MODULE 5

E-PAYMENT SYSTEMS

Electronic payment
Electronic payment is defined as a financial exchange that takes place online between
buyers and sellers (or two entities).
●​ The customer: Customer in the ecommerce may be an individual or organization
who buy products or services online.
●​ The issuer: The financial institution, such as a bank, that provides the customer
with a payment card.
●​ The merchant: The person or organization that sells goods or services to the card
holder via a website is the merchant.
●​ The acquirer: It is a financial institution that establishes an account with the
merchant and processes payment card authorisations and payments. The
●​ Payment gateway: Processes merchant payments by providing an interface
between the merchant and the acquirer’s financial processing system.
●​ The processor: It is a large data centre that processes credit card transactions and
settles funds to merchants, connected to the merchant on behalf of an acquirer
via a payment gateway.

Digital payment requirements

Acceptability: This refers to whether the payment method is supported globally. It

should be available and accessible to all type of buyers and sellers.

Affordability: The cost of implementing and using the system must be affordable for
consumers and merchants.

Efficiency: Systems should be able to receive small payments without performance

degradation.
Flexibility: The system must allow consumers to order products or services from any
location, and not just from one PC.

Interoperability: The system must be interoperable between different computing

platforms, web browsers and server software packages.

Anonymity: It is the desire to protect one’s privacy, identity, and personal information.

Reliability: The system must be reliable since it is used from the transmission and
manipulation of sensitive information.

Security:The payment method should be secure.

Internet banking
It refers to any banking transaction that can be conducted over the internet, generally
through a bank’s website under a private profile.
●The user must register with the financial institution online and create a login ID and
password.
● User can also keep a track of his account transactions and balance all the time.

Digital token based payment system

Electronic currency looks like conventional cash.
● Electronic currency is stored in digital form and serves as a cash substitute.

Electronic tokens: There are two types of electronic tokens namely prepaid tokens
and postpaid tokens.
● The users may get prepaid token by making the payment in advance. Digital cash or
e-cash, debit cards,electronic purses are examples of this kind of tokens.
● In the case of postpaid tokens, fund transfer instructions are being exchanged
between buyer and seller. Electronic cheques and credit cards are examples.
Digital coins: The digital coin is based on the following principle : The bank provides
consumers with the serial number of a coin encrypted with the bank’s private key.
● If the consumer wants to spend the coin, the bank checks the serial number on the list
of spent coins and, if the coin has not already been spent, the bank either credits the
bank account or provides them with a new coin.

Debit Credit system or Account based systems

With the debit approach, the customer maintains a positive balance of the account and
money is subtracted when a debit transaction is performed.
● With the credit approach, charges are posted against the customer’s account and the
customer is billed for this amount later or subsequently pays the balance of the account
to the payment service.

Credit card as e-payment system:

Credit cards are most widely used and convenient method.
● Credit card is a small plastic card with a unique number attached with an account.
● When a customer purchases a product via credit card, credit card issuer bank pays on
behalf of the customer and the customer has a certain time period after which he/she
can pay the credit card bill. .
● Cards are issued to customers on the basis of their income level, credit history, and
total financial soundness.
● By using these cards, customers can purchase goods and services either offline or
online without making immediate payment. Payment to the merchants will be made by
the customer’s bank.
● The customer is supposed to repay his debts during the payment period. Otherwise
interest will accumulate.

Advantages:

Convenience: Credit cards are easier to use.

Fastpayment: It takes a few seconds to swipe a credit card.
Easy access: At any time user can access his/her credit card.
More shopping options: Credit card can be used for online shopping.
Consumer protections: If someone steals our credit card we can block the card.
Credit score: It is a measure to know the credit worthiness of a user. Ie, how likely he
is to pay money back on time when he borrow it.
Record keeping: User gets an automatic record of his spending

Disadvantages:
Overspending: They encourage people to spend money that they don’t have.
High interest rate and increased debt: If dues are not cleared before the billing due
date, the amount is carried forward and interest is charged on it.
Credit card fraud: It is possible to clone a card and gain access to confidential
information.
Hidden costs: Credit cards have a number of taxes and fees, such as late payment fees,
joining fees and processing fees.

Debit card as e-payment system

Debit card is a prepaid card and also known as ATM card.
● This is a payment card that deducts money directly from a customer's bank account.
● Debit card serve a dual purpose : first, they allow user to withdraw money from his
bank. second, they allow user to make purchases.

