Types of Traditional Payment

Systems
Cash
Most common form of payment
Instantly convertible into other forms of value

Credit card
Credit card associations
Issuing banks
Processing centers
 Types of Traditional Payment
Systems (cont.)
Stored value
Funds deposited into account, from which funds are paid
out or withdrawn as needed
Debit cards, gift certificates
Peer-to-peer payment systems
Accumulating balance
Accounts that accumulate expenditures and to which
consumers make period payments
Utility, phone, American Express accounts
Electronic Payment Systems (EPS)
To transfer money over the Internet
Methods of traditional payment
Check or cash
Methods of electronic payment
Electronic cash, Electronic wallets, smart cards, and
credit/debit cards
Digital cash minted by third-party organizations

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 Requirements for e-payments
Atomicity
Money is not lost or created during a transfer
Money and good are exchanged atomically
Non-repudiation
No party can deny its role in the transaction
Digital signatures

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 Desirable Properties of Digital Money

Universally accepted
Transferable electronically
Divisible
Non-forgeable, non-stealable
Private (no one except parties know the amount)
Anonymous (no one can identify the payer)
Work off-line (no on-line verification needed)

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 Types of E-payments

E-cash
Electronic wallets
Smart card
Credit card

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 E-cash Concept
Merchant
1. Consumer buys e-cash from Bank
2. Bank sends e-cash bits to consumer (after
5
charging that amount plus fee)
3. Consumer sends e-cash to merchant
4
4. Merchant checks with Bank that e-cash
Bank 3
is valid (check for forgery or fraud)
5. Bank verifies that e-cash is valid
6. Parties complete transaction: e.g., merchant
2 present e-cash to issuing back for deposit
1 once goods or services are delivered

Consumer still has (invalid) e-cash

Consumer

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 Electronic Cash Issues
E-cash must allow spending only once
Must be anonymous, just like regular currency
Safeguards must be in place to prevent counterfeiting
Must be independent and freely transferable regardless
of nationality or storage mechanism
Divisibility and Convenience
Complex transaction (checking with Bank)
Atomicity problem

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 Advantages and Disadvantages of
Electronic Cash
Advantages
More efficient, eventually meaning lower prices
Lower transaction costs
Anybody can use it, unlike credit cards, and does not
require special authorization
Disadvantages
Tax trail non-existent, like regular cash
Money laundering
Susceptible to forgery

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 Electronic Wallets
Stores credit card, electronic cash, owner
identification and address
Makes shopping easier and more efficient
o Eliminates need to repeatedly enter identifying
information into forms to purchase
o Works in many different stores to speed checkout
Amazon.com one of the first online merchants to
eliminate repeat form-filling for purchases

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 Smart Cards
Magnetic stripe
140 bytes, cost $0.20-0.75
Memory cards
1-4 KB memory, no processor, cost $1.00-2.50
Optical memory cards
4 megabytes read-only (CD-like), cost $7.00-12.00
Microprocessor cards
Embedded microprocessor
o (OLD) 8-bit processor, 16 KB ROM, 512 bytes RAM
o Equivalent power to IBM XT PC, cost $7.00-15.00
o 32-bit processors now available

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 Smart Cards
Plastic card containing an embedded microchip
Available for over 10 years
So far not successful in U.S., but popular in
Europe, Australia, and Japan
Unsuccessful in U.S. partly because few card
readers available
Smart cards gradually reappearing in U.S.; success
depends on:
Critical mass of smart cards that support applications
Compatibility between smart cards, card-reader devices,
and applications

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 Smart Card Applications
Ticketless travel
Seoul bus system: 4M cards, 1B transactions since 1996
Planned the SF Bay Area system
Authentication, ID
Medical records
Ecash
Store loyalty programs
Personal profiles
Government
Licenses
Mall parking
...

