Payment in E-commerce / M-commerce

Payment is one of the most important aspects of E-commerce as well as M-commerce. In traditional payment method, one does the payment using cash, cheque or credit card. Electronic payment systems are becoming more important to the online business processes as companies are looking for different ways to serve the customers faster and at low cost. Electronic payment is a financial exchange that takes place online between the buyer and the seller. These are various payment options available for payment in the market today.

The different types of electronic payment systems used are:

Payment Cards

The payment cards can be classified as Credit cards, Debit cards and Smart cards, generally businesses use the term payment card for all types of plastic cards that consumers use to make payments.

Credit Card

This is one of the most popular and widely accepted methods of payment on Internet.

A credit card is issued to the customers by the banks known as issuing banks.

The issuing banks provide the credit cards of the financial institutions which are established and reputed in the services of credit card business.

Examples include MasterCard® or Visa®.

Depending upon the customer’s credit history and income level, credit limits are provided and up to that limit the customer can spend and pay to the issuing bank within the billing period.

As credit cards are linked to a bank account, when they are used to pay online, the merchant charges the goods to the issuing bank account and the bank shows the debit in the next statement. The customer simply pays the bank.

For accepting payments on websites through credit card, merchant needs to open a merchant account with the banks which is known as acquiring banks, which in turn provides the services of online authorization and payment processing.

Authorization is the process of verifying whether the card is active; the credit limits are available to make purchase and verifying the other details of the customer like billing information.

Credit cards are widely accepted by merchants and provide assurance to the customer as well as the merchant.

In credit card transactions over the Internet, the customer visits the merchant’s website and selects goods to buy, all the information related to credit card is entered and then this information is transmitted to the merchant electronically. 

In this transaction four parties are involved:

• Customer with credit card
• Merchant accepting the credit card
• Issuing Bank: issues the credit card and guarantees the payment to the merchant. The bank collects the payment from the customer.
• Acquiring banks: Financial institution that establishes the account with the merchant validates the credit card information of the customer and authorizes sale based on the customer’s credit limit.

Two more entities play role in online payment.

• These are payment gateways and processors.

Payment gateways are services provided by the third parties like PayPal which connects networks of all the parties involved and enables to perform authorization and payment in secured manner.

Processors are data centers which perform the credit card transactions and settle funds to the merchant.

Processors are connected to the E-commerce website of the merchant through the payment gateway.

The online payment through credit card on Internet is divided into two parts: Authorization and Settlement.

During authorization the following steps are performed:

Customer checkouts, provides credit card information on the E-commerce website, which along with the transaction details (like them detail, date of purchase and others) is transferred to the payment gateway.

The payment gateway passes the information to the processor which contacts the issuing bank for the verification of the information.

After verification, issuing bank sends the status of verification (or transaction result like accepted or rejected) to the processor which in turn passes it to the payment gateway.

Finally, payment gateway sends the result of the transaction to the merchant’s website. If the merchant accepts the transaction then the next step is the settlement during which it transfers the amount from the customer’s account to the merchant’s account.

During the settlement or payment processing the following steps are performed:

• Merchant sends the transaction request with all the details to the payment gateway which sends to the processor.
• Processor sends the payment details to the issuing bank of the customer.
• It also sends the payment details to the acquiring bank where the merchant has an account.
• The acquiring bank credits the amount to the merchant account. 
• The issuing bank after including all the charges sends the bill to the customer which he needs to pay within the billing period.
• Major credit card companies use the Secure Electronic Transfer (SET) security system to make online transactions secure.

The advantages of credit card are:

• Gives flexibility to the customer as they do not have to carry lot of cash. Customer can pay for goods and services both online and offline.
• Keeps record of the customer’s purchase through the bank statement.
• Allows customers to purchase goods even when they do not have the cash available in the bank account.
• They can settle the cash by the end of the month.

The limitations of credit cards are:

• They are unsuitable for very small or very large payments. Also, due to security issues, these cards have a limit and cannot be used for excessively large transactions.
• Customers tend to overspend using credit cards
• Problems arise in case lost or stolen credit cards.

Debit Cards

• A debit card looks like credit card but works differently.
• It is a kind of payment card that transfers fund directly from the consumer’s bank account to the merchant.
• The amount is immediately deducted from the bank account of the consumer.
• The debit cards can keep the consumer purchases under a limit and do not allow him to exceed beyond his/her budget.
• But while using a debit card for a purchase, the consumer should always be aware of his account balance.

