Unit 5:

Electronic payment systems: Introduction, Types of Electronic payment Systems, Digital token-based
Electronic Payment Systems, Smart Cards and electronic payment systems, credit card based
Electronic Payment System

Introduction to EPS

Electronic payment systems in e-commerce facilitate transactions without requiring cash or checks,
offering a range of options for customers to pay online. These systems include debit and credit cards,
digital wallets, bank transfers, mobile payments, and more, providing convenience and security for both
buyers and sellers.

Types of Electronic Payment Systems in E-commerce:

1. Debit and Credit Cards: These are widely accepted and offer a straightforward way to make
online purchases.
2. Digital Wallets: Platforms like PayPal, Apple Pay, and Google Pay store payment information and
allow for quick, secure transactions.
3. Bank Transfers (EFT): The customers can transfer funds directly from their bank account to the
seller's account.
4. Cash on Delivery (COD): The customers pay for their purchase upon delivery, offering a more
traditional approach.
5. Buy Now, Pay Later (BNPL): It allows customers to purchase items and defer payment to a later
date.
6. Cryptocurrency: Some digital currencies like Bitcoin can be used for online transactions.
7. Prepaid Cards: These cards are loaded with funds and can be used for online purchases.
8. Smart Cards: These cards, often containing a microprocessor, can store funds for online
transactions.
9. E-Wallets: The prepaid accounts that store user data for online transactions.
10. Automated Clearing House (ACH): It is used for direct electronic transfers between bank
accounts.
11. Online Banking: The customers can make payments through their bank's online portal.

Key Features of E-Payment Systems in E-Commerce:

• Speed and Convenience: The transactions are completed instantly without physical presence.
• Security: The usage of SSL encryption, two-factor authentication, and tokenization ensures
transaction safety.
• Integration with E-Commerce Platforms: There is easy integration with platforms like Shopify,
WooCommerce, and Magento.
• Transaction Records: The detailed transaction histories for accounting and dispute resolution.
• Fraud Detection: Real-time monitoring and AI-based fraud detection mechanisms is used in
modern environment.
Challenges in Electronic Payment Systems:

• There are risks of cyberattacks, phishing, and data breaches.

• EPS are dependent on internet connectivity and technology literacy.
• There are some technical issues like server downtime or payment gateway failures.

Digital Tokens

Digital token-based electronic payment systems are modern financial technologies where tokens—
digital representations of value which are used in place of actual money or sensitive financial data
during electronic transactions. These systems enhance security, speed, and efficiency in e-commerce
and digital finance.

A digital token is a unit of data created and used within a secure digital transaction system to represent
money, assets, or rights. It does not carry intrinsic value but is linked to real-world assets or accounts.

In payment systems, tokens are usually generated temporarily and have limited use—often for a single
transaction or session.

Types of Digital Token-Based Payment Systems:

1. Tokenization in Card Payments

• It replaces sensitive card details (like card number) with a unique, encrypted token.
• It is used by Apple Pay, Google Pay, and Visa Token Service.
• It prevents actual card data from being exposed during a transaction.
• Each token is useless if intercepted, enhancing payment security.
2. Blockchain-Based Tokens (Cryptocurrency Payments)
• It is used decentralized blockchain technology to create cryptographic tokens (e.g., Bitcoin,
Ethereum).
• It is used for peer-to-peer e-commerce transactions or decentralized marketplaces.
• It provides high transparency and control but are subject to regulatory uncertainty.
3. Central Bank Digital Currencies (CBDCs)
• It is issued and regulated by central banks (e.g., India’s Digital Rupee or e₹).
• It represents legal tender in digital form.
• It enhances cross-border payments and reduce settlement time.
• It is currently being tested and gradually rolled out for retail and wholesale transactions.
4. Loyalty and Reward Tokens
• It is issued by businesses in place of traditional points systems.
• It can be spent or redeemed within the issuing ecosystem or partner platforms.
• Example: Airline miles, e-commerce cashback tokens.
5. Smart Contract-Based Tokens (DeFi Payments)
• It operates on decentralized applications (dApps) and use programmable conditions.
• It is used for automate payments, settlements, and conditions in digital commerce.
• It is used in decentralized finance platforms like Uniswap or Aave.
Advantages of Token-Based Payment Systems:

• Enhanced Security
• Improved Privacy
• Faster Settlement
• Regulatory Transparency
• Programmability

Smart Cards

Smart cards are physical cards, usually made of plastic, with an integrated circuit chip (microprocessor)
embedded within them. These chips store information, process data, and protect sensitive information,
including account details and PINs. They can be contact or contactless, using either physical contact or
wireless technology (like NFC or RFID) to interact with payment terminals.

How Smart Cards Work in Electronic Payment Systems:

1. Secure Storage and Processing: The chip on the smart card stores encrypted data, ensuring that
sensitive information is protected.
2. Authentication: Smart cards can use various authentication methods, such as PINs or biometrics,
to verify the cardholder's identity.
3. Contactless Payments: Many modern smart cards are contactless, allowing for quick and easy
payments without needing to swipe or insert the card.
4. Faster Transactions: The embedded chip enables faster transaction processing compared to
traditional magnetic stripe cards, which rely on slower magnetic reading.
5. Enhanced Security: Smart cards offer a higher level of security than magnetic stripe cards,
reducing the risk of fraud and data breaches.

Types of Smart Cards:

1. Payment Cards: Debit and credit cards are common examples of smart cards used for financial
transactions.
2. Electronic Benefits Transfer (EBT) Cards: Used for distributing government benefits, like SNAP.
3. Identification Cards: SIM cards, ID cards, and access control cards also utilize smart card
technology. [1]

Credit-card based EPS

A Credit Card-Based Electronic Payment System (EPS) is one of the most common and widely used
digital payment mechanisms in e-commerce. It enables customers to purchase goods or services online
using credit issued by a financial institution, with the settlement typically occurring at a later date.

Key Components:

• Credit Card Holder: The customer making the purchase.

• Merchant: The online seller accepting the credit card.
• Payment Gateway: Facilitates secure transaction processing.
 • Card Network: Routes payment requests (e.g., Visa, MasterCard).
• Issuing Bank: Provides the credit card and approves transactions.
• Acquiring Bank: Holds the merchant’s account and receives payment.

Credit card-based EPS remains a cornerstone of digital commerce due to its speed, reliability, and
widespread user familiarity, although it must be coupled with strong cybersecurity measures and
regulatory compliance.