Advantage:
● Easy to obtain
● Quick purchase
● Comfortable
● Safety
●Control on spending
● Readily accepted

Disadvantage:
● No grace period
● Limited money access
● Less safety
● Extra fees: Accessing from another bank’s ATM will cost additional fee and it
increases for each transaction.
 Smart card payment system
A smart card is similar to a credit card or debit card in size and shape.
● It is a small plastic card that has a built in microprocessor to store and process data
and records.
● Smart card has the facility to store the details about customer. It encrypts digital cash
on a chip and can be refilled by connecting to a bank. The ability of the chip to store
more information in its memory makes the card smart.

Advantage:
● Security
● Convenience
● Flexibility
● Control on spending
● International use
● Interest free loan

Disadvantage:
● Security
● Chance of loss
● Slow adoption
● Possible risk of identity theft.

Electronic cash or e-cash

E-cash is an electronic medium for making payments.
● This refers to a system in which a person can securely pay for goods or services
electronically without necessarily involving a bank to mediate the transaction.
● E-cash are also known as digital cash and cyber cash.
.● E-cash involves at least 3 parties:
○ Issuer not necessarily financial institution,
○ Consumer as the end user who uses the e-cash and
○Merchant who accept e-cash in exchange with products or
services provided.
Advantages:
● Convenience to consumers.
● Consumer privacy
●Purchase small items
● Global market
● Security
● Increased efficiency of banks

Disadvantages:
● Existence of counterfeiters
● Lack of infrastructure
● Computer literacy
● Less popularity
● Difficulty in monitoring

Electronic cheque or e-cheque

An e-cheque is an electronic document which substitutes the paper cheque for online
transactions.
● E-cheque work the same way as paper cheque.
● The payer/account holder writes an e-cheque using a computer or other type of
electronic device and transmits the e-cheque to the payee electronically.
● Digital signatures are used for signing and endorsing electronic cheques.

Advantages:
● Faster processing
● Lower costs
● Customer payment options Some users do not possess a debit or credit card. Such
users can use e-cheque.
● Security and reliability

Disadvantages:
● Fraud potential
● Errors
● Bouncing: E-cheques are often bounced or returned.
 E-wallets
E-Wallets is a type of electronic card which is used for transactions made online
through a computer or a smartphone.
● It’s utility is same as a credit or debit card.
● An e-wallet needs to be linked with the individual’s bank account to make payments.
● E-wallet is a type of prepaid account in which a user can store his money for any
future online transactions.
● An e-wallet is protected with a password.

Closed wallets: It doesn’t permit to redeem or withdraw cash. It can only be used for
goods and services for that specific company. Eg : MakeMyTrip, Jabong etc

Semi closed wallets: It doesn’t permit to redeem or withdraw cash. But it allows users
to purchase goods and services with listed merchants who have a contract wallet
company.
Eg : Paytm, PayUMoney, MobiKwik etc

Open wallets: The wallets that allow users to redeem plus withdraw cash name as
open wallets. Eg : M-pesa

BITCOIN - Cryptocurrency
Bitcoin is a cryptocurrency invented in 2008 by an unknown person or group of people
using the name Satoshi Nakamoto.
● The currency began use in 2009 when its implementation was released as open-
source software.
● Bitcoin is a decentralized digital currency, without a central bank or single
administrator, that can be sent from user to user on the peer-to-peer bitcoin network
without the need for intermediaries.
Irreversible: A transaction cannot be reversed by anybody.
Pseudonymous:Neither transactions nor accounts are connected to real world
identities.
Fast and global: Transactions are propagated instantaneously in the network and are
confirmed within minutes.
Secure: A bitcoin address is more secure. Strong cryptography and the magic of big
numbers make it impossible to break this scheme.
No permission: No permission from anybody is needed to use cryptocurrency. It is
only a software that everybody can download for free.

Risk and e-payment system

Customer’s risk:
●​ Stolen credentials or password
●​ Dishonest merchant
●​ Disputes over Transaction
●​ Inappropriate use of transaction details
●​
Merchant’s risk:
●​ Forged or copied instruments
●​ Disputed charges
●​ Insufficient fund in customer account
● Main issue : secure payment system

The adoption of electronic payment (e-payment) systems has revolutionized the way
businesses and consumers handle financial transactions. While e-payment systems
offer numerous benefits, such as convenience, speed, and global reach, they also
introduce a range of risks that need to be carefully managed. Here’s an overview of the
potential risks associated with e-payment systems:

1. Fraud and Security Risks

●​ Phishing and Identity Theft: Cybercriminals may use tactics like phishing
emails or fake websites to steal sensitive information such as passwords, credit
card numbers, and other personal details.
●​ Hacking: E-payment systems are often targeted by hackers trying to breach
security systems and steal funds or sensitive data.
●​ Data Breaches: Large amounts of financial data are often stored in e-payment
systems, making them attractive targets for data breaches. A breach can
compromise both individual and business information.
2. Transaction Fraud
●​ Chargebacks: Disputes between buyers and sellers can lead to chargebacks,
where the payment is reversed, causing financial losses for merchants.
●​ Unauthorized Transactions: If a user's credentials are compromised,
unauthorized transactions may take place before they are noticed.

