Electronic Payment Systems: Risk and Requirements

It includes contents related to risk and requirements associated to Electronic Payment Systems. Tt also contains descriptions on various types of electronic payment systems.

1. Electronic Payment Systems Mr . Roshan Bhattarai Kathmandu, Nepal

2. Introduction to Electronic Payment System Electronic Payment System is a financial exchange that takes place online between buyers and sellers avoiding use of paper documents like notes or checks The content of this exchange is usually some form of digital financial instrument (debit cards, credit cards, smart card etc) that is backed by a bank or any intermediary

3. The factors to stimulate for e-payments are: Reduced operational and processing cost Increasing online commercial transactions Decreased technology cost Advantages of EPS Reduces the time requirement to get your funds transfer Eliminates storage, handling and processing of paper documents Reduces visibility of transactions and information Reduces cost of transaction (operational and processing cost)

4. Disadvantages All financial institutions may not be able to offer the level of sophisticated services of e-payment Digital information can be hacked or electronically trespassed There is an issue of system’s reliability as there are chances of system failure if not handled properly, requirement of fault tolerance systems Requirement of technical knowledge to perform financial transactions appropriately Requirement of secured and sophisticated EPS that must be able to integrate all other systems required for financial transaction

5. Some common e-commerce payment systems 1. Credit Card Most dominant form of online payment A  credit card  is a payment card issued to users to enable the user to pay a merchant for goods and services based on the user's promise to the card issuer to pay them for the amounts plus the other agreed charges The card issuer (usually a bank) creates an account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant

6. 2. Debit Card A debit card is a payment card that deducts money directly from a consumer’s checking account to pay for a purchase Debit cards eliminate the need to carry cash or physical checks to make purchases directly from your savings Debit cards do not allow the user to go into debt, except perhaps for small negative balances that might be incurred if the user has signed up for   overdraft protection Debit cards usually have daily purchase limits, meaning it may not be possible to make an especially large purchase Also called asset card (in the US), or payment card (in the UK)

7. 3. Digital Cash Money kept in electronic form (on a smart card) which allows a buyer to pay for goods and services on the internet An e-Cash user will download the electronic money from their bank account and store this on their device When he/she wants to use their e-cash to pay an Internet merchant amount is taken from their e-Cash wallet and add it to the merchant’s wallet The e-cash goes through an e-cash bank so that the transaction can be verified

8. 4. Digital Cheque An e- cheque , is a form of payment made through the network designed to perform the same function as a conventional paper cheque The account holder writes an e- cheque using an electronic device and transmits to the payee electronically Like paper cheques , e- cheques are signed by the payer using digital signature The payee deposits the e- cheque and the payee's bank clears to the paying bank The paying bank validates the e- cheque and then charges the cheque writer's account for the cheque

9. 5. Digital Wallet Digital wallet is a software application, usually for a Smartphone that serves as an electronic version of a physical wallet It refers to a program used for making payments for purchases digitally Also, digital wallets are a potential benefit to companies that collect consumer data The more companies know about their customers' purchasing habits, the more effectively they can market to them The downside for consumers is a loss of privacy. Eg : Apple Pay, Google wallet, Samsung Pay, Paypal , etc.

10. Risk and E-payment Managing information privacy EPS must ensure and maintain privacy Information of every transaction goes into the database The database can be accessed to know what transaction has been made, where and when This violates the unspoken law of doing business, that the privacy of customers should be protected as much as possible

11. Managing credit risk Credit risk is major concern in net settlement system because a bank’s failure to settle its net position could lead to a chain reaction of bank’s failures A central bank should guarantee on settlement which removes insolvency (unable to pay debts) because banks will more readily assume credit risks from other banks

12. Operational risk Operational risk arises from the potential loss due to significant deficiencies in system reliability or integrity Security considerations are essential as banks may be subject to external or internal attacks on their systems Operational risk can also arise from customers misuse and from inadequately designed or implemented electronic banking systems

13. Legal risk Legal risk arises from violations of, or non-conformance with laws, rules, regulations or prescribed practices It may also arises when the legal rights and obligations of parties to a transaction are not well established

14. Requirements of EPS Payment security Privacy of transaction and information Authentication of customer and merchant Indivisible transaction ( transaction should not be interrupted in middle, if any malfunction occurs during the transaction, whole transaction should be aborted ) Mutual agreement ( parties involved in transaction should agree on terms and conditions )

15. Standardized ( universally accepted standard should be used to ensure inter operability ) Economical ( transaction cost should be minimized ) Reliability ( should avoid single point of failure ) Usability ( payments should be usable in the real world business )