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` Concept of e-Money
` Electronic Payment system
` Types of Electronic Payment System
` Smart Cards` Stored Value Cards & Electronic Payment Systems
` B2B Electronic payments
` Infrastructure issues in EPS
` Electronic Fund Transfer
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` Electronic money isbroadly defined as anelectronic store ofmonetary value on a
technical device thatmay be widely used formaking payments toundertakings other thanthe issuer without
necessarily involvingbank accounts in thetransactions, but actingas a prepaid bearerinstrument.
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Electronic Payment is a financial exchange that takesplace online between buyers and sellers. The contentof this exchange is usually some form of digital
financial instrument (such as encrypted credit cardnumbers, electronic cheques or digital cash) that isbacked by a bank or an intermediary, or by a legaltender.
Electronic payment system is a system which helpsthe customer or user to make online payment fortheir shopping.
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` By the early 90s, MICR computerized cheque clearing operations atthe 4 metropolitan centers i.e. Mumbai, Calcutta, Chennai and NewDelhi had stabilized.
` However, the volumes in cheque clearing continued to reflect anupward trend, creating considerable pressure on the existing work
flow processes.
` A closer analysis revealed that 'at par' items such as dividend andinterest warrants issued by various corporate were contributingsignificantly to the volumes in clearing.
` The existing system of paying interest / dividend to the beneficiariesthrough paper instruments is also fraud prone with frequent reports ofpostal interception and encashment, often resulting in the realbeneficiaries not getting their dues at all, or at other times gettingdelayed payments
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` It was decided that a system needed to be put in place
that would
(i) decrease the volumes of paper instruments in MICR
clearing and
(ii) improve customer service by ensuring prompt and
secure interest/dividend payments to the
beneficiaries.
` Such a system needed to be cost effective and serve
as an alternate method of effecting bulk, low value,recurring payment transactions, thereby obviating the
need to issue and handle paper instruments
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` To get into the depth of electronic payment
process, it is better to understand the
processing of conventional or traditional
payment system.
` A conventional process of payment and
settlement involves a buyer-to-seller transfer of
cash or payment information (i.e., cheque andcredit cards). The actual settlement of payment
takes place in the financial processing network.
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A cash payment requires a buyers withdrawals form his/her bankaccount.
A transfer of cash to the seller, and the Sellers deposit of paymentto his/her account.
Non-cash payment mechanisms are settled by adjusting i.e.crediting and debiting the appropriate accounts between banksbased on payment information conveyed via cheque or creditcards.
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Sellers
bank
Buyers Bank
Seller
Buyer
Info flows for
notational
changes PaymentsGoods &
Services
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E-Cash
Smart
Cards
E-
Wallets
Debit
Cards
Credit
Cards
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A system that allows a person to pay for goods orservices by transmitting a number from one computerto another.
Like the serial numbers on real currency notes, the E-cash numbers are unique.
This is issued by a bank and represents a specified
sum of real money.
It is anonymous and reusable.
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Complex cryptographic algorithms prevent
double spending
Anonymity is preserved unless double spending is
attempted
Serial numbers can allow tracing to prevent
money laundering
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1. Consumer buys e-cash from Bank
2. Bank sends e-cash bits to consumer(after charging that amount plus fee)
3. Consumer sends e-cash to merchant
4. Merchant checks with Bank that e-cash
is valid (check for forgery or fraud)
5. Bank verifies that e-cash is valid
6. Parties complete transaction
Bank
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Smart Cards
A smart card, is any pocket-sized card with embedded
integrated circuits which can process data
This implies that it can receive input which is processed and
delivered as an output
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` This card also contains some kinds of an encryptedkey that is compared to a secret key contained on
the user's processor. Some smart cards haveprovision to allow users to enter a personalidentification number (PIN) code.
` Owing to their considerable flexibility, they have
been used for a wide range of functions like highwaytoll payment, as prepaid telephone cards and asstored value debit cards. However, with the recentemergence of e-commerce, these devices areincreasingly being viewed as a particularly
appropriate method to execute online paymentsystem with considerably greater level of securitythan credit cards.
