UNIT-II

E-payment System
Models and Methods of E-payment System:
E-commerce sites use electronic payment, where electronic payment refers to paperless monetary
transactions. Electronic payment has revolutionized the business processing by reducing the
paperwork, transaction costs, and labor cost. Being user friendly and less time-consuming than
manual processing, it helps business organization to expand its market reach/expansion. Listed
below are some of the modes of electronic payments −
 Credit Card
 Debit Card
 Smart Card
 E-Money
 Electronic Fund Transfer (EFT)
Credit Card
Payment using credit card is one of most common mode of electronic payment. Credit card is
small plastic card with a unique number attached with an account. It has also a magnetic strip
embedded in it which is used to read credit card via card readers. When a customer purchases a
product via credit card, credit card issuer bank pays on behalf of the customer and customer has a
certain time period after which he/she can pay the credit card bill. It is usually credit card
monthly payment cycle. Following are the actors in the credit card system.
 The card holder − Customer
 The merchant − seller of product who can accept credit card payments.
 The card issuer bank − card holder's bank
 The acquirer bank − the merchant's bank
 The card brand − for example , visa or Mastercard.
Credit Card Payment Proces
Step Description

Step 1 Bank issues and activates a credit card to the customer on his/her request.

Step 2 The customer presents the credit card information to the merchant site or
to the merchant from whom he/she wants to purchase a product/service.

Step 3 Merchant validates the customer's identity by asking for approval from the
card brand company.

Step 4 Card brand company authenticates the credit card and pays the transaction
by credit. Merchant keeps the sales slip.

Step 5 Merchant submits the sales slip to acquirer banks and gets the service
charges paid to him/her.

Step 6 Acquirer bank requests the card brand company to clear the credit amount
and gets the payment.

