ABSTRACT

The emergence of e-commerce has created new financial needs that in many cases
cannot be effectively fulfilled by the traditional payment Systems. Recognizing this,
virtually all interested parties are exploring various types of electronic payment system
and issues surrounding Electronic payment system and digital currency. Broadly
electronic payment systems can be classified into four categories: Online Credit Card
Payment System, Online Electronic Cash System, Electronic Cheque System and Smart
Cards based Electronic Payment System. Each payment system has its advantages and
disadvantages for the customers and merchants. These payment systems have numbers
of requirements: e.g. security, acceptability, convenience, cost, anonymity, control,
and traceability. Therefore, instead of focusing on the technological specifications of
various electronic payment systems, the researcher have Distinguished electronic
payment systems based on what is being transmitted over the network; and analyze
the difference of each electronic payment system by evaluating their requirements,
characteristics and assess the applicability of each system.

INTRODUCTION
As payment is an integral part of mercantile process, electronic payment system is an
integral part of e-commerce. The emergence of e-commerce has created new financial
needs that in many cases cannot be effectively fulfilled by traditional payment systems.
For instance, new types of purchasing relationships-such as auction between individuals
online-have resulted in the need for peer-to-peer payment methods that allows
individuals to e-mail payments to the other individual. Recognizing this, virtually
all interested parties (i.e. academicians, government, business community and financial
service providers) are exploring various types of electronic payment system and issues
surrounding electronic payment system and digital currency. Some proposed
electronic payment systems are simply electronic version of existing payment
systems such as cheques and credit cards, while, others are based on the digital currency
technology and have the potential for definitive impact on today’s financial and
monetary system. While popular developers of electronic payment system predict
fundamental changes in the financial sector because of the innovations in electronic
payment system. Therefore, electronic payment systems and in particular, methods
of payment being developed to support electronic commerce cannot be studied in an
isolation. A failure to take place these developments into the proper context is likely to
result in undue focus on the various experimental initiatives to develop electronic
forms of payment without a proper reflection on the broader implications for the existing
payment system.
 Electronic Payment Systems

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.

Electronic Payment is a financial exchange that takes place online between buyers and
sellers. The content of this exchange is usually some form of digital financial instrument
(such as encrypted credit card numbers, electronic cheques or digital cash) that is backed
by a bank or an intermediary, or by a legal tender. The various factors that have lead the
financial institutions to make use of electronic payments are:

1. 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.

2. 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.

3. 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:

1. Affecting the consumers:

Credit cards, Debit Cards, ATMs (Automated Teller Machines),

Stored value cards, E-Banking.

2. Enabling online commerce:

Digital Cash, E-Cash, Smart cards (or Electronic Purse) and encrypted
Credit cards.

3. Affecting Companies:
Traditional payment systems

To get into the depth of electronic payment process, it is better to understand the
processing of conventional or traditional payment system. A conventional process of
payment and settlement involves a buyer-to-seller transfer of cash or payment
information (i.e., cheque and credit cards). The actual settlement of payment takes place
in the financial processing network. A cash payment requires a buyer‟s withdrawals
form his/her bank account, a transfer of cash to the seller, and the seller‟s deposit
of payment to his/her account. Non-cash payment7 mechanisms are settled by adjusting
i.e. Crediting and debiting the appropriate accounts between banks based on payment
information conveyed via cheque or credit cards.
Problems with the traditional payment systems

There are also many problems with the traditional payment systems that are leading to its
fade out. Some of them are enumerated below:

1. 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.

2. 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.

3. 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 companies offices. This statement is self-
explanatory.

4. Lack of Eligibility:

Not all potential buyers may have a bank account.

