Electronic_Payment_System - Copy1

8/7/2019 Electronic_Payment_System - Copy1

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` Concept of e-Money

` Electronic Payment system

` Types of Electronic Payment System

` Smart Cards` Stored Value Cards & Electronic Payment Systems

` B2B Electronic payments

` Infrastructure issues in EPS

` Electronic Fund Transfer


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` Electronic money isbroadly defined as anelectronic store ofmonetary value on a

technical device thatmay be widely used formaking payments toundertakings other thanthe issuer without

necessarily involvingbank accounts in thetransactions, but actingas a prepaid bearerinstrument.


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Electronic Payment is a financial exchange that takesplace online between buyers and sellers. The contentof this exchange is usually some form of digital

financial instrument (such as encrypted credit cardnumbers, electronic cheques or digital cash) that isbacked by a bank or an intermediary, or by a legaltender.

Electronic payment system is a system which helpsthe customer or user to make online payment fortheir shopping.


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` By the early 90s, MICR computerized cheque clearing operations atthe 4 metropolitan centers i.e. Mumbai, Calcutta, Chennai and NewDelhi had stabilized.

` However, the volumes in cheque clearing continued to reflect anupward trend, creating considerable pressure on the existing work

flow processes.

` A closer analysis revealed that 'at par' items such as dividend andinterest warrants issued by various corporate were contributingsignificantly to the volumes in clearing.

` The existing system of paying interest / dividend to the beneficiariesthrough paper instruments is also fraud prone with frequent reports ofpostal interception and encashment, often resulting in the realbeneficiaries not getting their dues at all, or at other times gettingdelayed payments


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` It was decided that a system needed to be put in place

that would

(i) decrease the volumes of paper instruments in MICR

clearing and

(ii) improve customer service by ensuring prompt and

secure interest/dividend payments to the

beneficiaries.

` Such a system needed to be cost effective and serve

as an alternate method of effecting bulk, low value,recurring payment transactions, thereby obviating the

need to issue and handle paper instruments


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` 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 andcredit cards). The actual settlement of payment

takes place in the financial processing network.


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A cash payment requires a buyers withdrawals form his/her bankaccount.

A transfer of cash to the seller, and the Sellers deposit of paymentto his/her account.

Non-cash payment mechanisms are settled by adjusting i.e.crediting and debiting the appropriate accounts between banksbased on payment information conveyed via cheque or creditcards.


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Sellers

bank

Buyers Bank

Seller

Buyer

Info flows for

notational

changes PaymentsGoods &

Services


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E-Cash

Smart

Cards

E-

Wallets

Debit

Cards

Credit

Cards


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A system that allows a person to pay for goods orservices by transmitting a number from one computerto another.

Like the serial numbers on real currency notes, the E-cash numbers are unique.

This is issued by a bank and represents a specified

sum of real money.

It is anonymous and reusable.


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Complex cryptographic algorithms prevent

double spending

Anonymity is preserved unless double spending is

attempted

Serial numbers can allow tracing to prevent

money laundering


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1. Consumer buys e-cash from Bank

2. Bank sends e-cash bits to consumer(after charging that amount plus fee)

3. Consumer sends e-cash to merchant

4. Merchant checks with Bank that e-cash

is valid (check for forgery or fraud)

5. Bank verifies that e-cash is valid

6. Parties complete transaction

Bank


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Smart Cards

A smart card, is any pocket-sized card with embedded

integrated circuits which can process data

This implies that it can receive input which is processed and

delivered as an output


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` This card also contains some kinds of an encryptedkey that is compared to a secret key contained on

the user's processor. Some smart cards haveprovision to allow users to enter a personalidentification number (PIN) code.

` Owing to their considerable flexibility, they have

been used for a wide range of functions like highwaytoll payment, as prepaid telephone cards and asstored value debit cards. However, with the recentemergence of e-commerce, these devices areincreasingly being viewed as a particularly

appropriate method to execute online paymentsystem with considerably greater level of securitythan credit cards.


