Types of Electronic Payment Systems - Security and Payment, E-Commerce | E-Commerce - B Com PDF Download

TYPES OF ELECTRONIC PAYMENT SYSTEMS

Conventional Payment Process : A conventional process of payment and settlement involves a buyer-to-seller transfer of cash or payment information (e.g. credit card or check). The actual settlement of payment takes place in the financial processing network. A cash payment requires a buyer's withdrawal from his bank account, a transfer of cash to the seller, and the seller's deposit of the payment to his/her account. Non-cash payment mechanisms are settled by adjusting, i.e. crediting and debiting, the appropriate accounts between the banks based  on payment information conveyed via check or credit card. Figure 5.1 is a simplified diagram for both cash and non-cash transactions. Cash moves from the buyer's bank to  the seller's bank through face-to-face exchanges in the market. If a buyer uses a non-cash method of payment, payment information instead of cash flows from the buyer to the seller, and ultimately payments are settled between affected banks who  notationally adjust accounts based on the payment information. In real markets, this clearing process involves some type of intermediaries such as credit card services or check clearing companies. Schematically then most payment systems are based on similar processes.  The 'information' conveyed to settle payments can be one of the following: information about the identities of the seller and the buyer and some instruction to settle payments without revealing financial information [payment clearing systems financial  information such as credit card or bank accounts numbers (including checks and debit cards) actual values represented by digital currency

Figure 5.1: A Cheque simplified model of transaction

Type 1: Payment Through an Intermediary - Payment Clearing Services : When face-to-face purchase is replaced with on-line commerce, many aspects of a transaction occur instantly, under which various processes of a normal business interaction are subsumed. For example, a typical purchase involves stages of locating a seller, selecting a product, asking a price quote, making an offer, agreeing over payment means, checking the identity and validity of the payment mechanism, transferring of goods and receipts. In order to be used as a substitute for face-to-face payments, online payment systems must incorporate all or some of these stages within their payment functions. The lack of face-to-face interaction also leads to more secure methods of payment being developed for electronic commerce, to deal with the security problems for sensitive information and uncertainty about identity. Consequently, electronic commerce transactions require intermediaries to provide security, identification, and authentication as well as payment support.

Figure 5.2 shows a stylized transaction for online commerce using an intermediary. In  this model, the intermediary not only settles payments, it also takes care of such needs as confirming seller and buyer identities, authenticating and verifying ordering and payment information and other transactional requirements lacking in virtual interactions. In the figure, two boxes delineate online purchasing and secure or off-line payment clearing processes. Payment settlement in this figure follows the example of the traditional electronic funds transfer model which uses secured private value networks. The intermediary contributes to market efficiency by resolving uncertainties about security and identity and relieving vendors of the need to set up duplicative hardware and  software to handle the online payment clearing process. The payment information transmitted by the buyer may be one of three types. First, it may contain only customer order information such as the identity of the buyer and seller, name of the product, amount of payment, and other sale conditions but no payment information such as credit card numbers or checking account numbers. In this case, the intermediary acts as a centralized commerce enabler maintaining membership and payment  information  for both sellers and buyers. A buyer need only send the seller his identification number assigned by the intermediary. Upon receiving the purchase order, the intermediary verifies it with both the buyer and seller and handles all sensitive payment information on behalf of both.

The key benefit of this payment clearing system is that it separates sensitive and nonsensitive information and only non-sensitive information is exchanged online. This alleviates the concern with security that is often seen as a serious barrier to online commerce. In fact, First Virtual does not even rely on encryption for messages between buyers and sellers. A critical requisite for this system to work is the users' trust in the intermediaries.

Type 2: Payment Based on EFT - Notational Funds Transfer : The second type of payment systems does not depend on a central processing intermediary. Instead, sensitive payment information (such as credit card or bank account number) is transmitted along with orders, which is in effect an open Internet implementation of financial electronic data interchange (EDI) (see Figure 5.3). An electronic funds transfer (EFT) is a financial application of EDI, which sends credit card numbers or electronic checks via secured private networks between banks and major corporations. To use EFTs to clear payments and settle accounts, an online payment service will need to add capabilities to process orders, accounts and receipts. In its simplest form, payment systems may use digital checks —simply an image of a check— and rely on existing payment clearing networks. The Secure Electronic  Transaction (SET) protocol - a credit card based system supported by Visa and MasterCard - uses digital certificates, which are digital credit cards. We call this type of payment system as notational funds transfer system since it resembles traditional electronic fund transfers and wire transfers which settle notational accounts of buyers and sellers.

Figure 5.3: Notational funds transfer system

Notational funds transfer systems differ from payment clearing services in that the 'payment information' transferred online contains sensitive financial information. Thus, if it is intercepted by a third party, it may be abused like stolen credit cards or debit cards. A majority of proposed electronic payment systems fall into this second type of payment systems. The objective of these systems is to extend the benefit and convenience of EFT to consumers and small businesses. However, unlike EFTs, the Internet is open and not as secure as private value added networks (VANs). The challenge to these systems is how to secure the integrity of the payment messages being transmitted and to ensure the interoperability between different sets of payment protocols.

Type 3: Payment Based on Electronic Currency The third type of payment systems transmit not payment information but a digital product representing values: electronic currency. The nature of digital currency mirrors that of paper money as a means of payment. As such, digital currency payment systems have the same advantages as paper currency payment, namely anonymity and convenience. As in other electronic payment systems, here too security during transmission and storage is a concern, although from a different perspective, for digital currency systems doubles pending, counterfeiting, and storage become critical issues whereas eavesdropping and the issue of liability (when charges are made without authorization) are important for notational funds transfers. Figure 5.4 shows a digital currency payment scheme.

Figure 5.4: Digital Currency Payment Scheme

The only difference from Figure is that the intermediary in Figure 5.4 acts as an  electronic bank which converts outside money, into inside money (e.g. tokens or e-cash) which is circulated within online markets. However, as a private monetary system, digital currency will have wide ranging impact on money and monetary system with  implications extending far beyond mere transactional efficiency. Already digital currency has spawned many types of new businesses: software vendors for currency server systems; hardware vendors for smart card readers and other interface devices; technology firms for security, encryption and authentication; and new banking services interfacing accounts in digital currency and conventional currency.