E-Commerce

Electronic Payment System

Module 5
Electronic payment
.
● Electronic payment is defined as a financial exchange that takes
place online between buyers and sellers (or two entities).
● The participants in an online electronic payment transaction,
include the following :
■ The customer
■ The issuer
■ The merchant
■ The acquirer
■ The payment gateway
■ The processor
● The customer
. Customer in the ecommerce may be an individual or organization
who buy products or services online.

● The issuer

The financial institution, such as a bank, that provides the

customer with a payment card.

● The merchant

The person or organization that sells goods or services to the

cardholder via a website is the merchant.
● The acquirer
. It is a financial institution that establishes an account with the
merchant and processes payment card authorisations and
payments.
● The payment gateway
Processes merchant payments by providing an interface between
the merchant and the acquirer’s financial processing system.
● The processor
It is a large data centre that processes credit card transactions and
settles funds to merchants, connected to the merchant on behalf of
an acquirer via a payment gateway.
Basic steps of an online payment
,
● Step 1 :
The customer places an order online by selecting items from the
merchant’s website and sending the merchant a list.
● Step 2 :
The buyer submits a payment request through his phone or
computer.
● Step 3 :
The service provider routes the data via a secure connection to the
buyer’s bank.
● Step 4 :
. The buyer’s bank either approves or declines the transaction based
on the buyers available funds or credit. If approved the transaction
is routed back to the payment provider to be processed.
● Step 5 :
The payment provider stores the transaction and send a record to
both the seller and buyer.
● Step 6 :
The goods or services are sent to the buyer and the buyer’s bank
sends the funds to the seller.
Digital payment requirements
.
● Acceptability

This refers to whether the payment method is supported globally. It

should be available and accessible to all type of buyers and sellers.
● Affordability

The cost of implementing and using the system must be affordable

for consumers and merchants.
● Efficiency
. Systems should be able to receive small payments without
performance degradation.

● Flexibility

The system must allow consumers to order products or services

from any location, and not just from one PC.

● Interoperability

The system must be interoperable between different computing

platforms, web browsers and server software packages.
● Anonymity
. It is the desire to protect one’s privacy, identity, and personal
information.
● Reliability

The system must be reliable since it is used from the transmission

and manipulation of sensitive information.

● Security

The payment method should be secure.

Online payment categories
.
Digital token based payment system
● Electronic currency looks like conventional cash.
● Electronic currency is stored in digital form and serves as a cash
substitute.
● Electronic tokens
There are two types of electronic tokens namely prepaid tokens
and postpaid tokens.
.● The users may get prepaid token by making the payment in
advance. Digital cash or e-cash, debit cards, electronic purses are
examples of this kind of tokens.

● In the case of postpaid tokens, fund transfer instructions are being

exchanged between buyer and seller. Electronic cheques and credit
cards are examples.
.Digital coins

● The digital coin is based on the following principle : The bank

provides consumers with the serial number of a coin encrypted
with the bank’s private key.
● If the consumer wants to spend the coin, the bank checks the serial
number on the list of spent coins and, if the coin has not already
been spent, the bank either credits the bank account or provides
them with a new coin.
Debit Credit system or Account based systems
.
● With the debit approach, the customer maintains a positive balance
of the account and money is subtracted when a debit transaction is
performed.

● With the credit approach, charges are posted against the

customer’s account and the customer is billed for this amount later
or subsequently pays the balance of the account to the payment
service.
Credit card as e-payment system
.
● Credit cards are most widely used and convenient method.

● Credit card is a small plastic card with a unique number attached

with an account.

● When a customer purchases a product via credit card, credit card

issuer bank pays on behalf of the customer and the customer has a
certain time period after which he/she can pay the credit card bill.
● Cards are issued to customers on the basis of their income level,
. credit history, and total financial soundness.

● By using these cards, customers can purchase goods and services

either offline or online without making immediate payment.
Payment to the merchants will be made by the customer’s bank.

● The customer is supposed to repay his debts during the payment

period. Otherwise interest will accumulate.
Advantages:
.● Convenience
Credit cards are easier to use.
● Fast payment
It takes a few seconds to swipe a credit card.
● Easy access
At any time user can access his/her credit card
● More shopping options
Credit card can be used for online shopping.
● Consumer protections
. If someone steals our credit card we can block the card.

