Electronic Payment System

What is Electronic Payment System, Steps, Types

Table of Contents:-

  • What is Electronic Payment System?
  • Steps of Electronic Payment System
  • Types of Electronic Payment System Technologies

What is Electronic Payment System?

The electronic payment system is the most critical part of an e-commerce system because it is the most essential operation of a business process. Traditional payment systems cannot fulfil the organisation’s financial needs (which emerged with e-commerce systems). In electronic payment systems, financial transactions are carried out with the help of non-paper methods. For example, purchases made through credit cards are one of the most common electronic payment methods.

To fulfil the requirements of individuals, different organisations provide various payment methods. E-payment methods have pros and cons that have made them suitable for a particular type of e-commerce transaction.

Electronic payment systems are based on the client-server model and have two modules:

i) Server Module: The server stores all the information of a transaction (done via an electronic payment system) in a data file and uploads the buyer (who deposits the money) information for auditing purposes.

ii) Client Module: This module is an interface between the user and another application system. The main work of this module is to transfer the client request to the server and receive the server response.

TCP/IP (Transmission Control Protocol/Internet Protocol) protocol is used for the communication between the client interface and the server module.

Steps of Electronic Payment System

Electronic payment processing can be divided into two major phases:

1) Authorization: The image below shows the authorization process: 

Step 1: The customer first creates an account on the merchant’s website and login to it. Now select and add the product to shopping carts. Then proceed to checkout, select the payment method, and enter the required information (like credit or debit card information). 

Step 2: The merchant’s website receives that information and sends it to the payment gateway.

Step 3: The payment gateway transfers this information to the processor.

Step 4: The processor then sends information to the Issuing bank (issuer of the customer’s credit card) for verification.

Step 5: The card issuing bank sends the transaction information (accept or decline) to the processor.

Step 6: The processor routes transaction information to the payment gateway.

Step 7: The payment gateway passes this information to the merchant.

Step 8: The merchant finally accepts or rejects the transaction.

2) Settlement: During this phase, the money is transferred from the customer’s bank account to the merchant’s.

Step 1: The merchant requests the payment gateway (PayPal, CCAvenue, etc.) to settle a transaction. 

Step 2: Now, the payment gateway transfers all the transactions to the processor for settlement.

Step 3: The processor sends settlement payment information to the card issuing bank. The processor transfers payment details to the acquiring bank of a merchant at the same time.

Step 4: The card issuing bank includes the merchant’s charge on the customer’s credit card statement while the acquiring bank credits the merchant’s account.

Types of Electronic Payment System Technologies

There are various electronic payment system technologies such as:

  1. Debit Cards
  2. Electronic Cheques(E-Checks)
  3. Electronic or Digital Cash
  4. Credit Cards

Debit Cards

A debit card is also known as a bank card or check card. Debit Card is prepaid in nature and has some stored value. Whenever the user uses a debit card to purchase a product, then the value of the product is transferred into the merchant’s account from the customer’s account.

To obtain a debit card, an individual has to open an account in a bank or financial institution. The bank issues the debit card with a four-digit Personal Identification Number (PIN). The customer has to enter this PIN in the PIN pad of the shop whenever he makes a purchase. Customers can never overspend when they always spend their money wisely, and if the customer tries to overspend, the system rejects or declines the transaction.

Electronic Cheques(E-Checks)

The digital cheque is another form of credit payment that enables customers to pay the merchants online. To use such a facility, the customers can create an account with a third-party account server. The merchant has received the banker’s cheque. Merchants need not be an account holder of the third-party server. A third party now manages the flow of funds.

The features of e-cheques are similar to that of paper cheques. First, a message is sent to the cheque receiver, who has to endorse it. An endorsed cheque is now presented to the bank to receive the funds. One example of an electronic cheque is the NetCheque, developed by the Information Science Institute. It consists of all the software needed for issuing cheques, their identification and total depositing in the bank. Some of the organizations are using this for their internal operations.

Working of E-Cheques

The buyer and the seller must first get the certification from the certifying authority so they can use e-cheques to carry out their transactions. The following steps comprise the e-cheque operation cycle, which is illustrated in the image below.

1) The consumer selects the goods or services from the seller’s website. 

2) The buyer then receives the details, such as an invoice or bill from the seller.

