E- PAYMENT
Electronic Payment is a financial exchange that takes place online between buyers and sellers. The content of this exchange is usually some form of digital financial instrument (such as encrypted credit card numbers, electronic cheques or digital cash) that is backed by a bank or an intermediary, or by a legal tender.
An E- payment system is an online system that facilitates the acceptance of electronic payment for online transactions and any kind of non-cash payment that doesn't involve a paper check.
The electronic payment system has grown increasingly over the last decades due to the widely spread of internet-based banking and shopping. As the world advance more on technology development, a lot of electronic payment systems and payment processing devices have been developed to increase, improve and provide secure e-payment transactions while decreasing the percentage of check and cash transaction.
TYPES OF E-PAYMENT SYSTEMS
1. A one-time customer-to-vendor payment:
o It is commonly used when user shop online at an e-commerce site, such as Amazon. User clicks on the shopping cart icon, type in the credit card information and click on the checkout button. The site processes the credit card information and sends an e-mail notifying the user that the payment was received. On some Web sites, an e-check can be used instead of a credit card.
2. Recurring customer-to-vendor payment:
o It is used when user pay a bill through a regularly scheduled direct debit from their checking account or an automatic charge to their credit card. This type of payment plan is commonly offered by car insurance companies, phone companies and loan management companies.
3. Automatic bank-to-vendor payment,
o User’s bank must offer a service called online bill pay where the user log on to the bank's Web site, enter the vendor's information and authorize the bank to electronically transfer money from their account to pay their bill. User can choose whether to do this manually for each billing cycle or have their bills automatically paid on the same day each month.
METHODS OF ELECTRONIC PAYMENTS
1. BANKING AND FINANCIAL PAYMENTS
2. ON-LINE ELECTRONIC COMMERCE PAYMENTS
1. BANKING AND FINANCIAL PAYMENTS
The banks can accept a restricted deposit which is limited to a specific amount per customer. The banks cannot issue loans and credit cards. Both current account and savings accounts can be operated by banks. Payments banks can issue services like ATM cards, debit cards, online banking and mobile banking.
Banking and financial payments include:
· Large-Scale or wholesale payments (e.g. bank to bank transfer)
· Small-Scale or Retail payments (e.g. automated teller machine and cash dispenses)
· Home banking (e.g. bill payment)
2. ON-LINE ELECTRONIC COMMERCE PAYMENTS
[i] Token Based Payments system-Electronic cash, Electronic cheques, Smart Cards or debit cards.
[ii] Credit card based payment system.
DIGITAL TOKEN-BASED E-PAYMENT
A token based payment system is one in which tokens are purchased from authorized vendors may be used as credit in the purchase of goods and services. E-token is equivalent to cash that is backed by a bank.
Digital token payment is of 3 types:
1. Cash or real time: Transactions are settled with the exchange of electronic currency. Example- E-cash.
2. Debit or prepaid: Users pay in advance. Example-Smart Cards.
3. Credit or postpaid: The server authenticates the customers and verifies with the bank that funds are adequate before purchase.
BENEFITS OF DIGITAL TOKEN BASED PAYMENT SYSTEM-
A. Benefits to buyer:
1. Convenience of global acceptance, a wide range of payment options, and enhanced financial management tools.
2. Enhance security and reduce liability for stolen or miss used cards.
3. Consumer protection through and established system of dispute resolution.
4. Convenient and immediate access to funds on deposit via debit cards.
5. Accessibility to immediate credit, intuitively, the comparative cost of arranging for a consumer loan related to the ability to obtain credit at the point of sell is substantial in considering both the direct processing costs as well as the implicit opportunities costs to borrower and lender.
B. Benefits to Seller:
1. Speed and security of the transaction processing chain from verification and authorization to clearing and settlement.
2. Freedom for more costly labour, materials and accounting services that are required in paper based processing.
3. Better management of cash flow, inventory and financial planning due to swift bank payment.
4. Incremental purchase power on the part of the consumer.
5. Cost and risk saving by eliminating the need to run an in house credit facility.
TYPES OF DIGITAL TOKEN BASED PAYMENT
1. E-CASH
· It is cryptographic electronic money cash system designed in 1983 used as micropayment system.