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` Ticketless travel

Seoul bus system: 4M cards, 1B transactions since 1996

Planned the SF Bay Area system

` Authentication, ID

`

Medical records` E cash

` Store loyalty programs

` Personal profiles

` Government

Licenses

` Mall parking


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` The principal function of stored-value or smart cards is the portable storage andretrieval of data.

` These applications have evolved from existing electronic funds transfer

mechanisms using debit cards, such as prepaid cards and copy machine cards.` The embedded integrated circuit on the card defines the capabilities of the

product, and possible components may include a microprocessor, no staticrandom access memory (RAM), read only memory (ROM), erasableprogrammable read only memory (EPROM), other nonvolatile memory, andspecial purpose coprocessors.

` These characteristics make smart cards a viable medium for a digital currencypayment system. In making a payment through stored-value cards, the followingpoints can be noted: There are no backend settlements involved.

` There is no audit trail for transactions.


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` If a card is lost, the same result is achieved when actual cash islostits gone.

` Developers are working on ways to deliver card-to-card fundstransfers.

` Stored-value cards have met with high approval ratings amongconsumers in Europe, and the United States. Stored-value smartcards are capable of more than facilitating payments. They canoffer added-value information, including digital certificates foridentification purposes, and may authenticate a secure

transaction.

` It is worth noting that computer hardware manufacturers havestarted to include smart card readers with their PCs and PCkeyboards.


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It is a Plastic Card having a Magnetic Number andcode on it.

It has Some fixed amount to spend.

Customer has to repay the spend amount aftersometime.


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Principal Bank Sends

Transaction back to

Merchant Bank

Customer Pays by

Credit Card

Merchant Processes Credit

Card Using Software Provided

Electronically submitted

to Principal Bank

Principal Bank Sends

Request to Issuing Bank

Issuing Bank Approves/Declines

Sends Transaction principal Bank

ENTIRE

PROCESS

TAKES 5-15

SECOND

Think of this, The

acquiring bank , the

bank that underwrites

your merchant account

The Bank that

Issue Credit

Card To your

Customer


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` Customer uses a stolen card or account number tofraudulently purchase goods or service online.

` Family members use bankcard to order goods/

services online, but have not been authorized to do so.

` Customer falsely claims that he or she did not receivea shipment.

` Hackers find the ways into an e-commercemerchants payment processing system and then issuecredits to hacker card account numbers.


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` A debit card (also known as a bank card orcheck

card) is a plastic card that provides an alternative

payment method to cash when making purchases.

` Functionally, it can be called an electronic check, as

the funds are withdrawn directly from either the bank

account, or from the remaining balance on the card.

` Debit cards may also allow for instant withdrawal of

cash, acting as the ATM card for withdrawing cash and

as a check guarantee card.


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` Credit card Used for the majority of Internet

purchases Has a preset spending limit based

on the users credit history. Currently most convenient method

Most expensive e-paymentmechanism

Advantagex Each month user can pay part or all

of the amount owed

Disadvantages

x Does not work for small amount

(too expensive)x Does not work for large amount

(too expensive)

Debit card

Used for the majority of generalpurchases

Has no spending limit

Currently most convenient method

Most non-expensive e-paymentmechanism

Special feature helps to withdrawfrom ATM as hard cash

Advantages

Operates like cash or apersonal check

Disadvantages

Money is immediatelydeducted from users accountbalance


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The E-wallet is another payment scheme that operates like a carrier of e-cash

and other information.

The aim is to give shoppers a single, simple, and secure way of carrying

currency electronically.

Trust is the basis of the e-wallet as a form of electronic payment.

The software provides security and encryption for the personal information

and for the actual transaction


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1. Decide on an online site where you would like to shop.

2. Download a wallet from the merchants website.

3. Fill out personal information such as your credit card number, name, addressand phone number, and where merchandise should be shipped.

4. When you are ready to buy, click on the wallet button, the buying process is fullyexecuted.


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Features Online Credit

Card Payment

Electronic

Cash

Electronic

Cheque

Smart Cards

Actual

Payment Time

Paid later Prepaid Paid later Prepaid

Transaction

information

transfer

The store and

bank checks

the status of

the credit card

Free transfer.