● Credit score

It is a measure to know the creditworthiness of a user. Ie, how

likely he is to pay money back on time when he borrow it.

● Record keeping

User gets an automatic record of his spending.

.Disadvantages

● Overspending

They encourage people to spend money that they don’t have.

● High interest rate and increased debt

If dues are not cleared before the billing due date, the amount is
carried forward and interest is charged on it.
 ● Credit card fraud
. It is possible to clone a card and gain access to confidential
information.

● Hidden costs

Credit cards have a number of taxes and fees, such as late

payment fees, joining fees and processing fees.
Debit
. card as e-payment system
● Debit card is a prepaid card and also known as ATM card.

● This is a payment card that deducts money directly from a

customer's bank account.

● Debit card serve a dual purpose : first, they allow user to withdraw
money from his bank. second, they allow user to make purchases.
Advantage
.● Easy to obtain
● Quick purchase
● Comfortable
● Safety
● Control on spending
● Readily accepted
Disadvantage
.● No grace period
● Limited money access
● Less safety
● Extra fees

Accessing from another bank’s ATM will cost additional fee and it
increases for each transaction.
Classification of new payment system
.
Smart card payment system
● A smart card is similar to a credit card or debit card in size and
shape.
● It is a small plastic card that has a built in microprocessor to store
and process data and records.
● Smart card has the facility to store the details about customer. It
encrypts digital cash on a chip and can be refilled by connecting to
a bank. The ability of the chip to store more information in its
memory makes the card smart.
.Advantage

● Security
● Convenience
● Flexibility
● Control on spending
● International use
● Interest free loan
.Disadvantage

● Security
● Chance of loss
● Slow adoption
● Possible risk of identity theft.
Electronic cash or e-cash
.
● E-cash is an electronic medium for making payments.

● This refers to a system in which a person can securely pay for

goods or services electronically without necessarily involving a
bank to mediate the transaction.

● E-cash are also known as digital cash and cyber cash.

.● E-cash involves at least 3 parties :
○ Issuer not necessarily financial institution,
○ Consumer as the end user who uses the e-cash and
○ Merchant who accept e-cash in exchange with products or
services provided.

● The following procedure is followed to implement e-cash :

○ Consumer needs to open an account with a bank.
 ○ Install software called electronic wallet. As to get DigiCash, an
. electronic wallet is used by consumer to create coins and thus
these created coins are sent to the bank to get signed.

And after the coins are signed, the equivalent amount of money
is withdrawn from the person’s account of concerned bank.

○ When the person interested in making purchase, he supposed

to send signed digital coins to the vendor.
○ Upon receiving e-cash from consumer, merchant will get
confirmation from the bank.
.Properties of e-cash :

● Security
● Portability - It does not depends on physical location.
● Anonymity - It should not be traceable
● Transferability
● Divisibility - It can be divided into small denominations.
.Advantages of e-cash :

● Convenience to consumers.
● Consumer privacy
● Purchase small items
● Global market
● Security
● Increased efficiency of banks
.Disadvantages of e-cash :

● Existence of counterfeiters
● Lack of infrastructure
● Computer literacy
● Less popularity
● Difficulty in monitoring
Electronic cheque or e-cheque
.
● An e-cheque is an electronic document which substitutes the paper
cheque for online transactions.
● E-cheque work the same way as paper cheque.

● The payer/account holder writes an e-cheque using a computer or

other type of electronic device and transmits the e-cheque to the
payee electronically.
● Digital signatures are used for signing and endorsing electronic
cheques.
.Advantages of e-cheque :

● Faster processing
● Lower costs
● Customer payment options

Some users do not possess a debit or credit card. Such users can
use e-cheque.

● Security and reliability

.Disadvantages of e-cash :

● Fraud potential
● Errors
● Bouncing

Echeques are often bounced or returned.

E-wallets
.
● E-Wallets is a type of electronic card which is used for transactions
made online through a computer or a smartphone.
● It’s 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.

● E-wallet is a type of prepaid account in which a user can store his

money for any future online transactions.
● An e-wallet is protected with a password.
There are 3 kinds of mobile wallets
.● Closed wallets
It doesn’t permit to redeem or withdraw cash. It can only be used
for goods and services for that specific company.
Eg : MakeMyTrip, Jabong etc
● Semi closed wallets

It doesn’t permit to redeem or withdraw cash. But it allows users

to purchase goods and services with listed merchants who have a
contract wallet company.
Eg : Paytm, PayUMoney, MobiKwik etc
.