· It combines computerized convenience with security and privacy that improve on paper cash. E-Cash is based on cryptographic systems called digital signature. This method involves a pair of numeric keys that work in tandem; one for locking and the other for unlocking. It focuses on replacing cash as the principal payment vehicle in consumer oriented payments system. Customers open an account with bank and either buy or receive free special software for their PC’s.
· Two approaches to holding electronic cash are online storage where the consumer does not personally have possession of it and off-line where the consumer does have physical control. A smart card is an example of off-line electronic cash storage.
PROPERTIES OF E-CASH
1.Monetary value: It is back by either cash, a bank authorized credit, or a bank certified cashier cheque. When e-cash created by one bank is accepted by others, reconciliation must occur without any problem.
2.Interoperable: It is exchangeable as payment for other e-cash, paper cash, goods or services, lines of credit, deposit in banking account, bank notes or obligation, electronic benefit transfer and the like. Most e-Cheque proposal use a single bank.
3.Storable and retrieval: Remote storage and retrieval would allow user to exchange e-cash from home or office or while traveling. The cash could be stored on the remote computer memory, in smart cards or special purpose devices. It is preferable that cash is stored on a dedicated device that can’t be altered and should have suitable interface. To facilitate personal authentication using passwords or other means.
4.Security: E-Cash is not easy to copy or temper with while being exchanged. This includes preventing or detecting duplication or double spending. Detection is essential in order to audit whether prevention is working or not or to know the tricky issue of double spending.
ADVANTAGES OF E-CASH:
1. More efficient than cash, checks or credit cards for both the consumer and the merchant.
2. Lower transaction costs and perhaps product costs related to increases in efficiency.
3. The distance which electronic cash must travel in a transfer does not effect the transmission costs or the time as it does with traditional payment methods.
4. Electronic cash does not require any special authorization, so anyone may use it for almost any kind of transaction, large or small.
DISADVANTAGES OF E-CASH:
1. Potential collection problems if an Internet tax is ever enacted.
2. Since electronic cash does not leave an audit trail, it could be used in money laundering operations or as a medium of exchange in other illegal activities.
3. Electronic cash is susceptible to forgery and double spending abuses.
2. E-CHEQUES
· Electronic Cheques are designed to accommodate the many individuals and entities that might prefer to pay on credit or through some mechanism other than cash.
· In e-Cheque system, consumer posses an e-Cheque book on a Personal computer memory card International Associations (PCMCIA Card). The buyers must register with a third party account server before they are able to write e-Cheque. As needed, Cheque are return electronically from an e-Cheque book on the card. They are then send over the internet to the retailer, who in turn sends the e-Cheque to the customer banks. Settlement is made through a financial network such as ACH. E-Cheque method was deliberately created to work in much the same way as a conventional paper Cheque.
ADVANTAGES OF E-CHEQUE:
1. They work in the same way as traditional Cheque, thus simplifying customer education.
2. E-Cheque is well suited for clearing micro payments; their use of conventional cryptography makes it much faster than e-cash.
3. E-Cheque creates float and the availability of float is an important requirement for commerce.
4. Financial risk is assume by the accounting server and may result in easier acceptance. Reliability and scalability are providing by using multiple accounting servers.
3. SMART CARDS
o A smart card is a plastic card with a small, built in microcomputer chip and integrated circuit that can store and process a lot of data.
o These are generally made of polyvinyl chloride, but sometimes polyethylene terephthalate based polyesters, acrylonitrile butadiene styrene or polycarbonate.
o They can provide personal identification, authentication, data storage, and application processing and strong security authentication for single sign-on (SSO) within large organizations.
o Depending on your application you should choose right card.
TYPES OF SMART CARDS
1. CONTACT SMART CARDS :
o These pads provide electrical connectivity when inserted into a reader, which is used as a communications medium between the smart card and a host (e.g., a computer, a point of sale terminal) or a mobile telephone.
o These cards do not contain batteries; power is supplied by the card reader.
o These have a contact area of approximately 1 square centimetre (0.16 sq in), comprising several gold-plated contact pads.
