e-payment system

ELECTRONIC FUND
TRANSFER

By Prof T.R. Vaidyanathan

 e-payment system

As payment is an integral part of mercantile process,
electronic payment system is an integral part of e-
commerce. The emergence of e-commerce has
created new financial needs that in many cases
cannot be effectively fulfilled by traditional payment
systems.

E-payment systems are becoming central to e-
commerce as companies look for ways to server
customers fasters and at lower cost, thereby paving
way for new business opportunities
 E-payment system
These payment systems have number of requirements

Security Anonymity

Control Low financial risks

Traceability Privacy

Integrity Standards(for

Good transaction efficiency interoperability)

Acceptability

Convenience

Cost
 e-payment system
Conventional Vs Electronic Payment System

To get into the depth of electronic payment process, it is
better to understand the processing of conventional or
traditional payment system. A conventional process of
payment and settlement involves a buyer-to-seller
transfer of cash or payment information (i.e. cheque and
credit cards). The actual settlement of payment takes
place in the financial processing network. A cash
payment requires a buyer’s withdrawal from his/ her
bank account, a transfer of cash to the seller, and the
seller’s deposit of payment to his/her account. Non-cash
payment mechanism are settled by adjusting i.e. crediting
and debiting the appropriate accounts between banks
based on payment information conveyed via cheque or
credit cards.


 e-payment system

Process of Electronic Payment System

Electronic payment systems have been in operations
since 1960s and have been expanding rapidly as well as
growing in complexity. After the development of
conventional payment system, EFT (Electronic Fund
Transfer) based payment system came into existence.

A real revolution in the meaning of electronic payment
system came with the development of EFT technology.
EFT is a technology (one of e-commerce technologies)
that allows the transfer of fund from the bank account of
the one person or organization to another. It is an
important addition in organization that implements EDI
in their organization.
 Electronic Funds Transfer (EFT)
ELECTRONIC FUNDS TRANSFER (EFT) IS DEFINED AS
“ANY TRANSFER OF FUNDS INITIATED THROUGH AN
ELECTRONIC TERMINAL, TELEPHONIC INSTRUMENT,
OR COMPUTER OR MAGNETIC TAPE SO AS TO ORDER,
INSTRUCT, OR AUTHORIZE A FINANCIAL INSTITUTION
TO DEBIT OR CREDIT AN ACCOUNT. EFT UTILIZES
COMPUTER AND TELECOMMUNICATION COMPONENTS
TO TRANSFER MONEY OR FINANCIAL ASSETS.
 E-payment system

EFT was first electronic based system, which does not

depend on a central processing intermediary.

An electronic fund transfer is a financial application of
EDI (Electronic Data Interchange), which sends credit
card numbers or electronic cheques via secured private
networks between banks and major corporations.

To use EFT to clear payments and settle accounts, an
online payment service will need to add capabilities to
process orders, accounts and receipts. But a landmark
came in this direction with the development of digital
currency.
 Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a system of
transferring money from one bank account directly to
another without any paper money changing hands.

One of the most widely-used EFT programs is Direct
Deposit, in which payroll is deposited straight into an
employee's bank account, although EFT refers to any
transfer of funds initiated through an electronic
terminal, including credit card, ATM, and point-of-sale
(POS) transactions.

It is used for both credit transfers, such as payroll
payments, and for debit transfers, such as mortgage
payments
 Electronic Funds Transfer (EFT)

EFT can be segmented into three broad categories

1)Banking and financial payments

Large-scale or wholesale payments (e.g. bank-to-bank
transfer)

Small-scale or retail payments (e.g. automated teller
machines and cash dispensers)

Home banking (e.g. bill payment)
2)Retailing payment

Credit card (e.g. VISA or MasterCard)

Private label credit / debit cards

Charge cards (e.g. American Express)
 Electronic Funds Transfer (EFT)
3)On-line electronic commerce payments

Token-based payment systems

Electronic cash (i.e. DigiCash)

Electronic Checks(e.g. NetCheque)

Smart cards or debit cards

Credit card-based payment systems

Encrypted credit cards

Third-party authorization numbers
 Electronic Funds Transfer (EFT)

The growing popularity of EFT for online bill

payment is paving the way for a paperless universe
where checks, stamps, envelopes, and paper bills are
obsolete. The benefits of EFT include reduced
administrative costs, increased efficiency, and
simplified book-keeping and greater security. The
online payments are categorized as follows based on
the limit under each category

1)Micro payment 2) Consumer payment

3) Business payment
 Electronic Funds Transfer (EFT)
The term is used for a number of different concepts:

Cardholder-initiated transactions, where a cardholder makes
use of a payment card

Direct deposit payroll payments for a business to its
employees, possibly via a payroll service company

Direct debit payments from customer to business, where the
transaction is initiated by the business with customer
permission

Electronic bill payment in online banking, which may be
delivered by EFT or paper check

Transactions involving stored value of electronic money,
possibly in a private currency

Wire transfer via an international banking network
(generally carries a higher fee)