● Open wallets

The wallets that allow users to redeem plus withdraw cash name as
open wallets.

Eg : M-pesa
.
Micro payment system
● Micro payments are made for small payments on the web.
● A micropayment is a financial transaction involving a very small
sum of money and usually one that occurs online.
● Efficiency
● Security
BITCOIN - Cryptocurrency
.

● Bitcoin is a cryptocurrency invented in 2008 by an unknown

person or group of people using the name Satoshi Nakamoto.

● The currency began use in 2009 when its implementation was

released as open-source software.
● Bitcoin is a decentralized digital currency, without a central bank
. or single administrator, that can be sent from user to user on the
peer-to-peer bitcoin network without the need for intermediaries.

● Transactions are verified by network nodes through cryptography

and recorded in a public distributed ledger called a blockchain.

● Cryptocurrency is nothing but a digital currency in which

encryption techniques are used to regulate the generation of units
of currency and verify the transfer of funds.
Properties of Bitcoin
.
● Irreversible

A transaction cannot be reversed by anybody.

● Pseudonymous

Neither transactions nor accounts are connected to real world

identities.

● Fast and global

Transactions are propagated instantaneously in the network and are

confirmed within minutes.
● Secure
. A bitcoin address is more secure. Strong cryptography and the
magic of big numbers make it impossible to break this scheme.

● No permission

No permission from anybody is needed to use cryptocurrency. It is

only a software that everybody can download for free.
Internet banking
.
● It refers to any banking transaction that can be conducted over the
internet, generally through a bank’s website under a private profile.

● The user must register with the financial institution online and
create a login ID and password.

● User can also keep a track of his account transactions and balance
all the time.
Advantages of Internet Banking
.
● Simplicity
● Convenient
● Anytime anywhere
● Fast and efficient
● Safety
● Promotion - Its a medium for banks to endorse their products and
services.
Risks and E-Payment Systems
.
Customer’s risk
● Stolen credentials or password
● Dishonest merchant
● Disputes over transaction
● Inapproprate use of transaction details
.
Merchant’s risk
● Forged or copied instruments
● Disputed charges
● Insufficient fund in customer account
● Main issue : secure payment system
CRYPTOGRAPHY
.
● It is an algorithmic process of converting a plain text message to a
cipher text message based on an algorithm that both the sender and
receiver know.

● A message can be encrypted by applying a secret numerical code ,

called an encryption key, so that it is transmitted as a twisted set
of characters.
● The key consists of large number of letters, numbers, and symbols.
.

● In order to read, the message must be decrypted with a matching

key.

● The act of converting a plain text message to its cipher text form is
called enciphering (encryption). Reversing that act is deciphering
(decryption).
.

Forms of cryptography
● Secret key cryptography or symmetric
● Public key cryptography or asymmetric
Secret key cryptography or symmetric
.
● Uses a single key for both encryption and decryption.

● The limitations of symmetric cryptography is that, a key is to be

agreed between communicating partners and for this purpose some
prior communication need to take place between them.

● The most widely used symmetric key cryptography method is the

Data Encryption Standard (DES).
.
Public key cryptography or asymmetric
.
● Uses one key for encryption and another key for decryption.
● Each user has a public/private key pair.

● The public key is distributed among the message senders and they
use the public key to encrypt the message.

● The recipient uses their private key to decrypt the message.

● RSA is a widely used public/private key algorithm.
Digital signature
.
● It is a mathematical scheme for demonstrating the authenticity of a
digital document.
● Authentication means that recipient knows who created the
document and it has not been altered in any way since that person
created it.
● When sender digitally signs a document, he adds a one way
hash(encryption) of the message using his public and private key
pair. Recipient can still read it, but the process creates a signature
that only the server’s public key can decrypt.
Digital signature provide the following benefits :
.● Authentication

Digital signature authenticates a document and which enables to

identify the sender.

● Non repudiation

Signing takes place through a series of steps and tracks all of those
steps. This eliminates the possibility of signer suggesting he made
a mistake in signing.
.

● Integrity

Documents signed with digital signature alert the reader in real

time if anything has been changed or if there is any reason not to
trust the document.
.

The End

Thank You
Teacher : Jishna K

College of Applied Science, Thamarassery.