Overview of the electronic payment

Technology,PaymentFinancial system is the backbone of every economy. In order to handle

staggering number of monetary transactions every economy requires a reliable financial system.
By financial system it means banks and non-bank financial institutions which provide various
types of financial services to the customers. In the payment system fund transfer service and
financial clearing are the two most important services than other services. Payment system
improves financial intelligibility, stimulating business growth and helps in banking sector reform.
Attitude of people towards a new payment system has been changing for the last two decades
largely due to the following reasons:

 1. 
Increased either Volume or Value of Transaction: As people are becoming more conscious
regarding their financial matter, numbers as well as value of the transactions are increasing.
This phenomenon is attributed to the rapid growth in financial market activity around the world
and the payment generated by such activity.

 2. 
Technological Enhancement: From last two decades there is an incredible technological
improvement in banking and financial sector. It is due to the advancement of Information and
Communication Technology and massive growth of Internet. As a result, financial institutions
and consumers both have the ability and the resource to move funds much faster through the
system, at a lower cost.

 3. 
Effect of Globalization: With the effect of globalization more and more businesses have
started to overcome geographical boundaries. As a result more financial transactions are
flowing across the countries. The company that has the capability to streamline its payment
mechanism is able to trim costs and thus achieve competitive advantage. This can be
possible only in cross-nation payment.

Globalization and financial revolution have changed specially the developing countries in many
aspects.[1] Opportunity of trade and investments have increased, consumers taste and
preferences have changed, demands for foreign products and services have increased.
Technological advancements make the world more and more borderless. Advancements in
communication and information technology bundled with Internet have produced unprecedented
opportunities in the global economy, where Internet connects digitally all countries and regions.
Electronic money, which is an electronic replacement for cash, is a product of such digital
convergence. It is storable, transferable and perhaps unforgettable. The purpose of this chapter
is to provide a comprehensive idea of Electronic money and Electronic Payment System and its
acceptance in India.

E-Commerce Payment Gateway

Payment Gateway is an online payment processing technology
which helps businesses to accept credit cards and electronic checks.
In other words, payment gateways are “Manin-the-middle” which are
located between e-commerce platforms and clients.
A payment gateway allows you to −
 Make and take payments quickly and easily.
 Keep your customer's data (information) and money secure.
 Gain trust of your customers, so they are willing to hand over
their money.
To choose the right payment gateway, you should follow the following
guidelines −
 You should finalize that payment gateway which is supported in
your country, not all them operate globally.
 You should check what payment gateways are supported better
from your ecommerce platform. For example, PayPal gateway is
fully supported by Magento because the same group have
created them.
 Payment gateway should be of 3.0 PCI data security standards.
 Do you need payment gateway and merchant account or an all-
in-one payment service provider?
 You must see the charges and fees that will be deducted per
transaction.
 What payment method do they support? For example, VISA is a
payment method, Master Card is another.
  Do they support your type of business? For example, some of
them don’t deal with businesses that sell adult materials,
betting, gambling, firearms selling, narcotics, etc.

Most Popular Payment Gateway Providers

Following is the list of the most widely used and popular payment
getaway providers along with a brief history about them.
 PAYPAL − You can find all the terms and conditions of their
business model on their URL
– https://www.paypal.com/. PayPal is one of the longest
established and probably the best-known service for transferring
money online.
 Amazon Payments − The URL of this immensely popular
payment getaway provider is
– https://payments.amazon.com/. It was created in 2007,
Amazon Payments provides your customers with the same
checkout experience they get on Amazon.com
 Stripe − The URL of this payment getaway is
– https://stripe.com/. No monthly fees, no extra charges for
different cards and different payment methods, also for different
currencies. Stripe also offers a great API (Application Program
Interface) as well.
 Authorize Net − The URL for this popular payment getaway
provider is https://www.authorize.net/. It is among the most
powerful and well-known payment gateways. It is well-supported
by e-commerce WordPress plugins.
 2Checkout − The URL for this payment getaway provider is
– https://www.2checkout.com/. 2checkout is one of the most
simple and affordable credit card gateways.
What matters to your business

Before we get to evaluating the best payment mode for

your business, let’s get some things straight.

