E-Commerce – BIT 7th Semester

Unit-4: E-Commerce Payment System

E-payment System:
An important function of electronic commerce sites is the handling of payments over
the Internet. Most electronic commerce involves the exchange of some form of
money for goods or services. As we know many transactions of payments between
B2B companies are made using electronic funds transfers (EFTs).

So, E-payment system is the means of making payment or transaction for goods and
services on an e-commerce website or electronic environment without any need to
use cash or check. E-payment system is also known as online payment system.
Normally e-payment is done via debit cards, credit cards, direct bank deposits, and
e-checks, other alternative e-payment methods like e-wallets, bitcoin,
cryptocurrencies, bank transfers are also gaining popularity.

Electronic payment has revolutionized the business processing by reducing the

paperwork, transaction costs, and labour cost. Being user friendly and less time-
consuming than manual processing, it helps business organization to expand its
market reach/expansion.

The electronic payment systems have grown dramatically after the inception of
online shopping and eCommerce websites. The E-payment system made it
convenient for the customer to pay for anything at any time.

E-payments can be done in the following ways

Internet banking:
Internet Banking, also known as net-banking or online banking, is an electronic
payment system that enables the customer of a bank or a financial institution to make
financial or non-financial transactions online via the internet.

In this case, the payment is done by digitally transferring the funds over the internet
from one bank account to another.

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Card payments:
Card payments are done via cards e.g., credit cards, debit cards, smart cards, stored
valued cards, etc. In this mode, an electronic payment accepting device initiates the
online payment transfer via card.

 Credit Card: 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.
 Debit card: Debit card, like credit card, it is required to have a bank account
before getting a debit card from the bank. The major difference between a
debit card and a credit card is that in case of payment through debit card, the
amount gets deducted from the card's bank account immediately and there
should be sufficient balance in the bank account for the transaction to get
completed; whereas in case of a credit card transaction, there is no such
compulsion. Debit cards free the customer to carry cash and cheques. Even
merchants accept a debit card readily. Having a restriction on the amount that
can be withdrawn in a day using a debit card helps the customer to keep a
check on his/her spending.
 Smart card: Smart card is again similar to a credit card or a debit card in
appearance. It has the capacity to store a customer’s work-related and/or
personal information. Smart cards are also used to store money and the
amount gets deducted after every transaction. Smart cards can only be
accessed using a PIN that every customer is assigned with. Smart cards are
secure, as they store information in encrypted format and are less
expensive/provides faster processing. Mondex and Visa Cash cards are
examples of smart cards.
 Stored value card: A stored-value card (SVC) is a payment card with a
monetary value stored on the card itself, not in an external account maintained
by a financial institution. This means no network access is required by the
payment collection terminals as funds can be withdrawn and deposited
straight from the card. Like cash, payment cards can be used anonymously as
the person holding the card can use the funds. They are an electronic

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development of token coins and are typically used in low-value payment

systems or where network access is difficult or expensive to implement, such
as parking machines, public transport systems, closed payment systems in
locations such as ships or within companies. Stored value cards come in two
major categories. Closed-loop cards have a one-time limit, as with Visa,
Mastercard, and American Express gift cards, merchant gift cards, and prepaid
phone cards. Open-loop cards, on the other hand, may reload these with funds
and use them again.

Direct debit:
Direct Debit is an instruction from you to your bank. Direct Debit authorizes
someone to collect payments from your account when they are due. That is direct
debit transfers funds from a customer’s account with the help of a third party.

E-Cash:
It is a form where the money is stored in the customer’s device which is used for
making transfers. It is a system of purchasing cash credits in relatively small
amounts, storing the credits in your computer, and then spending them when making
electronic purchases over the Internet.

E-Check:
This is a digital version of a paper check used to transfer funds within accounts.

Alternate payment methods

As technology is evolving, e-payment methods kept evolving with it (are still

evolving). These innovative alternate e-payment methods became widely popular.
Some of the popular alternate e-payment methods are:

 E-wallet: E-wallet is a type of electronic card which is used for transactions

made online through a computer or a smartphone. Its utility is same as a credit
or debit card. An E-wallet needs to be linked with the individual’s bank
account to make payments.
 Mobile wallet: A mobile wallet is a type of virtual wallet that stores credit
card numbers, debit card numbers, and loyalty card numbers. It is accessible
through an app installed on a mobile device, such as a smartphone or tablet.
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Customers use mobile wallets to make in-store payments, and it is a

convenient payment method compared to paying with cash or carrying
physical credit cards. Mobile wallets are accepted as a method of payment in
stores that are listed with mobile service providers. The most popular mobile
wallets include Google Pay, Apple Pay, and Samsung Pay, PayPal etc. The
wallets are integrated into mobile devices, or users can download the
application from app stores.
 QR payments: QR code stands for ‘Quick Response’ code, a code that
contains a pixel pattern of barcodes or squares arranged in a square grid. QR
code payment is a contactless payment method where payment is performed
by scanning a QR code from a mobile app. This is an alternative to
doing electronic funds transfer at point of sale using a payment terminal. This
avoids a lot of the infrastructure traditionally associated with electronic
payments such as payment cards, payment networks, payment terminal
and merchant accounts.
 Biometric payments: Biometric payments are done via using/scanning
various parts of the body, e.g., fingerprint scanning, eye scanning, facial
recognition, etc. These payments are replacing the need to enter the PIN for
making transactions making these payments more accessible and easier to use.
 Payments are done via Wearable devices: Wearable devices are rapidly
becoming popular among customers. These devices are connected to the
customer’s bank account and are used to make online payments. An example
of a wearable used for making an online payment is a smartwatch.
 AI-based payments: As machine learning and Artificial Intelligence is
creating a revolution all around the world, AI-based solutions are becoming
more popular. Payments based on AI such as speakers, chatbots, ML tools,
deep learning tools, etc are making it easier for businesses to maintain
transparency.

