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PUnit 4 : Electronic Payment System:

Study and examine the use of Electronic Payment system and the protocols used, Study
Electronic Fund Transfer and secure electronic transaction protocol for

credit card payment. Digital economy: Identify the methods of payments on the

net – Electronic Cash, cheques and credit cards on the Internet.

Electronic Payment System

Definition: Electronic Payment Systems (EPS) facilitate the exchange of funds over
electronic networks, enabling online transactions between buyers and sellers. These systems
are crucial for the digital economy, as they support the seamless, secure, and efficient transfer
of money.

A. Protocols Used in Electronic Payment Systems

1. SSL/TLS (Secure Socket Layer/Transport Layer Security):

o Description: SSL and its successor TLS are cryptographic protocols that
provide secure communication over a computer network. They are widely
used to secure online transactions by encrypting the data transmitted between
a user's browser and a web server.

o Example: When a customer makes a purchase on Amazon, SSL/TLS ensures

that their credit card details are encrypted during transmission.

o Importance: Protects sensitive information such as credit card numbers,

ensuring it cannot be intercepted by malicious actors.

2. SET (Secure Electronic Transaction) Protocol:

o Description: Developed by Visa and MasterCard, SET is a protocol used to

ensure secure transactions using credit cards over the Internet. It involves
encryption, digital certificates, and digital signatures to secure data.

o Example: A bank might use SET to secure the processing of online credit
card transactions for e-commerce platforms.

o Importance: Ensures the confidentiality and integrity of credit card

information during transmission, reducing the risk of fraud.

3. 3D Secure (Three-Domain Secure):

o Description: An authentication protocol used to enhance the security of online

credit and debit card transactions. It involves a multi-step authentication
process before payment is authorized.
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o Example: When making an online purchase, a user might be redirected to

their bank’s 3D Secure page to enter a one-time password (OTP) before the
transaction is completed.

o Importance: Adds an additional layer of security, ensuring that the cardholder

is indeed the person making the transaction.

B. Electronic Fund Transfer (EFT)

1. Definition:

o Electronic Fund Transfer (EFT) is the electronic transfer of money from

one bank account to another, either within the same financial institution or
across different institutions. EFT encompasses various types of financial
transactions, including direct deposits, ATM withdrawals, and online bill
payments.

o Example: Direct Deposit is a common form of EFT where employers transfer

salaries directly to employees' bank accounts.

o Importance: EFTs offer a convenient, fast, and secure way to transfer funds
without the need for physical checks or cash.

2. Types of EFT:

o Direct Deposit: Salaries and benefits are electronically transferred to

employees' bank accounts.

o ATM Transactions: Allows customers to withdraw, deposit, or transfer funds

using an Automated Teller Machine.

o ACH (Automated Clearing House) Transfers: Used for batch processing of

debit and credit transactions, such as payroll processing.

o Wire Transfers: Real-time electronic transfers of funds across banks, often

used for large sums.

3. Security Measures in EFT:

o Encryption: Protects data during transmission.

o Authentication: Verifies the identity of the parties involved in the transfer.

o Monitoring: Banks use monitoring systems to detect and prevent fraudulent

transactions.

C. Secure Electronic Transaction (SET) Protocol for Credit Card Payment

1. Overview:

o The Secure Electronic Transaction (SET) protocol was designed to secure

credit card transactions over the Internet. It involves the use of digital
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certificates to authenticate all parties involved (merchants, customers, and

banks) and to encrypt transaction data.

o Example: SET might be used in an online shopping transaction where the

buyer’s credit card information is encrypted before being sent to the merchant
and then to the bank for processing.

o Importance: Ensures that sensitive credit card details are protected from
interception during transmission and that all parties are authenticated.

2. Key Components of SET:

o Cardholder: Uses a credit card to make a purchase and provides payment

information.

o Merchant: Accepts the payment information and forwards it to the payment

gateway.

o Payment Gateway: Processes the payment by forwarding the transaction

details to the acquirer bank.

o Acquirer Bank: Processes the transaction and communicates with the

cardholder’s bank (issuer).

o Issuer Bank: Authorizes the transaction and transfers funds to the acquirer
bank.

3. Process Flow:

o Step 1: The customer’s browser generates a digital certificate and encrypts the
payment information.

o Step 2: The merchant receives the encrypted data and forwards it to the
payment gateway.

o Step 3: The payment gateway decrypts the data, verifies it with the issuer
bank, and processes the payment.

o Step 4: The issuer bank authorizes the transaction, and the funds are
transferred to the merchant’s account.

