Lecture 10

Rehan Ullah
Lecture overview
 Electronic Payment Systems
 Factors increasing interest in online payment
mechanisms
 Limitations of traditional Payment instruments
 Micropayments
 Types of electronic Tokens
 E-checks
 Benefits of E-checks
 Working of E-checks
Electronic Payment Systems
 Electronic payment is a financial exchange that takes
place online between buyers and sellers.
 Electronic
payment is an integral part of electronic
commerce.
Factors increasing interest in online payment
mechanisms
Decreasing technology cost
Reduced operational and processing cost
Increasing online commerce

Limitations of traditional Payment instruments
 Traditional payment methods such as checks are not adequate for
real-time payment interaction.
 “Real-time” means that these transactions are triggered and

completed when the consumer hits the “pay” button on the web
browser.
 With real-time payments, a consumer’s web browser delivers

payment instructions to a merchant who forwards those instructions
to a network bank.
 The bank then authenticates the individual and releases funds to the
merchant.
 The merchant delivers the purchased product upon customer

verification.
Off-line payment assumptions
 Two-fundamental assumptions are made by the off-line
payment methods.
 The transacting parties-buyer and seller-will at some time be in
each other’s physical presence.
 There will be a sufficient delay in the payment process for detection
of fraud and other problems to be identified and corrected.
 These assumptions are not valid for electronic
commerce .
 Thus many of these payment mechanisms are being
modified and adapted for the efficient conduct of
business over computer networks.
Problems with traditional payment methods
 Lack of convenience
 Traditional payment methods generally require that the
consumer leave the online platform and use the
telephone or send a check in order to make payment.
 Lack of security
 In order to make a traditional payment over the Internet,
a consumer has to provide card/payment account details
and other personal information online.
 Leaving the Internet and providing the card/Payment
account details over the telephone and/or by mail also
entails security risks.
Problems continued…
 Lack of coverage
 Credit cards only work with signed up merchants and do
not generally support individual-to-individual or direct
business-to-buisness payment transactions.
 Lack of eligibility
 Not all potential buyers have suitable credit card ratings
to allow them access to credit cards and /or checking
accounts.
 Lack of support for micro-transactions
 Many payments made over the Internet are of sufficiently
low value that the cost of a phone call or letter may be too
high of an overhead.
Micro-Payments
 Micropayments or small fee transactions are the driver
behind many of the new electronic token-based
methods.
 The example of Micropayments will be as:
 For example, if company X charged $0.05 to download a

customer service file “cs123.txt” from a server and 20,000
people chose to do it every day,
 then X would have $1000 added to its bank account just for that
one file.
Micro-Payments continued…
 Now assume that there are 1000 files with similar activity.
 This volume of activity entails $1,000,000 changing hands in

one day.
Issues regarding micropayments
 With traditional payment methods, processing even a
five-cent transaction could cost a bank as much as
$1.00.
 The overhead is high because the accounting systems of
several banks have to be able to respond to a message of
the format ”transfer five cents from account #1231 of
Bank X[the purchaser] to account #5432 of Bank Y [the
service provider]”.
 Although the transaction is not complex, the
surrounding issues of settlement between the payer and
payee banks and verification of funds to cover the
transaction to the overall cost.
Issues continued…
 The potential usefulness of small money transfers in
generating a steady cash flow ,combined with the
inability of traditional banks to meet the need has
created a vacuum.
 Some entrepreneurs appear to be moving in to fill the
vacuum and to supply a form of electronic token that
can be used on Internet.
Types of tokens
 An electronic token is a digital analog of various forms
of payment backed by a bank or financial institution.
 The two basic types of tokens are real-time(or pre-paid)
tokens and post-paid tokens.
 Real Time tokens are exchanged between buyer and
seller.
 Here, users prepay for tokens that serve as currency.
 Transactions are settled with the exchange of electronic
currency.
Types of tokens continued…
 Examples of prepaid mechanisms are digital cash, debit
cards and electronic purses that store electronic money.
 Settlement or Postpaid tokens are used with funds
transfer instructions being exchanged between buyer
and seller.
 Examples of postpaid mechanisms are electronic checks,
encrypted credit cards, and third party authorization
mechanisms.
Electronic checks
 Electronic checks are designed to accommodate the
many individuals and entities that might prefer to pay on
credit or through some mechanism other than cash.
 Electronic checks are modeled on paper checks except
that they are initiated electronically,
 They use digital signature for signing and endorsing.
 They require the use of digital certificates to
authenticate the payer, the payer’s bank and bank
account.
Benefits of Electronic Checks
 Electronic checks work in the same way as traditional
checks, thus specifying customer education.
 By retaining the basic characteristics and flexibility of
paper checks while enhancing the functionality,
electronic checks can be easily understood and readily
adopted.
 Electronic checks are well suited for clearing micro
payments.
 The conventional cryptography of electronic checks
makes them easier to process than systems based on
public key cryptography.
Benefits continued…
 The payee and the payee’s bank and the payer’s bank
can authenticate each other through digital certificates.
 Digital signatures can also be validated automatically.
 Electronic checks can serve corporate markets.
 Firms can use electronic checks to complete payments
over the networks in a more cost-effective manner than
present alternatives.
 Since the contents of a check can be attached to the
trading partner’s remittance information, the electronic
check will easy integrate with EDI applications such as
accounts receivable.
Benefits continued…
 Electronic checks create float and availability of float is
an important requirement for commerce.
 The third party accounting server can earn revenue by
charging the buyer or seller a transaction fee or a flat
rate fee or it can act as a bank and provide deposit
accounts and make money from the deposit account
pool.
 E-check technology links public networks to the
financial payments and bank clearing networks ,
leveraging the access of public networks with the
existing financial payment infrastructure.
How Electronic checks work?
 Electronic check users must register with a third-party
account server before they are able to write e-checks.
 The account server also act as a billing service.
 The registration procedure can vary depending on the
particular account server and may require a credit card
or a bank account to back the checks.
 Once registered a consumer can then contact a seller of
goods and services.
 Using e-mail or other transport methods,the buyer sends
an electronic check to the seller for a certain amount of
money.
Working continued…
 When deposited the check authorizes the transfer of
account balances from the account against which the
check was drawn to the account to which the check was
deposited.
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Rehan Ullah

Reduced operational and processing cost

Increasing online commerce

 “Real-time” means that these transactions are triggered and

 With real-time payments, a consumer’s web browser delivers

 The merchant delivers the purchased product upon customer

 The example of Micropayments will be as:

 For example, if company X charged $0.05 to download a

 This volume of activity entails $1,000,000 changing hands in

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