Step 6 Now the card brand company asks to clear the amount from the issuer
bank and the amount gets transferred to the card brand company.
Debit Card
Debit card, like credit card, is a small plastic card with a unique number mapped with the
bank account number. It is required to have a bank account before getting a debit card from the
bank. The major difference between a debit card and a credit card is that in case of payment
through debit card, the amount gets deducted from the card's bank account immediately and there
should be sufficient balance in the bank account for the transaction to get completed; whereas in
case of a credit card transaction, there is no such compulsion.
Smart Card
Smart card is again similar to a credit card or a debit card in appearance, but it has a small
microprocessor chip embedded in it. It has the capacity to store a customer’s work-related and/or
personal information. Smart cards are also used to store money and the amount gets deducted
after every transaction.
E-Money
E-Money transactions refer to situation where payment is done over the network and the
amount gets transferred from one financial body to another financial body without any
involvement of a middleman. E-money transactions are faster, convenient, and saves a lot of
time.
Electronic Fund Transfer
It is a very popular electronic payment method to transfer money from one bank account
to another bank account. Accounts can be in the same bank or different banks. Fund transfer can
be done using ATM (Automated Teller Machine) or using a computer.
Nowadays, internet-based EFT is getting popular. In this case, a customer uses the website
provided by the bank, logs in to the bank's website and registers another bank account. He/she
then places a request to transfer certain amount to that account. Customer's bank transfers the
amount to other account if it is in the same bank, otherwise the transfer request is forwarded to
an ACH (Automated Clearing House) to transfer the amount to other account and the amount is
deducted from the customer's account. Once the amount is transferred to other account, the
customer is notified of the fund transfer by the bank.
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Digital Signatures
A digital signature is a specific type of e-signature that complies with the strictest legal
regulations and provides the highest level of assurance of a signer’s identity
Digital signatures are like electronic “fingerprints.” In the form of a coded message, the digital
signature securely associates a signer with a document in a recorded transaction. Digital
signatures use a standard, accepted format, called Public Key Infrastructure (PKI), to provide the
highest levels of security and universal acceptance.
Components of the Digital Signature:
Name
The name of the individual is the first and foremost thing that a digital signature includes.
Anyone who is using the signature or authorizing a digital document for distribution or access
must have a name in the signature. It reduces any chances of fraud that may be caused by another
person sharing the same name.
Personal Information
Apart from the full name of the user, it is must to have contact details and email address also
mentioned in the digital signature. It helps in easy locating of the person.
Public Key
Another important element of a digital signature is a public key. It is unique to each digital
signature generated or issued. This is a key used for encryption of the document being
authorized. It is essential for the verification process. The expiry date of the digital signature also
determined by its public key. It is also useful when there is a need to reset the signature.
Serial Number
It is another component that acts as a unique identifier of a digital signature. It is used by a
certification authority. It also holds prime importance to ensure the viability of a digital
signature.
Process/steps for Digital Signature Certificate:
In recent times, the application for Digital Signature Certificate (DSC) has been completely
digitized. Thereby, removing any hard copy flow of documents like signing of application form,
self attestation of documents etc. This has resulted in faster processing of application. The new
process of paperless DSC is explained below in detail.
Paperless DSC:
Under this method the manual form filling can be avoided and the complete process is online for
ease of the applicant. Various methods under Paperless DSC are covered below. The Aadhar
based DSC is the fastest process for getting a new DSC.
 Aadhar-based e-KYC Verification DSC
Aadhaar based Paperless DSC is an easy and fastest way to make DSC. The whole process of
Paperless DSC will save your time, money, efforts and it is totally authenticated. Aadhaar
Paperless DSC is based on "Aadhaar Paperless Offline e-KYC".
 PAN-based e-KYC Verification DSC
By opting for Paperless PAN-based E-KYC DSC, the applicant is able to significantly reduce
costs. The greatest advantage of this Pan-based E-KYC is that one can apply for this type of DSC
anytime or anywhere,
STEP 1: Log on and select your type of entity:
Log on to the website of a Certifying Authority licensed to issue Digital Certificates in India.
Having accessed the page, you will be guided to the Digital Certification Services’ section. Now
under the ‘Digital Certification Services’ section, click on the type of entity for which you want
to obtain the DSC:’ individual or organization’, etc.
In case you are applying for an individual DSC, click on ‘individual’. A new tab containing the
DSC Registration Form will appear. Download the DSC Registration Form on your PC.
STEP 2: Fill the necessary details
Once you have downloaded the form, fill in all the necessary details as required in the form:
 Class of the DSC.
 Validity.
 Type: Only Sign or Sign & Encrypt.
 Applicant Name & Contact Details.
 Residential Address.
 GST Number & Identity Details of Proof Documents.
 Declaration.
 Document as proof of identity.
 Document as proof of address.
 Attestation Officer.
 Payment Details.
On filling up all the necessary details you must affix your recent photograph and put your
signature under the declaration. Check thoroughly for completion of the form. Take a print of the
completed form and preserve it.
STEP 3: Proof of identity and address
The supporting document provided as proof of identity and address must be attested by an
attesting officer. Ensure the sign and seal of the attesting officer is visibly clear on the supporting
proof documents.
STEP 4: Payment for DSC
A demand draft or cheque must be obtained towards payment for application of DSC in the
name of the Local Registration Authority where you are going to submit your application for
verification. You can find the details of the Local Registration Authority according to your city
of residence by searching for a Certifying Authority licensed to issue Digital Certificates online.
STEP 5: Post the documents required
Enclose the following in an envelope:
DSC Registration Form duly completed -Supporting document for Proof of Identity and proof of
address attested by the attesting officer.
Demand Draft / Cheque for payment.
Address the enclosed envelope to the Local Registration Authority (LRA) and post it to the
designated address of the LRA for further processing.
On completion of the above-mentioned steps by filling in the DSC Form and providing
necessary documents and payment, you have successfully completed the application process for
your Digital Signature Certificate.
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Working of Digital Signature:
How does a digital signature work?
The working of the digital signature is based on the combined functionality of both public and
private keys. The functionality of a digital signature is only a cryptography that forms the basis
of this system. The pairing of public or private keys is used to encrypt or decrypt a document
while sending it to a receiver to verify the signature. The private key has been kept with the
owner of the document and is confidential. On the other hand, public keys shared freely.
Every document has a unique hash and thus a unique signature. It is being done to ensure
that the document is unique to the owner and no one else can tamper, reproduce or make
duplicate copies of the document or the signature.
Digital signatures, like handwritten signatures, are unique to each signer. Digital signature
solution providers, such as DocuSign, follow a specific protocol, called PKI. PKI requires the
provider to use a mathematical algorithm to generate two long numbers, called keys. One key is
public, and one key is private.
When a signer electronically signs a document, the signature is created using the signer’s
private key, which is always securely kept by the signer. The signature is also marked with the
time that the document was signed. If the document changes after signing, the digital signature is
invalidated.
Legal position of Digital Signatures:
Which factors make e-signatures valid in India?
Here are the 5 criteria that e-signatures must satisfy to be valid and reliable, as per the
IT Act:
 The signature creation data or the authentication data are, within the context in which
they are used, linked to the signatory or, as the case may be, the authenticator and to no
other person;
 The signature creation data or the authentication data were, at the time of signing, under
the control of the signatory or, as the case may be, the authenticator and of no other
person;
 Any alteration to the electronic signature made after affixing such signature is detectable;
 Any alteration to the information made after its authentication by electronic signature is
detectable; and
 It is issued by a Certifying Authority based on e-authentication; particulars specified in
Form C of Schedule IV of the Information Technology (Certifying Authorities) Rules,
2000 and as recognized by the Controller of Certifying Authorities (CCA) appointed
under the IT Act.
 If each of the reliability conditions is satisfied, then there is a legal presumption in favor
of the validity of any document signed using an electronic signature.
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Payment Gateways
A payment gateway is what keeps the payments ecosystem rolling smoothly, as it enables online
payments for consumers and businesses. If you’re an online merchant, you don’t need to be a
payment gateway expert, but it’s worth understanding the basics of how an online payment flows
from your customer to your bank account.

