5. Explain the E-Marketing strategies.

6. What are the components of E-Marketing Mix?

7. What is E-Mail Marketing?
8. Explain the importance of affiliate marketing strategy.
9. Explain various advertisement methods used on the web
10. What are the objectives of web advertising?
11. What is E-Branding?
12. What is E-Banking?
13. What do you mean by Search Engine Marketing?
14. What do you understand by Search Engine Optimization?
15. What is Social Media Marketing?

87
 UNIT- IV
E- Payment Systems
LEARNING OBJECTIVES
After reading this unit, you would be able to
 Understand the concept of E-Payment system
 Know about various types of E-Payments
 Learn the process of E=Payment system
CONTENTS
4.1 Introduction
4.2 Types of E-Payment Systems
4.3 Requirements of E-Payments
4.4 Digital Token Based E-Payment System
4.5 Credit cards as E-Payment System
4.6 Smart Card Cash Payment System
4.7 Micro Payment System
4.8 E-Cash
4.9 Summary
4.10 Key Terms
4.11 Self Evaluation Questions

4.1 INTRODUCTION
The ease of purchasing and selling products over the Internet has helped the growth of
electronic commerce and electronic payments services are a convenient and efficient way to do
financial transactions. Generally we think of electronic payments as referring to online
transactions on the internet, there are actually many forms of electronic payments. As technology
developing, the range of devices and processes to transact electronically continues to increase
while the percentage of cash and cheque transactions continues to decrease.

The Internet has the potential to become the most active trade intermediary within a
decade. Also, Internet shopping may revolutionize retailing by allowing consumers to sit in their
homes and buy an enormous variety of products and services from all over the worlds. Many

88
businesses and consumers are still wary of conducting extensive business electronically.
However, almost everyone will use the form of E Commerce in near future.

An electronic payment system is needed for compensation for information, goods and
services provided through the Internet - such as access to copyrighted materials, database
searches or consumption of system resources - or as a convenient form of payment for external
goods and services - such as merchandise and services provided outside the Internet. it helps to
automate sales activities, extends the potential number of customers and may reduce the amount
of paperwork.

Electronic Payment is a financial exchange that takes place online between buyers and
sellers. The content of this exchange is usually some form of digital financial instrument (such as
encrypted credit card numbers, electronic cheques or digital cash) that is backed by a bank or an
intermediary, or by a legal tender.

E payment is a subset of an e-commerce transaction to include electronic payment for

buying and selling goods or services offered through the Internet.

Risks in Electronic Payment systems

Customer's risks
 Stolen credentials or password
 Dishonest merchant
 Disputes over transaction
 Inappropriate use of transaction details
Merchant’s risk
 Forged or copied instruments
 Disputed charges
 Insufficient funds in customer’s account
 Unauthorized redistribution of purchased items
Electronic payments Issues
 Secure transfer across internet
 High reliability: no single failure point

89
  Atomic transactions
 Anonymity of buyer
 Economic and computational efficiency: allow micropayments
 Flexibility: across different methods
 Scalability in number of servers and users
Designing Electronic Payment systems
It includes several factors:
Privacy: A user expects to trust in a secure system; just as a telephone is a safe
Security: A secure system verifies the identity of two-party transactions through “user
authentication” & reserves flexibility to restrict information/services through access control
Intuitive interfaces: The payment interface must be as easy to use as a telephone.
Database integration: With home banking, for ex, a customer wants to play with all his
accounts.
Brokers: A “network banker”-someone to broker goods & services, settle conflicts, & financial
transactions electronically-must be in place
Pricing: One fundamental issue is how to price payment system services. For e.g., from cash to
bank payments, from paper-based to e-cash. The problem is potential waste of resources.

4.2 TYPES OF E-PAYMENT SYSTEMS

Electronic payment systems are proliferating in banking, retail, health care, on-line
markets, and even government—in fact, anywhere money needs to change hands. Organizations
are motivated by the need to deliver products and services more cost effectively and to provide a
higher quality of service to customers. The emerging electronic payment technology is labelled
as electronic funds transfer (EFT). 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. EFT can be segmented into three broad categories:
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)
 Home banking (e.g., bill payment)

90
Retailing payments
 Credit Cards (e.g., VISA or MasterCard)
 Private label credit/debit cards (e.g., J.C. Penney Card)
 Charge Cards (e.g., American Express
On-line electronic commerce payments
1. Token-based payment systems
 Electronic cash (e.g., DigiCash)
 Electronic cheques (e.g., NetCheque)
 Smart cards or debit cards (e.g., Mondex Electronic Currency Card))
2. Credit card-based payments systems
 Encrypted Credit Cards (e.g., World Wide Web form-based encryption)
 Third-party authorization numbers (e.g., First Virtual)
Electronic payment refers to paperless monetary transactions. Electronic payment has
revolutionized the business processing by reducing paper work, transaction costs, labour cost.
Being user friendly and less time consuming than manual processing, it helps business
organization to expand its market reach / expansion. Some of the modes of electronic payments
are following.
 Credit Card
 Debit Card

 Smart Card

 E-Money

 Electronic Fund Transfer (EFT)

4.2.1 Cards
Credit cards, debit cards and prepaid cards currently represent the most common form of
electronic payments. For all 3 types of cards the consumer or the business uses a plastic card,
commonly with a magnetic stripe..Along with magnetic stripe cards, smart cards are also used
for payments. Smart cards are at present overwhelmingly plastic credit cards with an embedded
computer chip.
Credit Card: Credit card is small plastic card with a unique number attached with an account. It
has also a magnetic strip embedded in it which is used to read credit card via card readers. When

91
a customer purchases a product via credit card, credit card issuer bank pays on behalf of the
customer and customer has a certain time period after which he/she can pay the credit card bill.
It is usually credit card monthly payment cycle. Following are the actors in the credit card
system.

