INTRODUCTION

 Electronic Payment is a financial exchange

that takes place online/electronically
between buyers and sellers. The content of
this exchange is usually in the 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.
 As payment is an integral part of business
process, electronic payment system is an
integral part of e-business and e-commerce.
 The emergence of e-business and e-
commerce has created new financial needs
that in many cases cannot be effectively
fulfilled by traditional payment systems.
 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.
 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.
 Lack of Convenience: Traditional payment systems
require the consumer to either send paper cheques by
snail-mail or require him/her to physically come over and
sign papers before performing a transaction. This may
lead to annoying circumstances sometimes.
 Lack of Security: This is because the consumer has to send
all confidential data on a paper, which is not encrypted,
that too by post where it may be read by anyone.
 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.
 Lack of Eligibility: Not all potential buyers may have a
bank account.
 Advantages of E-Payment
• Increase payment efficiency
– Reduce transaction costs
– Enable trade in goods and services of very low
value
• Increase convenience of making payments
– Payment can be made swiftly and remotely using
various devices
• Can be used for
– e-commerce / e-trade
– For other purposes like paying bills, taxes, etc.
• Anonymity of Buyer, Atomic Transactions, Allow
Micro Payments, Security, Authentication,
Reliability, and Scalability are some other
advantages.
I. Online Electronic Commerce payment
system can be broadly divided into four
general types:
 Electronic Cash System
 Electronic Cheque System
 Smart Card based Electronic Payment
System
 Online Credit Card 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.

 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 four characteristics: monetary

value, retrievability, interoperability and
security.
 E-cash Concept
Merchant 1. Consumer buys e-cash from Bank
2. Bank sends e-cash bits to consumer
(after charging that amount plus fee)
5
3. Consumer sends e-cash to merchant
4
4. Merchant checks with Bank that e-
Bank 3 cash is valid (check for forgery or fraud)
5. Bank verifies that e-cash is valid
2 6. Parties complete transaction: e.g.,
merchant present e-cash to issuing
1
bank for deposit once goods or services
are delivered.
Consumer
Advantages and Disadvantages of
Electronic Cash
• Advantages
– More efficient, eventually meaning lower prices
– Lower transaction costs
– Anybody can use it, unlike credit cards, and does not
require special authorization

• Disadvantages
– Susceptible to forgery
 E-cheques
• E-cheques are another form of electronic tokens.

• A new electronic version of paper cheques. E-

check is an instruction to a financial institution to
pay a given amount of money to the payee.

• It is a specially formatted email message sent over

the Internet. It contains as the same information as
on paper based cheques.
Transaction Payment Sequence
in E-cheque system
 Process of Electronic Cheque System
• 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 is sent to him.
• Step 5: The purchaser gets a consolidated debit advice
periodically.
Advantages of E-cheque :

• They work in the same way as traditional cheque.

• E-cheques are suited for micro payments.

• They do not require consumers to reveal account

information to other individuals .

• They are less expensive than credit cards

• They are much faster than paper based traditional

cheque.
SMART CARD & ELECTRONIC PAYMENT
SYSTEMS
• The enormous potential of electronic tokens is
currently stunted by the lack of a widely accepted and
secure means of transferring money on-line.

•In spite of the money prototypes developed ,we are

a long way form universal payment system because
merchants and banks have to be signed up and a
means has to be developed to transfer money.

• Such a system moreover must be robust and

capable of handling a large no of transaction and will
require extensive testing.
SMART CARD
• Smart cards are credit and debit cards and other card
products having micro processor chip capable of
holding more information then the traditional magnetic
strips.

• The chip, at its current step of development, can store

significantly greater amount of data, estimated to be 80
times more than a magnetic stripe.

• The smart card technology is widely used in countries

such as France, Germany, Japan, and Singapore for
public phone calls, transportation and shopper loyalty
programs.
 Types of Smart cards
Smart cards are basically of two types:
1. Relationship-based Smart Cards, 2. Electronic Purses and Debit Cards
Relationship-based Smart Cards
It is the enhancement of existing card services that offer customers far better
options like:
1. Access to multiple accounts (debit, credit, e-cash) on one card.
2. Offer various functions (cash access, bill payment, balance inquiry, fund
transfer)
3. Multiple access options at multiple location using multiple access device
(ATM, PC, PDA or screen phone, etc.)

Electronic Purses and Debit Cards

1. Electronic Purses or E-wallet are the smart cards embedded with
programmable microchip that store sum of money instead of cash.
2. Once a purse is loaded with money it require card reader vending machine
which verifies its authenticity. Then after amount is deducted from balance. It
shows the remaining balance on the card hence eliminate the small bill in busy
stores.
3. E-wallets when depleted can be recharged with money.
1. 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.
2. 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.
3. 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.
 Credit cards-based e-payment system
Credit Cards
• A credit card is a small plastic card issued to users dealing in e-
commerce. Most credit cards are the same shape and size, as specified
by the ISO 7810 standard.
• A credit card is different to a debit card in that it does not remove
money from the user's account after every transaction. In the case of
credit cards, the issuer lends money to the consumer (or the user) to be
paid to the merchant.
Credit cards-based e-payment system
Customers who purchase any goods send their credit card details to the
service provider involved and the credit card organization will handle
this payment.
Online credit card payment has following categories:
1. Payment using plain credit card details
2. Payments using encrypted credit card details
3. Payment using third-party verification
Entities Involved in Credit card Transaction
•Consumer (Buyer or Card holder)
• Merchant (Seller)
• Card Issuer (Consumers’ Bank)
• Acquirer or Principal (Merchant’s Bank)
• Card Association (Visa, Master Card etc)
• Third party processor
Encryption and Credit Cards
Encryption process starts when credit card information is
entered into a browser and sent securely over network
between buyer to seller. Encryption process includes
following steps:
1. Customer presents his credit card information securely to
merchant.
2. Merchant validates the authenticity of card holder
3. Merchant relays this information to its bank or on-line card
processor.
II. Banking and financial payments:
1. Large-scale or Wholesale Payments
(e.g., bank-to-bank transfer using NEFT/RTGS/ECS).
2. Small-scale or Retail Payments
(e.g., automated teller machines or cash dispensers).
3. Home Banking/Net Banking (e.g., bill payment)

III. Retailing Payments

1. Credit cards (e.g., VISA or MasterCard)
2. Private label credit/debit cards (e.g. J.C. Penny Card)
3. Charge cards (e.g., American Express)