2. Digital Economy: Payment Methods on the Internet

Digital Economy: Methods of Payments on the Internet

In the context of the digital economy, methods of payment on the internet play a crucial role
in facilitating online transactions. These methods include electronic cash, cheques, and credit
cards, each with its unique characteristics, benefits, and challenges. Below are detailed notes
on each method of payment.
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1. Electronic Cash (E-Cash)

Definition:

Electronic cash, or e-cash, refers to a form of currency that is stored electronically. It is

designed to mimic the functionality of traditional cash, allowing users to make transactions
without the need for a physical medium like paper money or coins.

Key Characteristics:

- Anonymity: E-cash transactions can be anonymous, similar to physical cash, making it

difficult to trace the transaction back to the user.

- Portability: Users can store e-cash on digital wallets or smart cards, allowing for easy
transport and use in online transactions.

- Security: E-cash employs cryptographic techniques to ensure the security of transactions,

preventing counterfeiting and unauthorized access.

How It Works:

- Issuance: E-cash is typically issued by a financial institution or an e-cash provider. Users

can exchange physical cash or bank deposits for e-cash.

- Storage: Once issued, e-cash is stored in a digital wallet, which can be on a computer,
smartphone, or specialized e-cash card.

- Spending: Users can spend e-cash by transferring it from their digital wallet to the
merchant's account. This transaction is usually instantaneous and does not require bank
approval.

Examples of E-Cash Systems:

- DigiCash: One of the earliest implementations of e-cash, introduced in the 1990s.

- Bitcoin: While primarily a cryptocurrency, Bitcoin can function as a form of e-cash in

certain contexts.

Advantages:

- Provides privacy and security in online transactions.

- Enables quick and easy transactions without needing intermediaries like banks.

Challenges:

- Adoption is limited compared to traditional payment methods.

- Legal and regulatory issues, especially concerning anonymity and security.

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2. Cheques on the Internet

Definition:

Electronic cheques, or e-cheques, are the digital equivalent of traditional paper cheques. They
allow individuals and businesses to make payments over the internet using a cheque that is
processed electronically.

Key Characteristics:

- Familiarity: E-cheques work similarly to traditional cheques, making them easy to

understand and use for individuals familiar with cheque payments.

- Authorization: The payer must authorize the e-cheque by providing a digital signature,
which serves as proof of the transaction's authenticity.

- Clearing Process: E-cheques are processed through an electronic clearinghouse, which

validates the cheque and facilitates the transfer of funds.

How It Works:

- Issuance: The payer writes an e-cheque using their online banking interface or a
specialized e-cheque service.

- Submission: The e-cheque is submitted to the payee, who can deposit it into their account
electronically.

- Clearing and Settlement: The e-cheque is cleared through the banking system, where funds
are transferred from the payer's account to the payee's account.

Examples of E-Cheque Systems:

- PayPal E-Cheques: PayPal allows users to send e-cheques to pay for goods and services
when their PayPal balance is insufficient.

- Bank-Specific E-Cheques: Some banks offer e-cheque services directly through their
online banking platforms.

Advantages:

- Leverages existing cheque-processing infrastructure.

- Suitable for users who prefer or are accustomed to cheque-based payments.

Challenges:

- Processing time can be longer compared to other electronic payment methods.

- Risk of cheque bounce if insufficient funds are available in the payer's account.
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3. Credit Cards on the Internet

Definition:

Credit cards are widely used as a method of payment on the internet. They allow consumers
to make purchases online by borrowing funds from the card issuer up to a pre-approved credit
limit.

Key Characteristics:

- Convenience: Credit cards are one of the most convenient and commonly accepted
payment methods for online transactions.

- Security: Credit card transactions on the internet are secured using encryption technologies
such as Secure Socket Layer (SSL) or Transport Layer Security (TLS).

- Chargeback: Credit card users have the ability to dispute charges and request a chargeback
if they encounter issues with their purchases.

How It Works:

- Purchase Process: When a customer makes an online purchase, they enter their credit card
details on the merchant’s website.

- Authorization: The transaction is authorized by the card issuer, who verifies the
cardholder's information and checks the credit limit.

- Settlement: If the transaction is approved, the issuer transfers the funds to the merchant's
account, and the cardholder's account is debited for the transaction amount.

Examples of Credit Card Systems:

- Visa, MasterCard, American Express: These are among the most widely accepted credit
cards for online transactions.

- Payment Gateways: Services like Stripe, PayPal, and Square facilitate online credit card
payments by providing secure gateways.

Advantages:

- Highly accepted across a wide range of online merchants.

- Offers protection against fraud and unauthorized charges.

Challenges:

- Risk of credit card fraud and data breaches.

- Potential for accumulating debt due to easy access to credit.

Conclusion:Understanding the various methods of payments on the internet, such as

electronic cash, e-cheques, and credit cards, is essential for navigating the digital economy.
Each method has its advantages and challenges, and the choice of payment method can
depend on factors like convenience, security, and familiarity with the technology. As the
digital economy continues to evolve, these payment methods may also undergo further
advancements, enhancing their functionality and accessibility.
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