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` Ticketless travel
Seoul bus system: 4M cards, 1B transactions since 1996
Planned the SF Bay Area system
` Authentication, ID
`
Medical records` E cash
` Store loyalty programs
` Personal profiles
` Government
Licenses
` Mall parking
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` The principal function of stored-value or smart cards is the portable storage andretrieval of data.
` These applications have evolved from existing electronic funds transfer
mechanisms using debit cards, such as prepaid cards and copy machine cards.` The embedded integrated circuit on the card defines the capabilities of the
product, and possible components may include a microprocessor, no staticrandom access memory (RAM), read only memory (ROM), erasableprogrammable read only memory (EPROM), other nonvolatile memory, andspecial purpose coprocessors.
` These characteristics make smart cards a viable medium for a digital currencypayment system. In making a payment through stored-value cards, the followingpoints can be noted: There are no backend settlements involved.
` There is no audit trail for transactions.
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` If a card is lost, the same result is achieved when actual cash islostits gone.
` Developers are working on ways to deliver card-to-card fundstransfers.
` Stored-value cards have met with high approval ratings amongconsumers in Europe, and the United States. Stored-value smartcards are capable of more than facilitating payments. They canoffer added-value information, including digital certificates foridentification purposes, and may authenticate a secure
transaction.
` It is worth noting that computer hardware manufacturers havestarted to include smart card readers with their PCs and PCkeyboards.
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It is a Plastic Card having a Magnetic Number andcode on it.
It has Some fixed amount to spend.
Customer has to repay the spend amount aftersometime.
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Principal Bank Sends
Transaction back to
Merchant Bank
Customer Pays by
Credit Card
Merchant Processes Credit
Card Using Software Provided
Electronically submitted
to Principal Bank
Principal Bank Sends
Request to Issuing Bank
Issuing Bank Approves/Declines
Sends Transaction principal Bank
ENTIRE
PROCESS
TAKES 5-15
SECOND
Think of this, The
acquiring bank , the
bank that underwrites
your merchant account
The Bank that
Issue Credit
Card To your
Customer
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` Customer uses a stolen card or account number tofraudulently purchase goods or service online.
` Family members use bankcard to order goods/
services online, but have not been authorized to do so.
` Customer falsely claims that he or she did not receivea shipment.
` Hackers find the ways into an e-commercemerchants payment processing system and then issuecredits to hacker card account numbers.
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` A debit card (also known as a bank card orcheck
card) is a plastic card that provides an alternative
payment method to cash when making purchases.
` Functionally, it can be called an electronic check, as
the funds are withdrawn directly from either the bank
account, or from the remaining balance on the card.
` Debit cards may also allow for instant withdrawal of
cash, acting as the ATM card for withdrawing cash and
as a check guarantee card.
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` Credit card Used for the majority of Internet
purchases Has a preset spending limit based
on the users credit history. Currently most convenient method
Most expensive e-paymentmechanism
Advantagex Each month user can pay part or all
of the amount owed
Disadvantages
x Does not work for small amount
(too expensive)x Does not work for large amount
(too expensive)
Debit card
Used for the majority of generalpurchases
Has no spending limit
Currently most convenient method
Most non-expensive e-paymentmechanism
Special feature helps to withdrawfrom ATM as hard cash
Advantages
Operates like cash or apersonal check
Disadvantages
Money is immediatelydeducted from users accountbalance
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The E-wallet is another payment scheme that operates like a carrier of e-cash
and other information.
The aim is to give shoppers a single, simple, and secure way of carrying
currency electronically.
Trust is the basis of the e-wallet as a form of electronic payment.
The software provides security and encryption for the personal information
and for the actual transaction
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1. Decide on an online site where you would like to shop.
2. Download a wallet from the merchants website.
3. Fill out personal information such as your credit card number, name, addressand phone number, and where merchandise should be shipped.
4. When you are ready to buy, click on the wallet button, the buying process is fullyexecuted.
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Features Online Credit
Card Payment
Electronic
Cash
Electronic
Cheque
Smart Cards
Actual
Payment Time
Paid later Prepaid Paid later Prepaid
Transaction
information
transfer
The store and
bank checks
the status of
the credit card
Free transfer.
