentication, sealing,
integrity
• Digital Certificates
 Secure EPS Infrastructure(cont..)
• SSL
– Provides electronic wrapping around the transactions
– Advantages
Authentication
Access Limit
Data Protection
Information Share
– Disadvantages
Simple Encryption:
Stolen Certificate/Key
Point-to-Point Transactions
Customer's risk
Merchant's risk
 Secure EPS Infrastructure(cont…)
• SET
– Advantages
• Information security
• Credit card security
• Flexibility in shopping
– Disadvantages
• Complexity
• high cost for implementation
Making a purchase using SET protocol
 Assessment of EPS
• Technological
• Economic
• Social
• Regulatory
• Security
 Technological
• Expandability
• Efficiency
• Durability
• Compatibility with other payment
systems(Interoperability)
• Level of complexity for consumers to adapt
 Economic
• Cost of transaction
• Financial risk
• Ease of integration
 Social aspect
• Anonymity
• User friendliness
• Mobility
 Regulatory
• Digital signatures
• Digital fund transfer
• E-commerce contracts
• Technical standards
• Custom and taxation
• International agreements
 Security
• Fraud protection
• No double spending
• No overspending
• Dispute settlement
• Privacy control
 NOTE
• Slides are for your guidance only for exam
preparations refer to the book also.
• For Unit III Electronic Business by Anuranjan
Mishra