CHAPTER IV

Payment Mechanisms

Synopsis

4.1Introduction

Offline Payment System

Online Payment Sytem

4.2Credit Cards

Benefits to Customers

Growth of Credit Card in India

Debit Cards

Difference between Credit and Debit Card?

Secured Payment Gateway (SPG)

Secure Socket Layer (SSL)

E-Wallet

Mobile Payment

Premium SMS Based Transactional Payments

Mobile Web Payments (WAP)

Smart Cards

E-Billings

Net Banking

4.1 Introduction

A payment is the transfer of wealth from one party (such as a person or company) to another. A
payment is usually made in exchange for the provision of goods, services, or both, or to fulfil a
legal obligation.

The payment mechanism is divided into two parts:-

1.Offline payment system.

2.Online payment sytem.

Offline Payment System

 The simplest and oldest form of payment is barter system, the exchange of one goods or service
for another. Barter, is defined as "a trade or exchange of goods or services without using money."
Its origins are traced back to the dawn of mankind. Earlier bartering was done on a one-on-one
basis and is still used today between some individuals and businesses on an informal basis.
However, Modern Barter and Trade has moved beyond the old one-on-one barter concept by
practising third party barter whereby the buyer is not obligated to purchase from the seller and
vice versa. Rather, in Modern Barter and Trade, a barter exchange operates as a broker and banker
and trade credits are used as a unit of exchange to facilitate trading among multiple companies
and individuals. Modern trade and barter have developed into a sophisticated tool to help
businesses increase their efficiencies by monetizing their unused capacities and excess inventories.
The worldwide organized barter exchange and trade industry has grown to be an 8.0 billion dollar a
year industry and is used by hundreds of thousands of businesses and individuals as a mechanism
to increase their revenues, preserve cash flows and market themselves to new buyers. The modern
barter and trade industry operates to improve the overall economy by injecting additional
commerce into the system and thereby improving the financial strength of all of its participants.
The advent of the internet, and sophisticated relational database software programs has further
advanced the barter industry's growth financial credibility. Barter offers a tremendous opportunity
for entrepreneurs that understand economics, sales, banking and customer service. The U.S.
Government officially recognized barter exchanges as third party record keepers in 1982 with the
passage of the Tax Equity & Fiscal Responsibility Act which also required all barter exchanges to
classify their members' barter sales as reportable income to the IRS via an annual 1099-B filing.
Organised barter has grown throughout the world to the point now where virtually every country
has a formalized barter and trade network of some kind.

In the modern world, common means of payment by an individual include money, cheque, debit,
credit, gold, siliver, paper currency or bank transfer, and in trade such payments are frequently
preceded by an invoice or result in a receipt. However, there are no arbitrary limits on the form a
payment can take and thus in complex transactions between businesses, payments may take the
form of stock or other more complicated arrangements.

Explain various modes of online payment system?

Online Payment Sytem

There are many modes under the online payments system. In this method, a third party must be
involved. Credit card, debit card, money transfers, and recurring cash or ACH disbursements are all
electronic payment methods. Electronic payment technologies are magnetic stripe card, Secured
Payment Gateway (SPG), E-Wallet, Mobile Payment, Smart Cards, E-Billings, Net Banking etc.

4.2 Credit Cards

A credit card is a system of payment named after the small plastic card issued to users of the
system. In the case of credit cards, the issuer lends money to the consumer (or the user) to be
paid later to the merchant. Credit cards allow the consumers to 'revolve' their balance, at the cost
of having interest charged. Most credit cards are issued by local banks or credit unions.
 The credit card was the successor of a variety of merchant credit schemes. It was first used in the
1920's, in the United States, specifically to sell fuel to a growing number of automobile owners. In
1938, several companies started to accept each other's cards.

The card is issued by bank with different credit unions along with their logos
(VISA/MASTERCARDS/DISCOVER/AMERICAN EXPRESS) are called acquirers who sign up with the
merchants, while the banks are called issuers.

Credit card issuers usually waive interest charges if the balance is paid in full each month, but
typically will charge full interest on the entire outstanding balance from the date of each purchase
if the total balance is not paid.

Benefits to Customers

Because of intense competition in the credit card industry, credit card providers often offer
incentives such as frequent flyer points, gift certificates, or cash back (typically up to 1 per cent.
based on total purchases) to try to attract customers to their programs.

Low interest credit cards or even 0% interest credit cards are available. The only downside to
consumers is that the period of low interest credit cards is limited to a fixed term, usually between
6 and 12 months after which a higher rate is charged. However, services are available which alert
credit card holders when their low interest period is due to expire. Most such services charge a
monthly or annual fee.

