What is Electronic Payment System?
The electronic payment system is an integral part of electronic commerce and one of its most critical aspects. The emergence of e-commerce has effectively created many new financial needs that in some cases cannot be efficiently fulfilled by traditional payment systems. An e-commerce payment system facilitates the acceptance of electronic payment for online transactions.
Table of Contents
To put it simply, electronic payment systems (EPSs) enable a customer to pay for goods and services online by using integrated hardware and software systems.
Types of Electronic Payment System
These are the various types of electronic payment system which given below:
Electronic Cash (E-cash)
Electronic cash (e-cash) is a new concept in online payments systems because it combines computerized convenience with security and privacy that improve on paper cash. Its versatility opens up a host of new markets and applications.
E-cash presents some interesting characteristics that should make it an attractive alternative for payment over the Internet. E-cash focuses on replacing cash as the principal payment mode in consumer-oriented electronic payments.
Money that is exchanged electronically is referred to as electronic cash or e-cash. E-cash transaction refers to a situation where payment is done over the network and the amount gets transferred from one financial body to another financial body without any involvement of a middleman.
Debit Card
Debit card also known as check card. Debit card look like a credit card, is a small plastic card with a unique number mapped with the bank account number. Debit card is a prepaid card and also known as ATM card.
An individual has to open an account with the issuing bank which gives debit card with a personal id number, when the customer makes a purchase he/she enter his pin number on shop pin pad.
The major difference between debit card and credit card is that in case of payment through debit card, amount gets deducted from card’s bank account immediately and there should be sufficient balance in bank account for the transaction to get completed, whereas in case of credit card there is no such compulsion.
Debit cards free customer to carry cash, cheques and even merchants accepts debit card more readily. Having restriction on amount being in bank account also helps customer to keep a check on his/her spending.
Credit Card
Credit card is used to borrow money, buy product and services on credit. These are issued by financial institutions. In e-commerce credit cards are most prevalently used. Payment using credit card is one of most common mode of electronic payment.
Credit card is small plastic card, 3-1/8 inches by 2-1/8 inches in size that carries information with a unique number attached with an account.
Basic process of Online Credit Card Payment System is very simple. If consumers want to purchase a product or service, they simply send their credit card details to the service provider involved and the credit card organization will handle this payment like any other.
Smart Card
Smart card was first introduced in Europe most of these methods are known as stored value card. Smart card is again similar to credit card and debit card in appearance but store information on a microprocessor chip instead of magnetic strips, embedded in it that holds important financial and personal information.
“Smart cards” are receiving renewed attention as a mode of online payment. They are essentially credit card sized plastic cards with the memory chips and in some cases, with microprocessors embedded in them so as to serve as storage devices for much greater information than credit cards34 with inbuilt transaction processing capability.
Cyber Cash
Cyber Cash, Inc of Reston, VA was founded in August 1994 to provide software services and solutions for secure financial transactions over the Internet. The Cyber Cash secure Internet Payment System, which uses special wallet software, enables consumers to make secure purchases using major credit cards from Cyber cash affiliated merchants.
Cyber cash provides more secure payment method than First Virtual. First Virtual does not make use of a payment protocol. This makes Cyber Cash more complex than First Virtual. Cyber Cash has a larger user base than First Virtual.
Electronic Cheque
Electronic checks are typically used in orders processed online and are governed by the same laws that apply to paper checks. Electronic checks offer protective measures such as authentification and digital signatures to safeguard digital transactions.
Electronic cheques address the electronic needs of millions of businesses, which today exchange traditional paper cheques with the other vendors, consumers and government.
Electronic cheque is messages that contain all the information that is found on an ordinary Cheque but it uses digital signature for signing and endorsing and has digital certificate to authenticate bank account.
Electronic Fund Transfer
It is a very popular electronic payment method to transfer money from one bank account to another bank account. Accounts can be in same bank or different bank. Fund transfer can be done using ATM (Automated Teller Machine) or using computer. Now a day, internet based EFT is getting popularity.
In this case, customer uses website provided by the bank. Customer logins to the bank’s website and registers another bank account. He/she then places a request to transfer certain amount to that account.
Digital Wallet (Electronic Wallet)
A digital wallet or electronic wallets being very useful for frequent online shoppers are commercially available for pocket, palm-sized, handheld, and desktop PCs. They offer a secure, convenient, and portable tool for online shopping.
They can store personal and financial information such as credit cards, passwords, PINs, and much more. To facilitate the credit-card order process, many companies are introducing electronic wallet services.
E-wallets allow you to keep track of your billing and shipping information so that it can be entered with one click at participating merchants’ sites.
Net Banking
This is a system, well known in India, which does not involve any sort of physical card. It is used by customers who have accounts enabled with Internet Banking. Instead of entering card details on the purchaser’s site, in this system the payment gateway allows one to specify which bank they wish to pay from.
Typically there will also be some form of two-factor authentication.
- It is typically seen as being safer than using credit cards, with the result that nearly all merchant accounts in India offer it as an option.
- A very similar system, known as iDEAL, is popular in the Netherlands.
Mobile Payment
This is also called “Mobile internet access”. Mobile payment can be done through each and every card available in the market whether it is pre-paid or post-paid. Instead of paying with cash, cheque or credit cards a consumer can use a mobile phone to pay for wide range of services such as:
- Downloading music, videos, ringtones, online game subscription or items, wallpapers and other digital goods.