5. 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.
Process of Electronic Payment System
Electronic payment systems have been in operations since 1960s and have been
expanding rapidly as well as growing in complexity. After the development of
conventional payment system, EFT (Electronic Fund Transfer) based payment system
came into existence. It was first electronic based payment system, which does not
depend on a central processing intermediary. An electronic fund transfer is a
financial application of EDI (Electronic Data Interchange), which sends credit card
numbers or electronic cheques via secured private networks between banks and
major corporations. To use EFT to clear payments and settle accounts, an online
payment service will need to add capabilities to process orders, accounts and receipts.
But a landmark came in this direction with the development of digital currency. The
nature of digital currency or electronic money mirrors that of paper money as a
means of payment. As such, digital currency payment systems have the same
advantages as paper currency payment, namely anonymity and convenience. As in other
electronic payment systems (i.e. EFT based and intermediary based) here too security
during the transaction and storage is a concern, although from the different perspective,
for digital currency systems double spending, counterfeiting, and storage become
critical issues whereas eavesdropping and the issue of liability (when charges are
made without authorizations) is important for the notational funds transfer. Figure 2
shows digital currency based payment system.
Types of E-payment system

With the growing complexities in the e-commerce transactions, different electronic

payment systems have appeared in the last few years. At least dozens of electronic
payment systems proposed or already in practice are found (Murthy, 2002). The grouping
can be made on the basis of what information is being transferred online. Murthy (2002)
explained six types of electronic payment systems: (1) PC-Banking (2) Credit Cards (3)
Electronic Cheques (i-cheques) (4) Micro payment (5) Smart Cards and (6) E-Cash.
Kalakota and Whinston (1996) identified three types of electronic payment systems:
(1) Digital Token based electronic payment systems12, (2) Smart Card based
electronic payment system13 and (3) Credit based electronic payment systems14. Dennis
(2001) classified electronic payment system into two categories: (1) Electronic Cash and
(2) Electronic Debit-Credit Card Systems. Thus, electronic payment system can be
broadly divided into four general types (Anderson, 1998):

1. Online Credit Card Payment System

2. Electronic Cheque System
3. Electronic Cash System and
4. Smart Card based Electronic Payment System

Online Credit Card Payment System:

It seeks to extend the functionality of existing credit cards15 for use as online shopping
payment tools. This payment system has been widely accepted by consumers and
merchants throughout the world, and by far the most popular methods of payments
especially in the retail markets (Laudon and Traver, 2002). This form of payment system
has several advantages, which were never available through the traditional modes of
payment. Some of the most important are: privacy, integrity, compatibility, good
transaction efficiency, acceptability, convenience, mobility, low financial risk and
anonymity. Added to all these, to avoid the complexity associated with the digital cash
or electronic-cheques, consumers and vendors are also looking at creditcard payments on
the internet as one of possible time-tested alternative. But, this payment system has
raised several problems before the consumers and merchants. Online credit card
payment seeks to address several limitations of online credit card payments for
merchant including lack of authentication, repudiation of charges and credit card
frauds. It also seeks to address consumer fears about using credit card such as having to
reveal credit information at multiple sites and repeatedly having to communicate
sensitive information over the Internet. Basic process of Online Credit Card Payment
System is very simple. If consumers want to purchase a product or service, they simply
send their credit card details to the service provider involved and the credit card
organization will handle this payment like any other. This can be understood very
easily with the format (Figure 3) of Credit Card Payment Form.
Electronic Cheque Payment System
Electronic cheques address the electronic needs of millions of businesses, which today
exchange traditional paper cheques with the other vendors, consumers and government.
The e-cheque method was deliberately created to work in much the same way as
conventional paper cheque. An account holder will issue an electronic document that
contains the name of the financial institution, the payer’s account number, the
name of payee and amount of cheque. Most of the information is in uncoded form.
Like a paper cheques e-cheques also bear the digital equivalent of signature: a
computed number that authenticates the cheque from the owner of the account.
Digital chequing payment system seeks to extend the functionality of existing chequing
accounts for use as online shopping payment tools. Electronic cheque system has
many advantages: (1) they do not require consumers to reveal account information
to other individuals when setting an auction (2) they do not require consumers to
continually send sensitive financial information over the web (3) they are less expensive
than credit cards and (4) they are much faster than paper based traditional cheque.
But, this system of payment also has several disadvantages. The disadvantage of
electronic cheque system includes their relatively high fixed costs, their limited use only
in virtual world and the fact that they can protect the users‟ anonymity. Therefore, it is
not very suitable for the retail transactions by consumers, although useful for the
government and B2B operations because the latter transactions do not require
anonymity, and the amount of transactions is generally large enough to cover
fixed processing cost. The process of electronic chequing system can be described using
(figure 4) the following steps. .