Growth of Credit Card in India

India is the second fastest growing market for financial cards in the Asia-Pacific region. The
country's credit card base, pegged at 27 million in 2007, is growing at an annual rate of 30-35%.
The cardholders are increasingly using credit/debit cards for dining, purchasing clothing, petrol,
durable goods and jewellery. Most Indians now have multiple cards, through which they utilize
balance transfers to reduce their interest burden over the short term. A thriving economy,
substantial increase in disposable incomes and consequent rise in consumer expenditure, growing
affluence levels and consumer sophistication have all led to robust growth in credit cards, and each
issuer has posted an enviable annual growth rate for several years. New products, foreign
participation and a booming tourism industry are combining to create high levels of growth in
India's nascent financial cards market, helped by product innovation and a supportive regulatory
environment.

The number of credit and debit card users in India is climbing fast, and rising affluence is likely to
erode Indians' lingering reluctance to spend on credit.

Indians have traditionally valued thrift and frugality. But the spread of affluence in the wake of
rapid economic growth is challenging these values, at least for many middle-class and high-income
families. One sign of this is the phenomenal growth in the number of credit and debit cards in
India-in the past three years, the number of credit cards has more than doubled and the number
of debit cards has almost quadrupled. However, despite these impressive rates of growth, the
Indian market for financial cards is only beginning to show its enormous potential. Future growth
 will be driven by rising consumerism, intensifying competition among card issuers and an
expanding financial architecture-although a culture of credit-based purchasing may take some time
to develop.

Debit Cards

A debit card (also known as a bank card) is a plastic card which provides an alternative payment
method to cash when making purchases. Functionally, it is similar to writing a cheque, as the funds
are withdrawn directly from either the bank account (often referred to as a cheque card), or from
the remaining balance on the card. In some cases, the cards are designed exclusively for use on
the Internet, and so there is no physical card.

The use of debit cards has become wide-spread in many countries and has overtaken the cheque,
and in some instances cash transactions by volume. Like credit cards, debit cards are used widely
for telephone and Internet purchases.

Debit cards can also allow for instant withdrawal of cash, acting as the ATM card for withdrawing
cash and as a cheque guarantee card. Merchants can also offer "cashback"/"cashout" facilities to
customers, where a customer can withdraw cash along with their purchase.

Difference between Credit and Debit Card?

For consumers, the difference between a "debit card" and a "credit card" is that the debit card
deducts the balance from a deposit account, like a checking account, whereas the credit card
allows the consumer to spend money on credit to the issuing bank. In other words, a debit card
uses the money you have and a credit card uses the money you don't.

In some countries: When a merchant asks "credit or debit?" the answer determines whether they
will use a merchant account affiliated with one or more traditional credit card associations (Visa,
MasterCard, Discover, American Express, etc.) or an interbank network typically used for debit and
ATM cards, like PLUS, Cirrus (interbank network), or Maestro.

In other countries: When a merchant asks "credit or debit?" the answer determines whether the
transaction will be handled as a credit transaction or as a debit transaction. In the former case, the
merchant is more likely than in the latter case to have to pay a fee defined by fixed percentage to
the merchant's bank. In both cases, the merchant may have to pay a fixed amount to the bank. In
either case, the transaction will go through a major credit/debit network (such as Visa,
MasterCard, Visa Electron or Maestro). In either case, the transaction may be conducted in either
online or offline mode, although the card issuing bank may choose to block transactions made in
offline mode. This is always the case with Visa Electron transactions, usually the case with Maestro
transactions and rarely the case with Visa or MasterCard transactions.

In yet other countries: A merchant will only ask for "credit or debit?" if the card is a combined
credit+debit card. If the payee chooses "credit", the credit balance will be debited the amount of
the purchase; if the payee chooses "debit", the bank account balance will be debited the amount of
the purchase.
 This may be confusing because "debit cards" which are linked directly to a checking account are
sometimes dual-purpose, so that they can be used seamlessly in place of a credit card, and can be
charged by merchants using the traditional credit networks. There are also "pre-paid credit cards"
which act like a debit card but can only be charged using the traditional "credit" networks. The
card itself does not necessarily indicate whether it is connected to an existing pile of money, or
merely represents a promise to pay later.

In some countries: The "debit" networks typically require that purchases be made in person and
that a personal identification number be supplied. The "credit" networks allow cards to be charged
with only a signature, and/or picture ID.