Advantages of electronic payments

 Reduced Transaction Costs: Paper-based payments are a hassle for both
businesses and suppliers. It is the expensive method where the collection and
processing paper checks is an extremely costly activity and they are also slow.

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It can take upwards of two weeks for a check to clear. Electronic payment
methods have made the advantage of being faster, safer, easier to collect, and
less expensive to the business.
 Secure E-Payment Transactions: Electronic payments are much more
efficient and safer than their traditional, paper-based counterparts. E-payment
methods and systems offer multiple ways of securing your payments, such
as payment tokenization, encryption, SSL, and more. Although digital
solutions are not immune to hackers and security breaches, most electronic
payment providers also have a host of data experts and engineers working to
keep your payment information safe.
 Saved Time and Resources: By adopting electronic payment methods, your
business saves time for its teams, its customers, and its leadership. Processing
supplier payments the traditional way takes a lot of time.
 Speed of E-Payments: Since electronic payments are made digitally, funds
are transferred much faster relative to traditional payment methods like
checks. E-payments allow users to make payments online at any time, from
anywhere in the world, and also remove the need to go to banks.
 Complete Visibility into Electronic Payment Process: Electronic payments
provide complete visibility and transparency throughout the entire payment
process for both your business and your suppliers, thus improving the supplier
relationship.

Online Credit Card Transaction

Because credit and debit cards are the dominant form of online payment, it is
important to understand how they work and to recognize the strengths and
weaknesses of this payment system.

Online credit card transactions are processed in much the same way that in-store
purchases are, with the major differences being that online merchants never see the
actual card being used, no card impression is taken, and no signature is available.

Online credit card transactions most closely resemble to Mail Order-Telephone

Order (MOTO) transactions. These types of purchases are also called Cardholder
Not Present (CNP) transactions and are the major reason that charges can be disputed

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later by consumers. Because the merchant never sees the credit card, nor receives a
hand-signed agreement to pay from the customer, when disputes arise, the merchant
faces the risk that the transaction may be disallowed and reversed, even though he
has already shipped the goods or the user has downloaded a digital product.

Figure below illustrates the online credit card purchasing cycle.

There are five parties involved in an online credit card purchase: consumer,
merchant, clearinghouse, merchant bank (sometimes called the “acquiring bank”),
and the consumer’s card issuing bank.

In order to accept payments by credit card, online merchants must have a merchant
account established with a bank or financial institution. A merchant account is
simply a bank account that allows companies to process credit card payments and
receive funds from those transactions.

Figure: Online credit card purchasing cycle

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As shown in Figure above,

1. An online credit card transaction begins with a purchase.

2. When a consumer wants to make a purchase, he or she adds the item to the
merchant’s shopping cart. When the consumer wants to pay for the items in
the shopping cart, a secure tunnel through the Internet is created using
SSL/TLS. Using encryption, SSL/TLS secures the session during which credit
card information will be sent to the merchant and protects the information
from interlopers on the Internet.
3. SSL does not authenticate either the merchant or the consumer. The
transacting parties have to trust one another. Once the consumer credit card
information is received by the merchant, the merchant software contacts a
clearinghouse.
4. A clearinghouse is a financial intermediary that authenticates credit cards and
verifies account balances. The clearinghouse contacts the issuing bank to
verify the account information.
5. Once verified, the issuing bank credits the account of the merchant at the
merchant’s bank.
6. The debit to the consumer account is transmitted to the consumer in a monthly
statement.

Online Stored Value Payment System

A stored-value card (SVC) is a payment card with a monetary value stored on the
card itself, not in an external account maintained by a financial institution. This
means no network access is required by the payment collection terminals as funds
can be withdrawn and deposited straight from the card.

Like cash, payment cards can be used anonymously as the person holding the card
can use the funds. They are an electronic development of token coins and are
typically used in low-value payment systems or where network access is difficult or
expensive to implement, such as parking machines, public transport systems, closed
payment systems in locations such as ships or within companies.

Stored value cards come in two major categories. Closed-loop cards have a one-time
limit, as with Visa, Mastercard, and American Express gift cards, merchant gift
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cards, and prepaid phone cards. Open-loop cards, on the other hand, may reload these
with funds and use them again.

Hence, it can be summarized as

 Stored value systems are a form of electronic payment technology.