Step 1: a purchaser fills a purchase order form, attaches a payment advice

(electronic cheque), signs it with his private key (using his signature hardware), attaches
his public key certificate, encrypts it using his private key and sends it to the vendor.

Step 2: the vendor decrypts the information using his private key, checks the
purchaser’s certificates, signature and cheque, attaches his deposit slip, and endorses the
deposit attaching his public key certificates. This is encrypted and sent to his bank.

Step 3: the vendor’s bank checks the signatures and certificates and sends the
cheque for clearance. The banks and clearing houses normally have a private secure data
network.

Step 4: when the cheque is cleared, the amount is credited to the vendor’s
Account and a credit advice are sent to him.

Step 5: the purchaser gets a consolidated debit advice periodically.

E-cheque provide a security rich Internet payment option for businesses and offer
an easy entry into electronic commerce without a significant investment in new
technologies or legal systems.
Electronic Cash Payment System
Electronic cash (e-cash) is a new concept in online payment system because it
combines computerized convenience with security and privacy that improve on paper
cash. Its versatility opens up a host of new markets and applications. E-cash is an
electronic or digital form of value storage and value exchange that have limited
convertibility into other forms of value and require intermediaries to convert. E-cash
presents some characteristics like monetary value, storability and irretrievability,
interoperability and security. All these characteristics make it more attractive payment
system over the Internet. Added to these, this payment system offers numerous
advantages like authority, privacy, good acceptability, low transactions cost, convenience
and good anonymity. But, this system of payment also has many limitations like
poor mobility, poor transaction efficiency and high financial risk, as people are solely
responsible for the lost or stolen. Gary and Perry (2002), just like real world currency
counterpart, electronic cash is susceptible to forgery. It is possible, though
increasingly difficult, to create and spend forged e-cash. E-Cash Structure: e-cash
structure could be identified as a string of bits that represents certain values such as
reference number and digital signature, which could be used for the security purpose to
prevent forgery and criminal use (Wright, 2002). But, the structure proposed by
Wright (2002) needs some extension to make e-cash more secure. Therefore, the present
model (Figure 3.5) adds a digital watermark to e-cash structure to protect it from the
illegal copy and forgery activities further, the model modified the structure of the
reference number to support tractability as shown in the figure 5.

The proposed e-cash structure is comparatively better than suggested by Wright (2002),
because security issue is given importance of top most priority in the present
model. But, still there are certain concerns to be addressed for an electronic cash system.
For example, who has the right to issue electronic cash? Can every bank issue its own
money? If so how do you prevent fraud? And who will monitor the banking operations to
protect consumers? Many of these concepts relate to the legal and banking regulatory
aspects. However all these issues are beyond the scope of the study and therefore,
cannot be included here. But, these issues must be addressed before establishing a
complete e-cash based payment system.
Smart Cards based Electronic Payment System
“Smart cards‟ are receiving renewed attention as a mode of online payment. They are
essentially credit card sized plastic cards with the memory chips and in some cases,
with microprocessors embedded in them so as to serve as storage devices for much
greater information than credit cards with inbuilt transaction processing capability. This
card also contains some kinds of an encrypted key that is compared to a secret key
contained on the user’s processor. Some smart cards have provision to allow users to
enter a personal identification number (PIN) code. Smart cards have been in use for well
over the two decades now and have been widespread mostly in Europe and Asian
Countries. Owing to their considerable flexibility, they have been used for a wide range
of functions like highway toll payment, as prepaid telephone cards and as stored value
debit cards. However, with the recent emergence of e-commerce, these devices are
increasingly being viewed as a particularly appropriate method to execute online
payment system with considerably greater level of security than credit cards.