When it comes to payments, there are some priorities

we would all like to maintain:

 Timely payments: We want money to reach our bank

account at regular, uninterrupted intervals.
 Faster payments: The faster it reaches our bank
account, the better!
 Pricing: we want a payment partner that doesn’t burn
a hole in our pockets.
 High success rates: We want a reliable payment
mode and don’t want payments failing every now and
then!
 More choices for your customers: We want to be
able to give our customers the freedom to choose the
mode they want to pay us with.

Understanding NEFT, RTGS, UPI

NEFT, RTGS, and UPI are all payment modes offered by

banking partners and payment gateways that you can use
to collect payments from your customers online. Here’s a
short introduction to each of the modes.

NEFT (National Electronic Funds Transfer):

NEFT is an online money transfer service where any

person can send/receive money given both parties have
an account number and the bank is enrolled in the NEFT
program.

RTGS (Real Time Gross Settlement):

RTGS is also an online money transfer service that allows

you to transfer funds on a real-time (immediate) basis.
The only difference between NEFT and RTGS is, the money
is settled in batches for NEFT making it slower.

UPI (Unified Payments Interface):

UPI is a quick payment mode built on the Immediate

Payments Service (IMPS). Made by the National Payments
Corporation of India (NPCI), UPI is the newest and fast-
growing payment mode. In June 2018, the NPCI clocked
over 240 million transactions accounting for 30% growth
month-over-month.
Choosing the right mode of online payment

Here’s a comparison chart for the three modes of

payment.

Feature NEFT RTGS UPI

Device of Phone and Phone and Phone and

use website website website

Payout 1-2 hours About 30 Instant transfer

speed minutes

Timings Mon-Sat (8:00 Mon-Sat (8:00 24*7 operational.

AM – 6.30 PM) AM – 4.30
Sunday, 2nd PM) Sunday,
Sat, 4th Sat, 2nd Sat, 4th
and bank Sat, and bank
holidays holidays
closed. closed.

Complexity Requires Requires Just requires a

IFSC, A/C no, IFSC, A/C no, Virtual Payment
and adding and adding Address (VPA).
beneficiary. beneficiary.

Bank a/c Absolute Absolute No need.

 details must. must.

Charges (for Anything AnythingAnything

sender) between Rs.2 between between Rs. 3
and Rs.25 Rs.25 and and Rs. 15
depending on
depending on Rs.50
the amount.
the amount. depending
Person2Person is
on the Free.
amount.

Transfer No upper No upper Rs. 1 Lakh per

limits limit. Cash- limit. day
based
remittances
limited to
Rs.50,000

OTP Yes. (depends Yes. (depends No.

on device and
requirement on device and bank)
bank)

Debit Card in E commerce

What is a debit card?

A debit card (also known as a gift card) is a plastic card which provides an

alternative payment method to cash when making purchases. Physically

the card is an ISO 7810 card like a credit card; however, its functionality is

more similar to writing a cheque as the funds are withdrawn directly from

either the cardholder’s bank account (often referred to as a check card), or

from the remaining balance on the card. 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.

Types of debit card

A Finish smart card. The 3 by 5 mm security chip embedded in the card is

shown enlarged in the inset. The gold contact pads on the card enable

electronic access to the chip.