 They coexist with credit and debit technology and principally target low-value
transactions.
 Online stored value systems have very low transaction costs.
 Stored value systems are based on creating a form of electronic value, for
example on smart cards or as computer files.
 The value can be bought (withdrawn) anytime.
 Today Stored Value Cards (SVC) are one of the most dynamic and fastest-
growing products in the financial industry
 One leading difference between SVC and debit cards is that debit cards are
usually issued in the name of the account holders. In contrast, Stored Value
Cards are usually anonymous.
 The notion "stored value" means the funds and data which is stored on the
card
 Eg: fare cards, telephone prepaid cards, etc.

Mobile Payment System:

The use of mobile devices as payment mechanisms is already well established in all
over the world. Physical goods are the most common purchase in mobile online
shopping, with over 50% of mobile buyers reporting that they had purchased such
goods (Javelin Strategy & Research, 2015c; Hernandez, 2015). Near field
communication (NFC) is one of the enabling technologies for mobile payment
systems. Near field communication (NFC) is a set of short-range wireless
technologies used to share information among devices within about 2 inches of each
other (50 mm).

Digital wallet, mobile banking, smart cards etc. are the example of mobile payment
system.

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Digital Wallet or Mobile Wallet:

A mobile wallet is a type of virtual wallet that stores credit card numbers, debit card
numbers, and loyalty card numbers. It is accessible through an app installed on a
mobile device, such as a smartphone or tablet.

Customers use mobile wallets to make in-store payments, and it is a convenient

payment method compared to paying with cash or carrying physical credit cards.
Mobile wallets are accepted as a method of payment in stores that are listed with
mobile service providers.

Examples of digital wallets are:

 Cash App
 ApplePay
 Google Wallet
 E-Sewa
 Khalti
 Prabhu Pay
 Paytm
 Samsung Pay
 PayPal
 Venmo
 AliPay
 Walmart Pay
 Dwolla
 Vodafone-M-Pesa

Smart Cards:

Smart card is again similar to a credit card or a debit card in appearance. It has the
capacity to store a customer’s work-related and/or personal information. Smart cards
are also used to store money and the amount gets deducted after every transaction.

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Smart cards can only be accessed using a PIN that every customer is assigned with.
Smart cards are secure, as they store information in encrypted format and are less
expensive/provides faster processing. Mondex and Visa Cash cards are examples of
smart cards.

Social/Mobile Peer-to-Peer Payment Systems

In addition to using a mobile device as a vehicle for e-commerce and as a payment

method at physical point-of-sale, another type of mobile payment transaction is
becoming increasingly popular: social/mobile peer-to-peer payments.

Peer-to-peer payment services are apps or app features that allow you to send money
to other people, Often by searching for their phone number, email address or
username, quickly and usually for free.

Services such as Venmo, Square Cash, Snapcash, the newly refocused Google
Wallet, and the new Facebook Messenger Payment service all enable users to send
another person money through a mobile application or Web site, funded by a
checking account, debit card, credit card, or a digital wallet balance.

Here are some of the most common P2P services available…

PayPal:
PayPal is a payment service that runs the gamut of helping people with personal
money transfers, online purchases and e-commerce. Using PayPal as a peer-to-peer
money transfer service, individuals can send money to each other via a linked bank
account or a debit or credit card.

How it works?

PayPal offers many different functions, perhaps the most popular being payment
services for online merchants and buyers. But PayPal also offers P2P money
transfers for registered users. Once you’ve created a PayPal account, you can send
and request money by searching for another user’s name, email or phone number
and then filling out the amount you want to send or request.

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Zelle:
Zelle is a service that is offered by most major banks in the U.S. and allows people
to send money to other Zelle users either through their bank account or the Zelle app.

After setting up a Zelle account either through their bank or the Zelle app, users can
send or request money by entering another Zelle user’s registered email address or
phone number. If the recipient doesn’t have a Zelle account, they will have to set
one up in order to send or receive money.

Venmo:
Venmo is an app that allows users to send money to each other via linked bank
account, Venmo balance or credit card. The service is owned by PayPal, but it has
some different functionality compared to PayPal’s peer-to-peer money transfer
service. One of Venmo’s most interesting draws is that the app also offers a free,
optional debit card that allows users to spend money from their Venmo account
balance.

How it works?

Users download the Venmo app and create an account. They can then link a bank
account or credit card to fund their Venmo account; then they can send, request or
receive money from other Venmo users.

Cash App:
Cash App is a money transfer app created by Block Inc. that allows people to send
money via their Cash App balance or linked bank account, credit card or debit card.
The service offers an optional debit card called a Cash Card that allows users to
spend the money in their Cash App balance as well as receive “cash boosts,” which
are savings that are applied to various vendors.

How it works?

Once Cash App is downloaded to a smartphone or tablet, users create an account and
link a debit card, credit card or bank account. Once their Cash App account is set up,
they can send, request and receive money from other Cash App users as well as
invest in stocks and buy and sell bitcoin.

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Digital Cash and Virtual Currencies

Although the terms digital cash and virtual currencies are often used synonymously,
they actually refer to two separate types of alternative payment systems.

Digital Cash acts much like real cash, except that it’s not on paper. Money in your
bank account is converted to a digital code. This digital code may then be stored on
a microchip, a pocket card (like a smart card), or on the hard drive of your computer.

