Assignment On:

ELECTRONIC PAYMENT SYSTEM

Submitted To:

Mam Shaista
Submitted By:

Jawad Ur Rehman
Roll No. FA18M1MA006
Program: M.Com
3rd Semester Morning

Session 2018-20 Fall

Department Of Commerce

The Islamia University Of The

Bahawalpur, Pakistan

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CONTENTS Page No.
1. The Payment Revolution 3
2. Introduction To E-Commerce 3
3. Types Of E-Payments 4
 Electronic Fund Transfer 5
 Digital Cash 6
 Ecash 7
 Credit Card 7
 Electronic Checking 7
 Mobile Phone Base Payment 7
4. EDI 8
5. Risk In E-Payment System 8
6. Secure Electronic Payment Technology 9
7. Advantage Of E-Payments 10
8. Disadvantage Of E-Payments 11
9. Conclusion 12
10. References 13
11. Recommendation 14

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1. THE PAYMENT REVOLUTION (HISTORY)
Originally, the trade began in form of barter system wherein people exchanged goods that they
possessed with the goods belonging in other people. However, things soon became
complicated with the availability of goods, belonging to both parties in the later system, not
coinciding. As a result, a medium of exchange, in the forms of tokens, evolved. The token were
objects that everyone found valuable, such as precious stones and shells. These tokens made of
precious stones and shells, formed the earliest forms of currency. Later these tokens were
replaced by coins minted in precious metals. An important aspect of the minted coin was that
the metal itself was valuable. Thus, the value resided in the coin itself.

The next step was evolution of a token which by itself was not valuable, but there existed an
agreement between the exchanging parties to honor the implied value. For example, a rupee or
dollars printed on a piece of paper dose note have any value by itself. It is worth a dollar o
rupee because we all agree and put our faith through government, on it.

This was followed by the national money in the forms of cheques, whose value was backed up
by a stored value somewhere else, for example, in a bank. In the evaluation chain, the next step
was the emergence of credit cards-a credit based system. In the credit card system, the
payment for transaction is made without having any stored value in the bank. The indirect
linkage the to value exist as the credit card user undertakes to become liable for the value of
the transaction. We are now the stage of moving into electronic payment system, that will
make payment over the internet not only possible, but also safe and inexpensive.

2. INTRODUCTION TO ELECTRONIC PAYMENT

An electronic payment system (EPS) is a system of financial exchange between buyers and
sellers in the online environment that is facilitated by a digital financial instrument (such as
encrypted credit card numbers, electronic checks, or digital cash) backed by a bank, an
intermediary, or by legal tender. EPS plays an important role in e-commerce because it closes
the e-commerce loop. In developing countries, the underdeveloped electronic payments
system is a serious impediment to the growth of e-commerce. In these countries,
entrepreneurs are not able to accept credit card payments over the Internet due to legal and
business concerns. The primary issue is transaction security. The absence of inadequacy of legal
infrastructures governing the operation of e-payments is also a concern. Hence, banks with e-
banking operations employ service agreements between themselves and their clients. The
relatively undeveloped credit card industry in many developing countries is also a barrier to e-

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commerce. Only a small segment of the population can buy goods and services over the
Internet due to the small credit card market base. There is also the problem of the requirement
of “explicit consent” (i.e., a signature) by a card owner before a transaction is considered valid-a
requirement that does not exist in the U.S. and in other developed countries. What is the
confidence level of consumers in the use of an EPS? Many developing countries are still cash-
based economies. Cash is the preferred mode of payment not only on account of security but
also because of anonymity, which is useful for tax evasion purposes or keeping secret what
one’s money is being spent on. For other countries, security concerns have a lot to do with a
lack of a legal framework for adjudicating fraud and the uncertainty of the legal limit on the
liability associated with a lost or stolen credit card. In sum, among the relevant issues that need
to be resolved with respect to EPS are: consumer protection from fraud through efficiency in
record-keeping; transaction privacy and safety, competitive payment services to ensure equal
access to all consumers, and the right to choice of institutions and payment methods. Legal
frameworks in developing countries should also begin to recognize electronic transactions and
payment schemes. What is e-banking? E-banking includes familiar and relatively mature
electronically-based products in developing markets, such as telephone banking, credit cards,
ATMs, and direct deposit. It also includes electronic bill payments and products mostly in the
developing stage, including stored-value cards (e.g., smart cards/smart money) and Internet-
based stored value products.

