MUTHAYAMMAL COLLEGE OF ARTS AND SCIENCE (AUTONOMOUS)

DEPARTMENT OF COMPUTER APPLICATION

Staff Name: Mrs.K.Gayathri Class: III B.COM “C” Paper Code: 21M6UCMS02

Paper Name: ECOMMERCE Unit: V

Electronic Payment Systems – Types – Digital token Based Electronic Payment Systems – Smart Card & Credit
Card Electronic Payment Systems – Risk – Designing Electronic Payment Systems.
ELECTRONIC PAYMENT SYSTEMS
 Electronic Payment is a financial exchange that takes place online between buyers and sellers.
 Electronic payment systems are becoming central to on-line business process innovations as companies
look for ways to serve customers faster and at lower cost.
 Emerging innovations in the payment for goods and services in electronic commerce promise to offer a
wide range of new business opportunities.
 Electronic payment systems and ecommerce are intricately linked given that online consumers must pay
for products and services.
 The various factors that have leaded the financial institutions to make use of electronic payments are:
Decreasing technology cost:
 The technology used in the networks is decreasing day by day, which is evident from the fact that computers
are now dirt-cheap and Internet is becoming free almost everywhere in the world.
Reduced operational and processing cost:
 Due to reduced technology cost the processing cost of various commerce activities becomes very less. A
very simple reason to prove this is the fact that in electronic transactions we save both paper and time.
Increasing online commerce:
 The above two factors have lead many institutions to go online and many others are following them.
 We began E-Commerce with EDI, this was primarily for large business houses not for the common man.
Many new technologies, innovations have lead to use of E-Commerce for the common man also.
 We will now briefly enumerate these innovations based on whom they affected:
Enabling online commerce:
 Digital Cash, E-Cash, Smart cards (or Electronic Purse) and encrypted Credit cards.
Affecting Companies:
 The payment mechanisms that a bank provides to a company have changed drastically. The Company can
now directly deposit money into its employee’s bank account. These transfers are done through Automated
Transfer Houses.
 There are also many problems with the traditional payment systems that are leading to its fade out. Some of
them are enumerated below:
Lack of Convenience:
 Traditional payment systems require the consumer to either send paper cheques by snail-mail or require
him/her to physically come over and sign papers before performing a transaction.
 This may lead to annoying circumstances sometimes.
Lack of Security:
 This is because the consumer has to send all confidential data on a paper, which is not encrypted, that too by
post where it may be read by anyone.
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Lack of Coverage:
 When we talk in terms of current businesses, they span many countries or states. These business houses need
faster transactions everywhere.
 This is not possible without the bank having branch near all of the company’s offices. This statement is
self-explanatory.
Lack of Eligibility:
 Not all potential buyers may have a bank account.
Lack of support for micro-transactions:
 Many transactions done on the Internet are of very low cost though they involve data flow between two
entities in two countries.
 The same if done on paper may not be feasible at all.
 We will now focus attention on the various ways available to pay online these methods of payment are still
new even when seen as a technology.
 Each has its own benefits and shortcomings:
Electronic Tokens:
 An electronic token is a digital analog of various forms of payment backed by a bank or financial institution.
 There are two types of tokens:
 Real Time: (or Pre-paid tokens) - These are exchanged between buyer and seller, their users pre-pay
for tokens that serve as currency. Transactions are settled with the exchange of these tokens. Examples
of these are DigiCash, Debit Cards, Electronic purse etc.
 Post Paid Tokens – are used with fund transfer instructions between the buyer and seller. Examples –
Electronic cheques, Credit card data etc.
Electronic or Digital Cash:
 This combines computerized convenience with security and privacy that improve upon paper cash. Cash is
still the dominant form of payment as: The consumer still mistrusts the banks.
 The non-cash transactions are inefficiently cleared. In addition, due to negative real interests rates on bank
deposits. Now we will enumerate some qualities of cash:
 Cash is a legal tender i.e. payee is obligatory to take it.
 It is negotiable i.e. can be given or traded to someone else.
 It is a bearer instrument i.e. possession is proof of ownership.
 It can be held & used by anyone, even those without a bank certificate.
 It places no risk on part of acceptor.
TYPES
 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:

