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UNIT-V ELECTRONIC PAYMENT SYSTEM

The concept of electronic commerce relates to selling goods or services over the Internet.This involves making payments over the Internet. Thus online payments and ecommerce

are intricately linked given that online consumers must pay for products and services.

Organizations are motivated to use e-payment systems by the need to deliver

products and services more cost effectively and to provide higher quality of service to thecustomers.

In 1970 the emerging electronic payment technology was labeled as Electronic FundTransfer.

EFT is defined as Any transfer of funds initiated through an electronic terminal,telephone instrument or computer or magnetic tape so as to order instruct or authorize a

financial institution to debit or credit an amount.

EFT uses computer and telecommunication components both to supply and to transfer

money or financial assets.

Definition:

Electronic Payment is a financial exchange that takes place online between buyers andsellers. The content of this exchange is usually some form of digital financial instrument

(such as encrypted credit card numbers, electronic cheques or digital cash) that is backedby a bank or an intermediary, or by a legal tender.

Requirements of Electronic payment System:

Acceptability: in order to be successful, the payment system needs to be widely

accepted.

Convertibility: the digital money should be able to convert into other types of

funds.

Efficiency: the cost per transaction should be very low or nearly zero.

Flexibility: several methods of payment should be supported.

Reliability: payment should be high reliable and should be avoid points of failure.

Scalability: allowing new customers and suppliers into the system should not

break down the infrastructure.

Usability: payment should be as easy as in the real world.

Security :Electronic payment systems should allow financial

The various factors that have direct the financial institutions to make use of

electronic payments are:

Decreasing technology cost: The technology used in the networks is decreasing

day by day, which is evident from the fact that computers are now dirt-cheap and

Internet is becoming free almost everywhere in the world.


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Reduced operational and processing cost:

Due to reduced technology cost the processing cost of various

commerce activities becomes very less. A very simple reason to prove this is the fact

that in electronic transactions we save both paper and time.

Increasing online commerce

PROBLEMS WITH THE TRADITIONAL PAYMENT SYSTEMS:

There are also many problems with the traditional payment systems that are leading

to its fade out. Some of them are enumerated below:

a) Lack of Convenience: Traditional payment systems require the consumer to eithersend paper cheques by snail-mail or require him/her to physically come over andsign papers before performing a transaction.

b) Lack of Security: This is because the consumer has to send all confidential data ona paper, which is not encrypted, that too by post where it may be read by anyone.

c) Lack of Coverage: When we talk in terms of current businesses, they span manycountries or states. These business houses need faster transactions everywhere. Thisis not possible without the bank having branch near all of the companies offices.

This statement is clear.

d) Lack of Eligibility:

Not all possible buyers may have a bank account.

e) Lack of support for micro-transactions:

Many transactions done on the Internet are of very low cost though theyinvolve data flow between two individuals in two countries. The same if done on

paper may not be possible at all.

Types of Electronic Payment system:

1. Instant paid or cash: Transactions are settled with the exchange of electroniccurrency. Ex: online currency exchange such as E-cash.


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2. Debit or prepaid: users have to first pay in advance and then buy a product or aservice. Ex: smart cards also called Electronic purses or virtual wallets that storeelectronic money.

3. Credit or post paid: allow the users to buy a product or service and pay afterwards.Ex: credit cards and electronic cheques.

ELECTRONIC PAYMENT SYSTEM PROTOCOLS:

There are many protocols that are currently employed to allow money to change

hands in cyberspace. the open protocols used for payments on the Web namely,SSL/TLS, SET, and IOTP

Secure Sockets Layer (SSL):

The Secure Sockets Layer (SSL) protocol was designed by Netscape as amethod for secure client-server communications over the Internet.

Using public key cryptography and certificates, SSL offers a mechanism so

that clients and servers can authenticate each other and then engage insecure communication.

During an initial handshaking phase, the client and server select a secret key

crypto scheme to use and then the client sends the secret key to the serverusing the server's public key from the server's certificate.

From that point on, the information exchanged between the client andserver is encrypted.