Digital cash typically is based on an algorithm that generates unique authenticated

tokens representing cash value that can be used in the real world.

Bitcoin is the best-known example of digital cash. Bitcoins are encrypted numbers
(sometimes referred to as cryptocurrency) that are generated by a complex algorithm
using a peer-to-peer network in a process referred to as “mining” that requires
extensive computing power.

Bitcoin, a form of electronic currency that does not exist in physical form and can
be transferred from one person to another via peer-topeer networks, without the need
for a bank or other financial institution as intermediary. This ability to operate
outside the banking system has made Bitcoin a favourite of narcotics traffickers and
buyers and sellers of illicit goods and services; but more recently, it has made Bitcoin
a darling among many in the technological elite who believe that Bitcoin and the
technology behind it could be the next big thing in the payments industry.

Virtual currencies, on the other hand, typically circulate primarily within an

internal virtual world community, such as Linden Dollars, created by Linden Lab
for use in its virtual world, Second Life. Virtual currencies are typically used for
purchasing virtual goods.

Virtual currencies are a subset of digital currencies and include other types of digital
currencies, such as cryptocurrencies and tokens issued by private organizations.

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Types of Virtual Currencies

Depending on their operating network, virtual currencies are classified as follows:

Closed Virtual Currency:

A closed virtual currency, as the name suggests, operates in a controlled and private
ecosystem. It cannot be converted into another virtual currency or into a real-world
fiat currency.

Examples of closed virtual currencies are currencies in gaming systems. Though,

such currencies can be used in their respective environments (in this case games),
they cannot be converted into real-world cash.

Another example of closed virtual currencies is airline miles. They are issued by
private parties, can only purchase additional miles, and cannot be converted into
their associated monetary value.

Open Virtual Currency

Open virtual currencies are also known as convertible virtual currencies because
they can be converted to other forms of money. They operate in open ecosystems
and can be converted into another currency either within the platform or outside it.

Examples of open virtual currencies are stablecoins and cryptocurrencies. Bitcoin

and Ethereum, the two biggest cryptocurrencies by market capitalization, can be
converted into other cryptocurrencies or certain fiat currencies. This conversion
process is considered a trade transaction by the IRS (Internal Revenue Service) and
is taxed.

Advantages of Virtual Currencies

The advantages of virtual currencies are as follows:

 Virtual currencies do not have expensive manufacturing and physical storage

costs.
 The technology rails of virtual currencies increase transaction speeds and
eliminate geographical boundaries.
 Decentralized virtual currencies can eliminate intermediaries during monetary
transactions and establish a direct connection between two transacting parties.
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 Virtual currencies can be programmed to complete automated transactions.

For example, smart contracts on Ethereum's blockchain can hold and release
money in escrow accounts without human intervention.
 Virtual currencies are digital repositories of value and can assign value to
disparate sets of objects, from gaming tokens to artwork.

Disadvantages of Virtual Currencies

The disadvantages of virtual currencies are as follows:

 Virtual currencies are attractive targets for hackers. There have been several
cases of hacking blockchain networks for cryptocurrencies, a form of virtual
currency.
 Though they do not have manufacturing or physical storage costs, virtual
currencies have other associated expenses. For example, cryptocurrency users
are required to store them in digital wallets. At trading exchanges,
cryptocurrencies also have custody costs.
 Virtual currencies can be subject to scams. Several initial coin offerings
(ICOs), which became popular in the aftermath of a runup in cryptocurrency
prices, were actually scams in which private developers sold worthless tokens
for hypothetical networks. The tokens could not be converted into other
currencies.
 Unregulated virtual currencies do not offer legal recourses to investors
because they are issued by private entities and, for the most part, are not
regulated by financial authorities.
 Virtual currencies traded on exchanges, such as cryptocurrencies, can be
subject to highly volatile price swings.

Differences between Digital Currencies, Virtual Currencies, and

Cryptocurrencies
Even though they sound alike and function in a similar manner, digital, virtual, and
cryptocurrencies are in fact different. Listed below are the main points of difference
between the three types of currencies:

 All virtual currencies and cryptocurrencies are digital currencies. Not all
digital currencies, however, belong to virtual and cryptocorrency categories.
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For example, CBDCs (Central Bank Digital Currencies) are not virtual
currencies or cryptocurrencies but they are digital currencies.
 Digital currencies can be regulated or unregulated. One example of a regulated
digital currency is CBDC. Examples of unregulated digital currencies are
Bitcoin and Ethereum. The overwhelming majority of virtual currencies are
unregulated, while cryptocurrencies are not regulated in any jurisdiction.
 Not all digital currencies are cryptographically secured. Cryptocurrencies
always use cryptography to secure their networks, while virtual currencies
may or may not use cryptography to secure their networks.

Blockchain:

Blockchain is an immutable (any data stored on blockchain is unable to be modified)

digital ledger that enables secure transactions across a peer-to-peer network. It
records, stores and verifies data using decentralized techniques to eliminate the need
for third parties, like banks or governments.

Every transaction is recorded, then stored in a block on the blockchain. Each block
is encrypted for protection and chained to the preceding block hence, “blockchain”
establishing a code-based chronological order. This means that, without consensus
(agreement) of a network, data stored on a blockchain cannot be deleted or modified.
These new-age databases act as a single source of truth and, among an
interconnected network of computers, facilitate trustless and transparent data
exchange.