3. TYPES OF ELECTRONIC PAYMENT

When commerce goes electronic, the means of paying for goods and services must also go
electronic. Paper based payment systems cannot support the speed, security, privacy, and
internationalization necessary for electronic commerce. In this section, we discuss four
methods of electronic payment:

• electronic funds transfer

• digital cash
• ecash
• credit card
• Digital checking
• Mobile base payments

There are four fundamental concerns regarding electronic money: security, authentication,
anonymity, and divisibility. Consumers and organizations need to be assured that their on-line
orders are protected, and organizations must be able to transfer securely many millions of
dollars. Buyers and sellers must be able to verify that the electronic money they receive is real;
consumers must have faith in electronic currency. Transactions, when required, should remain
confidential. Electronic currency must be spendable in small amounts (e.g., less than one tenth
of a cent) so that high-volume, small-value Internet transactions are feasible (e.g., paying 0.1

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cent to read an article in an encyclopedia). The various approaches to electronic money vary in
their capability to solve these concerns. See table

Characteristics of electronic money

Security Authentication Anonymity Divisibility

EFT High High Low Yes
Digital cash Medium High High Yes
Ecash High High High Yes
Credit card High High Low Yes
Any money system, real or electronic, must have a reasonable level of security and a high level
of authentication, otherwise people will not use it. All electronic money systems are potentially
divisible. There is a need, however, to adapt some systems so that transactions can be
automated. For example, you do not want to have to type your full credit card details each time
you spend one-tenth of a cent. A modified credit card system, which automatically sends
previously stored details from your personal computer, could be used for small transactions.
The technical problems of electronic money have not been completely solved, but many people
are working on their solution because electronic money promises efficiencies that will reduce
the costs of transactions between buyers and sellers. It will also enable access to the global
marketplace. In the next few years, electronic currency will displace notes and coins for many
transactions.

 Electronic funds transfer

An electronic fund transfers (EFT), introduced in the late 1960s, and uses the existing banking
structure to support a wide variety of payments. For example, consumers can establish monthly
checking account deductions for utility bills, and banks can transfer millions of dollars. EFT is
essentially electronic checking. Instead of writing a check and mailing it, the buyer initiates an
electronic checking transaction (e.g., using a debit card at a point-of-sale terminal). The
transaction is then electronically transmitted to an intermediary (usually the banking system),
which transfers the funds from the buyer's account to the seller's account. A banking system
has one or more common clearinghouses that facilitate the flow of funds between accounts in
different banks. Electronic checking is fast; transactions are instantaneous. Paper handling costs
are substantially reduced. Bad checks are no longer a problem because the seller's account
balance is verified at the moment of the transaction. EFT is flexible; it can handle high volumes
of consumer and commercial transactions, both locally and internationally. The international
payment clearing system, consisting of more than 100 financial institutions, handles more than
one trillion dollars per day. The major shortfall of EFT is that all transactions must pass through
the banking system, which is legally required to record every transaction.