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 Advantages and Disadvantages
of Smart Cards
Advantages:
1. Atomic, debt-free transactions
2. Feasible for very small transactions (information commerce)
3. (Potentially) anonymous
4. Security of physical storage
5. (Potentially) currency-neutral
Disadvantages:
1. Low maximum transaction limit (not suitable for B2B or most
B2C)
2. High Infrastructure costs (not suitable for C2C)
3. Single physical point of failure (the card)
4. Not (yet) widely used

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 Credit Cards
Credit card
Used for the majority of Internet purchases
Has a preset spending limit
Currently most convenient method
Most expensive e-payment mechanism
o MasterCard: $0.29 + 2% of transaction value
Disadvantages
o Does not work for small amount (too expensive)
o Does not work for large amount (too expensive)
Charge card
No spending limit
Entire amount charged due at end of billing period

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Payment Acceptance and Processing
Merchants must set up merchant accounts to
accept payment cards
Law prohibits charging payment card until
merchandise is shipped
Payment card transaction requires:
Merchant to authenticate payment card
Merchant must check with card issuer to ensure funds
are available and to put hold on funds needed to make
current charge
Settlement occurs in a few days when funds travel
through banking system into merchants account

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 Processing a Payment Card Order

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 Credit Card Processing

SOURCE: PAYMENT
PROCESSING INC.

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 Payment System Stakeholders

Consumers
Low-risk, low-cost, convenience, reliability
Financial intermediaries
Secure, low-risk, maximizing profit
Government regulators
Security, trust, protecting participants and
enforcing reporting
 E-commerce Payment Systems

Credit cards
70% of online payments
Debit cards
10% online payments
Limitations of online credit card payment
Security, merchant risk
Cost
Social equity
How an Online Credit Transaction
Works
Wireless/Mobile Payment Systems
Use of mobile phones as payment
devices established in Europe, Japan,
South Korea
Near field communication (NFC)
Short-range (2) wireless for sharing data
between devices
Expanding in United States
Google Wallet
o Mobile app designed
PayPal
Square
 B2B EPS
Overview: The B2B Online Payment System is an
online settlement service for online merchants.
Online merchants may conduct operations such as
order delivery and inquiry through B2B online
payment. Enterprises with B2B online settlement
needs use B2B online payment systems.

Features: By incorporating the security encryption

system in line with the international standard, the e-
commerce payment system are secure and reliable
and it provides a complete set of online settlement
functions for chartered B2B online merchants.

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 Requirements for B2B EPS: The applicant(merchant)
should meet the following requirements:

The applicant should be the enterprise or public

institution with the business qualification registered
at local industrial and commercial administrative
authorities.
The applicant should have a settlement account for
e-payment.
The applicant should have an e-commerce platform to
sell commodities or provide services and have secure
and stable links to the e-commerce payment system
through electronic channels.
The enterprise should abide by the state laws and
regulations in its operations and have sound credit
standing.
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 Electronic Fund Transfer (EFT)
Electronic funds transfer (EFT) is the electronic
transfer of money from one bank account to
another, either within a single financial institution
or across multiple institutions, through computer-
based systems and without the direct intervention
of bank staff.
One of the most widely-used EFT programs is
Direct Deposit, in which payroll is deposited
straight into an employee's bank account, although
EFT refers to any transfer of funds initiated
through an electronic terminal, including credit
card, ATM and point-of-sale (POS) transactions.

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 Why EFT is Preferred?
Besides being convenient, electronic transfer modes are
considered to be safe, secure and make transferring
money much simpler. Electronic transfers are processed
immediately with the transferred amount being deducted
from one account and credited to the other in real time,
thus saving time and effort involved in physically
transferring a sum of money. Opting for electronic
transferring system also reduces the possibilities of any
mistakes as a transaction is only authorized with
complete details which include the correct account
number of the beneficiary and the target banks specific
IFSC code.

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 Types of electronic funds transfer?

NEFT or National Electronics Funds Transfer

RTGS or Real Time Gross Settlement
IMPS or Immediate Payment Service.