- Booking train, bus tickets etc.
- Buying books, goods and other things
Components of an Effective Electronic Payment System
These are the following components of an effective electronic payment system. Which are given below:
Commercial cards
Starting with the component that gives businesses the most return on the time and effort it takes to migrate to e-payments, the core products that make up a commercial card program are each useful for different reasons:
Purchasing Card (P-card): It goes beyond a traditional business credit card with advanced features like virtual card numbers (VCNs). These are single-use, unique credit card numbers generated in real time for a specific purchase amount, date and supplier.
Travel and Entertainment (T&e) Cards: These are effective for companies that don’t want their employees to purchase items on their own credit cards or for employees who don’t want to worry about receiving timely reimbursement. According to RPMG, 68 percent of corporations expect travel card spending to increase through 2015.
Electronic Accounts Payable (EAP)
It accounts are non-plastic purchasing accounts used to pay for invoiced goods and services. EAP accounts can be integrated with a direct file transmission platform which centralizes all payments processing (virtual card numbers, ACH and wires).
EAP accounts can also enable different departments to issue distinct credit card numbers (through the use of ghost card accounts) that roll up to one corporate account. This allows finance to easily assign costs to departments and allows suppliers to charge the account directly (e.g., when a plastic p-card can’t be used), while providing the company with payment float, insight and controls.
EAP accounts also allow you to set dynamically adjustable spending limits that are assigned to match the transaction amount.
ACH Payments
The Automated Clearinghouse (ACH) network was originally established in the 1970s to provide an alternative to using paper checks. The ACH uses a batch process, in which the individual transactions are created/initiated and then batched as one or many for release to the bank.
These transactions typically take a few days to process. Today ACH payments are used for large volumes of credit and debit batched transactions, including regular direct deposit payroll and vendor payments.
Bill Payments
A bill payments solution makes sense for regular or one-time small to mid-sized payments managed and distributed online, including recurring expenses, such as rent and equipment leases.
Conveniently, web-based bill pay enables companies to view, manage and pay bills online and set up future and recurring payments from anywhere, any time. Companies also can define multiple users and establish various approval limits.
Wire Transfers
Wire transfers are used to make domestic and international high value and rapid direct bank-to-bank payments, including ad-hoc and one-time payments. Businesses typically use wire transfers to pay or receive funds same day—benefitting from nearly immediate and guaranteed availability of funds via secure, non-reversible transactions.
This can be important for businesses that need to make an immediate purchase or cover an urgent business need.
The Backend Stuff
Supporting all of these solutions are several essential backend systems, including an automated payment platform that integrates bill payment and accounting systems, a purchase control portal that securely generates virtual accounts for purchase requests, and a direct file transmission platform that centralizes all payments processing and that integrates with your ERP systems.
Digital Token-based Electronic Payment Systems
Electronics tokens are of three types:
Cash or Real-Time
Transactions are settled with the exchange of electronic currency. An example of on- line currency exchange is electronic cash (e-cash).
Debit or Prepaid
Users pay in advance for the privilege of getting information. Examples of prepaid payment mechanisms are stored in smart cards and electronic purses that store electronic money.
Credit or Post Paid
The server authenticates the customers and verifies with the bank that funds are adequate before purchase. Example of post paid mechanisms is credit/debit cards and electronic checks.
Advantages of Electronic Payment System
These are the follwing advantages of electronic payment system:
Consumer Convenience
Electronic payment system could prove very convenient for consumers. Because it involves advanced charge of money from the owner’s bank account, almost anybody can be supplied with a smart card, as there is no risk to the issuer. Consumers will also find it useful to have to do without carrying cash for small transactions, such as bus fares.
Increased Consumer Confidence
Because a smart card only holds the amount of money that the bearer has placed on it, consumers will be more willing to use it to purchase over the Internet without fear of somebody else misusing the payment information, as happens with credit card fraud.
Some of the schemes are also being issued with a built in locking code, which will allow users to lock the cash on a card, making sure that if the card gets lost or stolen another person will not be able to use the money.
Payer Anonymity
The payer can remain anonymous, as is the case with paying in cash.
Issuer Advantages
As it has been mentioned, this system is much cheaper to operate than other payment models, which is a great advantage for issuing institutions. The liability for the issuer is also minimal, which reduces costs and enhances profits.
Disadvantages of Electronic Payment System
Although the potential advantages for electronic payment system are considerable, there are still several problems that should provide a healthy dose of skepticism for this payment system.
Followings are the disadvantages of electronic payment system.
Consumer Confusion
With three schemes competing to become the Electronic Payment System standard, there is a real possibility of the whole system becoming too complicated for users. One of the main problems with too many schemes would be that the user may not be able to use the card everywhere, which is what would be expected of a system that is meant to replace physical currency.
Regulatory Maze
As it will be seen later, the regulation for EPS is still unclear in some vital points, which must be answered before the system is made more widely available
Security
The main concern that must exist in the minds of those interested in the implementation of electronic cash must be security. As happens with physical cash, widespread counterfeiting of electronic currency could have huge implications for the economy. Security will receive a more detailed treatment in a later section.