In other countries: Identification typically requires the entering of a personal identification number
or signing a piece of paper. This is regardless of whether the card network in use mostly is used for
credit transactions or for debit transactions. In the event of an offline transaction (regardless of
whether the offline transaction is a credit transaction or a debit transaction), identification using a
PIN is impossible, so only signatures on pieces of paper work.

In some countries: Consumer protections also vary, depending on the network used. Visa and
MasterCard, for instance, prohibit minimum and maximum purchase sizes, surcharges, and
arbitrary security procedures on the part of merchants. Merchants are usually charged higher
transaction fees for credit transactions, since debit network transactions are less likely to be
fraudulent. This may lead them to "steer" customers to debit transactions. Consumers disputing
charges may find it easier to do so with a credit card, since the money will not immediately leave
their control. Fraudulent charges on a debit card can also cause problems with a checking account
because the money is withdrawn immediately and may thus result in an overdraft or bounced
checks. In some cases, debit card-issuing banks will promptly refund any disputed charges until
the matter can be settled, and in some jurisdictions the consumer liability for unauthorised charges
is the same for both debit and credit cards.

In other countries: In India, the consumer protection is the same regardless of the network used.
Some banks set minimum and maximum purchase sizes, mostly for online-only cards. However,
this has nothing to do with the card networks, but rather with the bank's judgment of the person's
age and credit records. Any fees that the customers have to pay to the bank are the same
regardless of whether the transaction is conducted as a credit or as a debit transaction, so there is
no advantage for the customers to choose one transaction mode over another. Shops may add
surcharges to the price of the goods or services in accordance with laws allowing them to do so.
Banks consider the purchases as having been made at the moment when the card was swiped,
regardless of when the purchase settlement was made. Regardless of which transaction type was
used, the purchase may result in an overdraft because the money is considered to have left the
account at the moment of the card swiping.

Secured Payment Gateway (SPG)

As the internet increasingly becomes the hunting ground for snoopers and scammers, secure
communication are essential, Secure Payment Gateway, using the Secure Socket Layer (SSL)
 technology allow Gateway, Card holders, Merchants, Processors and others to encrypt and safely
communicate sensitive and confidential data over the web.

Secure Socket Layer (SSL)

A small electronic file that uniquely identifies individuals and servers on the internet. Secure
Socket Layer certificate the web browser to authenticate an internet site before entering
confidential information such as user name or password. Typically, Digital Secure Socket Layer
certificate are issued by "certification authorities" who are trusted and independent parties that
ensure validity.

E-Wallet

A digital wallet (also known as an e-wallet) allows users to make electronic commerce transactions
quickly and securely.

A digital wallet functions much like a physical wallet. The digital wallet was first conceived as a
method of storing various forms of electronic money (e-cash), but with little popularity of such e-
cash services, the digital wallet has evolved into a service that provides internet users with a
convenient way to store and use online shopping information.

A digital wallet has both a software and information component. The software provides security
and encryption for the personal information and for the actual transaction. Typically, digital wallets
are stored on the client side and are easily self-maintained and fully compatible with most e-
commerce web sites. A server-side digital wallet, also known as a thin wallet, is one that an
organization creates for and about you and maintains on its servers. Server-side digital wallets are
gaining popularity among major retailers due to the security, efficiency, and added utility that it
provides to the end-user, which increases their enjoyment of their overall purchase.

The information component is basically a database of user-inputted information. This information

consists of your shipping address, billing address, payment methods (including credit card
numbers, expiry dates, and security numbers), and other information.

Mobile Payment

Mobile payment (also referred to as mobile web payment or WAP billing) is the collection of money
from a consumer via a mobile device such as their mobile phone, SmartPhone, Personal Digital
Assistant (PDA) or other such device.

Mobile payment can be used to purchase any number of digital or hard goods, such as:

· Music, videos, ringtones, games, wallpapers and other digital goods.

· Books, magazines, tickets and other hard goods.

There are two primary models for mobile payments:

· Premium SMS based transactional payments.

· Mobile Web Payments (WAP).

 Mobile payment solutions have been widely adopted by a wide range of leading companies, for
example World Wrestling Entertainment for the sale of audio and videos.

Premium SMS Based Transactional Payments

This is where the consumer sends a payment request via an SMS text message to a shortcode and
a premium charge is applied to their phone bill. The merchant involved is informed of the payment
success and can then release the paid-for goods.

Since a trusted delivery address has typically not been given, these goods are most frequently
digital with the merchant replying using a Multimedia Messaging Service to deliver the purchased
music, ringtones, wallpapers, etc.