No need to

leave the name

of parties

involved

Electronic

checks or

payment

indication must

be endorsed

The smart card

of both parties

make the

transfer

Online and

offline

transactions

Online

transactions

Online

transactions

Offline transfers

are allowed

Offline transfers

are allowed

Bank account

involvement

Credit card

account makes

the payment

No involvement The bank

account makes

the payment

The smart card

account makes

the payment

Users Any legitimate

credit card

users

Anyone Anyone with a

bank account

Anyone with a

bank or credit

card account


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Features Online Credit

Card Payment

Electronic

Cash

Electronic

Cheque

Smart Cards

Mobility Yes No No Yes

Limit on

transfer

Depends on the

limit of the credit

card

Depends on

how much is

prepaid

No limit Depends on how

much money is

saved

Party to

which

payment is

made out

Distributing

Bank

Store Store Store

Consumers

transaction

risk

Most of the risk

is borne by the

distributingbank,

consumers only

have to bear

part of the risk

Consumer is

at risk of the

electroniccash getting

stolen, lost, or

misused

Consumer

bears most of

the risk, but theconsumer can

stop check

payments at

any time

Consumer is at

risk of the smart

card gettingstolen, lost or

misused


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` Electronic funds transfer (EFT), is simply the use of electronic means totransfer funds directly from one account to another, rather than bycheck or cash.

` The EFT process cycle is spread over 3 days. Funds are madeavailable to the beneficiary on a T+1 basis

Electronic funds transfer can be used to:

` have your paycheck deposited directly into your bank or credit unionchecking account

` withdraw money from your checking account from an ATM machine

` transfer funds from your checking account to your mutual fund account


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` instruct your bank or credit union to

automatically pay certain monthly bills from

your account;

` make purchases using a check card rather than

cash;

` use a smart card with a prepaid amount of

money embedded in it instead of cash;

`

use your computer and personal finance software tocoordinate your total personal financial management.


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` Automated teller

machines(ATMs)

` Direct Deposit and

Withdrawal Services


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` Allow consumers to authorize specific deposits, such as

paychecks or social security checks, to their accounts on

a regular basis.

` It is also possible to authorize the bank, for a fee, to

withdraw funds from your account to pay your recurringbills, such as mortgage payment, installment loan

payments, insurance premiums, and utility bills.


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` Pay by Phone Systems let consumers phone their

financial institutions with instructions to pay certain bills

or to transfer funds between accounts.

` Point-of-Sale TransferTerminals allow consumers topay for retail purchase with a debit card. This card looks

like a credit card but with a significant difference -- the

money for the purchase is transferred immediately from

your account to the store's account.


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` Personal Computer Banking Services offer

consumers the convenience of conducting many

banking transactions electronically using a personal

computer. Consumers can view their account balances,

request transfers between accounts, and pay billselectronically from home.


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Transactional

Security

Interoperability

Scalabilty

Economic

Issues

Infrastructure Issues of EPS


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It refers to the actual exchange of currency with

the goods or services being transferred. Every

transaction should exhibit the following

characteristics:

` Atomicity

` Transfer Of Funds

` Complete Transfer

` Consistency` Durability


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` It refers to the systems ability to protect all parties fromfraud, due to interception of online transmission andstorage. The payment system should be secure enough tooffer the following:

` Fraud Protection` No Double Spending` No Counterfeiting` No Overspending` Non-Refutability

` Privacy Control` Non- Traceability` Hardware Tamper Resistance


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` It refers to its ability to operate in multiple online in

multiple online as well offline Payment

environment. The various issues involved under

interoperability are:

` Divisibility

` Bi- Directional

` Re-Spendibility

` Acceptability` Multi- Currency Support

` Portability


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It refers to the level of operations possible within a

certain payment system. The ability of a system to

handle load under peak hours. The various issues

involved under Scalability are:

` Offline operations

` Micro Payments

` Low Costs

` Efficiency` Macro Payments


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In order to become an accepted Economicalinstrument, a digital payment system needs toprovide a trusted, reliable and economicallyfeasible service to a sufficiently large user

community. The system should have:` Large User Base

` Low Risk

` Reliability

` Conservation` Ease Of Integration


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