SSL/TLS can be employed by any application layer protocol running over theTransmission Control Protocol (TCP), including Hypertext Transfer Protocol

(HTTP), File Transfer Protocol (FTP), Telnet, and the e-mail protocols (SimpleMail Transfer Protocol SMTP, Post Office Protocol POP3, and Internet

Message Access Protocol IMAP4).

the most widely known and widely used application of SSL/TLS is for securing

HTTP communication

SSL/TLS is not a payment protocol at all.

SSL's goal is to provide a secure connection between two parties and its

application for electronic commerce is to provide a secure communicationschannel over which a customer and business can exchange private

information.

Secure communications in SSL/TLS relies on secret key cryptography (SKC)

to ensure privacy and public key cryptography (PKC) for key exchange andauthentication.

SET: Secure Electronic Transaction:

Despite SSL's popularity, MasterCard, Visa, and several other companies developed

the Secure Electronic Transaction (SET) protocol specifically to handle electronic

payments.


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The SET approach to cryptography is similar to SSL's, employing a combination of of

the DES secret key and RSA public key schemes.

One of the biggest differences between SET and SSL is in scope. SET has severalcomponents which communicate securely end-to-end across the Internet.

Cardholders interact with merchants who process order information and passpayment information to payment gateways. In difference, SSL is essentially point-to-

point between buyer and seller, and makes no explicit provisions for involvingfinancial institutions.

SET only appears on the scene at the end of a purchase. Allcryptographic schemes add processing delay, so product selections aregenerally made without encryption to improve performance.

After completing the order process, the customer clicks a button on the website'spayment page to activate a wallet application.

A reference number is generated by the merchant software and sent to the customersoftware along with a summary of the order.

The cardholder selects the appropriate credit card in the digital wallet and clicks on apayment button, invoking SET and beginning the payment process.

An exchange of SET messages over the Internet-between the cardholder and the

merchant, and between the merchant and the payment gateway-completes thetransaction. Connections between the payment gateway and banks use the existingpayment network, and are thus are not part of the SET specification.

Internet Open Trading Protocol (IOTP):

SSL is a secure communications protocol that can be used by a consumer to forward

payment information.

SET is a protocol specifically designed for credit card transactions.

The Internet Open Trading Protocol (IOTP) provides an interoperable framework for

consumer-to-business Internet-based electronic commerce.

IOTP is designed to replicate the "real" world of transactions where consumers

choose their product, choose their vendor, choose their form of payment (inconjunction with their vendor), arrange delivery, and, periodically, even return

products.

An e-commerce trading framework that is payment system independent. IOTP isdesigned to accommodate today's protocols and trading models and potentially

extendable to new Internet-specific trading models.

ELECTRONIC PAYMENT SYSTEM SECURITY SCHEMES:

Authenticity:

The electronic check may consist of a document that is signed by the consumer's

private key. The receiver (the merchant or the merchant's bank) uses the payer's public key to

decrypt the digital signature. This declares the receiver that the sender had reallysigned the check.

It also provides for non-repudiation, such that the payer cannot reject issuing the

check since it is signed by the payer's private key (that only the payer is expected topossess).

Additionally, the electronic check may also require the digital signatures of the

originator's bank.


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This step will guarantee the receiver that the check is written on a valid bank

account.

The receiver (or receiver's bank) can validate the authenticity of the originator'sbank by using the public key of the originator's bank. For large sums of money,

additional security requirements may be charge.

Delivering public key:

The originator as well as the originator's bank must provide their public keys to the

receiver. Attaching their X.509 certificates to the electronic checks can provide the

public keys.

These certificates may use certificate chains including the signatures of the root

Certification Authority.

The public key of the root Certification Authority should be well shown to avoid fraud.

Storage of private Key:

To avoid fraud, the consumer's private key needs to be securely stored and

made available to the consumer.

This can be achieved by providing a smart card that can be carried by the consumer.

Cashier Checks:

A cashier's check is created by a bank and is signed using the bank's private key.

The originating bank includes its certificate with the electronic check.

The receiving bank uses the originating bank's public key to decrypt the digital

signature.

In this way, the receiving bank is assured that the cashier check was indeed

originated by the name of the bank indicated on the check.

It also provides the receiving bank with non-repudiation such that the originating

bank cannot deny issuing this check since it is signed by the originating bank's

private key (that only the originating bank is expected to possess

ELECTRONIC CREDIT CARD SYSTEM ON THE INTERNET

Define: Credit card:

A plastic card having a magnetic strip, issued by a bank or businessauthorizing the holder to buy goods or services on credit. Credit card is also called charge

card.