A Multimedia Messaging Service can also deliver barcodes which can then be scanned for
confirmation of payment by a merchant. This is used as an electronic ticket for access to cinemas
and events or to collect hard goods.

Transactional payments have been popular in Asia and Europe but are now being overtaken by
mobile web payments (WAP) for a number of reasons:

1.Poor reliability - Transactional payments can easily fail as messages get lost.

2.Slow speed - Sending messages can be slow and it can take hours for a merchant to get
receipt of payment. Consumers do not want to be kept waiting more than a few seconds.

3.High cost - There are many high costs associated with this method of payment. The cost
of setting up shortcodes and paying for the delivery of media via a Multimedia Messaging
Service and the resulting customer support costs to account for the number of messages
that get lost or are delayed.

4.Low payout rates - Operators also see high costs in running and supporting transactional
payments which results in payout rates to the merchant being as low as 30%.

5.Low follow-on sales - Once the payment message has been sent and the goods received
there is little else the consumer can do. It is difficult for them to remember where
something was purchased or how to buy it again. This also makes it difficult to tell a friend.

Mobile Web Payments (WAP)

This is where the consumer uses web pages displayed on their mobile phone to make a payment.
This process is quickly replacing premium SMS based transactional payments for digital content
and also enables the sale of physical goods. Using a familiar web payment model gives a number
of proven benefits:

1.Follow-on sales where the mobile web payment can lead back to a store or to other goods
the consumer may like. These pages have a URL and can be bookmarked making it easy to
re-visit or share with friends.

2.High customer satisfaction from quick and predictable payments.

 3.Ease of use from a familiar set of online payment pages.

Mobile web payment methods are now being mandated by a number of mobile network operators.
A number of different actual payment mechanisms can be used behind a consistent set of web
pages. Mobile payment systems are also used in developing countries for micropayments.

Smart Cards

A smart card, chip card, or Integrated Circuit Card (ICC), is defined as any pocket-sized card with
embedded integrated circuits which can process information. This implies that it can receive input
which is processed - by way of the ICC applications - and delivered as an output. There are two
broad categories of ICCs. Memory cards contain only non-volatile memory storage components,
and perhaps some specific security logic. Microprocessor cards contain volatile memory and
microprocessor components. The card is made of plastic, generally PVC, but sometimes ABS. The
card may embed a hologram to avoid counterfeiting. Using smart cards also is a form of strong
security authentication for single sign-on within large companies and organisations.

A "smart card" is also characterized as follows:

· Contains a security system with tamper-resistant properties (e.g., a secure

cryptoprocessor, secure file system, human-readable features) and is capable of providing
security services (e.g., confidentiality of information in the memory).

· Asset managed by way of a central administration system which interchanges information

and configuration settings with the card through the security system. The latter includes
card hotlisting, updates for application data.

· Card data is transferred to the central administration system through card reading
devices, such as ticket readers, ATMs, etc.

E-Billings

Electronic Billing (General) is the electronic delivery and presentation of financial statements, bills,
invoices, and related information sent by a company to its customers. Electronic billing is also
known as other payment models based on consumer-to-business and business-to-business:

· EBPP - Electronic Bill Presentment and Payment (typically focused on business-to-

consumer billing and payment).

· EIPP - Electronic Invoice Presentment and Payment (typically focused on business-to-

business billing and payment).

Electronic bill payment is a fairly new technique that allows consumers to view and pay bills
electronically through internet. There are a significant number of bills that consumers pay on a
regular basis, which include: power bills, water, oil, internet, phone service, mortgages, car
payments, etc. Systems send bills from service providers to individual consumers via the internet.
The systems also enable payments to be made by consumers, given that the amount that appears
 on the e-bill is correct. Many banks are offering these online payment services for some time now,
and are growing in popularity.

Net Banking

Online banking (or Internet banking) allows customers to conduct financial transactions on a
secure website operated by their retail or virtual bank, credit union or building society.

Online banking solutions have many features and capabilities in common, but traditionally also
have some that are application specific.

The common features fall broadly into several categories-

· Transactional (e.g., performing a financial transaction such as an account to account

transfer, paying a bill, wire transfer... and applications... apply for a loan, new account,
etc.).

· Electronic bill payment.

· Funds transfer between a customer's own checking and savings accounts, or to another
customer's account.

· Investment purchase or sale.

· Loan applications and transactions, such as repayments.

· Non-transactional (e.g., online statements, check links, cobrowsing, chat).

· Bank statements.

· Financial Institution Administration - features allowing the financial institution to manage

the online experience of their end users.

· ASP/Hosting Administration - features allowing the hosting company to administer the

solution across financial institutions.

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