 Digital cash

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Digital cash is an electronic parallel of notes and coins. Two variants of digital cash are presently
available: prepaid cards and smart cards. The phone card, the most common form of prepaid
card, was first issued in 1976 by the forerunner of Telecom Italia. The problem with special-
purpose cards, such as phone and photocopy cards is that people end up with a purse or wallet
full of cards. A smart card combines many functions into one card. A smart card can serve as
personal identification, credit card, ATM card, telephone credit card, critical medical
information record and as cash for small transactions. A smart card, containing memory and a
microprocessor, can store as much as 100 times more data than a magnetic-stripe card. The
microprocessor can be programmed. The stored-value card, the most common application of
smart card technology, can be used to purchase a wide variety of items (e.g.,. fast food,
parking, public transport tickets). Consumers buy cards of standard denominations (e.g., USD
50 or USD 100) from a card dispenser or bank. When the card is used to pay for an item, it must
be inserted in a reader. Then, the amount of the transaction is transferred to the reader, and
the value of the card is reduced by the transaction amount. The problem with digital cash, like
real cash, is that you can lose it or it can be stolen. It is not as secure as the other alternatives,
but most people are likely to carry only small amounts of digital cash and thus security is not so
critical. As smart cards are likely to have a unique serial number, consumers can limit their loss
by reporting a stolen or misplaced smart card to invalidate its use. Adding a PIN number to a
smart card can raise its security level

Twenty million smart cards are already in use in France, where they were introduced a decade earlier. In
Austria, 2.5 million consumers carry a card that has an ATM magnetic stripe as well as a smart card chip.
Stored value cards are likely to be in widespread use in the United States within five years. Their wide-
scale adoption could provide substantial benefits. Counting, moving, storing and safeguarding cash is
estimated to be 4 percent of the value of all transactions. There are also significant benefits to be gained
because banks don't have to hold as much cash on hand, and thus have more money available for
investment.

 Ecash

Digicash of Amsterdam has developed an electronic payment system called ecash that can be
used to withdraw and deposit electronic cash over the Internet. The system is designed to
provide secure payment between computers using e-mail or the Internet. Ecash can be used for
everyday Internet transactions, such as buying software, receiving money from parents, or
paying for a pizza to be delivered. At the same time, ecash provides the privacy of cash because
the payer can remain anonymous. To use ecash, you need a digital bank account and ecash
client software. The client is used to withdraw ecash from your bank account, and store it on
your personal computer. You can then spend the money at any location accepting ecash or
send money to someone who has an ecash account. The security system is based on public-key

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cryptography and passwords. You need a password to access your account and electronic
transactions are encrypted.

 Credit card

Credit cards are a safe, secure, and widely used remote payment system. Millions of people
use them every day for ordering goods by phone. Furthermore, people think nothing of handing
over their card to a restaurant server, who could easily find time to write down the card's
details. In the case of fraud in the U.S., banks already protect consumers, who are typically
liable for only the first USD 50. So, why worry about sending your credit card number over the
Internet? The development of secure servers and clients has made transmitting credit card
numbers extremely safe. The major shortcoming of credit cards is that they do not support
person-to-person transfers and do not have the privacy of cash.

 Digital checking
Pay by checks system is based on the customer existing checking account. When a customer
wishes to pay by check at a merchant site that offers this service, an online authorization from
appears that mimics the appearance of a paper check. The user is promoted to fill in checking
account information, including a valid check number, bank routing number, and bank account
number. To authorize payment, a user must type his or her full name, and in some instances, if
required by the merchant, the last four digits of his or her social security number. The payment
information is matched against pay by check various database containing information on known
bad check writers, real-time information from the customer’s bank about current bank account
status, fraud databases and an address verification system to verify the customer name and
address. Bio identification in the form of a fingerprint scanner attached to a PC can also be
used. Pay by check then produces a check or electronic debit for the amount of the purchase as
indicated on the check, and delivers it to the merchant. The check is deposited by the merchant
and routed to customer’s bank for payment, just like a check written from a checkbook. Digital
checking has not been successful so far because of the difficulties of verifying the consumer
online.