Trustlessness: By being immutable, blockchains eliminate the need for

intermediaries (like banks or central authorities) to validate and secure
transactions. Participants can trust the system without relying on a central entity.

Blockchain is a revolutionary technology because it helps reduce security risks,

stamp out fraud and bring transparency in a scalable way.

Popularized by its association with cryptocurrency and NFTs (non-fungible token),

blockchain technology has since evolved to become a management solution for all
types of global industries. Today you can find blockchain technology providing

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transparency for the food supply chain, securing healthcare data, innovating
gaming and changing how we handle data and ownership on a large scale.

How does Blockchain work?

Blockchains are distributed data-management systems that record every single
exchange between their users. These immutable digital documents use several
techniques to create a trustless, intermediary-free system.

Each block contains stored data, as well as its own unique alphanumeric code, called
a hash. These cryptographically generated codes can be thought of as a digital
fingerprint. They play a role in linking blocks together, as new blocks are generated
from the previous block’s hash code, thus creating a chronological sequence, as well
as tamper proofing. Any manipulation to these codes outputs an entirely different
string of gibberish, making it easy for participants to spot and reject misfit blocks.

Another key feature to the inner workings of blockchain is decentralization.

Blockchains distribute control across a peer-to-peer network made up of
interconnected computers, or nodes. These nodes are in constant communication
with one another, keeping the digital ledger up-to-date. So when a transaction is
taking place among two peers, all nodes take part in validating the transaction
using consensus (agreement) mechanisms. These built-in protocols keep all in-
network nodes in agreement on a single data set. No blocks can be added to the
blockchain until it is verified and has reached consensus. Luckily, this step has been
sped up with the advent of smart contracts, which are self-executing programs coded
into a blockchain that automate the verification process.

Once a transaction is recorded, it’s considered permanent. Blockchains are one-way

operations in that there are no reversible actions. This immutability is part of creating
transparency across the network and a trustworthy record of all activities on the
blockchain.

Cryptocurrency:

Cryptocurrency is a digital payment system that doesn't rely on banks to verify

transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and
receive payments. Instead of being physical money carried around and exchanged in
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the real world, cryptocurrency payments exist purely as digital entries to an online
database describing specific transactions. When you transfer cryptocurrency funds,
the transactions are recorded in a public ledger. Cryptocurrency is stored in digital
wallets.

Cryptocurrency received its name because it uses encryption to verify transactions.

This means advanced coding is involved in storing and transmitting cryptocurrency
data between wallets and to public ledgers. The aim of encryption is to provide
security and safety.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the
best known today. Much of the interest in cryptocurrencies is to trade for profit, with
speculators at times driving prices skyward.

How does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all
transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves
using computer power to solve complicated mathematical problems that generate
coins. Users can also buy the currencies from brokers, then store and spend them
using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key
that allows you to move a record or a unit of measure from one person to another
without a trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of
blockchain technology are still emerging in financial terms, and more uses are
expected in the future. Transactions including bonds, stocks, and other financial
assets could eventually be traded using the technology.

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Cryptocurrency examples:
There are thousands of cryptocurrencies. Some of the best known include:

Bitcoin:
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly
traded. The currency was developed by Satoshi Nakamoto – widely believed to be a
pseudonym for an individual or group of people whose precise identity remains
unknown.

Ethereum:
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency,
called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:
This currency is most similar to bitcoin but has moved more quickly to develop new
innovations, including faster payments and processes to allow more transactions.

Ripple:
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used
to track different kinds of transactions, not just cryptocurrency. The company behind
it has worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish

them from the original.

Electronic Billing Presentment and Payment (EBPP) System

Electronic bill presentment and payment; often abbreviated to EBPP; is a form of
electronic billing service that enables businesses to present electronic billing
statements and invoices to customers, typically using an online platform. In most
cases, customers also have the option to pay their bill electronically using the same
platform. EBPP is an integral component of online banking and other electronic
billing systems across all industries.

Electronic billing presentment and payment (EBPP) systems are systems that enable
the online delivery and payment of monthly bills. EBPP services allow consumers

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to view bills electronically and pay them through electronic funds transfers from
bank or credit card accounts.

More and more companies are choosing to issue statements and bills electronically,
rather than mailing out paper versions. But even those businesses that do mail paper
bills are increasingly offering online bill payment as an option to customers,
allowing them to immediately transfer funds from a bank or credit card account to
pay a bill somewhere else.

There are two main types of EBPP systems:

 Biller-Direct
 Online Banking
 Consolidated
 Mobile Payment

Biller-Direct EBPP:

In a biller-direct EBPP system, companies and customers interact directly. The

company or service provider sends an electronic bill to the customer, typically via
email. The customer then can follow the instructions provided with the bill to log
into their account on the company’s website, review the bill, and pay online.

For example, an insurance company might use the biller-direct method to notify you
via email that your monthly premium is due. You can then visit the company’s
website to make a payment.

Online Banking:

Online banking allows you to conduct financial transactions through the internet.
Online banking offers customers almost every service traditionally available through
a local branch including deposits, transfers, and online bill payments.