NEFT
The National Electronic Funds Transfer is a nation-wide
money transfer system which allows customers with the
facility to electronically transfer funds from their
respective bank accounts to any other account of the
same bank or of any other bank network. Not just
individuals but also firms and corporate organizations
may use the NEFT system to transfer funds to and fro.
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 NEFT Continues
Funds transfer through NEFT requires a transferring bank and a
destination bank. With the RBI organizing the records of all the
bank branches at a centralized database, almost all the banks are
enabled to carry out an NEFT transaction. Before transferring
funds via NEFT you register the beneficiary, receiving funds. For
this you must possess information such as name of the recipient,
recipients bank name, a valid account number belonging to the
recipient and his respective banks IFSC code. These fields are
mandatory for a funds transfer to be authorized and processed.
Any sum of money can be transferred using the NEFT system with a
maximum cap of Rs. 10, 00, 000.
NEFT transactions can be ordered anytime you want, even on
holidays except for Sundays which are designated bank holidays.
However, the transactions are settled in batches defined by the
Reserve Bank of India depending upon specific time slots. There are
12 settlement batches operating at present between the time slot of
8am to 7 pm on weekdays and from 8 am to 1pm on Saturdays with 6
settlement
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 RTGS
Real Time Gross Settlement as the name suggests is a
real time funds transfer system which facilitates you to
transfer funds from one bank to another in real time or
on a gross basis. The transaction isnt put on a waiting
list and cleared out instantly. RTGS payment gateway,
maintained by the Reserve Bank of India makes
transactions between banks electronically. The
transferred amount is instantly deducted from the
account of one banks and credited to the other banks
account.
Users such as individuals, companies or firms can
transfer large sums using the RTGS system. The
minimum value that can be transferred using RTGS is
Rs. 2 Lakhs and above. However there is no upper cap on
the
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 RTGS Continues
The remitting customer needs to add the
beneficiary and his bank account details prior to
transacting funds via RTGS. A beneficiary can be
registered through your internet banking portal.
The details required while transferring funds
would be the beneficiarys name; his/her account
number, receivers bank address and the IFSC
code of the respective bank.
On successful transfer the Reserve Bank of India
acknowledges the receiver bank and based on this
the both the remitting bank as well as the
receiving bank may/ may not notify the customers.

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 IMPS
Majority of the funds transferred using electronic
channels are processed via NEFT or RTGS. But as the
funds could only be cleared in batches using these
transfer gateways, the National Payments Corporation
of India introduced a pilot mobile payment project also
known as the Immediate Payment Service (IMPS).
Available to Indian public, IMPS offers instant
electronic transfer service using mobile phones. IMPS
interbank transfer service is available 24X7 and allows
you to use your mobile phones to access your account
and to authorize transfer of funds between accounts
and banks. The IMPS service also features a secure
transfer gateway and an immediate confirmation on
fulfilled orders.
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 IMPS Continues
IMPS is offered on all the cellular devices via Mobile Banking or through

SMS facility.
To be able to transfer money via IMPS route you must first register for
the immediate payment services with your bank. On obtaining the Mobile
Money Identifier (MMID) and MPIN from the bank you can login or
make a request via SMS to transfer a certain amount to a beneficiary.
Meanwhile the beneficiary must link his/her mobile number with his/her
respective account and obtain the MMID from the bank to be able to
receive money.
To initiate a transfer you must enter the beneficiarys mobile number,
beneficiary MMID, the transfer amount and your MPIN while requesting
the fund transfer. As soon as the transaction is cleared, you receive a
confirmation SMS on deduction from your account and the money
credited into the beneficiarys account. The transaction reference
number can be noted for future reference.
Thus IMPS enables customers to use mobile instruments as an instant
money transfer gateway, facilitating user convenience and saving time
and effort involved in other modes of transfer.

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 Differences b/w NEFT, RTGS & IMPS
There is no cap on the minimum value that can be
transacted via NEFT. RTGS system however only process
transactions of a value starting from Rs. 2 Lakhs and
above as it caters to gross settlements.
While the NEFT system settles transactions in batches,
RTGS option transfer funds in real time. Using NEFT if a
transfer order is received after the defined cut-off time,
the transaction will have to wait until the next clearance
to be fulfilled whereas RTGS transactions are processed
continuously throughout the RTGS business hours.
IMPS stands out as the most convenient and instant mode
of money transfer, allowing transfer of money across
various accounts and banks on the go using a mobile device.

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