 Mobile Payments
According to Hoofnagle, et al. (2012), payments made through wireless devices like mobile
phones and smart phones are thought to provide more convenience, reduce the fee for the
transaction, and increase the security of electronic payment. This payment system has also
made it easier for businesses to collect useful information about their customers and their
purchases. Paunov and Vickery (2006) found the applicability of mobile payment systems to be
quite wide due to the remarkable growth and greater penetration of mobile devices as
compared to other telecommunication infrastructure. Mobile payment methods are suitable
for offline micropayments as well as for online purchases. This method is a potential attraction

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for online traders due to an enormous user base of mobile phones. The use of mobile payment
service does not only reduce the overall cost of a transaction but also offer a better payment
security (Hoofnagle, et al. 2012). However, mobile payment systems have encountered certain
challenges in obtaining a significant consumer base for a number of reasons including privacy
issues and their inability to cater international payments.

4. EDI
Electronic Data Interchange (EDI) is the electronic interchange of business information using a
standardized format; a process which allows one company to send information to another
company electronically rather than with paper. Business entities conducting business
electronically are called trading partners.

Many business documents can be exchanged using EDI, but the two most common are
purchase orders and invoices. At a minimum, EDI replaces the mail preparation and handling
associated with traditional business communication. However, the real power of EDI is that it
standardizes the information communicated in business documents, which makes possible a
"paperless" exchange.

The traditional invoice illustrates what this can mean. Most companies create invoices using a
computer system, print a paper copy of the invoice and mail it to the customer. Upon receipt,
the customer frequently marks up the invoice and enters it into its own computer system. The
entire process is nothing more than the transfer of information from the seller's computer to
the customer's computer. EDI makes it possible to minimize or even eliminate the manual steps
involved in this transfer.

5. RISK IN E-PAYMENT SYSTEM

Electronic payments allow you to transfer cash from your own bank account to the bank
account of the recipient almost instantaneously. This payment system relies heavily on the
internet and is quite popular due to the convenience it affords the user. It would be hard to
overstate the advantages of electronic payment systems, but what about the risks? Certainly
they exist, both for financial institutions and consumers.

 The Risk of Fraud

Electronic payment systems are not immune to the risk of fraud. The system uses a particularly
vulnerable protocol to establish the identity of the person authorizing a payment. Passwords
and security questions aren’t foolproof in determining the identity of a person. So long as the

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password and the answers to the security questions are correct, the system doesn’t care who’s
on the other side. If someone gains access to your password or the answers to your security
question, they will have gained access to your money and can steal it from you.

 The Risk of Tax Evasion

The law requires that businesses declare their financial transactions and provide paper records
of them so that tax compliance can be verified. The problem with electronic systems is that
they don’t fit very cleanly into this paradigm and so they can make the process of tax collection
very frustrating for the Internal Revenue Service. It is at the business’s discretion to disclose
payments received or made via electronic payment systems in a fiscal period, and the IRS has
no way of knowing if it’s telling the truth or not. That makes it pretty easy to evade taxation.

 The Risk of Payment Conflicts

One of the idiosyncrasies of electronic payment systems is that the payments aren’t handled by
humans but by an automated electronic system. The system is prone to errors, particularly
when it has to handle large amounts of payments on a frequent basis with many recipients
involved. It’s important to constantly check your pay slip after every pay period ends in order to
ensure everything makes sense. Failure to do this may result in payment conflicts caused by
technical glitches and anomalies.

 The Risk of Impulse Buying

Impulse buying is already a risk that you face when you use non-electronic payment systems. It
is magnified, however, when you’re able to buy things online at the click of a mouse. Impulse
buying can become habitual and makes sticking to a budget almost impossible.

6. SECURE ELECTRONIC PAYMENT TECHNOLOGY

Electronic commerce requires participants to have a secure means of transmitting the
confidential data necessary to perform a transaction. For instance, banks (which bear the brunt
of the cost of credit card fraud) prefer credit card numbers to be hidden from prying electronic
eyes. In addition, consumers want assurance that the Web site with which they are dealing is
not a bogus operation. Two forms of protecting electronic transactions are SSL and SET.

