DU SOL B.Com 3rd Year E-Commerce Notes Chapter 4 Mechanism of Making Payment through Internet
What are the Special Features Required in Payment Systems for E-Commerce?
To understand the payment system, we first must understand the Electronic Payment System (EPS). The EPS (Electronic Payment System) is an online Business process used for fund transfer using electronic means i.e. using Personal Computers, Servers, Mobile Phones and hand held devices (PDA). They are widely used in Bank whenever transactions are made in ten 1 IS of payment and other means.
EPS 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 to debit or credit an account”.
Thus, EPS stands in marked contract to conventional money and payment modes that rely on physical delivery of cash and cheqeus by truck, train or airplane. Some of the special features required for the importance of the electronic payments are discussed as follows.
Consumer point of view: An EPS is a convenient way of making a purchase or paying for a service without holding cash or having to got through in process of completing a cheque producing some form of acceptable identification.
Supplier point of view: To a supplier of goods or services an Electronic payment is the receipt or outward movement of funds, perhaps linked into an inventory management, ordering or accounting system, eliminating much of the need for large cash holdings, time consuming clerical activities and potentially offering easier management of cash flows. E-Payment represents an efficient means changing funds and cash flows, offering improved security and assurance of value.
An account/payment manager or Bank point of view: An E-Payment is a series of processes by which value exchange is captured, verified and accepted, a series of checks, balances and reconciliation to ensure integrity. E-Payment generally requires less manual intervention, offers reduced costs and easier record storage and handlings.
Elements of online commerce and their relationships to the banking networks
- The consumer and the associated browser to interact with the consumer.
- The merchant system residing on an online web server with a connection to Web Browser with a connection to Web browsers on the internet.
- An online shopping mall that may help direct consumers to the, merchant servers.
- The background banking network to support online payments from consumers the merchant.
Working of EPS. EPS are proliferating in banking, retail, health care, online markets and even government in facts, anywhere money needs to change hands. Organizations are motivated by the need to deliver products and services more costs effectively and to provide a higher quality of service to customers. Work on EPS can be segmented into three broad categories
1. Banking and Financial Payments
(a) Large scale or wholesale payment ( e.g. Bank-to-bank transfer)
(b) Small scale or retail payments (eg. ATMs and Cash dispenses)
(c) Home Banking (Bill Payment)
2. Retailing Payments :
(a) Credit Cards (e.g. Visa or Master Card)
(b) Private Label Credit! debit cards (e.g. JC Penney Cards)
(c) Charge Cards (e.g. American Cards)
3. On-Line Electronic commerce Payments
(a) Token-based payment systems
- Electronic Cash (e.g. Digicash)
- Electronic Checks (e.g. Net cheques)
- Smart Cards or Debit Cards (e.g. Mondex Electronic Currency Cards)
(b) Credit-Card based payment systems:
- Encrypted Credit Cards (e.g. WWW form based encryptions)
- Third part authorization numbers (e.g. First virtual)
Describe the various types of E-Payment Systems
Following are the various types of e-payment systems- Digital Token Based EPS. Newly developed financial Instrument “Electronic Tokens” in the form of electronic cash/money or checks. Electronic tokens are designed as electronic analogs of various forms of payments backed by a bank or financial institutions. E- Tokens are equivalent to cash that is backed by a bank. E-Token are of three types –
- Cash to real time: Real time payments are exchanged between buyer and seller. Here user prepays for the token that server as currency. Transactions are settled with server as e-currency.
- Debit or prepaid: User pay in advance for the privilege of getting information e.g. smart card, electronic purses,
- Post paid or credit: The server authenticates the customer and verified with both that hinds, are adequate before the purchase of goods e.g. credit /debit card and checks.
1. E-Cash or Electronic Cash. Electronic cash or E-cash digital money or digital cash provider the means to transfer money between parties ones a network such as’ the internet e-cash must satisfy some general properties of digital money.
- Independence: E-cash must not depend on c its existence in any- given computer System or location.
- Non-reusability: E-cash should not be reusable after its first use. For example, f I get e-cash for $50 and spend it to buy a shirt, then I cannot spend this money again
- Anonymity: E-cash cannot provide information that can be used to trace the previous owner of the cash. If I buy a shirt, then there should be nothing associated with the E-cash that trace it to me.