The key players in online payments:

When a customer clicks on the “Pay” button on your website, these are the key players involved
in the payment process:
 The merchant: this is you, i.e. an online business operating in any vertical (travel, retail,
e-commerce, gaming, Forex, etc), offering a product or service to customers
 The customer: the customer, also called a cardholder, who wants to access the products
or services that the merchant is selling, and initiates the transaction
  The issuing bank: the issuing bank is the customer’s bank that issues the cardholder’s
credit or debit card on behalf of the card schemes (Visa, MasterCard)
 The acquirer: also known as the acquiring bank, the acquirer is the financial institution
that maintains the merchant’s bank account (known as the merchant's account). The
acquiring bank passes the merchant's transactions to the issuing bank to receive payment
How does a payment gateway work?
1. The customer chooses the product or service they want to purchase and proceeds to the
payment page. Most payment gateways offer you different options for your payment
page.
2. The customer enters their credit or debit card details on the payment page. These details
include the cardholder’s name, card expiration date and CVV number
3. The acquiring bank sends securely the information to the card schemes (Visa,
MasterCard).
4. The issuing bank, after performing fraud screening, authorises the transaction. The
approved or declined payment message is transferred back from the card schemes, then to
the acquirer.
5. Based on the message, the merchant may either display a payment confirmation page or
ask the customer to provide another payment method.
Most Popular Payment Gateway Providers
Following is the list of the most widely used and popular payment getaway providers along with
a brief history about them.
PAYPAL − You can find all the terms and conditions of their business model on their URL –
https://www.paypal.com/. PayPal is one of the longest established and probably the best-known
service for transferring money online.
Amazon Payments − The URL of this immensely popular payment getaway provider is –
https://payments.amazon.com/. It was created in 2007, Amazon Payments provides your
customers with the same checkout experience they get on Amazon.com
Stripe − The URL of this payment getaway is – https://stripe.com/. No monthly fees, no extra
charges for different cards and different payment methods, also for different currencies. Stripe
also offers a great API (Application Program Interface) as well.
Authorize Net − The URL for this popular payment getaway provider is
https://www.authorize.net/. It is among the most powerful and well-known payment gateways. It
is well-supported by e-commerce WordPress plugins.
2Checkout − The URL for this payment getaway provider is – https://www.2checkout.com/.
2checkout is one of the most simple and affordable credit card gateways.

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Meaning and Concept of Online Banking