2. CONTACTLESS SMART CARDS
o These cards are those in which the card communicates with and is powered by the reader through RF induction technology (at data rates of 106–848 kbit/s).
o These cards require only proximity to an antenna to communicate.
o Like smart cards with contacts, contactless cards do not have an internal power source. Instead, they use an inductor to capture some of the incident radio-frequency interrogation signal, rectify it, and use it to power the card's electronics.
3. MEMORY CARDS
o The most common and least expensive smart cards are memory cards.
o This type of smart cards, contains EEPROM (Electrically Erasable Programmable Read-Only Memory), non-volatile memory. Because it is non-volatile when you remove the card from the reader, power is cut off, card stores the data.
o This microcontroller is responsible for accessing the files and accepting the communication.
o The data can be locked with a PIN (Personal Identification Number), your password. PIN's are normally 3 to 8 digit numbers those are written to a special file on the card. Because this type is not capable of cryptography, memory cards are used in storing telephone credits, transportation tickets or electronic cash.
4. MICROPROCESSOR CARDS:
o A microprocessor smartcard is defined as an IC chip contact card with a microprocessor and memory.
o This smart card contains a small microchip that can process and store thousands of bits of electronic data.
o Memory cards or magnetic stripe cards can only store information, while the microprocessor smart card is truly smart as it has its own operating system able to process data in reaction to a given situation. This capability to record and modify information in its own non-volatile, physically protected memory makes the smart card a powerful and practical tool.
o These smart cards are small and portable, they can interact with computers and other automated systems, and the data they carry can be updated instantaneously.
o Also with the ongoing mass adoption of microprocessors, predominantly in the banking (EMV) and mobile phone markets (SIM cards), it has led to falling costs through economies of scale. This makes microprocessor cards attractive to developers in the emerging markets such as access control, E-passport, PKI and multi applications where their cryptographic capabilities addresses the issues of security.
o There are open platforms available such as Java Card, Native Operating systems and the emerging .net architectures.
5. HYBRID CARDS
o A hybrid smart card which clearly shows the antenna connected to the main chip.
o Hybrid cards implement contactless and contact interfaces on a single card with dedicated modules/storage and processing.
6. DUAL INTERFACE CARDS
o Dual-interface cards implement contactless and contact interfaces on a single card with some shared storage and processing.
o An example is Porto's multi-application transport card, called Andante, which uses a chip with both contact and contactless (ISO/IEC 14443 Type B) interfaces.
7. USB CARDS
o The CCID (Chip Card Interface Device) is a USB protocol that allows a smartcard to be connected to a Computer, using a standard USB interface. This allows the smartcard to be used as a security token for authentication and data encryption such as Bitlocker.
o CCID devices typically look like a standard USB dongle and may contain a SIM card inside the USB dongle.
APPLICATIONS OF SMART CARDS
1. Financial
o Smart cards serve as credit or ATM cards, fuel cards, mobile phone SIMs, authorization cards for pay television, household utility pre-payment cards, high-security identification and access-control cards, and public transport and public phone payment cards.
o Smart cards may also be used as electronic wallets. The smart card chip can be "loaded" with funds to pay parking meters, vending machines or merchants. Cryptographic protocols protect the exchange of money between the smart card and the machine. No connection to a bank is needed. The holder of the card may use it even if not the owner.
2. Identification
o Smart-cards authenticate identity by storing an encrypted digital certificate issued from the PKI (public key infrastructure) provider along with other relevant information.
o Examples include the U.S. Department of Defense (DoD) Common Access Card (CAC), and other cards used by other governments for their citizens.
o If they include biometric identification data, cards can provide superior two- or three-factor authentication.
3. Public transit
o Smart cards and integrated ticketing are used by many public transit operators.
o Card users may also make small purchases using the cards. Some operators offer points for usage, exchanged at retailers or for other benefits.