- Transferability: E-cash should be easily transferable from one person or party to another. This should occur without leaving any trace of who has been in possession of this money.
- Divisibility: E-cash must be available in several denominations. It should also be divisible in a way similar to real cash. For example, 25 digital pennies should yield a digital quarter and four quarter should equal a dollar.
- Secure Storage: E-cash should be available in such a way so it can be securely stored at the consumer’s hard drive or on a smart card. It is possible to transfer this electronic cash b/w various types of parties on the Internet
Working of E-cash. The E-cash transactions take place in three district and independent phases as discussed beiow:
Phase I: Obtaining Electronic Cash
This phase can be described in the following steps:
- The consumer requests his/her bank to transfer money to the e- mint to obtain e-cash.
- The consumer bank transfer money from the consumer’s a/c to the e-mint.
- the e-mint sends e-cash to the consumer. The consumer serves his e-cash.
Phase II: Purchasing with Electronic Cash
This phase is executed whenever the consumer desires to make a purchase with ecash. It can take place after consumer transferring his money to e-cash from the emint.
- The consumer selects the goods and transfers the e-cash to the merchant.
- The merchant provides the goods to the consumer
Phase III: Redeeming Cash by the Merchant
This phase occurs whenever the merchant is ready to redeem the e-cash. The merchant should be capable of converting this e-cash to money for the merchant’s bank a/c.
- The merchant may send the e-cash to its bank and the bank in turn redeems the Money from the e-mint.
- The e-mint transfers money to the merchant’s bank for crediting the merchant’s a/c. .
- The potential for fraud is reduced because in proper verification is done in case e-business.
- It can protect the customer’s anonymity so that although the merchant is assured of the payment, the merchant does not need to know the details of the customer.
- Merchant would prefer an e-cash scheme, since it prevents denial by the customer or lack of funds in a customer’s account.
Currency Server. The currency server is a special term used in EPS whereby the customer and Merchant can exchange the different currencies depending upon the machine used.
Types of Currency Server are as written below—
- ATM Machine
- POS Terminal
- Card Reader, etc.
The various applications where Currency Servers are used as written below—
- Bank Debit Card
- Credit Card
- Telephone Card
- Employee Identification Card
1. E-Cheques. E-Chequing pertains to the use of networking services to issue and process payments that emulate real world chequeing. The payer issues a digital cheque to the payer and the payer deposits it in the bank to redeem the money. Each transaction is carried over the Internet.
- Paying fees through the ATM network.
- Paying bills through monthly bank account deduction.
- Transfer of large sums of money among banks across the world.
Difference between E-Cheque and EFT. Fore-checks, electronic version of cheques are issued, received and processed. So the payer issues an electronic cheque for each payment. For EFT, automatic withdrawals are made for monthly bills or other fixed payments and no cheques are issued.
In case of e-cash, we have five primary parties: the consumer, the consumer bank, the merchant, the merchants’ bank and the e-mint. For E-cheques, we have added the clearing house to process cheques among different banks.
Working of E-Cheques. Working of e-cheques can be described in the following steps. ‘
Steps regarding e-cheques. The e-cheques are executed in three phases. In the 1 st phase, the Consumer makes a purchase and in the 2nd phase the merchant sends the electronic cheques to its bank for redemption and in the 3rd phase, the merchants bank approaches the clearing house or the consumers bank to encash the e-cheques.
Phase I: Purchasing Goods :
- The consumer accesses the merchant server and the merchant server presents its Goods to the consumer.
- The consumer selects the goods and purchases them by sending an electronic Cheque to the merchant.
- The merchant may validate the electronic cheque with its bank for payment authorization.
- Assuming the cheque is validated the merchant closes the transaction with the consumer.
Phase II: Depositing Cheques at the Merchant’s bank :
- The merchant electronically forwards the cheque to the bank.
- The merchant bank forwards the e-cheque for clearing house for cashing.
- The clearing house with the consumer’s bank, clears the cheque and transfers money to the merchants bank, which updates the merchant account.
- At last the consumers bank update the consumers with the withdraw information.
Benefits of E-cheques
- E-Cheques works in the same way as the traditional cheques the simplifying customer education.