Meaning:
Online banking, also known as internet banking, web banking or home banking, is
an electronic payment system that enables customers of a bank or other financial institution to
conduct a range of financial transactions through the financial institution's website.
(OR)
Internet Banking, also known as net-banking or online banking, is an electronic payment system
that enables the customer of a bank or a financial institution to make financial or non-financial
transactions online via the internet. This service gives online access to almost every banking
service, traditionally available through a local branch including fund transfers, deposits, and
online bill payments to the customers.
E-banking makes the bank and its client’s enable-
 Provides access to financial as well as non-financial banking services
 Facility to check bank balance any time
 Make bill payments and fund transfer to other accounts
 Keep a check on mortgages, loans, savings a/c linked to the bank account
 Safe and secure mode of banking
 Protected with unique ID and password
 Customers can apply for the issuance of a cheque book
 Buy general insurance
 Set-up or cancel automatic recurring payments and standing orders
 Keep a check on investments linked to the bank account
The Concept of E-Banking:
Science has made the world more dynamic and progressive. It has brought changes in
economy, politics, culture, society and the people themselves. It has made banking transactions
more speedy, easy and comfortable. Today, the client needs not carry a checkbook or cash
money rather it is enough for him just to carry a plastic card.
In other words, E-banking means that kind of banking in which the bank uses electronic
or satellite based computerized devices for ensuring promptness and accuracy in banking
transactions.
Importance of Online-banking:
We will look at the importance of electronic banking for banks, individual customers, and
businesses separately.
Banks:
Lesser transaction costs – electronic transactions are the cheapest modes of transaction
A reduced margin for human error – since the information is relayed electronically, there is no
room for human error
Lesser paperwork – digital records reduce paperwork and make the process easier to handle.
Also, it is environment-friendly.
Reduced fixed costs – A lesser need for branches which translates into a lower fixed cost.
More loyal customers – since e-banking services are customer-friendly, banks experience higher
loyalty from its customers.
Customers:
Convenience – a customer can access his account and transact from anywhere 24x7x365.
Lower cost per transaction – since the customer does not have to visit the branch for every
transaction, it saves him both time and money.
No geographical barriers – In traditional banking systems, geographical distances could hamper
certain banking transactions. However, with e-banking, geographical barriers are reduced.
Businesses:
Account reviews – Business owners and designated staff members can access the accounts
quickly using an online banking interface. This allows them to review the account activity and
also ensure the smooth functioning of the account.
Better productivity – Electronic banking improves productivity. It allows the automation of
regular monthly payments and a host of other features to enhance the productivity of the business.
Lower costs – Usually, costs in banking relationships are based on the resources utilized. If a
certain business requires more assistance with wire transfers, deposits, etc., then the bank charges
it higher fees. With online banking, these expenses are minimized.
Lesser errors – Electronic banking helps reduce errors in regular banking transactions. Bad
handwriting, mistaken information, etc. can cause errors which can prove costly. Also, easy
review of the account activity enhances the accuracy of financial transactions.
Reduced fraud – Electronic banking provides a digital footprint for all employees who have the
right to modify banking activities. Therefore, the business has better visibility into its transactions
making it difficult for any fraudsters to play mischief.
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Electronic funds 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,
via computer-based systems, without the direct intervention of bank staff.
EFTs debit (increase) one person’s account and credit (decrease) the other person’s
account.
EFT transactions are also known as electronic banking. Everything is paperless, so there isn’t a
need for cash or paper checks.
Types of EFT:
o There are a number of ways to transfer money electronically. Here are just some
common EFT payments you might use for your business.
 Direct deposit lets you electronically pay employees. After you run payroll, notify your
direct deposit service provider of the amount to deposit in each employee’s bank account.
Then, the direct deposit provider transfers that money to employee accounts on payday.
Not all employers can make direct deposit mandatory, so brush up on direct deposit laws.
 Wire transfers are a fast way to send money. They are typically used for large,
infrequent payments (because there’s a fee). You might use wire transfers to pay vendors
or make a large down payment on a building or equipment.
 The Electronic Federal Tax Payment System (EFTPS) is a tax payment service you
can use to make tax payments to the IRS.
 ATMs let you bank without going inside a bank and talking to a teller. You can withdraw
cash, make deposits, or transfer funds between your accounts.
 Debit cards allow you to make EFT transactions. You can use the debit card to move
money from your business bank account. Use your debit card to make purchases or pay
bills online, in person, or over the phone. And, you can accept debit card payments from
customers.
 Electronic checks are similar to paper checks, but they are used electronically. You enter
your bank account number and routing number to make a payment.
 Mobile wallets let you pay bills, transfer money between accounts, or receive payments
over the phone.
 Personal computer banking lets you make banking transactions with your computer or
mobile device. You can use your computer or mobile device to move money between
accounts.
How does an EFT payment work?

You might want to send an EFT payment to someone. Or, you may give customers the option to
pay you via an electronic funds transfer.

To make an EFT payment, the sender must know the recipient’s bank account information. If
you’re making an EFT payment, you must authorize the funds transfer. Then, the money is taken
from your account and deposited into the recipient’s account.

There might be a fee for some EFT transactions. For example, you might have to pay for certain
ATM transactions. However, other transactions might be free.
Risks involved in E-payments:

Fraud: Fraud can be defined as the undesired activities taking place in an operational system.
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 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.

Tax Evasion: Businesses are required by law to provide the government with records of their
financial transactions so that their tax compliance can be checked. E-payment, however, can
thwart tax collection efforts. Until a company discloses the numerous e-payments it has made or
received during the tax period, the government will not know the truth that may lead to tax
evasion.

Payment Conflicts: Payment problems also occur because payments are not made manually, but
through an automated system that can cause errors. This is particularly important when payment
is made on a daily basis to several recipients. For example, if you do not review your pay slip at
the end of will pay period, you could end up in a dispute due to such technical issues or
anomalies.

Impulse Buying: E-payment systems promote pulse transactions, particularly online, and
consumers are likely to make a decision to buy an item they find on sale online, as it will cost
only a click to buy it via a credit card. The buying of impulses leads to disorganized budgets and
is one of the drawbacks of e-payment systems.

Dishonest providers and Merchants: Those who exploit and sell consumers 'personal data in
order to be used by advertisers in ads often use this data for fraud purposes.