4. Computer security
o Smart cards are used as a security token. The Mozilla Firefox web browser can use smart cards to store certificates for use in secure web browsing.
o Some disk encryption systems, such as Microsoft’s BitLocker, can use smart cards to securely hold encryption keys, and also to add another layer of encryption to critical parts of the secured disk.
o GnuPG, the well known encryption suite, also supports storing keys in a smart card.
o Smart cards are also used for single sign-on to log on to computers.
5. Electronic commerce
o Smart cards are used in electronic commerce for customized services.
o Example, in order for the service supplier to deliver the customized service, the user may need to provide each supplier with their profile, a boring and time-consuming activity. A smart card can contain a non-encrypted profile of the bearer, so that the user can get customized services even without previous contacts with the supplier.
ADVANTAGES OF SMART CARDS
1. FLEXIBILITY
o Smart cards have multiple functions which simultaneously can be an ID, a credit card, a stored-value cash card, and a repository of personal information such as telephone numbers or medical history.
o The card can be easily replaced if lost, and, the requirement for a PIN (or other form of security) provides additional security from unauthorized access to information by others.
o At the first attempt to use it illegally, the card would be deactivated by the card reader itself.
2. SECURITY
o Smart cards can be electronic key rings, giving the bearer ability to access information and physical places without need for online connections.
o They are encryption devices, so that the user can encrypt and decrypt information without relying on unknown, and therefore potentially untrustworthy, appliances such as ATMs.
o Smart cards are very flexible in providing authentication at different level of the bearer and the counterpart.
o With the information about the user that smart cards can provide to the other parties, they are useful devices for customizing products and services.
3. DATA INTEGRITY
o Information on a smart card cannot be erased or removed accidentally by any electrical or magnetic means.
4. PORTABILITY
o Smart cards have the ability of software to be transferred from one machine or system to another.
DISADVANTAGES OF SMART CARDS
1. EASILY LOST
o Smart cards are small, lightweight and can be easily lost if the person is irresponsible as they have multiple uses and so the loss may be much more inconvenient.
2. SLOW ADOPTION
o If used as a payment card, not every store may have the hardware necessary to use these cards as it is more expensive to produce and use. Therefore, some stores may charge a basic minimum fee for using smart cards for payment, rather than cash.
3. POSSIBLE RISK OF IDENTIFY THEFT
o When used correctly for identification purposes, they make the jobs of law enforcement and healthcare professionals easier. However, for criminals seeking a new identity, they are like gold, based on the amount of information it can contain on an individual.
CREDIT CARD PAYMENT SYSTEMS
o A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services, based on the cardholder's promise to the card issuer to pay them for the amounts so paid plus other agreed charges.
o The card issuer (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.
CHARACTERISTICS OR FEATURES OF CREDIT CARD:
- Alternative to cash.
- Credit limit.
- Aids payment in domestic and foreign currency.
- Record keeping of all transactions.
- Regular charges.
- Grace period or grace days.
- Higher fees on cash withdrawals.
- Additional charges for delay in payment.
ADVANTAGES OF CREDIT CARD
1. Purchase Power and Ease of Purchase – Credit cards can make it easier to buy things as the cardholder need not carry large amounts of cash with them and becomes convenient to pay big amounts to airlines, hotels, and car rental agencies.
2. Protection of Purchases - Credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can vouch for the fact that you have made a purchase if the original receipt is lost or stolen. In addition, some credit card companies offer insurance on large purchases.
3. Building a Credit Line - Having a good credit history is often important, not only when applying for credit cards, but also when applying for things such as loans, rental applications, or even some jobs. Having a credit card and using it wisely (making payments on time and in full each month) will help you build a good credit history.
4. Emergencies - Credit cards can also be useful in times of emergency. While you should avoid spending outside your budget (or money you don't have!), sometimes emergencies (such as your car breaking down or flood or fire) may lead to a large purchase (like the need for a rental car or a motel room for several nights.)
5. Credit Card Benefits - In addition to the benefits listed above, some credit cards offer additional benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances (like travel or life insurance.)
