Unit2

Electronic
Payment Systems
Introduction to Electronic Payment systems

• An Electronic payment system is a financial arrangement that consists of an intermediator to facilitate

transfer of money-substitute between a payer and a receiver. Sometimes it is also called liquidation,
clearing system or clearing service. It ensures the transfer of value from one subject of the economy to
another and plays an important role in modern monetary systems.
• Modern payment systems may be physical or electronic and each has its own procedures and
protocols that guide the financial institution with payment mechanisms and legal systems.
Standardization has allowed some of these systems to grow globally.
• The term electronic payment refers to a payment made from one bank account to another bank
account using electronic methods forgoing the direct intervention of bank employees.
• Payment system is an essential part of a company’s financial operations. But it becomes complex, when
many different payment systems are used. Further challenges come from the continuous introduction
of newer payment systems such as paytm, UPI, bitcoin and various mobile payment options. As a result
there are more than 750 payment systems throughout the world.
• Payment system in eCommerce is gaining popularity with the growing trend of online shopping. Even a
global crisis like COVID-19 forced people to switch to the online market, which brought traditional
sellers online.
E-Payment (Electronic Payment)
• e-payment refers to all kinds of transactions made
electronically, digital payment is a more modern term that
includes more cutting-edge technologies and mobile-based
payment systems.
• Definition: E-payment refers to any kind of financial transaction
that occurs electronically. It includes transactions carried out
through electronic channels like debit/credit cards, bank
transfers, or online payment platforms.
• Scope: E-payments cover a wide range of payment methods,
including:
• Card payments (credit, debit)
• Online banking transfers
• Mobile payments
• Electronic checks (eChecks)
Why Is Electronic Payment System Important?
• With the increase in telecommunication and ease of access to the internet, electronic payments are
increasing rapidly. People have started replacing their traditional form of payment methods with online
transactions.
• According to Statista, in 2021, India had recorded a whopping number of more than 40 billion digital
transactions which were worth about a quadrillion INR (Indian Rupees).
• Apart from this, let’s understand other factors that make it important for businesses to adopt ePayment
system in eCommerce.
1. Increased Reach: You can cross all the possible physical boundaries and reach maximum customers with
eCommerce. When your customers can pay by their preferred method, they are likely to shop more from
you. In India, online shoppers are expected to reach 220 million by 2025, and with the integration of
ePayment systems, all of them have the potential of becoming your prospects.
2. Minimize Costs: ePayment system in eCommerce saves costs for both parties, the buyer and the seller.
Processing payments in the traditional way adds to operational and processing costs like paper expenses,
postage cost, additional staff, etc. These costs further become burdensome for customers. But with the
increasing popularity and use of ePayment methods, these costs can be minimized.
Why Is Electronic Payment System Important?
• Faster Transactions: You no longer need to be involved in the time-consuming process of
drafting cheques, transferring cash, and generating invoices. Both the parties can make
and receive instant payments with eCommerce payment gateway.
• Enrich Security: Traditional payment systems require the buyer to share confidential
information via mail, call or SMS. This raised some serious security-related concerns like
the mail could get lost or land in the wrong hands. But with eCommerce payment
systems, no buyer needs to risk his/her confidential information during transactions.
• Boost Productivity: Setting up an eCommerce payment gateway automates the
transaction process and saves time, cost, and manpower. Quick online payments
eliminate the need for mundane tasks such as manual data entry, and keeping a paper-
based record of cash payments. This allows your staff to utilize their minds in growing
the business further.
How Does the Electronic Payment System Work?
Electronic payment systems are sophisticated platforms that facilitate the transfer of funds between parties,
often initiated from one bank account to another. Here’s a step-by-step explanation of how electronic
payments typically operate:
1. Entering Payment Information
• When making a purchase or initiating a transfer, users enter their payment information into the system. This
could be credit card details, bank account numbers, or digital wallet credentials.
2. Payment Gateway
• The payment information is then sent to a payment gateway, which acts as a bridge between the user, the
merchant, and the financial institution. The payment gateway plays a crucial role in approving or denying
payment requests.
How Does the Electronic Payment System Work?
3. Validation and Security
• Before processing the transaction, the system validates the payment information to ensure it is accurate and
legitimate.
• Stringent security protocols and encryption techniques are employed to safeguard the data during transmission,
making electronic payments highly secure.
4. Transaction Processing
• Once the payment is approved, the transaction is processed, and the funds are transferred from the user’s account
to the merchant’s account or the recipient’s account.
• Electronic payments can be broadly categorized into two main types:
• one-time payments
• Recurring payments.
• Each serves a unique purpose in facilitating transactions between customers and service providers or vendors.
e-Payment System
Payment Gateway
• To make an ePayment system in eCommerce simpler, you need to have a strong payment gateway.
• A payment gateway helps connect your eCommerce website or application with the bank.
• Whenever a payment is initiated, the payment gateway confirms the buyer’s credit/debit card details from the bank
and the amount gets transferred.
• Payment gateway protects credit cards details encrypting sensitive information, such as credit card numbers, to
ensure that information passes securely between the customer and the merchant and also between merchant
and payment processor.
• In India, you can choose from the most popular payment gateways, such as:
1. Citrus Pay
2. Paytm,
3. Instamojo Payment Gateway
4. Atom Paynetz
5. PayUBiz India
6. Direcpay
7. Razorpay
8. PayUMoney
How It works??
The factors to stimulate for e-payments are:
• Reduced operational and processing cost
• Increasing online commercial transactions
• Decreased technology cost