The third and final digital economy scheme is using credit cards for e-commerce. In

electronic credit, conversational credit cards may be used along with a PIN. The PIN is asecret code that the consumer must enter while using the credit card on-line.

Electronic credit uses four essential components:
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A consumer with a Web browser.

A merchant server that provides the home page. Specifically, the merchant

Server handles the credit card transactions.

A merchant's bank that handles the credit card transactions for the merchant.

A card-issuing institution that has issued a credit card to the consumer.

An electronic credit card transaction processes the following steps, which can be divided intothree phases:

Phase I: Purchase of goods

1. The consumer accesses a merchant's home page and receives a display of themerchant's goods.

2. The consumer selects the desired goods and offers a credit payment to themerchant.

3. The merchant server accesses its bank for credit authorization of the consumer'scredit card number and the amount of purchase. The merchant's bank completes the

authorization and informs the merchant whether to proceed with the purchase ornot.

4. The merchant informs the consumer whether the transaction has been completed.

Phase II: Settlement
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5. This phase is executed separately by the merchant server to collect the payments onthe various credit card purchases.

6. The merchant server accesses the merchant's bank and provides a collection of

receipts of various electronic credit purchases.

7. 7. The merchant's bank accesses the card issuer and obtains the money for thepurchases.

Phase III: Credit card bill8. In this phase, the card issuer updates the cardholder (consumer) about the amount

of credit transferred to other parties as a result of purchases. The consumer may

receive the account updates once a month through postal mail.

Security:

Electronic credit card transactions must:

Provide a mechanism to validate the identity of the merchant's bank, the merchant

and the consumer. A fraud can result from whichever party is not sufficientlyauthenticated. X.509 certificates may be sent with each message to authenticate the

sender and to provide the sender's public key. Protect the private key of the certificate authority (CA). Theft or loss of the CA's

private key can cause significant damage.

Protect the credit card number, the expiration date, PIN, the amount of purchase and

other sensitive information during transmission over the Net.

Institute a process to resolve credit card payment disputes between the consumer,the merchant and the bank.

ELECTRONIC FUND TRANSFER:

EFT consists of three forms of transactions:

Paying fees through the ATM (Automatic Teller Machine) network

Paying bills through monthly bank account deductions

Transfer of large sums of money among banks across the world

Electronic checking pertains to the use of networking services to issue and process

payments that follow real world checking. The payer issues a digital check to the payee andthe payee deposits it in the bank to transfer the money. Each transaction is carried over the

Internet.

Electronic fund transfer is different from traditional methods of payment that depends on

physical delivery of cash by using physical means of transport. Electronic funds transfer canbe segmented into three broad categories.

1. Banking and financial payments

Large-scale or wholesale payments - Bank-to-bank transfer is a good example for this kind

of payment where the funds flow from one bank to another.
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Small-scale or retail payments -Automated teller machines and cash dispensers are

examples for this kind of payment using ATM, a customer can withdraw money fromanywhere and at anytime.

Home banking - Home banking service can be classified into three types.

1) Basic services include personal finance service.

2) Intermediate services include financial management.

3) Advanced services include trading service.

2. Retailing Payments:

Credit cards (e.g., VISA or MasterCard)

Private label credit / debit cards (e.g., J.C. Penney Card)

Charge cards (e.g., American Express)

3. On-line electronic commerce payments:

i) Token-based payment systems

Electronic cash (e.g., DigiCash)

-It is a form of digital cash which provides a high level of security. It also reduces the

overhead of paper cash.

Electronic checks (e.g., NetCheque)

E-check is another from of e-payment preferred when a customer is willing to make papercurrency.

Smart cards or debit cards (e.g., Mondex Electronic Currency Card)

-Smart cards are similar to debit/credit card but with enhanced features such asmicroprocessor that have the ability to store massive amount to information which is 80

times greater than conventional, magnetic strip cards.

ii) Credit card- based payment systems

The different types of credit-card based payment systems are:

Plain credit-card payment system - In this type of payment system, the credit card

transaction is provided without using any encryption techniques. It is one of the simplest

form of payment system.