- E-Cheques serve such .corporate markets. Firms can use e-cheques to complete payment over the market in more cost effective than present alternatives.
- E-Cheques are well suited for clearing micro payments. The conventional cryptography of e-cheques makes them easy to process then the system based on public-key cryptography like digital cash. The payer pays bank-authorized checks through the use public key certificate.
3. CREDIT CARDS (Electronic Cards). For the online transactions, the credit cards are the easiest method of others because people are already accustomed by using them remotely. The Credit card transaction simply requires that the consumer have a valid Credit card number and expiration date when placing an order. This information has been provided through standard Internet options like e-mail/sms.
In E-Credit, conversational Credit cards may be used along with a pin. The pin is a secret code that the consumer must enter while using the credit card online. As such, it prevents misuse of the credit card in case it is stolen.
Working of E-Credit or Credit Cards:
Phase-I: Purchase of Goods: transaction starting from 1-4.
Phase-II: Settlement of transaction from 5-6.
Phase-III: Consumer update of Credit card bill in the transaction number.
4. SMART CARDS. Smart cards looks very much like a traditional credit card with one major exception. There is tiny microprocessor unit [MPU like CPU] or chip on the face of the card. Smart card combines with the characteristics of the credit or debit cards. They are being offered to consumer for small purchases less than $10 or more/less for Following are the some examples for using the Credit Cards as –
- Prepaid telephone cards [SIM].
- Have a cup of coffee.
- Buy a movie ticket.
- Buy a train ticket etc.
Smart cards are also called stored value cards uses magnetic strip technology or Integrated circuits [ICs] chip to store the consumer specific information including e-money. These cards can be used to purchase goods or services and store information, control access to a/c and performs many other functions. Smart cards offer clear! Benefits to both merchant and customer. They reduce cash hand expenses and losses caused by frauds.
5. Electronic Purse Digital Wallet and Debit Cards. E-Purse or D-Purse is wallet size smart card embraced with programmable micro chip that store monitory value in form of money to be used with Point of Sale (POS) terminal.
- After we get E-Purse from the bank we can use it for different purpose depending upon the type of POS.
- The corresponding P~S scans the E-Purse to authenticate the E- Purse and Perform the operation corresponding.
- The machine can send the value printing on E-Purse and perform Automatic deduction from balance of the card.
- When the balance on the E- Purse is shown the same machine can be used to recharge the same card.
6. Electronic Bill. E-Bill is similar with general bill used to pay offline exchange with merchant. It consists of digital document (Document File), which is signed by the consumer by using private key. The merchant use the payer public key to decode the digital document if the result return the receiver identification that match with the sender’s identity, it means the digital documents are valid. There by the electronic version of paper cheque are issues, received and processed online.
Write a short note on Business issues and Economic Implications.
Business Issue: E-business world acquires various issues that must be considered by the trading partner whenever e-transaction takes place using electronic payment systems. The Business issues are basically all the legal issue exchange between two parties whenever risk management system exhibits various constrains on different electronic payment transactions. These risks associate with customer, merchant and third party etc.
Business Issue in concern with customer: Since customer only avails the resources, the merchant is offering therefore the business are largely playa very small role during small transaction having $ 5, $ 10, $ 20, etc.
Business Issue in Concern With Merchant: The Business issue deals with foreign policy, standardization of services, international certificate and other legal issues that the merchant has to acquire by dealing with the party. By considering the technological for various types of E-payment system, the merchant also considered all the risk mgt phases while exchanging e-currency on the net. By combining risk management option and business issue with respect to merchant the following observation should be given due care before and after making e-transaction.
Risks of the Electronic Payment System highlights are as below—
- Risk Management Option
- Information Privacy
Risk Management. Risk management is a methodology processing potential of future event that cause adverse effect and implement cost effective strategies deals with these Risk.
Risk in concern with consumer. The internet has not been viewed by most users as a safe place to use credit cards to conduct business transactions. This feeling of insecurity is primarily due to the large among of press report citing story after story about thefts of credit card information Ey Internet hackers.
1. Information Privacy. During the customer interaction with the merchants, the IT Act, 2000 has proposed the privacy act that maintains all the internal information of consumer in a separate block to ensure that the customer must protect from internet threats. This process is also known as Record Keeping System.