Electronic Benefit Transfer
 Electronic Funds Transfer (EFT)

Electronic Benefit Transfer (EBT) is an

electronic system, more prevelant in the United
States that allows state governments to provide
financial and material benefits to authorized
recipients via a plastic debit card. Common benefits
provided via EBT are typically sorted into two
general categories: Food Stamp and Cash benefits.
Food stamp benefits are federally authorized benefits
that can be used only to purchase food and non-
alcoholic beverages. Cash benefits include State
General Assistance
 Electronic Funds Transfer (EFT)

EFT may be initiated by a cardholder when a

payment card such as a credit card or debit card is
used. This may take place at an automated teller
machine (ATM) or point of sale (POS), or when the
card is not present, which covers cards used for
mail order, telephone order and internet
purchases.

Card-based EFT transactions are often covered by
the ISO 8583 standard.
 Electronic Funds Transfer (EFT)
Transaction types

A number of transaction types may be performed,
including the following:

Sale: where the cardholder pays for goods or service

Refund: where a merchant refunds an earlier payment
made by a cardholder

Withdrawal: the cardholder withdraws funds from
their account, e.g. from an ATM. The term Cash
Advance may also be used, typically when the funds are
advanced by a merchant rather than at an ATM

Deposit: where a cardholder deposits funds to their
own account (typically at an ATM)

Cash back: where a cardholder withdraws funds from
their own account at the same time as making a
purchase
 Electronic Funds Transfer (EFT)

Inter-account transfer: transferring funds between
linked accounts belonging to the same cardholder

Payment: transferring funds to a third party account

Enquiry: a transaction without financial impact, for
instance balance enquiry, available funds enquiry,
linked accounts enquiry, or request for a statement of
recent transactions on the account

E top-up: where a cardholder can use a device
(typically POS or ATM) to add funds (top-up) their pre-
pay mobile phone

Mini-statement: where a cardholder uses a device
(typically an ATM) to obtain details of recent
transactions on their account

Administrative: this covers a variety of non-financial
transactions including PIN change
 )
Electronic Funds Transfer (EFT

Authorization

EFT transactions require communication between a
number of parties. When a card is used at a
merchant or ATM, the transaction is first routed to
an acquirer, then through a number of networks to
the issuer where the cardholder's account is held.
 Electronic Funds Transfer (EFT)

A transaction may be authorized offline by any of these
entities through a stand-in agreement. Stand-in
authorization may be used when a communication link
is not available, or simply to save communication cost
or time. Stand-in is subject to the transaction amount
being below agreed limits, known as floor limits.

These limits are calculated based on the risk of
authorizing a transaction offline, and thus vary
between merchants and card types.

Offline transactions may be subject to other security
checks such as checking the card number against a 'hot
card' (stolen card) list, velocity checks (limiting the
number of offline transactions allowed by a
cardholder) and random online authorization.
 Electronic Funds Transfer (EFT)

Before online authorization was standard practice
and credit cards were processed using manual
vouchers, each merchant would agree a limit
("floor limit) with his bank above which he must
telephone for an authorization code. If this was not
carried out and the transaction subsequently was
refused by the issuer ("bounced"), the merchant
would not be entitled to a refund.
 Electronic Funds Transfer (EFT)

EFT transactions may be accompanied by methods
to authenticate the card and the card holder. The
merchant may manually verify the card holder's
signature, or the card holder's Personal
Identification Number (PIN) may be sent online in
an encrypted form for validation by the card issuer.
Other information may be included in the
transaction, some of which is not visible to the card
holder (for instance magnetic stripe data), and
some of which may be requested from the card
holder (for instance the card holder's address or
the CVV value printed on the card).
 Electronic Funds Transfer (EFT)

Electronic cheque vs Electronic fund transfer

Electronic cheque also known as e-cheque and I-cheque are
used to make payment between two parties through an
intermediary and not very much different from the
traditional or current cheque processing system. Electronic
cheques are generated and exchanged online. The
intermediary will debit the customer account and credit the
merchant account.

Electronic cheques is different from the electronic fund
transfer in several ways. For electronic cheques, electronic
versions of cheques are issued, received and processed. So,
the consumer issues an electronic cheque for each payment.
For EFT, automatic withdrawals are made for monthly bills
or other fixed payments at no extra cost.
 Electronic Funds Transfer (EFT)

Instant Cheque reading ATMs (Source: - ET 5th October

2009)

New technology is emerging in India that new ATM machines will
be launched. You can insert a bundle of notes of any denomination.
The ATMs will read the notes, and credit the amount in your
account instantly.

Pradeep Sen, MD, NCR India says that the company has been
showcasing its CTM-ATMs to banks in India, where by the CTM-
ATM scans the cheque inserted in and produces a digital image of
the same. It sends the digital image electronically to the IT network
of the issuing bank for clearance. Within seconds, the amount is
credited to your account which one can withdraw immediately via a
debit card.

According to RBI, the banks are already allowed to use CTM
(cheque truncating machine) scanners for inter and intra bank
purposes.