No need to
leave the name
of parties
involved
Electronic
checks or
payment
indication must
be endorsed
The smart card
of both parties
make the
transfer
Online and
offline
transactions
Online
transactions
Online
transactions
Offline transfers
are allowed
Offline transfers
are allowed
Bank account
involvement
Credit card
account makes
the payment
No involvement The bank
account makes
the payment
The smart card
account makes
the payment
Users Any legitimate
credit card
users
Anyone Anyone with a
bank account
Anyone with a
bank or credit
card account
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Features Online Credit
Card Payment
Electronic
Cash
Electronic
Cheque
Smart Cards
Mobility Yes No No Yes
Limit on
transfer
Depends on the
limit of the credit
card
Depends on
how much is
prepaid
No limit Depends on how
much money is
saved
Party to
which
payment is
made out
Distributing
Bank
Store Store Store
Consumers
transaction
risk
Most of the risk
is borne by the
distributingbank,
consumers only
have to bear
part of the risk
Consumer is
at risk of the
electroniccash getting
stolen, lost, or
misused
Consumer
bears most of
the risk, but theconsumer can
stop check
payments at
any time
Consumer is at
risk of the smart
card gettingstolen, lost or
misused
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` Electronic funds transfer (EFT), is simply the use of electronic means totransfer funds directly from one account to another, rather than bycheck or cash.
` The EFT process cycle is spread over 3 days. Funds are madeavailable to the beneficiary on a T+1 basis
Electronic funds transfer can be used to:
` have your paycheck deposited directly into your bank or credit unionchecking account
` withdraw money from your checking account from an ATM machine
` transfer funds from your checking account to your mutual fund account
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` instruct your bank or credit union to
automatically pay certain monthly bills from
your account;
` make purchases using a check card rather than
cash;
` use a smart card with a prepaid amount of
money embedded in it instead of cash;
`
use your computer and personal finance software tocoordinate your total personal financial management.
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` Automated teller
machines(ATMs)
` Direct Deposit and
Withdrawal Services
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` Allow consumers to authorize specific deposits, such as
paychecks or social security checks, to their accounts on
a regular basis.
` It is also possible to authorize the bank, for a fee, to
withdraw funds from your account to pay your recurringbills, such as mortgage payment, installment loan
payments, insurance premiums, and utility bills.
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` Pay by Phone Systems let consumers phone their
financial institutions with instructions to pay certain bills
or to transfer funds between accounts.
` Point-of-Sale TransferTerminals allow consumers topay for retail purchase with a debit card. This card looks
like a credit card but with a significant difference -- the
money for the purchase is transferred immediately from
your account to the store's account.
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` Personal Computer Banking Services offer
consumers the convenience of conducting many
banking transactions electronically using a personal
computer. Consumers can view their account balances,
request transfers between accounts, and pay billselectronically from home.
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Transactional
Security
Interoperability
Scalabilty
Economic
Issues
Infrastructure Issues of EPS
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It refers to the actual exchange of currency with
the goods or services being transferred. Every
transaction should exhibit the following
characteristics:
` Atomicity
` Transfer Of Funds
` Complete Transfer
` Consistency` Durability
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` It refers to the systems ability to protect all parties fromfraud, due to interception of online transmission andstorage. The payment system should be secure enough tooffer the following:
` Fraud Protection` No Double Spending` No Counterfeiting` No Overspending` Non-Refutability
` Privacy Control` Non- Traceability` Hardware Tamper Resistance
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` It refers to its ability to operate in multiple online in
multiple online as well offline Payment
environment. The various issues involved under
interoperability are:
` Divisibility
` Bi- Directional
` Re-Spendibility
` Acceptability` Multi- Currency Support
` Portability
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It refers to the level of operations possible within a
certain payment system. The ability of a system to
handle load under peak hours. The various issues
involved under Scalability are:
` Offline operations
` Micro Payments
` Low Costs
` Efficiency` Macro Payments
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In order to become an accepted Economicalinstrument, a digital payment system needs toprovide a trusted, reliable and economicallyfeasible service to a sufficiently large user
community. The system should have:` Large User Base
` Low Risk
` Reliability
` Conservation` Ease Of Integration
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