 An example of the front of a typical debit card:

1. Issuing bank logo

2. EMV chip
3. Hologram
4. Card number
5. Card brand logo
6. Expiry date
7. Cardholder’s name
An example of the reverse side of a typical debit card:

1. Magnetic stripe
2. Signature strip
3. Card Security Code
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, for example Switch (now: Maestro) and Solo in the

United Kingdom, Carte Bleue in France, Laser in Ireland, “EC electronic

cash” (formerly Eurocheck) in Germany and EFTPOS cards in Australia and

New Zealand. The need for cross-border compatibility and the advent of the

euro recently led to many of these card networks (such as Switzerland’s

“EC direkt”, Austria’s “Bankomatkasse” and Switch in the United Kingdom)

being rebranded with the internationally recognised Maestro logo, which is

part of the MasterCard brand. Some debit cards are dual branded with the

logo of the (former) national card as well as Maestro (e.g. EC cards in

Germany, Laser cards in Ireland, Switch and Solo in the UK, Pinpas cards in

the Netherlands, Bancontact cards in Belgium, etc.).

Debit card systems have become popular in video arcades, bowling centers

and theme parks. The use of a debit card system allows operators to

package their product more effectively while monitoring customer

spending. An example of one of these systems is ECS by Embed

International.

Online and offline debit transactions

Typical debit card transaction machine, branded to McDonalds. 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). In some countries including the United States

and Australia, they are often referred to at point of sale

as “debit” and “credit” respectively, even though in either case the user’s

bank account is debited and no credit is involved.Online debit (“PIN debit”

or “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. One difficulty in using online debit cards is the

necessity of an electronic authorization device at the point of sale (POS)

and sometimes also a separate PINpad to enter the PIN, although this is

becoming commonplace for all card transactions in many countries.

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. Banks

in some countries, such as Canada and Brazil, only issue online debit cards.

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 (e.g. Maestro in the United Kingdom and

other countries, but not the United States) 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. Offline debit cards in

the United States and some other countries are not compatible with the PIN

system, in which case they can be used with a forged signature, since users

are rarely required to present identification. Transactions conducted with

offline debit cards usually require 2-3 days to be reflected on users’

account balances.

Advantages and Disadvantages

 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 plastic 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.
 For most transactions, a check card can be used to avoid check
writing altogether. Check cards debit funds from the user’s account
on the spot, thereby finalizing the transaction at the time of
purchase, and bypassing the requirement to pay a credit card bill at
a later date, or to write an insecure check containing the account
holder’s personal information.
 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.The debit card has many
disadvantages as opposed to cash or credit:
 Some banks are now charging over-limit fees or non-sufficient
funds fees based upon pre-authorizations, and even attempted but
refused transactions by the merchant (some of which may not even
be known by the client).
 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.
 For certain types of purchases, such as gasoline, lodging, or car
rental, the bank may place a hold on funds much greater than the
actual purchase for a fixed period of time. Until the hold is released,
any other transactions presented to the account, including checks,
may be dishonored, or may be paid at the expense of an overdraft
fee if the account lacks any additional funds to pay those items.
 While debit cards bearing the logo of a major credit card are
accepted for virtually all transactions where an equivalent credit
card is taken, a major exception is at car rental facilities. Car rental
agencies require an actual credit card to be used, or at the very
least, will verify the creditworthiness of the renter using a debit
card. These companies will deny a rental to anyone who does not
fit the requirements, and such a credit check may actually hurt
one’s credit score.
What is credit card?

A credit card is a system of payment named after the small plastic card

issued to users of the system. A credit card is different from a debit card in

that it does not remove money from the user’s account after every

transaction. In the case of credit cards, the issuer lends money to the

consumer (or the user) to be paid to the merchant. It is also different from

a charge card (though this name is sometimes used by the public to

describe credit cards), which requires the balance to be paid in full each

month.

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. Thus if the

cardholder puts down Rs. 1000, he or she will be given credit in the range of

Rs. 500–Rs. 1000. In some cases, credit card issuers will offer incentives

even on their secured card portfolios. In these cases, the deposit required

may be significantly less than the required credit limit, and can be as low as

10% of the desired credit limit. This deposit is held in a special savings

account.