Virtually every banking institution has some form of online banking you can access
through a computer or app. Online banking is also known as internet banking or web
banking.

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For example, you can pay your bill form your online banking or mobile banking app
which is provided by your account holder bank.

Consolidated EBPP:

The consolidated form of EBPP uses a third-party service provider to aggregate

financial transactions. This third party is usually a bank, and consolidated EBPP is
also known as bank-aggregator or bank-consolidator EBPP. The consolidator
service collects billing data from one or more companies, delivers it to customers,
accepts payments, then distributes the funds to the appropriate companies.

Consolidated EBPP allows customers to use a single portal to view and pay bills for
multiple accounts instead of signing into each account separately.

For example, you might be able to use your online bank account to pay your credit
card, cellphone, and utility bills.

When a company uses a consolidator to handle presentment, it can share different

amounts of information with its customers. “Thick” presentment means customers
can view a detailed summary of their transactions. “Thin” presentment only includes
basic bill details, so the customers must visit the billing company’s website for more
information.

Mobile Payment:

A mobile payment is a money payment made for a product or service through a

portable electronic device such as a tablet or cell phone. Mobile payment
technology can also be used to send money to friends or family members, such as
with the applications PayPal, E-Sewa, Khalti, Venmo etc.

Nowadays many banks have adopted technology into their banking apps that allow
customers to pay bills or send money instantly to friends and family members
directly from their bank accounts. Mobile payments are also made on site at stores
by scanning a barcode or QR code on an app on your phone, accepting payments
from convenience stores to large, multi-national retailers.

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Auctioning in E-commerce:
An online auction is a service in which auction users or participants sell or bid for
products or services via the Internet. It is a transaction between sellers (the
auctioneers) and bidders (suppliers in the business-to-business scenarios) that takes
place on an electronic marketplace. It can occur business to business, business to
consumer, or consumer to consumer, and allows suppliers to bid online against each
other for contracts against a published specification.

Virtual auctions facilitate online activities between buyers and sellers in different
locations or geographical areas. Various auction sites provide users with platforms
powered by different types of auction software. An online auction is also known as
a virtual auction.

An eBay.com, eBid.net, Webstore.com Bonanza.com are the best online auction site
similarly Zip Auctions is the best traditional online auction site.

Types of e-auctions

English Auction:

The English Auction is one of the most common types of auctions. It’s a live auction,
meaning that bids happen in real-time. It can be conducted as an online or in-person
event, with the online auctions lasting much longer than the in-person ones.

English auction is the auction process under which one quantity of a product is listed
for sale. Under this method, all the bidders are aware of each other, and the bids are
placed openly in front of everyone. The process starts with the declaration of the
opening bid or the reserve price, which the seller of the product sets. After this, the
interested bidders start placing their respective bids in an ascending order, i.e., the
next bid should be higher than the previous bidder’s price. This process continues
until there is a bid above which any other buyer is not interested in buying the item.
This is the highest bid and the selling price of the product.

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Features:
1. English auction is an open and transparent auction as the different bidders,
and the value of the bid placed by each bidder is known to others.
2. All the bids should be in ascending order, and the next bidder can place the
bid with the amount higher than the previous bid amount only.
3. The seller of the product sets the reserve price or the opening bid. So, the bid
below such price is allowed.
4. The auction houses set the mechanism of the bid price increment.

Example of English Auction

Mr. A defaulted on the loan taken from the bank. On his inability to repay the loan,
the bank decided to sell off the security attached to the loan, i.e., Mr. A’s house. So,
the bank decided to recover the loan by selling the house through the bidding
process. Bank arranged the auction and advertise about the auction so that many
bidders can come and bid. The bank’s initial price was $ 250,000, which was the
current market value of the house prevailing at the time of auction.

The bidding process started by the host of the bid program declared the initial set
price as $ 250,000 to all the bidders at the time of auction and asked them to bid
further. One of the bidders placed the bid at $ 265,000, and further bid increased to
$ 275,000 and then to $ 300,000. After which no further bid was received. So, the
house was sold to the person who bided for $ 300,000, and with this, the host
announced the completion of the auction. This is an example of an English auction.

Dutch Auction:

The Dutch auction is like an English auction, except that prices start high and are
successively dropped until a bidder accepts the going price, and the auction ends.
The Dutch auction is so-named because it is used to sell cut flowers in Holland, in
the enormous flower auctions.

A strategy in a Dutch auction is a price at which the bidder bids. Each bidder watches
the price decline, until it reaches such a point that either the bidder bids or a rival
bids, and the auction ends. Note that a bidder could revise his bid in the course of
the auction, but there isn’t any reason to do so. For example, suppose the price starts

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at $1,000, and a bidder decides to bid when the price reaches $400. Once the price
gets to $450, the bidder could decide to revise and wait until $350. However, no new
information has become available and there is no reason to revise. In order for the
price to reach the original planned bid of $400, it had to reach $450, meaning that
no one bid prior to a price of $450. In order for a bid of $400 to win, the price had
to reach $450; if the price reaching $450 means that a bid of $350 is optimal, then
the original bid of $400 could not have been optimal. Of course, a bidder who thinks
losing is likely may wait for a lower price to formulate the bid, a consideration
ignored here. In addition, because the Dutch auction unfolds over time, bidders who
discount the future will bid slightly higher in a Dutch auction as a way of speeding
it along, another small effect that is ignored for simplicity.