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Encrypted credit-card payment system - In this type of payment system, the credit card is

encrypted before performing any transaction using various encryption schemes like PrivacyEnhanced Mail (PEM) and Pretty Good Privacy (PGP).

On-line Third party credit card payment system - Security and verification can be provided

by using third-party, which is a company that gathers and verifies the payment of funds

that flow from one party to another.

Electronic checking differs from EFT in several ways.

For electronic checking, electronic versions of checks are issued, received and

processed. So, the payee issues an electronic check for each payment.

For EFT, automatic withdrawals are made for monthly bills or other fixed payments;

no checks are issued.

DEBIT CARDS:

A debit card(also known as a bank card or check card).

An electronic card issued by a bank which allows bank clients access to their account

to withdraw cash or pay for goods and services. This removes the need for bank

clients to go to the bank to remove cash from their account as they can now just go

to an ATM or pay electronically at merchant locations.

This type of card, as a form of payment, also removes the need for checks as the

debit card immediately transfers money from the client's account to the business

account.

Advantages of debit cards:

No need to carry cash. You do not need to worry about losing cash since the personresponsible for would need your PIN number to access your funds.

You don't need to make a journey to the bank every time you need to withdrawalmoney. You can use your card just about any where you go, and if you need the

cash you can access your money at an ATM machine any time of day or night.

Disadvantages:

With a debit card you must keep accurate records. You must record each transaction

so you will know what your account balance is at all times.

ELECTRONIC CASH:

Define: E-cash was developed to allow fully anonymous secure electronic cash to be

used on the Internet to support online trading between buyers and sellers.


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E-Cash: is a computer generated Internet based system which allowsfunds to be transferred and items to be purchased by credit card, check or by money

order, providing secure on-line transaction processing.

The primary function of e-cash is to facilitate transactions on the Internet. Many ofthese transactions may be small in size and would not be cost efficient through other

payment mediums such as credit cards.

Advantages of Electronic Cash Payment Systems:

Saved time:

Reduce transaction process timeSpeed up transaction processes.

Reduced costs:Reduce transaction costsReduce cash distribution costs

Flexibility:

Digital cash can take many forms, including prepaid cardsDigital cash can be converted into different currencies

Reduce cash distribution risk:Reduce the regular cash distribution risk

Error free and efficient:

Reduce transaction errors

Assume that there is an electronic cash-issuing bank (e-mint) that

generates electronic cash. The e-mint signs the electronic cash as the issuer. It may use adigital signature algorithm. The e-mint issues the electronic cash based on the money

provided to it by the customer. The payer (customer) can use this electronic cash topurchase items over the Internet.

Electronic cash transactions take place in three distinct and independent phases:


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Phase I: Obtaining e-cash

1. The consumer requests his/her bank to transfer money to the e-mint to obtainelectronic cash.

2. The consumer bank transfers money from the consumer's account to the e-mint.3. The e-mint sends electronic cash to the consumer, who saves the electronic cash on

a hard drive or a smart card.

Phase II: Buying with e-cash

This phase is executed whenever the consumer desires to make a purchase with electroniccash. It can take place at any time after the consumer has obtained electronic cash from the

e-mint.

4. The consumer selects the goods and transfers the electronic cash to the merchant.

5. The merchant provides the goods to the consumer.

Phase III: Redeeming cash

This phase occurs whenever the merchant is ready to use the electronic cash. Themerchant should be capable of converting this electronic cash to money for the merchant's

bank account.

6. The merchant transfers the electronic cash to the e-mint. Alternatively, the merchant

may send the electronic cash to his/her bank and the bank in turn use the moneyfrom the e-mint.

7. The e-mint transfers money to the merchant's bank for crediting the merchant'saccount.

A similar scheme can be develop to transfer money between twoindividuals or institutions such as banks, universities or other businesses.

PROPERTIES OF E-CASH:

Electronic cash (e-cash), digital money or digital cash provides the means to transfer money

between parties over a network such as the Internet. Electronic cash must satisfy some

general properties of digital money:

Independence:

Electronic cash must not depend on its existence in any given

computer system or location.

Non-Reusability:

It should not be reusable. For example, if you get electronic

cash for $50 and spend it to buy a shirt, then you cannot spend this money again.