Smart Cards

• Smart cards look just like credit cards but are different as they have a microchip embedded in their surface.
• A smart card contains user’s private information, such as account information, health insurance information, private keys etc.
• It can store 100 times more information than the normal cards.
• They are much safer than the credit or debit cards as the information stored in the smart card is encrypted.
• Customers can load their card with cash and then use this to pay for goods in a merchant’s retail outlet or website.
• Card readers are available for retail outlets as well as an attachment for PCs.
• This convenience gives a great advantage to smart cards.
• They can be used for a range of purposes like storing digital cash, storing a patient’s medical records etc.
• Smart cards are popular in countries like U.S., Europe, Japan and some parts of Asia.
• A smart card reader is required to read information or add data to it.
• It is a small device into which the smart card is inserted.
• For example, when one visits their family doctor, the smart card can be given to him to review the medical history and prescribe medicines.
• This information is also inserted into the smart card.
• At the medical store, the card can be handed over to the pharmacist, who can see the prescription and give the medicine accordingly. 
• Also, the payment for the medicines can be done using smart card.

Charge cards

• A charge card is another form of payment mechanism wherein the customer can pay through the card to the vendor.
• As compared to credit cards that have a credit limit, the charge card does not carry any spending limit.
• The customer has to pay the total amount used at the end of the billing period to the company that has issued the card.
• If the total amount is not paid back then the customer has to pay a late fee.

Net Banking

• Another option which is becoming more popular is net banking or online banking. It does not involve any type of card.
• It can be used by customers who have bank accounts enabled with Internet Banking.
• The bank provides the net banking password to the customer for operating the account from Internet including the payment for online purchases.
• Many of the E-commerce / M-commerce websites provide the facility to make the payments using net banking.
• Instead of entering card details on the website, it allows one to specify the bank through which the user wishes to pay from.
• On these websites, when one proceeds to make the payment, one is asked to select the bank.
• Once the bank is selected, the screen of the bank’s website will be seen.
• That is where the login procedure is done using account number and net banking password.
• The transaction and transfer of the amount can be performed from the users account of the merchant.
• First, the user has to register with the site and provide the details of the jopurney along with the passenger information.
• Once the information is filled up, the user can proceed to the payment where net banking option is provided.
• Selection of bank is done here and continued further which displays the login screen of the bank and transfer fund to Indian railway to complete the booking.
• After successful payment, the user gets a message on the registered mobile number, which can be shown at the time of travel or E-copy of the ticket can also be printed.
• Net banking payment system is seen as being safer than using credit cards as nearly all merchant accounts in India offer it as an option.

Electronic Fund Transfer

Electronic Funds Transfer (EFT) means transferring money from one bank account to another electronically.

It is safe, secure, efficient, and less expensive than paper check payments and collections.

Examples of EFT are:

• Transactions amongst various banks around the world.
• Payment of tuition fees using an ATM.
• Deposit of employee’s salaries in their accounts.
• Monthly bank account deductions and many more.
• The popularity of EFT for online bill payment is growing.
• The benefits of EFT include reduced administrative costs, increased efficiency, simplified book keeping and greater security.

E-wallet

• Most of the time when a purchase is made on the web, the user has to fill out a form with name, shipping address, billing address, credit information and so on. 
• It becomes an annoyance if the similar form has to be filled up every time the user shops.
• Some merchants solve the problem by having to fill out a form only once, and then saving the information on their servers for later use.
• These merchants provide e-wallet for its customers.
• Today many banks, online grocery stores, telecom services etc, provide e-wallet services.
• E-Wallet is an electronic card for making secure online payments towards a merchant.
• It works just like a credit or a debit card.
• While making payment through E-Wallet the customer is not required to provide the credit / debit card number thus reducing the risk of credit / debit card number being exposed.
• For example, IRCTC has launched E-Wallet scheme for the customers to make online booking easier.
• The customers having an account can deposit money in advance with IRCTC which can be used in future as payment option to book the tickets online.
• Currently the users have to provide the credit / debit card details for booking tickets.This payment procedure takes time as the customer is transferred to the bank’s server for payment.

RuPay

• The term RuPay is coined from two terms Rupee and Payment.
• It is a new card payment mechanism launched by National Payments Corporation of India (NPCI).
• Currently, as there is no domestic card Indian banks have to tie up with Mastercard or Visa to connect cardholders, merchants and issuing banks around the globe.
• Mastercard and Visa are the world leaders in card payments and all payment transactions are processed through them.
• Every transaction done using a credit or debit card issued by a domestic bank is routed through their network switches which are outside the country.
• These transactions involve additional charges for providing the services.
• The banks have to pay for processing all debit and credit card payments.
• RuPay cards are the domestic alternative to the other payment cards.
• By using RuPay cards, all the transactions will be processed within India.
• As the transaction processing will be done domestically, the cost of each transaction clearing and settlement will be reduced.
• RuPay will benefit the customers and the banks by reducing the cost.