What is interesting about the Dutch auction is that it has exactly the same possible
strategies and outcomes as the sealed-bid auction. In both cases, a strategy for a
bidder is a bid, no bidder sees the others’ bids until after her own bid is formulated,
and the winning bidder is the one with the highest bid. This is called strategic
equivalence. Both games—the Dutch auction and the sealed-bid auction—offer
identical strategies to the bidders and, given the strategies chosen by all bidders,
produce the same payoff. Such games should produce the same outcomes.

The strategic equivalence of the Dutch auction and the sealed-bid auction is a very
general result that doesn’t depend on the nature of the values of the bidders (private
vs. common) or the distribution of information (independent vs. correlated). Indeed,
the prediction that the two games should produce the same outcome doesn’t even
depend on risk aversion, although that is more challenging to demonstrate.

Example of a Dutch Auctions

Let's assume there are 10 shares of stock for sale. A bidder offers $10 per share of
stock for 8 shares. The next highest bidder offers $9 per share for 10 shares. The
auction will end, as there are adequate bids to sell all shares. The price paid for all
shares will be the lowest successful bid of $9. The first bidder will receive 8 shares
at a price of $9 (lower than her original $10 bid). The second bidder will receive the
2 remaining shares (less than her desired lot of 10 shares) at $9.

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Vickery Auction:

Vickrey auction is a sealed-bid auction in which each participant simultaneously

submits his or her bid. This is the same concept like in any other standard sealed-bid
auction. Vickrey auction is however a "second price" auction. The price paid for the
exchanged good is equal to the second-highest bid placed.

The Vickrey auction is named after Canadian national William Vickrey who first
described this concept in his paper in 1961 and pointed out benefits of the Vickrey
auction. The Vickrey auction is also often called second-price sealed-bid auction.
William Vickrey received a Nobel Prize for his work.

Vickrey auction is a type of auction where all the bidders will bid for their true value
or worth and will have the maximum willingness to pay for the highest price to stand
as the winner of the bid. The auction is a sealed bid where no bidder is aware of
other bids. Thus everyone contributes willingly and wants to go the extra mile to win
the bid. Every bidder will put the maximum bid possible. They are kind of motivated
or encouraged to quote a high bid because, anyways, they won’t be paying the
highest amount and will only have to pay for the second-highest bid. This will not
cause any disadvantage to the bidder for quoting the maximum bid. Thus, we see
Vickrey’s auction follows the second price mechanism. By following the second
price mechanism, bidders will bid truthfully.

Example of Vickrey Auction

Let us suppose an auction for an antique gemstone is going on, and four bidders have
got involved in the bidding process. Now, bidder A places a bid of $1500, bidder B
places a bid for $2000, bidder C places a bid for $1800, and finally, bidder D places
a bid for $1700. It is evident now that bidder B had the highest bid, winning the
auction bid. The twist in the Vickrey auction is that although bidder B has won the
auction quoting a bid of $2000, he will only pay the sum of the second-highest bid,
which is $1800. Thus, in this way, he is ending up in surplus money of $200. Thus,
in the Vickrey auction every bidder is willingly motivated to call for the highest bid
because of the hope to end up retaining surplus money. Therefore, every bidder tries
to win the bid and thus places the bid truthfully based on the value of the item and
is motivated about doing so.
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Double Auctions:

In double auction, Buyer’s place bids and sellers place offers throughout the trading
day. This can be done electronically, or by open outcry where each party calls out
prices they are willing to buy or sell at and make a transaction if the prices match
up. In this way a negotiation of sorts occurs where buyer and seller work together to
arrive at a fair market price.

Secure Electronic Transaction (SET)

Secure Electronic Transaction is also called SET, is a credit card based online
payment system developed by Visa and Microsoft, supported by MasterCard, IBM,
CyberCash and NetScape which provided technology of Secure Socket Layer
(SSL).

The first official version was launched in May 1997. SET aims at enabling a secure
electronic payment. It is an expensive system and has low acceptance in the markets.
It is an open-source encryption and security specification designed to protect credit
card transactions on the internet. The Secure electronic transaction is not a payment
system; it is a set of security protocols and format that ensures that using online
payment transaction on the internet is secure.

SET provides a secure environment for all the parties that are involved in the e-
commerce transaction. It also ensures confidentiality. It provides authentication
through digital certificates. It uses different encryption and hashing techniques to
secure payments over internet done through credit cards.

In order for secure transactions to work, SET must possess the following qualities
(key features):

 Confidentiality: others cannot eavesdrop on an exchange.

 Integrity: the messages received are identical to the messages sent.
 Authenticity: you are assured of the persons with whom you are making an
exchange.
 Non-Repudiability: none of the involved parties can deny that the exchange
took place.

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In addition to these four requirements, SET also assumes that that a hierarchy of
certificate authorities that can vouch for the bindings between a user and a public
key already exists. Therefore, consumers, merchants, and acquirers must exchange
certificates before a party can know what public key to employ to encrypt a message
for a particular correspondent.