Advantages of EPS
• Reduces the time requirement to get your funds transfer
• Eliminates storage, handling and processing of paper documents
• Reduces visibility of transactions and information
• Reduces cost of transaction
(operational and processing cost)
Disadvantages
• All financial institutions may not be able to offer the
level of sophisticated services of e-payment
• Digital information can be hacked or electronically
trespassed
• There is an issue of system’s reliability as there are
chances of system failure if not handled properly,
requirement of fault tolerance systems
• Requirement of technical knowledge to perform
financial transactions appropriately
• Requirement of secured and sophisticated EPS that
must be able to integrate all other systems required for
financial transaction
 1. Credit Card

• Credit card is an electronic payment system normally used for retail

transactions. A credit card enables the bearer to buy goods or services
from a vendor, based on the cardholder’s promise to the card issuer to
payback the value later with an agreed interest. Every credit card
account has a purchase limit set by the issuing bank or the firm. A
credit card is different from a debit card where the credit card issuer
lends money to customer instead of deducting it from customer’s bank
account instantly.
Key players in operations of credit card
• 1. Bearer: The holder of the credit card account who is responsible for payment of invoices in full
(transactor) or a portion of the balance (revolver) the rest accrues interest and carried forward.
• 2. Merchant: Storekeeper or vendor who sell or providing service, receiving payment made by its
customers through the credit card.
• 3. Acquirer: Merchant’s bank that is responsible for receiving payment on behalf of merchant
send authorization requests to the issuing bank through the appropriate channels.
• 4. Credit Card Network: It acts as the intermediate between the banks. The Company responsible
for communicating the transaction between the acquirer and the credit card issuer. These entities
operate the networks that process credit card payments worldwide and levy interchange fees.
E.g. Visa, MasterCard, Rupay
• 5. Issuer: Bearer’s bank, that issue the credit card, set limit of purchases, decides the approval of
transactions, issue invoices for payment, charges the holders in case of default and offer card-
linked products such as insurance, additional cards and rewards plan.
Key players in operations of credit card
Anatomy of a credit card
• All Payment cards (including debit card) are usually plastic cards of size 85.60 mm width × 53.98 mm
height, rounded corners with a radius of 2.88 mm to 3.48 mm and thickness of 0.76 mm. These
standards dimensions are maintained universally in accordance with ISO/IEC 7810#ID-1. See Figure
16.3
• 1. Publisher: Emblem of the issuing bank (along with the sub category or scheme if any)
• 2. Credit card number: The modern credit card number has 16-digit unique identification number.
• 3. Name of the cardholder: It is visibly embossed on the front side (additionally stored on the magnetic
stripe) some cards like gift cards do not hold any name.
• 4. EMV chip: It is integrated chip in addition to magnetic stripe to store cardholder’s information. EMV
stands for Europay, MasterCard, Visa. These three names correspond to the names of the companies
which are responsible to develop this technology. It is categorized into Chip-and-Signature and Chip-
and-PIN.
• 5. RFID symbol: It is four curved lines radiating rightwards similar to a tilted Wi-Fi symbol. It indicates
that it is a contactless smartcard.
Anatomy of a credit card

6. Expiration month and year: It is visible on the front side (also stored on the magnetic stripe or chip). The card is valid until the
last day of the month printed on it.