Credit card issuers offer this as they have noticed that delinquencies were

notably reduced when the customer perceives he has something to lose if

he doesn’t repay his balance. The cardholder of a secured credit card is still
expected to make regular payments, as he or she would with a regular

credit card, but should he or she default on a payment, the card issuer has

the option of recovering the cost of the purchases paid to the merchants

out of the deposit. The advantage of the secured card for an individual with

negative or no credit history is that most companies report regularly to the

major credit bureaus. This allows for building of positive credit history.

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 (150 to 180 days). This means that an account

which is less than 150 days delinquent will continue to accrue interest and

fees, and could result in a balance which is much higher than the actual

credit limit on the card. In these cases the total debt may far exceed the

original deposit and the cardholder not only forfeits their deposit but is left

with an additional debt. Most of these conditions are usually described in a

cardholder agreement which the cardholder signs when their account is

opened.

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.

Secured credit cards are available with both Visa and MasterCard logos on
them. Fees and service charges for secured credit cards often exceed

those charged for ordinary non-secured credit cards, however, for people in

certain situations, (for example, after charging off on other credit cards, or

people with a long history of delinquency on various forms of debt),

secured cards can often be less expensive in total cost than unsecured

credit cards, even including the security deposit.

Security Overview

Credit card security is based on privacy of the actual credit card number.

This means that whenever a person other than the card owner reads the

number, security is potentially compromised. Since this happens most of

the time when a transaction is made, security is low. However, a user with

access to just the number can only make certain types of transactions.

Merchants will often accept credit card numbers without extra verification

for mail order, but then the delivery address will be recorded, so the thief

must make sure he can have the goods delivered to an anonymous address

(i.e. not his own) and collect them without being detected.

Some merchants will accept a credit card number for in-store

purchases,where upon access to the number allows easy fraud, but many

require the card itself to be present, and require a signature. Thus, a stolen

card can be cancelled, and if this is done quickly, no fraud can take place in

this way. For internet purchases, there is sometimes the same level of

security as for mail order (number only) hence requiring only that the
fraudster take care about collecting the goods, but often there are

additional measures. The main one is to require a security PIN with the

card, which requires that the thief have access to the card.

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.

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 Electronic Payment System

Many credit card companies will also, when applying payments to a card,

do so at the end of a billing cycle, and apply those payments to everything

before cash advances. For this reason, many consumers have large cash

balances, which have no grace period and incur interest at a rate that is

(usually) higher than the purchase rate, and will carry those balances for

years, even if they pay off their statement balance each month.

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 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 cred-it 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 tot 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 con-centrated

attack on these sites could bring the system to a halt.

Support for Privacy Enhanced Mail (PEM) and Pretty Good Privacy (PGP)

encryption has been built into several browsers. Both of these schemes

can be substantially bolstered with the addition of encryption to defeat

snooping attacks. Now any vendor can create a secure system that

accepts credit card numbers in about an hour.

 Advantages and Disadvantage of credit cards:

Consumers use credit cards by presenting them for payment and then

paying an aggregate bill once a month. Consumers pay either by flat fee or

individual transaction charges for this service. Merchants get paid for the

credit card drafts that they submit to the credit card company. Businesses

get charged a transaction charge ranging from 1 percent to 3 percent for

each draft submitted.