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 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:
 Token-based payment systems
 Electronic cash (e.g., DigiCash)
 Smart cards or debit cards (e.g., Mondex Electronic Currency Card))
Credit card-based payments systems:
 Encrypted Credit Cards (e.g., World Wide Web form-based encryption)
 Third-party authorization numbers (e.g., First Virtual)
DIGITAL TOKEN BASED ELECTRONIC PAYMENT SYSTEM
 Electronic tokens are designed as electronic analogs of various forms of payment backed by a bank or
financial institution. Electronic tokens are equivalent to cash that is backed by a bank.
 Electronic tokens are of three types:
 Cash or Real-time: Transactions are settled with exchange of electronic currency.Ex: on-line currency
exchange is electronic cash (e-cash).
 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.
 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.
Electronic Cash
 Electronic cash (e-cash) is a new concept in on-line payment systems because it combines computerized
convenience with security and privacy that improve on paper cash.
 E-cash presents some interesting characteristics that should make it an attractive alternative for payment over
the internet.
 E-cash focuses on replacing cash as the principal payment vehicle in consumer-oriented electronic payments.
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 maintaining enough money in the account to bank the purchase. Some customers might prefer to

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

SMART CARD & CREDIT CARD ELECTRONIC PAYMENT SYSTEMS

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 It is a plastic credit card containing a microprocessor and a storage unit. The smart card gives access to
ATM, debit facility, credit facility, charge facility and the electronic purse facility.
 Monetary values can be loaded in this card and it acts as an electronic purse. Cash management, foreign
exchange services, transfer of funds etc.
 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.
Two types of Smart cards:
 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 want to store on their card
 Relationship based products are offers options for customer:
 Access to multiple accounts, such as debit, credit, investments or stored value for e-cash, on one card or
an electronic device.
 A variety of functions, such as cash access, bill payment, balance inquiry, or funds transfer for selected
accounts.
 Multiple access options at multiple locations using multiple device types, such as an automated teller
machine, a screen phone, a personal computer, a personal digital assistant (PDA), or interaction TVs.
Electronic Purses and Debit cards
 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:
 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.
 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.
Smart card Readers and Smart Phones
 The benefits of smart cards will relay on the ubiquity of devices called smart card readers that can
communicate with the chip on a smart card.
 Some smart card readers combine elements of a personal computer, a point of sale terminal, and phone to
allow consumers to quickly conduct financial transactions without leaving their homes.
 The card reader features a two line by 16-character display that can show both a prompt and the response
entered by the user.
 Smart card readers can be customized for specific environments.
Business Issues and Smart Cards
 Banks and card issuers also expect to cut down on fraud, given that an embedded microchip is harder to
tamper with than magnetic stripe technology.

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 The banks that issue mondex cards will not be able to keep track of who makes or receives payments (two
cardholders can transfer money to each other as long as they have card readers, which is analogous to cash
exchange between two people).
 While bankers concerned that the system may open the doors to fraud and abuse, others say anonymity and
flexibility are vital to acceptance.
RISKS
 Operations of the payment systems incur three major risks:
1. Fraud or mistake 2.Privacy issues 3.Credit risk.
Risks from Mistake and Disputes
Consumer Protection:
 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.
 The nature of electronic tractions 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 automatic records include,
 Permanent storage
 Accessibility and traceability
 A payment system database
 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.
Managing Information Privacy
 The electronic payment system must ensure and maintain.
 Every time one purchases goods using a credit card, subscribes to a magazine or accesses a server, that
information goes into a database somewhere.
 The 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 designed agents.
 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.
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.
 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.
DESIGNING ELECTRONIC PAYMENT SYSTEM
 Despite cost and efficiency gains, many hurdles remain to the spread of electronic payment systems.

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 These include several factors, many nontechnical in nature, that must be addressed before any new payment
method can be successful:
 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, & ‘financial
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.

************************* UNIT- V COMPLETED *********************