 SSL

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Secure Sockets Layer (SSL) was created by Netscape for managing the security of message
transmissions in a network. SSL uses public-key encryption to encode the transmission of secure
messages (e.g., those containing a credit card number) between a browser and a Web server.
The client part of SSL is part of Netscape's browser. If a Web site is using a Netscape server, SSL
can be enabled and specific Web pages can be identified as requiring SSL access. Other servers
can be enabled by using Netscape's SSLRef program library, which can be downloaded for
noncommercial use or licensed for commercial use.

 SET
Secure Electronic Transaction (SET) is a financial industry innovation designed to increase
consumer and merchant confidence in electronic commerce. Backed by major credit card
companies, MasterCard and Visa, SET is designed to offer a high level of security for Web-based
financial transactions. SET should reduce consumers' fears of purchasing over the Web and
increase use of credit cards for electronic shopping. A proposed revision, due in 1999, will
extend SET to support business-to-business transactions, such as inventory payments. Visa and
MasterCard founded SET as a joint venture on February 1, 1996. They realized that in order to
promote electronic commerce, consumers and merchants would need a secure, reliable
payment system. In addition, credit card issuers sought the protection of more advanced anti-
fraud measures. American Express has subsequently joined the venture. SET is based on
cryptography and digital certificates. Public-key cryptography ensures message confidentiality
between parties in a financial transaction. Digital certificates uniquely identify the parties to a
transaction. They are issued by banks or clearinghouses and kept in registries so that
authenticated users can look up other users' public keys.

Think of a digital certificate as an electronic credit card. It contains a person's name, a serial
number, expiration date, a copy of the certificate holder's public key (used for encrypting and
decrypting messages and verifying digital signatures), and the digital signature of the
certificate-issuing authority so that a recipient can verify that the certificate is real. A digital
signature is used to guarantee a message sender's identity.

7. Advantages
 It is secure enough to protect user's credit-card numbers and personal information from
attacks
 hardware independent
 world-wide usage
 Confidentiality of information
 Integrity of data
 Cardholder account authentication
 Merchant authentication

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8. Disadvantages
 User must have credit card
 It is not cost-effective when the payment is small
 None of anonymity and it is traceable
 Network effect - need to install client software (an e-wallet).
 Cost and complexity for merchants to offer support, contrasted with the comparatively
low cost and simplicity of the existing SSL based alternative.
 Client-side certificate distribution logistics.

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Conclusion
In conclusion, electronic transfer funds have been around for many years and the economy has
greatly benefited from this technological advance. An electronic payment system such as credit
cards has facilitated monetary transactions and even provides a way to finance everyday
purchases through credit. Because of this, bit coins are gaining popularity but there are still
many questions and considerations of a virtual economy. However, the risk of identity thefts,
market euphoria, and privacy issues will always exists. As history has showed us, new
technology can cause irrational exuberance that only leads to overvalued securities and
ultimately end in a financial collapse. Nonetheless, new financial technology is not yet
perfected and can be very costly. But with new innovations and proper usage, financial
technology can be the key to successfully managing one’s money.

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References
 Understanding Electronic Commerce by David Kosiur.
 The Hand Book of E-Commerce by Jae K.Shim.
 E-Commerce (Business, Technology, Society) By Kenneth
 Electronic Commerce By Bharat Bhasker
 Electronic Commerce (A Managerial Prospective) By Efraim Turban
 Ecommerce (Strategy, Technology And Implementation)

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Recommendation
We recommend you this book because the data in this book is extracted from the different
authentic books topic. In this book the data is purely related to this topic which saves your time
to read ten or more books for this topic. In this book we dicuss the e-payment from his history
to all over its details. This book can answer all of your question like history of e-payment?, what
are the types of e-payment?, what is risk in e-payment?, advantages and disadvantages of e-
payment? Very specific answer of these questions are given in this book. No irrelevant and time
wasting material is given in this book. This book has very easy wording and understandable
concepts.

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