SET Protocol
Most Internet merchants use the SSL protocol to prevent eavesdroppers from
learning customers’ account details, such as credit card numbers. This arrangement
follows the classical idea that bad persons are necessarily outsiders, and it has two
major limitations:

 The customer has to trust the merchant to keep these details secure. Some
merchants are dishonest or at best incompetent. A million credit card numbers
have recently been stolen from Internet sites whose managers had not applied
security patches.
 The merchant has to trust the customer, who does not sign anything. The
merchant has little protection from the use of stolen card numbers or from
customers who repudiate their purchases.

Visa and Mastercard designed the SET protocol to address this unsatisfactory
situation and they are:

1. Provide confidentiality of payment information

2. Ensure integrity of all transmitted data
3. Provide authentication that a cardholder is a legitimate user of a branded
payment card account
4. Provide authentication that a merchant can accept branded payment card
transactions
To achieve these goals, the SET protocol comprises following sub-protocols:

 Cardholder Registration allows a customer to register a credit card with a

Certificate Authority. The request includes the Cardholder’s public signature
key and a secret nonce (called Card Secret). The outcome of registration is a

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public-key certificate that includes the hash of the primary account number
(PAN), i.e. the credit card number, and of a secret nonce (PANSecret).
 Merchant Registration is analogous (similar). A Merchant registers both a
signature key and an encryption key.
 Purchase Request allows a Cardholder to place an order with a Merchant.
 Dual Signature: The dual signature is a concept introduced with SET, which
aims at connecting two information pieces meant for two different receivers:
o Order Information (OI) for merchant and
o Payment Information (PI) for bank
 Payment Authorization follows or is combined with Purchase Request. It
allows a Merchant to verify the Cardholder’s details with a so-called Payment
Gateway, which authorizes the transactions.
 Payment Capture allows a Merchant to request the actual transfer of funds.

The basic idea is that both Cardholders and Merchants must register with Certificate
Authorities before they engage in transactions. Unsuitable individuals (known
criminals, for example) may not get past this stage. Reliable (or reliable-looking)
principals can then engage in business. During the purchase phases, all parties
commit themselves to each transaction by using digital signatures. In this way,
registered Cardholders can make purchases without sharing account details with the
Merchant.

Requirements in SET:

SET protocol has some requirements to meet, some of the important requirements
are:

 It has to provide mutual authentication i.e., customer (or cardholder)

authentication by confirming if the customer is intended user or not and
merchant authentication.
 It has to keep the PI (Payment Information) and OI (Order Information)
confidential by appropriate encryptions.
 It has to be resistive against message modifications i.e., no changes should be
allowed in the content being transmitted.

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 SET also needs to provide interoperability and make use of best security
mechanisms.

Feature of SET:

 Using public-key and private-key encryption to ensure data confidentiality

 Use information digest technology to ensure the integrity of information
 Use dual signature technology to ensure identity of both parties in the
transaction
 Ensure Cardholder Account Authentication
 Ensure Merchant Authentication

How SET Protocol works?

Both cardholders and merchants must register with the CA (certificate authority)
first, before they can buy or sell on the Internet. Once registration is done, cardholder
and merchant can start to do transactions, which involve nine basic steps in this
protocol, which is simplified.

1. Customer browses the website and decides on what to purchase

2. Customer sends order and payment information, which includes two parts in
one message:
a. Purchase order – this part is for merchant
b. Card information – this part is for merchant’s bank only.
3. Merchant forwards card information to their bank
4. Merchant’s bank checks with the issuer for payment authorization
5. Issuer sends authorization to the merchant’s bank
6. Merchant’s bank sends authorization to the merchant
7. Merchant completes the order and sends confirmation to the customer
8. Merchant captures the transaction from their bank
9. Issuer prints credit card bill (invoice) to the customer

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SET Participants
A number of participants are involved in the SET process:

 Cardholder: A cardholder is an authorized holder of the payment card. The

card can be a Master card or a Visa which an issuer has issued.
 Merchant: A merchant is any person or organization who wants to sell its
goods and services to cardholders. Note that a merchant must have a
relationship with the acquirer to accept the payment through the internet.
 Issuer: An issuer is a financial organization such as a bank that issues
payment card Master card or visa to user or cardholder. The issuer is
responsible for the cardholder’s debt payment.
 Acquirer: This is a financial organization with a relationship with the
merchant for processing the card payment authorization and all the payments.
An acquirer is part of this process because the merchant can accept credit
cards of more than one brand. It also provides an electronic fund transfer to
the merchant account.
 Payment Gateway: For payment authorization, the payment gateway acts as
an interface between secure electronic transactions and existing card payment
networks. The merchant exchanges the Secure Electronic Transaction
message with the payment gateway through the internet. In response to that,
the payment gateway connects to the acquirer’s system by using a dedicated
network line.
 Certification Authority: It is a trusted authority that provides public-key
certificates to cardholders, payment gateways, and merchants.

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Fig: Participants in SET System

Assignment:

1. Status of E-Payment system in Nepal

2. Case Studies: Global and Local Payment System

End of Unit-4

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