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Anonymity:

Electronic cash cannot provide information that can be used to trace the

previous owner of the cash. If you buy a product, there should be nothing associated

with the electronic cash that traces it to you.

Transferability:

It should be easily transferable from one person or party to another.

This should occur without leaving any trace of the person who has been in

possession of this money.

Divers-ability:

It must be available in several denominations. It must also be divisible in a way

similar to real cash. For example, 25 digital pennies should yield a digital quarter and four

digital quarters should equal a dollar.

Secure Storage:

It should be available in such a way so that it can be securely

stored at the consumer's hard drive or on a smart card (such as PCMCIA card).

Furthermore, it should be possible to transfer this electronic cash between various

types of parties on the Internet.

E-Cash IN ACTION:

E-Cash is based on cryptographic systems called Digital Signatures. This methodinvolves a pair of numeric keys

One for locking (or encoding) and the other for unlocking (decoding).

Messages encoded with one numeric key can only be decoded with the other numerickey.

The encoding key is kept private and the decoding key is made public.

By supplying all customers (buyers and sellers) with its public key, a bank enables

customers to decode any message (or currency) encoded with the banks privatekey.

If decoding by a customer yields a recognizable message, the customer can be fairly

confident that only the bank could have encoded it.

Purchasing E-cash from currency server

E-Cash can be purchased from an On Line currency server in 2 steps namely, Establishing

an account and maintaining enough money in the account to back the purchase.

How actually E-Cash will work

1. The user of e-Cash has to have an Account with a bank ready to offer e-Cash.


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2. The user will apply for e-Cash in the denomination and amount the he desires. Inexchange of money debited from the customers account, the bank uses its private

key to digitally sign the note for the amount requested and transmits the note backto the customer. The network currency server in effect is issuing a "bank note" with

a serial number and a dollar amount.3. Since the bank is digitally signing it, the bank is committing itself.

4. The user has the e-Cash available. He can sign the e-Cash and give it to anybody.5. When the e-Cash software generates a note, it masks the original number or "blinds"

the note. The blinding carried out makes it impossible for anyone to link Payment toPayer.

6. A central bank also maintains a database of Spent notes.

USING DIGITAL CURRENCY:


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Once the tokens are purchased, the e-cash software on the customer's PC stores digitalmoney undersigned by a bank. The user can spend the digital money at any shop accepting

e-cash, without having to open an account there first or having to transmit credit cardnumbers. As soon as the customer wants to make a payment, the software collects the

necessary amount from the stored tokens.

Detection of Double Spending in E-cash

Two types of transactions are possible using digital money:

1. Bilateral and

2. Trilateral

Typically, transactions involving cash are bilateral or two-party (buyer and seller)

transactions, whereby the merchant checks the veracity of the note's digital signature byusing the bank's public key. Transactions involving financial instruments other than cash are

usually trilateral or three-party (buyer, seller, and bank) transactions, whereby the "notes"

are sent to the merchant, who immediately sends them directly to the digital bank. Thebank verifies the validity of these "notes" and that they have not been spent before. Theaccount of the merchant is credited. In this case, every "note" can be used only once.

To uncover double spending, banks must compare the note passed to it by the merchant

against a database of spent notes. Just as paper currency is identified with a unique serialnumber, digital cash can also be protected. The ability to detect double spending has to

involve some form of registration so that all "notes" issued globally can be uniquely

identified. However, this method of matching notes with a central registry has problems inthe on-line World. For most systems, which handle high volumes of micro payments, this

method would simply be too expensive. In addition the problem of double spending meansthat banks have to carry added overhead because of the constant checking and auditing

logs


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One drawback of e- cash is its inability to be easily divided into smaller amounts. It is oftennecessary to get small denomination change in business transactions. A number of

variations have been developed for dealing with the "change" problem.

OPERATIONAL RISK OF E-CASH:

1. The time period over which a given Ecash is valid

2. How much ECASH can be stored and forwarded to different users.3. The number of exchanges that can take place before ECASH needs to be re-

deposited with the bank / Financial Institution4. No. of transactions that are allowed during the period.