Figure-5:- Smart Card

USAGE OF ELECTRONIC PAYMENT SYSTEMS
It is observed that different countries prefer the different forms of electronic
payment system. The market has been from the start dominated by traditional financial
intermediaries offering conventional electronic payment services augmented with minor
innovations to adapt to the Internet. In 2003, 94.1 percent of all worldwide e-commerce
transactions were conducted using credit cards (Pago, 2003). Even today, Credits cards
are dominant form of online payment all over the world. This is especially true about the
developed and fastest developing countries. This fact can be supported by the Research
conducted by Jupiter Media Matrix (2000). The research revealed that credits cards are
the most dominant methods of online payment in US. In the year 2000, credit cards
accounted 95 % of online payments and accounted $47 billion of credit cards
transactions in the US. This figure rosé to $25 trillion in the year 2004 (Federal Reserve
Payment Study, 2004). However, according to Jupiter Media Matrix Research Survey,
some consumers would prefer to other payment system, such as e-cash, debit cards and e-
chequing. Only 50 % of consumers outside the US use credit cards for online purchase
(Landon and Traver, 2002). According to the “Banking on the Internet Report”, Australia
has a strong platform for e-payment growth, with 37.7 per cent of the population willing
to engage in online payment. In Europe (especially in UK) and other countries of
developed world like Canada, New Zealand, and in some of the Asian Developing
Countries like China. Thailand, Japan and Singapore, smart cards based electronic
payment system is popular. Most of the developing countries like India rely much more
on electronic funds transfer and smart cards based electronic payment system. Very few
percent of people have credit cards and use of e-cheque is in vogue. But according to
Sumanjeet (2008) credit card is most popular method of payments in India (Table 2)
CRITICAL SUCCESS FACTORS OF E-COMMERCE PAYMENT SYSTEM

Success of e-commerce businesses, including both the largest of corporations and small
retailers, rely on electronic payment system. Therefore, understanding the various critical
success factors of e-commerce payment system is important. There are various factors,
which should be considered by an e-commerce, firm before introducing and
implementing e-commerce payment system. From the business perspective, new
payment products are notoriously difficult to introduce as the barriers to entry
(Lee, 1989; Yin, 1994), acceptance, and ubiquity are high (Abrazhevich, 2002).

Table 4 shows some factors, which are obstacles in the online payment systems. A
good payment system should also consider these factors. Added to this, new payment
products must be low margin to compete, high volume to build critical mass and
be profitable, receive favorable press treatment, be well branded to gain customer
confidence, achieve rapid uptake, and be differentiated from check and credit card
so that consumers and merchants find reason to prefer and use them. Studies also
revealed that simplicity (Schwartz, 2001; Truman et. al, 2003), trust (Herzberg, 2003;
Juang, 2006), security and mutuality (Peha and Khamitow, 2004; Baddeley, 2004; Oh
et al, 2006) of stakeholder benefits are all of importance to the adoption of e-
commerce payment system. Thus the factors which are critical for the success of
e-commerce payment systems are multifaceted. These include integrity, non-
repudiation, authentication, authorization, confidentiality and reliability, which are
discussed below:

Integrity: transaction data are transmitted and received unchanged and as intended.

Non-repudiation: transactions have the quality of non deniable proof or receipts.

Authentication: identities and attributes of parties engaged in commerce are established

at some tolerable level of risk.
Authorization: individuals are established and recognized as entitled to receive, Send or
view transactions.

Confidentiality: transactions can be protected from view except by those who are
authorized.

Reliability: probability of failure in the transaction-send, receive, acknowledge-is low.

Functionally, money technologies also need to achieve these operating characteristics:

privacy, scalability, ease of use, personalize-able, seamlessness, interoperability,
write one-apply anywhere and cost effective.

Benefits of Electronic Payment System

Electronic payment is very convenient for the consumer. In most cases, you only need to
enter your account information -- such as your credit card number and shipping address --
once. The information is then stored in a database on the retailer's web server. When you
come back to the Web site, you just log in with your username and password. Completing
a transaction is as simple as clicking your mouse: All you have to do is confirm your
purchase and you're done.

Electronic payment lowers costs for businesses. The more payments they can process
electronically, the less they spend on paper and postage. Offering electronic payment can
also help businesses improve customer retention. A customer is more likely to return to
the same e-commerce site where his or her information has already been entered and
stored.
Disadvantages of Electronic Payment Systems

Most of the online banking sites as also the online financial transaction sites require you
to open an online account with them. You need to register to the institution in order to be
authorized to perform money transactions with them. This involves a username and a
password, which implies the need of password protection. You also need to maintain an
account per organization, which can make it bothersome for some of you.