7. Card brand logo: It is the name of the credit card network company. Visa and MasterCard are leading credit card network
companies. Rupay is Indian domestic open loop card launched in 2012.

8. Magnetic stripe: It is an iron based magnetic material containing encrypted data about the card holder and account number.
9. Hologram: Hologram is a security feature that prevents duplication. It is a 3-dimentional image formed by interference of light
beams.
10. Signature: It is cardholder’s signature at the back of the card, used as an attempt to identify cardholder’s identity. It also holds
the last 4 digits of card number.

11. CVC/CVV: Card Verification code/ value is a 3 digit code usually printed to the left of signature pane validates the card. CVC2 is
used in contact less transactions.
 2.Debit Card:
Debit Card is an electronic payment card where the transaction amount is deducted directly from
the card holder’s bank account upon authorization.
Debit card is a great option for customers to make purchases within their paying capacity. A debit
card allows a customer to make payments with the balance that already exists in his/her bank
account. Being a popular payment method, debit card is the second largest eCommerce payment
gateway used in India.
The debit card and credit card are identical in their physical properties. It is difficult to differentiate
two by their appearance unless they have the term credit or debit imprinted.
2. Debit Card
• A debit card is a payment card that deducts money directly from a consumer’s checking account to
pay for a purchase
• Debit cards eliminate the need to carry cash or physical checks to make purchases directly from your
savings
• Debit cards do not allow the user to go into debt,
• except perhaps for small negative balances that might be incurred if the user has signed up
for overdraft protection
• Debit cards usually have daily purchase limits,
• meaning it may not be possible to make an especially large purchase
• Also called asset card (in the US), or payment card (in the UK)
3. Stored value cards
• Stored value card is a type of debit card that is pre-loaded with certain amount(value), with which
a payment is made. It is a card that has default monetary value onto it. The card may be disposed
when the value is used, or recharged to use it again.
• The major advantage of stored value card is that customers don’t need to have a bank account to
get prepaid cards.
3. Stored value cards
There are two varieties for stored value card.
1. Closed loop (single purpose)
• In closed loop cards, money is metaphorically stored on the card in the form of binary-coded
data. Closed loop cards are issued by a specific merchant or merchant group and can only be
used to make purchases from specific place. e.g. chennai metro rail travel card.

2. Open loop (multipurpose)

• Open loop cards can be used to make debit transaction at variety of retailers. It is also called as
prepaid-debit cards. It can be used anywhere the branded cards are accepted. e.g. Visa gift
cards.
4. Smart card
• The modern version of card based payment is smart cards.
• Smart cards along with the regular features of any card based payment system holds a EMV chip. This chip is
similar to well-known sim card in appearance but differ in its functionalities.
• The advantage of Smart cards is that it can provide identification, authentication, data storage and application
processing.
• Smart cards can be classified into Contact smart cards and Contactless smart cards.
5.Digital Cash/Digital Currency
• Money kept in electronic form (on a smart card) which allows a buyer to
pay for goods and services on the internet
• An e-Cash user will download the electronic money from their bank
account and store this on their device
• When he/she wants to use their e-cash to pay an Internet merchant
• amount is taken from their e-Cash wallet and add it to the merchant’s
wallet
• The e-cash goes through an e-cash bank so that the transaction can be
verified.
• Although big giants have started accepting digital currencies like Bitcoin
and Ethereum, but it is yet to gain popularity.
6. Digital Cheque
• An e-cheque, is a form of payment
• made through the network designed to perform the same function as a conventional paper cheque