2. Timing Gap. One of potential problem of EPS System is the shifting of Credit/Debit enquiry through timing gap in the exchange of Assets. Such gaps can create float and leads to risk.
3. Operation Risk. The operation risk are due to human being interaction or the machine on fault that could be considered as fraud.
4. Security Risk: The security risk is in concern with customer are indirectly deals with the lacks of SET protocol or non implementation of their security method.
Risk in concern with Merchant:
1. Protocol Risk : Other risk management like lack of regulation policies or not implemented the protocol hierarchy sometimes leads the major problem with concern bank e.g. State Bank of Patiala. The common problem that generally results is non-acceptance of other banks cards is also considered as the banks failure in implementing protocol.
2. Relationship Risk: In the competition world, to maintain a sound relationship with your customer, the banks have to provide a balance approach to attract more number of customers. The relationships
– risk can delegate the image of the Bank, if the concern bank does not offer Customer Relationship Mgt. (CRM), Partner Relationship Management (PRM) and Strategies of E-business.
3. Policies Risk: A Digital Central Bank Guarantee on settlement which involve time to time changes policies between different services e.g. Bank Loan, Mutual funds, Insurance Policy.
4. Infrastructure Risk: The E-bank also deals with infrastructure issue including hardware, software and standards.
Hardware – Currency server Software – (1) Bank Away (2) Pay Away
Information Privacy. Privacy is an important issue on the Internet. Organization wants to achieve all possible data about these customers to protect the sent information about the customer. Different organizations worldwide have making efforts to lay down legislative framework for privacy on the Internet.
“ECLIP” (Electronic Commerce Legal Issue Platform) set up by European Union that defined standards for various Privacy Issue as:
Buffer – temporary data
Cookies – Place on client server
- ECLIP Guidelines says that the server data of the customer must be processed fairly lawfully.
- A per son can be identified by using its If address. Therefore, it becomes Personal Information & Committee ‘says that one should use dynamic IP address to protect the personal data.
- A number of issues like taxation should be addressed.
- Tariffs, data protection and copyrights need to be reviewed from E- prospective.
Legal Issue of E-payment system. Legal issue defines framework protocol that defines the mechanism whereby the E-transaction takes place on the Internet. The legal issue also highlights the Guidelines setup by organization concern [Visa, Dig cash, TRAI, DOT etc] while issuing the legal documents to the service provide or individual.
Legal Issue for Credit Card.
- X-509 Certificate: These forms may be sent with each message to authenticate the sender and its messages. The certificate provides the procedure to validate the identity of the consumer, merchant, Merchant Bank.
- The Law also makes provision to protect the Pvt. Key of Certificate Authority.
- The Law also ensures to protect the card number, its expiry date, its PIN number, amount and other sensitive information during transaction.
- In case of any dispute between the two parties there must be means to solve the conflicts.
Operational Risk and Credit Risk: Deals with e-cash and e-credit is concern with all operational aspect of plastic payment when use to pay online for product and services.
- The Operational Risk in concern with e-cash includes expiry date, amount to be transferred, the number of exchange and number of transactions.
- Operational Risk in concern with other method such as e-purse etc Sometimes during exchange of e-money certain constraints introduce by banking system and other constraints imposed by the machine mismatched as a result the strategy of reporting transaction would be inefficient for the subscribed and complete* transaction process stops which result loss of customer, efforts and total number of transaction.
- All the operational risk are indirectly linked with legal issue and other business issue when the several transaction are made concurrent.
What are the components of an Effective Electronic Payment System?
The components can be described as below –
Consumer and the Browser: A consumer interacts with the online commerce system through a Web-Browser. Typically a consumer first access a shopping mall and then uses the hyperlinks from the mall to access the merchants home page.
Shopping Mall: a shopping mall is where most consumers first visit for a shopping free. There will be several shopping malls, and it may pay to enlist with one or more well known malls.
Merchant System: Consists of the Home Page and related software to manage the business.
Banking Network: Consists of several components. There is a bank that processes the online financial transaction:) for the given merchant. The bank maintains the account for the merchant, authorizes and processes the payment. The merchant bank also maintain a link with the consumers bank for verifying the transactions.