For secure online transactions, the site that hosts your account should follow strict
security policies. If the passwords are susceptible to being hacked, it can mean a serious
financial loss for you. Banks or financial institutes, which maintain your personal
information, cannot afford to expose it to hackers. There is a potential risk of your
personal and account details being stolen.

One of the most severe disadvantages of electronic payment systems is that of identity
theft. The available security measures can prevent the sensitive information from being
exposed. But it is important to use virus protection or firewalls for your computer. It is
important to carry out money transactions over a secure server.

There is a great risk involves in the theft or the losing of the smart cards. In case the cards
fall in unsafe hands, there is a danger of the expenditure of your entire bank balance.
There are measures to inform the concerned authorities about the loss of the card. But,
the time between losing the card and informing the authorities is critical. Unauthorized
users may carry out transactions in your name during this period of time.

Mostly, electronic cash is based on cryptographic systems. The transactions are encoded
by means of numeric keys while the transaction details travel across the net. Though
electronic payments are resistant to forgery, the keys are vulnerable to attack.

This was not to discourage you from taking to electronic payments. It was rather to make
you aware of the disadvantages of electronic payment systems. While we are moving
towards a paperless environment, we are inviting issues related to electronic security.
Present status of Electronic Payment System in Bangladesh
At present several utility service providers along with many banks have started using
electronic payment system in Bangladesh. But the system has still not reached the mass
majority of people in the country. Bangladesh Bank has posted an “ICT Guideline” in
their web site for the banks and financial institutes to create their own ICT Policy for the
security of the online transactions. Nationalized banks like Sonali, Janata, Agrani and
private banks like DBBL, Eastern Bank, Standard Chartered, and HSBC etc are using
ATMs and POS for payment of utility bills electronically. It is seen that Ready Cash card,
Q-Cash card ATMs and POS are the mostly used options for the electronic payment. One
of the problems for this is that these services are mostly available in big cities and towns.
The people living in remote villages still have no idea that such a service is available.
Also the card holder has to be a client of service providing bank to use the ATMs. Other
options available also include Electronic Banking which is done by some banks through
which the utility bill can be paid over Internet. But this service is yet to be started by
other banks. Bangladesh Bank has already started a project on Automatic Clearing House
under which the electronic banking will be implemented in the future. The utility service
providers have also taken several steps so that they can work along with the banks to
provide the service of electronic payment. PDB, DESA, WASA, BTTB, Titas Gas,
DESCO, Grameen Phone etc have all made several contracts with different banks to pay
their bills electronically using ATMs and other channels. Several Works are still getting
carried away by these organizations to introduce new options of electronic payment.
Other government and non-government organizations are also making changes in their
infrastructure to make them capable of handling electronic payments.
CONCLUDING REMARKS
Technology has inarguably made our lives easier. It has cut across distance, space and
even time. One of the technological innovations in banking, finance and commerce is the
Electronic Payments. Electronic Payments (e-payments) refers to the technological
breakthrough that enables us to perform financial transactions electronically, thus
avoiding long lines and other hassles. Electronic Payments provides greater freedom to
individuals in paying their taxes, licenses, fees, fines and purchases at unconventional
locations and at whichever time of the day, 365 days of the year. On the basis of present
study, first remark is that despite the existence of variety of e-commerce payment
systems, credit cards are the most dominant payment system. This is consequences of
advantageous characteristics, most importantly the long established networks and very
wide users‟ base. Second, alternative e-commerce payment systems are some countries
are debit cards. In fact, like many other studies, present study also reveals that the smart
card based e-commerce payment system is best and it is expected that in the
future smart cards will eventually replace the other electronic payment systems. Third,
given the limited users bases, e-cash is not a feasible payment option. Thus, there are
number of factors which affect the usage of e-commerce payment systems. Among all
these user base is most important. Added to this, success of e-commerce payment
systems also depends on consumer preferences, ease of use, cost, industry agreement,
authorization, security, authentication, non-refutability, accessibility and reliability and
anonymity and public policy.