• The account holder writes an e-cheque using an electronic device and

transmits to the payee electronically.
• Like paper cheques, e-cheques are signed by the payer using digital
signature
• The payee deposits the e-cheque and the payee's bank clears to the
paying bank
• The paying bank validates the e-cheque and then charges the cheque
writer's account for the cheque
7.Digital Wallet
• Digital wallet is a software application, usually for a Smartphone that
serves as an electronic version of a physical wallet
• It refers to a program used for making payments for purchases digitally
• Also, digital wallets are a potential benefit to companies that collect
consumer data
• The more companies know about their customers' purchasing habits,
the more effectively they can market to them
• The downside for consumers is a loss of privacy.
• Eg: Apple Pay, Google wallet, Samsung Pay, Paypal, etc.
Types of Payment Methods for eCommerce Websites
8 Net Banking: This payment gateway for the eCommerce website is similar to that of debit
and credit cards that allow a customer to make a direct payment from the bank. Net banking
is an eCommerce payment gateway that can be accessed with a personalized id and pin.
9.UPI Transfers: Unified Payments Interface (UPI )is another popular option among
eCommerce customers. Your delivery guy can carry a QR code that can be scanned upon
delivery to make cashless payments. An option to pay from a UPI id can also be integrated
as a payment gateway in websites.
10.AI powered payment
• AI-powered payments in e-commerce use artificial intelligence to streamline and
enhance the payment process, focusing on fraud detection, personalized payment
experiences, and automation. These systems help secure transactions, recommend
payment options based on user behavior, and automate payment tasks like invoicing and
reconciliation. The goal is to provide a faster, safer, and more convenient checkout
experience for customers.
 E-Payment Method Description Key Features Benefits Limitations

Plastic cards issued by banks for Widely accepted, fraud protection, Convenience, rewards programs, Risk of fraud, high-interest rates
Credit/Debit Cards
payments. credit facility (credit cards). buyer protection. (credit), transaction fees.

Mobile Wallets (e.g., PayPal, Apple Apps store payment details and NFC payments, digital transactions, Fast, convenient, contactless Dependent on smartphone, data
Pay, Google Pay) facilitate transactions. integration with apps. payments, secure transactions. privacy concerns.

Supports online banking, can be

Direct transfer of funds from one Secure, traceable, suitable for high- Time-consuming, transaction fees
Bank Transfers scheduled, suitable for large
bank account to another. value transactions. (international transfers).
amounts.

Cryptocurrencies (e.g., Bitcoin, Digital currency using blockchain Decentralized, anonymous, low fees, No central authority, fast Volatile value, limited acceptance,
Ethereum) technology. global acceptance (in some cases). international payments. regulatory issues.

Real-time payment system in India Instant transfers, linked to mobile No need to enter bank details, 24/7 Limited to India, dependent on
UPI (Unified Payments Interface)
enabling instant money transfers. number, secure PIN. availability, low fees. internet connectivity.

Electronic version of traditional Uses bank routing and account Cost-effective, paperless, suitable Processing time can be longer than
Digital Checks (eChecks)
paper checks. number for payments. for recurring payments. card payments.

Cards preloaded with a set amount No bank account needed, Budget control, can be used like Limited use, may incur reload or
Prepaid Cards
for transactions. reloadable, anonymous payments. credit/debit cards. usage fees.

Buy Now, Pay Later (BNPL) (e.g., Allows consumers to split payments Short-term financing, installment Flexibility, accessible to those High late fees, encourages
Afterpay, Klarna) over time. payments, interest-free periods. without credit cards. overspending, credit checks.

High fees, limited transaction

Charges payments to mobile phone Suitable for digital content Convenient, especially for
Direct Carrier Billing amounts, mobile carrier
bill. purchases, no bank account needed. micropayments, fast transactions.
dependence.
Cost involved in electronic payment system
• The costs involved in an electronic payment system can vary depending on the payment method, transaction
volume, and specific payment service provider. Here are the main cost components associated with
electronic payment systems:
1. Transaction Fees.
• Credit/Debit Cards: Typically, a percentage of the transaction amount (1-3%) plus a fixed fee per
transaction. Fees vary based on card type (Visa, MasterCard, American Express) and whether the card is
used online or in person.
• Mobile Wallets: Some mobile wallet providers charge a percentage-based fee for certain transactions,
especially business payments.
• Bank Transfers: May involve fees for transfers, particularly international ones. Fees vary based on the
bank and the transfer amount.
• Cryptocurrencies: Transaction fees are typically lower than traditional methods but can fluctuate
depending on the network's congestion.
Cost involved in electronic payment system
2. Setup and Monthly Fees –
• Payment Gateways/Processors: Businesses might incur setup fees for payment gateways or
processors. Monthly fees can also apply for using payment gateway services.
• Merchant Account Fees: Businesses may need to maintain a merchant account for processing card
payments, which can come with monthly fees.