Finally some analysts believe that, e-Cash proved even better than traditional cash, because

it allows more secure transactions, eliminates the risk of theft, and makes accessing

personal funds easier.

E-CASH LEGAL ISSUES:

Legal Issues.

Electronic cash will force bankers and regulators to make tough choices that will shape the

form of lawful commercial activity related to electronic commerce. As a result of the veryfeatures that make it so attractive to many, cash has occupied an unstable and

uncomfortable place within the existing taxation and law enforcement systems.

Anonymous and virtually untraceable, cash transactions today occupy a place in a kind of

underground economy. This underground economy is generally confined to relatively small-

scale transactions because paper money in large quantities is cumbersome to use andmanipulate - organized crime being the obvious exception.

The Impact of e-cash on Taxation

Transaction-based taxes (e.g., sales taxes) account for a significant portion of state andlocal government revenue. But it e-cash really is made to function the way that paper

money does, payments we would never think of making in cash to buy a new car, say, or asthe down payment on a house could be made in this new form of currency because there

would be no problem of bulk and no risk of robbery. The threat to the government'srevenue flow is a very real one, and officials in government are starting to take cognizance

of this development and to prepare their responses.

Business Issues

Electronic cash fulfills two main functions

1) as medium of exchange and

2) as a store of value.


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Medium of exchange - Digital money is a perfect medium of exchange. E-cash hasbecome an important and easy way of processing exchange transactions. The complexity of

interlocking credits and liabilities is simplified by assigning value in terms of money of e-cash and by making settlements of transaction instantaneously.

For instance, small businesses that spend months waiting for big customers to pay their bills

would benefit hugely from a digital system in which instant settlement is the norm. Instantsettlement of micro payments is also a tantalizing proposition.

Storage of Values - Paper currency is perceptible and treated as legal tender which meansthat payee cannot refuse to accept it. If this cash is bank certified, many people wishes to

use financial institutions like banks to store their money and settle their payments using

checks or debit cards. On the other hand if e-cash is treated as a legal tender it wouldcreate a problem if each component of e-cash represents a real cash element then there will

be no rate of interest earned on real balances of e-cash.

The other business issue that is related to e-cash arises if there is huge up and down in face

value of cash. E-cash is more suitable for being exchanged at traditional rates of market

rather than using it for by passing foreign exchange market. The only way of startingconventional exchange market is to develop its own gray market.

ELECTRONIC CHECKS:

Definition: An electronicpaymentprocess that resembles the function of paper checks, but

offers greater security and more features. Electronic checks are typically used in orders

processed online, and are governed by the same laws that apply to paper checks. Electronic

checks offer protective measures such as authentication and digital signatures to safeguard

digitaltransactions.

The concept of electronic checking or e-checks is depicted in the figure given below.
http://www.businessdictionary.com/definition/electronic.htmlhttp://www.businessdictionary.com/definition/payment.htmlhttp://www.businessdictionary.com/definition/process.htmlhttp://www.businessdictionary.com/definition/function.htmlhttp://www.businessdictionary.com/definition/check.htmlhttp://www.businessdictionary.com/definition/offer.htmlhttp://www.businessdictionary.com/definition/security.htmlhttp://www.businessdictionary.com/definition/feature.htmlhttp://www.businessdictionary.com/definition/order.htmlhttp://www.businessdictionary.com/definition/online.htmlhttp://www.businessdictionary.com/definition/law.htmlhttp://www.businessdictionary.com/definition/apply.htmlhttp://www.businessdictionary.com/definition/measures.htmlhttp://www.businessdictionary.com/definition/authentication.htmlhttp://www.businessdictionary.com/definition/digital-signature.htmlhttp://www.businessdictionary.com/definition/safeguard.htmlhttp://www.businessdictionary.com/definition/digital.htmlhttp://www.businessdictionary.com/definition/transaction.htmlhttp://www.businessdictionary.com/definition/electronic.htmlhttp://www.businessdictionary.com/definition/payment.htmlhttp://www.businessdictionary.com/definition/process.htmlhttp://www.businessdictionary.com/definition/function.htmlhttp://www.businessdictionary.com/definition/check.htmlhttp://www.businessdictionary.com/definition/offer.htmlhttp://www.businessdictionary.com/definition/security.htmlhttp://www.businessdictionary.com/definition/feature.htmlhttp://www.businessdictionary.com/definition/order.htmlhttp://www.businessdictionary.com/definition/online.htmlhttp://www.businessdictionary.com/definition/law.htmlhttp://www.businessdictionary.com/definition/apply.htmlhttp://www.businessdictionary.com/definition/measures.htmlhttp://www.businessdictionary.com/definition/authentication.htmlhttp://www.businessdictionary.com/definition/digital-signature.htmlhttp://www.businessdictionary.com/definition/safeguard.htmlhttp://www.businessdictionary.com/definition/digital.htmlhttp://www.businessdictionary.com/definition/transaction.html