3) The buyer now sends the e-cheque to the supplier after filling it out and signing it.

4) the cheque is deposited in the bank by the seller.

5) The seller’s bank then transfers the cheque to the buyer’s bank because of two reasons:

  1. To confirm its validity, and 
  2. For updating the buyer’s account record.

6) After validity confirmation, the seller’s bank informs the seller about its authenticity.

7) The good is then supplied to the buyer, and the seller gets an acknowledgement of receipt from the buyer.

8) The buyer’s bank clears the cheque to pay the seller’s bank at the buyer’s request. The buyer’s bank deducts the amount from the buyer’s account and transfers it to the seller’s bank.

9) Finally, the seller is informed that the amount against the e-cheque has been received and credited to his account.

Electronic or Digital Cash

Cash is generally used in today’s world for all forms of payment. The currency notes and coins used as cash are printed and issued by the Government. The digital equivalent of cash is called digital cash or e-cash.

It is also known as e-currency, e-money, electronic cash, digital money, digital currency, and cyber currency. One of the initial alternative ways of payment in the e-commerce payment system is electronic cash or digital cash. In the digital cash system, unique tokens (representing the cash values) are transmitted over the Internet from customer to merchant for completing the transaction.

Working on Digital Cash

The representation of cash in the digital cash system is in the form of validated tokens created using a digit string. The customer can purchase e-cash from online currency servers or banks. The process involves two stages:

  1. Creating an account.
  2. Maintaining enough balance in the account to make the purchase.

The bank issues the cash as a string of digits and deducts the equal value of money from the customer’s account. To generate a random number that serves as a ‘note,’ the customer uses e-cash software (installed on a machine or computer).

Now, users can use two digital cash. Once the user requests to pay for purchase by e-cash, the software transmits the required amount to the merchant. The merchant then sends the request to the bank to redeem the money. The bank records the token in the database to ensure that each token is used only once. If the bank finds that a token is being used for the second time, it informs the merchant that it is valueless.

A blind signature is another procedure used in the working of e-cash. In this procedure, e-cash is assigned to a person without retaining his details. When the “note” is generated by the e-cash software, it masks the original number of ‘blinds’ with a random number and sends it to the bank. Then, the bank digitally signs the “note” for the total amount, as requested by the consumer and forwards the ‘note’ back to the consumer.

Credit Cards

A credit card is the most common way of electronic payment for e-commerce transactions.

It is a plastic card embedded with customer information such as account number and credit limits in digتبل form. It is issued by financial institutions or banks to its customers. Customers can use credit cards to purchase goods and services within the card limit (card value). It is a post-paid card through which consumers can buy products first and pay for them later.

The processing of online credit card transactions is the same as that of store purchases. The main difference is that the merchant needs to get a view of the card being used and does not need to take the card impression or the cardholder’s signature.

Online credit card transactions are similar to mail order-telephone order (MOTO) transactions, and the purchases are termed as cardholder not present (CNP); for this reason, the consumer can file a dispute later on.

Thus, the merchant suffers from the risk that the transaction will be disallowed or reversed as the customer has never seen the credit card nor has a signed document from the cardholder. However, the customer has already downloaded a digital product, and the goods have been shipped.

Steps of Credit Card Processing

The steps involved in online credit card purchasing have been shown in the image.

Step 1: The online credit card transaction starts with purchasing. Consumers first log in to the merchant’s website. If they do not have an account on the merchant’s website, sign up with their personal information. After logging in, the customer selects and adds the items to the merchant’s shopping cart. Once he has finished the purchase, he proceeds to the payment option. A secure tunnel is created using SSL for this purpose.

Step 2: SSL then secures the session using encryption so that credit card information can be sent to the merchant without getting into the hands of interlopers on the internet. The merchant and consumer must trust each other because SSL does not authenticate them.

Step 3: Upon receiving the credit card information from the consumer, the merchant software establishes a connection with a clearing house, which acts as a financial intermediary, authenticates the credit card, and verifies the account balance.

Step 4: The clearinghouse contacts the consumer’s credit card issuing bank to verify the account information.

Step 5: Once the verification ends, the issuing bank transfers the fund to the merchant’s account.

Step 6: The transaction information is sent to the consumer as a monthly statement.

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