3. Hardware/Software Costs
• Point of Sale (POS) Systems: Costs for purchasing or leasing POS terminals for card payments.
Costs vary depending on features and integrations.
• Software Licensing: Some payment systems require specific software licenses, which may
involve one-time or recurring fees.
Cost involved in electronic payment system
4. Compliance Costs
• PCI-DSS Compliance: For businesses handling card payments, adhering to the Payment Card Industry
Data Security Standard (PCI-DSS) can incur costs related to audits, network security, and data encryption.
• Anti-Money Laundering (AML) and Know Your Customer (KYC): Costs associated with compliance
programs and regulatory requirements.

5. Currency Conversion Fees

• When processing international payments, currency conversion fees may apply. These fees are
usually a small percentage of the transaction amount.
6. Chargebacks and Refund Fees
• Chargeback Fees: If a customer disputes a payment, the business may incur a chargeback fee in
addition to refunding the original payment.
• Refund Processing Fees: Some payment providers charge fees for processing refunds.
Cost involved in electronic payment system
7. Cross-Border Fees
• Additional fees may be charged for transactions involving international payments, particularly for cross-
border card payments or international bank transfers.

8. Service Fees for Digital Wallets and BNPL

• Some mobile wallets may charge fees for transferring money to a bank account or using certain
services.
• Buy Now, Pay Later (BNPL)Services: These services may charge merchants a percentage of the
transaction amount for offering installment payment options.
• These services are popular for online shopping, offering flexible repayment options. Indian
providers like Simpl, LazyPay, and ZestMoney make purchases more affordable without requiring
a credit card, although late fees may apply for missed payments.
Cost involved in electronic payment system
9. Recurring Subscription Fees
• If businesses use subscription-based payment software or services, they may have to pay monthly
or annual fees.
10. Maintenance and Upgrade Costs
• Regular updates to payment systems (hardware and software) may incur additional costs.
Risk and E-payment
In e-payment systems, risk refers to potential threats or vulnerabilities that can
affect the security, reliability, and integrity of electronic transactions.
Key risks in e-payment include:
1Managing information privacy
• EPS must ensure and maintain privacy
• Information of every transaction goes into the database
• The database can be accessed to know what transaction has
been made, where and when.
• This violates the unspoken law of doing business,
• that the privacy of customers should be protected as much as possible
2.Managing credit risk
• Credit risk is major concern in net settlement system
• In a net settlement system, credit risk is a major concern because if one bank fails to pay
its owed amount, it can trigger a chain reaction (domino effect), causing other banks to
default due to interdependencies, potentially destabilizing the entire financial system.
• A central bank should guarantee on settlement which removes insolvency
(unable to pay debts)
• A central bank guaranteeing settlement means it ensures that payments between banks are
completed, even if one bank faces financial trouble. This reduces the risk of non-payment, allowing
banks to confidently lend to each other, knowing that the central bank will step in if a counterparty
fails. This helps maintain stability in the financial system by preventing insolvency issues from
spreading across banks.
3. Operational Risk
• Operational risk arises from the potential loss
• due to significant deficiencies in system reliability or integrity
• Security considerations are essential
• as banks may be subject to external or internal attacks on their systems
• Operational risk can also arise from
• customers misuse and
• from inadequately designed or implemented electronic banking systems
4.Legal risk
• Legal risk arises from
• violations of, or non-conformance with laws, rules, regulations or
prescribed practices
• It may also arises when
• the legal rights and obligations of parties to a transaction are not well
established
Other Risks involved in E-payment

Dishonest
Stolen payment
merchants &
credentials and Impulse buying
financial
password
providers

Payment Lack of
conflicts anonymity
A) Payment conflicts

• Payment conflict often arise because payments are not

done manually but done by an automated system that can
cause error.

• This is especially common when payment is done on a regular

basis to many recipients.
B) Impulse Buying.
• Impulse buying means – sudden buying
• e-payment systems encourage impulse buying ,
especially online.

• Impulse buying leads to disorganized budgets.