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Phase I: Purchasing goods

1) The consumer accesses the merchant server, which presents its goods to theconsumer.

2) The consumer selects the goods and purchases them by sending an electronic checkto the merchant.

3) The merchant may validate the electronic check with his/her bank for paymentauthorization.

4) Assuming the check is validated, the merchant closes the transaction with theconsumer.

Phase II: Depositing checks

5) The merchant forwards the checks to his/her bank electronically.

The merchant's bank forwards the electronic checks to the clearing house for being

cashed.

The clearing house works with the consumer's bank, clears the check and transfers money

to the merchant's bank, which updates the merchant's account.

At a later time, the consumer's bank updates the consumer with the withdrawal information.

Electronic checking provides the following advantages:

Electronic-checks can greatly reduce the time from the moment a consumer writes acheck to the time when the merchant receives the deposit. The merchant can

forward checks to the bank instantly and get them credited to his account.

There is no need for long queues at banks on the first day of the month. It reduces

the bank employees' effort to receive the checks, process them and mail thecancelled checks to the consumers.

It can be designed in such a way that the merchant can get authorization from thecustomer's bank before accepting the electronic check.

Electronic checks can be used to give gifts or make payments without the fear of

being lost or stolen. If a check is stolen, the receiver can request the payer to stop

the payment.

RISK AND E-PAYMENT SYSTEM:

The risk of ecommerce model is shown below. There are three major risks.

Data protection: the abuse of data related to users.

Taxation: issued related to tax.

Data Reliability: the authentication parties are involved.
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A) Data Protection:

Technologies concern with authorization includes firewalls, passwordaccess, smartcards and biometrics fingerprinting. However in order to provide secure

electronic transaction (SET), encryption technologies are used. Encryption technologieswhich are supported by the appropriate legal mechanisms have the potential to allow

global e- commerce to develop.

The major risks involved in the electronic payment systems are given below. Many of

these problems can be resolved through an improved technology and better experience.

Fraud and mistakes: Preventing mistakes require an improvement in legal framework.

Improving security framework can eliminate fraud issues.

Privacy issues: Privacy issues can be dealt with an improved security framework.

Credit risk: Managing credit risk requires development of policies and procedures torestrict credit and reduce float in the market.


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B) Risks from Mistake and Disputes: Consumer Protection

All electronic payment systems require some ability to keep automatic records.

From technical stand point this si not a problem for electronic system.

Credit cards, debit cards and even paper check create automatic records.

Once information has been captured electronically, it is easy and not expensive to

keep. Features of these automatic records are:

1. Permanent storage2. Accessibility and traceability

3. A payment system database and4. Data transfer to payment maker, bank or monetary authorities.

Obviously the card reading terminals, machines or telephones could maintain

records of all transactions. with these records the balance on any smart cardcould be reconstructed after the fact thus allowing additional protection

against loss or theft.

c)Managing Information Privacy

The electronic payment system must provide and maintain privacy.

Every time one purchases goods using a credit card, subscribes to a magazineor accesses a server that information goes into a database.

All these records can be linked so that they constitute a single dossier(a set of

documents related to a person).

This violates one the unspoken laws of doing business; that the privacy ofcustomers should be protected as possible

d) Managing Credit Risk

Credit risk is an important concern in systems of net settlement because a banks

inability to settle its net position could give rise to a series response of failures of the

banks.

The digital central bank must prepare policies to handle this possibility. Variousalternatives exist, each with advantages and disadvantages.

A digital central bank guarantee on settlement issues destroy the insolvency test

from the system because banks will more easily assume credit risks from other

banks,


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