DISADVANTAGE
1. Blowing Budget -- The biggest disadvantage of credit cards is that they encourage people to spend money that they don't have as most credit cards do not require to pay off the balance each month. While this may seem like 'free money' at the time, you will have to pay it off -- and the longer you wait, the more money you will owe since credit card companies charge you interest each month on the money you have borrowed.
2. High Interest Rates and Increased Debt -- Credit card companies charge the cardholder an enormous amount of interest on each balance that they don't pay off at the end of each month. Most credit cards charge you up to 10 times that amount of interest on balances.
3. Credit Card Fraud - They may be physically stolen if lose the wallet or someone may steal the credit card number (from a receipt, over the phone, or from a Web site) and use the card to rack up debts. If, cardholder realize that their credit card or number has been stolen, report it to your credit card company immediately.
4. Cash advance fees and rates. Financial institutions make it very expensive to use your credit card to get cash out or make other “cash equivalent” transactions (such as buying foreign currency or gambling). Using a credit card for a cash withdrawal will attract a cash advance fee worth around 3% of the total transaction amount. It also typically attracts an interest rate of 19-22% right away.
5. Annual fees. While a cardholder can often get debit cards without annual fees, most credit cards have them. These can cost as little per year, or depending on the card type. Generally, the more perks, the higher the cost of the annual fee.
6. Credit card surcharges. Businesses often apply a surcharge when you pay with a credit card. For MasterCard and Visa products, this fee is usually 0.5-2% of the total transaction cost, while for Amex cards it could be closer to 3%. Whatever the case, this is an extra cost for the convenience of paying with plastic.
TYPES OF CREDIT CARDS
1. BUSINESS CREDIT CARDS
o Business credit cards are specialized credit cards issued in the name of a registered business, and can only be used for business purposes. Their use has grown in recent decades.
o Business credit cards offer a number of features specific to businesses. They frequently offer special rewards in areas such as shipping, office supplies, travel, and business technology. They can be harder to apply for than personal cards, however, and often carry high credit score requirements.
o Business credit cards are offered by almost all major card issuers—like American Express, Visa, and MasterCard in addition to local banks and credit unions. Charge cards for businesses, however, are currently only offered by American Express.
2. SECURED CREDIT CARDS
o A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. In some cases, credit card issuers will offer incentives even on their secured card portfolios. This deposit is held in a special savings account.
o This type of credit card is used by people with little to no credit or a past history of bad credit. Sometimes a credit card will be secured by the equity in the borrower's home.
BENEFITS
1. These cards provide the ability to rebuild or establish a credit history which at some point may allow users to gain unsecured credit cards or other forms of credit finance.
2. Holders can purchase products that can only be paid for with credit cards such as with some online retailers.
DISADVANTAGE
o Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards. For people in certain situations , after charging off on other credit cards, or people with a long history of delinquency on various forms of debt, secured cards are almost always more expensive than unsecured credit cards.
3. PREPAID CARDS
o A "prepaid credit card" is not a true credit card, since no credit is offered by the card issuer: the cardholder spends money which has been "stored" via a prior deposit by the cardholder or someone else, such as a parent or employer.
o However, it carries a credit-card brand such as Discover, Visa, MasterCard, American Express, or JCB and can be used in similar ways just as though it were a credit card.
o Unlike debit cards, prepaid credit cards generally do not require a PIN. An exception are prepaid credit cards with an EMV chip, which require a PIN if the payment is processed via Chip and PIN technology.
o After purchasing the card, the cardholder loads the account with any amount of money, up to the predetermined card limit and then uses the card to make purchases the same way as a typical credit card.
o Prepaid cards can be issued to minors (above 13) since there is no credit line involved.
ADVANTAGE
1. No credit check.
2. The cardholder is not required to come up to any specific amount or more to open an account.
3. Pre-paid cards are available for teenagers and students.
4. Act as a basic type of bank account.
5. Improve the credit rating of cashholder.
4. Digital cards
3. A digital card is a digital cloud-hosted virtual representation of any kind of identification card or payment card, such as a credit card.