3. System Failures
●​ Downtime: If the e-payment platform experiences outages or technical failures,
it can disrupt business operations, leading to lost sales or transaction delays.
●​ Software Bugs: Errors or vulnerabilities in the system’s software can lead to
incorrect billing, failed transactions, or unauthorized access to accounts.

4. Privacy Risks
●​ Data Privacy: E-payment systems collect sensitive personal and financial data.
If these systems are not properly secured, this data can be exposed or misused,
leading to privacy violations.
●​ Surveillance: Some e-payment platforms track user behavior, potentially
infringing on user privacy if not disclosed or controlled.

5. Compliance Risks
●​ Regulatory Compliance: Different regions have various regulations for
financial transactions and e-commerce (e.g., GDPR, PCI-DSS). Non-compliance
with these regulations can result in legal penalties and loss of customer trust.
●​ Money Laundering: E-payment systems may be used by criminals to launder
money or conduct illicit transactions. Businesses must implement Know Your
Customer (KYC) and Anti-Money Laundering (AML) procedures to mitigate
this risk.

6. Operational Risks
●​ Integration Issues: E-payment systems often need to integrate with other
systems, like accounting or customer relationship management (CRM) software.
Integration errors can lead to financial discrepancies, inefficiencies, or delays.
 ●​ Human Error: Employees or users may inadvertently make mistakes in
processing payments, leading to financial losses, incorrect invoicing, or issues
with refunds.

7. Reputation Risks
●​ Customer Trust: If an e-payment system is compromised, the company behind
the system could face reputational damage. Customers may lose trust, leading to
reduced use of the platform.
●​ Negative Publicity: If fraud or data breaches occur, it could result in negative
media coverage and loss of consumer confidence.

8. Legal Risks
●​ Disputes Over Payments: Users or merchants may have legal disputes
regarding refunds, payments, or service delivery. This can lead to lawsuits and
legal costs.
●​ Jurisdictional Issues: Cross-border transactions can complicate legal matters, as
different countries have different rules on taxation, payment disputes, and
consumer protection.

Designing an E-Payment System

Designing an effective e-payment system involves creating a secure, user-friendly, and
scalable solution for processing electronic transactions. Key components and
considerations include:

1.​ System Architecture:

○​ Payment Gateway: Acts as a mediator between customers and financial
institutions, processing payment requests.
○​ Merchant Account: Where merchants receive payments.
○​ Payment Processor: Verifies and routes the transaction to the appropriate
bank or card network.
○​ Users: Both customers and merchants interact with the system for
transactions.
 2.​ Security Measures:
○​ Encryption: SSL/TLS for securing sensitive information.
○​ Tokenization: Replaces sensitive data with tokens to minimize the risk of
data breaches.
○​ Authentication: Strong methods such as two-factor authentication (2FA)
or multi-factor authentication (MFA).
○​ Fraud Detection: Use algorithms to monitor and identify fraudulent
activities.
3.​ Payment Flow:
○​ Customers choose products, select payment methods, authenticate the
transaction, and receive confirmation.
○​ The system processes the transaction via a gateway, ensuring funds are
transferred securely.
4.​ Payment Methods Integration:
○​ Support various options like credit/debit cards, mobile wallets (e.g., Apple
Pay, Google Pay), bank transfers, and possibly cryptocurrencies.
○​ Integration with third-party payment processors like PayPal or Stripe is
common.
5.​ Compliance:
○​ Ensure adherence to PCI-DSS (for card payments), GDPR (for privacy
protection), and AML/KYC (to prevent fraud and money laundering).
6.​ Scalability and Performance:
○​ Design the system to handle growing transaction volumes, ensuring high
availability, real-time processing, and minimal downtime.
○​

Digital signature
It is a mathematical scheme for demonstrating the authenticity of a digital document.
● Authentication means that recipient knows who created the document and it has not
been altered in any way since that person created it.
● When sender digitally signs a document, he adds a one way hash(encryption) of the
message using his public and private key pair. Recipient can still read it, but the
process creates a signature that only the server’s public key can decrypt.
Digital signature provide the following benefits :

Authentication: Digital signature authenticates a document and which enables to

identify the sender.
Non repudiation:Signing takes place through a series of steps and tracks all of those
steps. This eliminates the possibility of signer suggesting he made a mistake in
signing.
Integrity: Documents signed with digital signature alert the reader in real time if
anything has been changed or if there is any reason not to trust the document.