C) Dishonest merchants and financial providers
• Sometimes, some ecommerce website are fake and if
the customers does any transaction from that website
then it becomes a fraudulent activity for that
customer.
• There are fake merchants who provoke the customers
to buy the goods.
 D) Stolen payment credentials and passwords
• Sometimes whatever transaction takes place, it is not safe.
There are different modes of electronic mode like credit
cards, debit card, e-cash etc.

• There are highly chance of passwords being hacked by the

middle men.
 E) Lack of Anonymity.
• The information about all the transactions are stored in the
database of the payment system.

• Simply means the intelligence agency has an access to this

information.
Requirements of EPS
• Payment security
• Privacy of transaction and information
• Authentication of customer and merchant
• Indivisible transaction (transaction should not be interrupted in middle, if any
malfunction occurs during the transaction, whole transaction should be aborted)
• Mutual agreement (parties involved in transaction should agree on terms and
conditions)
• Standardized (universally accepted standard should be used to ensure inter
operability)
• Economical (transaction cost should be minimized)
• Reliability (should avoid single point of failure)
• Usability (payments should be usable in the real world business)
 Security Requirements of EPS

Integrity Privacy Availability

Non- Safety
Authentication
repudiation
Security Requirements of EPS
1. Confidentiality: Protect sensitive payment information from unauthorized access.
2. Integrity: Ensure data is not altered or tampered with during transactions.
3. Authentication: Verify the identities of users and merchants involved in the transaction.
4. Non-repudiation: Provide proof of transaction to prevent denial by either party
5. .Authorization: Ensure only authorized users can initiate and complete transactions.
6. Availability: Keep the payment system functional and accessible at all times.
Measures to ensure Security
• Major security measures are following −
1. Encryption − It is a very effective and practical way to safeguard the data being
transmitted over the network. Sender of the information encrypts the data using a
secret code and only the specified receiver can decrypt the data using the same or a
different secret code.
2. Digital Signature − Digital signature ensures the authenticity of the information. A digital
signature is an e-signature authenticated through encryption and password.
3. Security Certificates − Security certificate is a unique digital id used to verify the identity
of an individual website or user.
Security Protocols in Internet
• some of the popular protocols used over the internet to ensure secured online
transactions.
1. Secure Socket Layer (SSL)
• It is the most commonly used protocol and is widely used across the industry. It
meets following security requirements −
• Authentication
• Encryption
• Integrity
• Non-reputability

Note - "https://" is to be used for HTTP urls with SSL, where as "http:/" is to be used for
HTTP urls without SSL.
Security Protocols in Internet
2.Secure Hypertext Transfer Protocol (SHTTP)
• SHTTP extends the HTTP internet protocol with public key encryption, authentication,
and digital signature over the internet. Secure HTTP supports multiple security
mechanism, providing security to the end-users.
• SHTTP works by negotiating encryption scheme types used between the client and the
server.
Security Protocols in Internet
3. Secure Electronic Transaction (SET) Protocol
• Jointly designed by MasterCard and Visa with backing of Microsoft, Netscape, IBM, GTE, SAIC,
and others
• Designed to provide security for card payments as they travel on the Internet
• Contrasted with Secure Socket Layers (SSL) protocol, SET validates consumers and merchants in
addition to providing secure transmission
• SET specification
• Uses public key cryptography and digital certificates for validating both consumers and merchants
• Provides privacy, data integrity, user and merchant authentication, and consumer nonrepudiation
The SET protocol Working
The SET protocol Working
• The diagram illustrates the steps involved in the SET (Secure Electronic Transaction) protocol for secure online
payments. This ensures secure payment processing and non-repudiation.
1. Cardholder Initialization: The cardholder starts the transaction by placing an order with the merchant and sending
payment details.
2. Merchant Request: The merchant sends the order information and a payment request to the payment gateway.
3. Payment Gateway Processing: The payment gateway, connected to the acquirer, processes the payment details
and forwards the transaction to the payment network.
4. Issuer Validation: The issuer (cardholder's bank) verifies the payment details and either approves or declines the
transaction.
5. Payment Network Communication: The payment network communicates the transaction status back to the
payment gateway and acquirer.
6. Certificate Authority Role: Throughout the process, the Certificate Authority validates the authenticity of all parties
involved using digital certificates.
7. Completion: The transaction is completed, and the payment status is conveyed back to the merchant and
cardholder.