 Credit cards have advantages over checks in that the credit card
company assumes a larger share of financial risk for both buyer
and seller in a transaction. Buyers can sometimes dispute a charge
retroactively and have the credit card company act on their behalf.
Sellers are ensured that they will be paid for all their sales—they
needn’t worry about fraud.
 One disadvantage to credit cards is that their transactions are not
anonymous, and credit card companies do in fact compile valuable
data about spending habits.
 Record keeping with credit cards is one of the features consumers
value most because of disputes and mistakes in billing. Disputes
may arise because different services may have different policies.
For example, an information provider might charge for partial
delivery of a file (the user may have abandoned the session after
reading part of the file), and a movie distributor might charge
depending on how much of the video had been downloaded. The
cause of interrupted delivery needs to be considered in resolving
disputes (e.g., intentional customer action versus a problem in the
network or provider’s equipment). In general, implementing
payment policies will be simpler when payment is made by credit
rather than with cash.
 The complexity of credit card processing takes place in the
verification phase, a potential bottleneck. If there is a lapse in time
between the charging and the delivery of goods or services (for
example, when an airline ticket is purchased well in advance of the
date of travel), the customer verification process is simple because
it does not have to be done in real time. In fact, all the relaying and
authorizations can occur after the customer-merchant transaction
is completed, unless the authorization request is denied. If the
customer wants a report (or even a digital airline ticket), which
would be downloaded into a PC or other information appliance
immediately at the time of purchase, however, many message
relays and authorizations take place in real time while the customer
waits. Such exchanges may require many sequence-specific
operations such as staged encryption and decrying and exchanges
of cryptographic keys.
 Encryption and transaction speed must be balanced, however, as
research has show that on-line users get very impatient and
typically wait for 20 seconds before pursuing other actions. Hence,
on-line credit card users must find the process to be accessible,
simple, and fast. Speed will have design and cost implications, as it
is a function of network capabilities, computing power, available at
every server, and the specific form of the transaction. The
infrastructure supporting the exchange must be reliable. The user
must feel confident that the supporting payment infrastructure will
be available on demand and that the system will operate
reasonably well regardless of component failures or system load
conditions.The builders and providers of this infrastructure are
aware of customer requirements and are in fierce competition to
fulfill those needs.
Infrastructure for On-Line Credit Card Processing
 Competition among these players is based on service quality, price,

processing system speed, customer support, and reliability. Most third-

party processors market their services directly to large regional or national

merchants rather than through financial institutions or independent sales

organizations .

Barriers to entry include

1. large initial capital requirements,
2. ongoing expenses related to establishing and maintaining an
electronic transaction processing network,
3. the ability to obtain competitively priced access to an existing
network, and
4. the reluctance of merchants to change processors. What exactly is
at stake here? A lot. In the emerging world of ecommerce, the
companies that own the transaction infrastructure will be able to
charge a fee, much as banks do today with ATMs. This could be
extremely profitable. Microsoft, VISA, and other companies
understand that they have to do something. If they wait for a clear
path to emerge, it will be “too little too late.” They know all too well
that ecommerce transaction architectures (similar to MS-DOS or
Windows) on which other e-commerce applications are developed
will be very profitable.
Many companies are developing advanced electronic services for home-

based financial transactions, and software companies are increasingly

allying with banks to sell home banking. Eventually, the goal would be to

offer everything from mutual funds to brokerage services over the network.

Many banks are concerned about this prospect and view it as an

encroachment on their turf. After years of dabbling, mostly unsuccessfully,

with remote banking, banking is receiving a jarring message: Get wired or

lose customers. The traditional roles are most definitely being reshuffled,

and electronic payment on the Internet can have a substantial effect on

transaction processing in the “real” (non electronic) world.

According to some estimates, trans-action processing services account,

for as much as 25 percent of non interest income for banks, so banks

clearly stand to lose business. Why banks are on the defensive is obvious if

we look at banking in the last ten years. A decade ago, banks processed 90

percent of all bank card transactions, such as VISA and MasterCard. Today,

70 percent of those transactions are processed by nonbanks such as First

Data Resources. If software companies and other interlopers become

electronic toll-takers, banks could become mere homes for deposits, not

the providers of lucrative value-added services. Even more worrisome,

banks could lose the all-important direct link to be the customer’s primary

provider of financial services that lets them hawk profitable services. The

effect of electronic commerce on the banking industry has been one of

total confusion. To be fair, things are happening so fast in this area that it’s

hard to keep up with it all.

Risks from Mistake and Disputes: Consumer Protection

Virtually all electronic payment systems need some ability to keep

automatic records, for obvious reasons. From a technical standpoint, this is

no problem for electronic systems. Credit and debit cards have them and
 even the paper-based check creates an automatic record. Once information

has been captured electronically, it is easy and inexpensive to keep (it

might even cost more to throw it away than to keep it). For example, in

many transaction processing systems, old or blocked accounts are never

purged and old transaction histories can be kept forever on magnetic tape.

Given the intangible nature of electronic transactions and dispute

resolution relying solely on records, a general law of payment dynamics

and banking technology might be: No data need ever be discarded. The

record feature is an after-the-fact transcription of what happened, created

without any explicit effort by the transaction parties. Features of these

automatic records include

1. permanent storage;
2. accessibility and traceability;
3. a payment system database; and
4. data transfer to payment maker, bank, or monetary authorities.
The need for record keeping for purposes of risk management conflicts

with the transaction anonymity of cash. One can say that anonymity exists

today only because cash is a very old concept, invented long before the

computer and networks gave us the ability to track everything. Although a

segment of the payment-making public will always desire transaction

anonymity, many believe that anonymity runs counter to the public welfare

because too many tax, smuggling, and/or money laundering possibilities

exist. The anonymity issue raises the question: Can electronic payments

hap-pen without an automatic record feature?

Many recent payment systems seem to be ambivalent on this point. For

instance, the Mondex electronic purse touts equivalence with cash, but its

electronic wallets are designed to hold automatic records of the card’s last

twenty transactions with a statement built in. Obviously, the card-reading

terminals, machines, or telephones could all maintain records of all

transactions and they probably ultimately will. With these records, the

balance on any smart card could be reconstructed after the fact, thus

allowing for additional protection against loss or theft.

This would certainly add some value versus cash. In sum, anonymity is an

issue that will have to be addressed through regulation covering consumer

protection in electronic transactions. There is considerable debate on this

point. An anonymous payment system without automatic record keeping

will be difficult for bankers and governments to accept. Were the regulation

to apply, each transaction would have to be reported, meaning it would

appear on an account statement making mistakes and disputes easier to

resolve. However, customers might feel that all this record keeping is an

invasion of privacy resulting in slower than expected adoption of electronic

payment systems. The next risk involved is the privacy of the customer

making a purchase.

Managing Information Privacy

The electronic payment system must ensure and maintain privacy. Every

time one purchases goods using a credit card, subscribes to a magazine or

accesses a server, that information goes into, a database somewhere.

Furthermore, all these records can be linked so that they constitute in

effect a single dossier. This dossier would reflect what items were bought

and where and when. This violates one the unspoken laws of doing

business: that the privacy of customers should be protected as much as

possible. All details of a consumer’s payments can be easily be

aggregated: Where, when, and sometimes what the consumer buys is

stored.

This collection of data tells much about the person and as such can

conflict with the individual’s right to privacy. Users must be assured that

knowledge of transactions will be confidential, limited only to the parties

involved and their designated agents (if any).Privacy must be maintained

against eavesdroppers on the network and against unauthorized insiders.

The users must be assured that they cannot be easily duped, swindled, or

falsely implicated in a fraudulent transaction. This protection must apply

throughout the whole transaction protocol by which a good or service is

purchased and delivered. This implies that, for many types of transactions,

trusted third-party agents will be needed to vouch for the authenticity and

good faith of the involved parties..

Managing Credit Risk

Credit or systemic risk is a major concern in net settlement systems

because a bank’s failure to settle its net position could lead to a chain

reaction of bank failures.The digital central bank must develop policies to

deal with this possibility. Various alternatives exist, each with advantages

and disadvantages. A digital central bank guarantee on settlement

removes the insolvency test from the system because banks will more

readily assume credit risks from other banks. Without such guarantees the

development of clearing and settlement systems and money markets-may

be impeded.

A middle road is also possible, for example, setting controls on bank

exposures (bilateral or multilateral) and requiring collateral. If the central

bank does not guarantee settlement, it must define, at least internally, the

conditions and terms for extending liquidity to banks in connection with

settlement. Despite cost and efficiency gains, many hurdles remain to the

spread of electronic payment systems.