 The card holder - Customer

 The merchant - seller of product who can accept credit card payments.

 The card issuer bank - card holder's bank

 The acquirer bank - the merchant's bank

 The card brand - for example, visa or mastercard.

Debit Card
Debit card, like credit card is a small plastic card with a unique number mapped with the
bank account number. It is required to have a bank account before getting a debit card from the
bank. The major difference between debit card and credit card is that in case of payment through
debit card, amount gets deducted from card's bank account immediately and there should be
sufficient balance in bank account for the transaction to get completed, whereas in case of credit
card there is no such compulsion.

Smart Card
Smart card is again similar to credit card and debit card in appearance but it has a small
microprocessor chip embedded in it. It has the capacity to store customer work related/personal
information. Smart card is also used to store money which is reduced as per usage. Smart card
can be accessed only using a PIN of customer. Smart cards are secure as they stores information
in encrypted format and are less expensive/provide faster processing. Mondex and Visa Cash
cards are examples of smart cards.
4.2.2 E-Money
E-Money transactions refer to situation where payment is done over the network and
amount gets transferred from one financial body to another financial body without any
involvement of a middleman. E-money transactions are faster, convenient and save a lot of time.
Online payments done via credit card, debit card or smart card are examples of e-money

92
transactions. Another popular example is e-cash. In case of e-cash, both customer and merchant
both have to sign up with the bank or company issuing e-cash.
4.2.3 Electronic Fund Transfer
It is a very popular electronic payment method to transfer money from one bank account
to another bank account. Accounts can be in same bank or different bank. Fund transfer can be
done using ATM (Automated Teller Machine) or using computer. Now-a-days, internet based
EFT is getting popularity. In this case, customer uses website provided by the bank. Customer
logins to the bank's website and registers another bank account. He/she then places a request to
transfer certain amount to that account. Customer's bank transfers amount to other account if it is
in same bank otherwise transfer request is forwarded to ACH (Automated Clearing House) to
transfer amount to other account and amount is deducted from customer's account. Once amount
is transferred to other account, customer is notified of the fund transfer by the bank.
4.2.4 Internet
Online payments involve the customer transferring money or making a purchase online
via the internet. Consumers and businesses can transfer money to third parties from the bank or
other account, and they can also use credit, debit and prepaid cards to make purchases online.
Current estimates are that over 80% of payments for online purchases are made using a credit
card or debit card. At present, most online transactions involve payment with a credit card. While
other forms of payment such as direct debits to accounts or pre-paid accounts and cards are
increasing, they currently represent a less developed transaction methodology.
4.2.5 Mobile Payments
Mobile phones are currently used for a limited number of electronic transactions.
However, the percentage seems likely to increase as mobile phone manufacturers enable the chip
and software in the phone for easier electronic commerce. Consumers can use their mobile phone
to pay for transactions in several ways. Consumers may send an SMS message, transmit a PIN
number and use WAP to make online payments, or perform other segments of their transaction
with the phone. As phones develop further, consumers are likely to be able to use infrared,
Bluetooth and other means more frequently to transmit full account data in order to make
payments securely and easily from their phone. Additionally, merchants can obtain an
authorization for a credit or debit card transaction by attaching a device to their mobile phone. A
consortium in the US also announced PowerSwipe, for example, which physically connects to a

93
Nextel phone, weighs 3.1 ounces, and incorporates a magnetic stripe reader, infrared printing
port and pass-through connector for charging the handset battery.
4.2.6 Financial Service Kiosks
Companies and service providers in several countries, including Singapore and the US,
have set up kiosks to enable financial and non-financial transactions. These kiosks are fixed
stations with phone connections where the customer usually uses a keyboard and television-like
screen to transaction or to access information. Kiosks in the United States enable the customer to
send money via wire transfers, cash cheques, make purchases using cash, and make phone calls.
Located at convenient public locations such as bus or subway stations, convenience stores or
shopping malls, these kiosks enable electronic payments by individuals who may not have
regular access to the internet or mobile phones.
4.2.7 Television Set-Top Boxes and Satellite Receiver
Specialized boxes attached to a television can also be used for payments in some
locations. The set-top box attaches to the television and a keyboard or other device, and
customers can make purchases by viewing items on the television. Payment is made
electronically using a credit card or other account. While usage is presently low, it could grow
substantially in countries with a strong cable or satellite television network.

4.2.8 Biometric Payments

Electronic payments using biometrics are still largely in their infancy. Trials are
underway in the United States, Australia and a limited number of other countries. Most biometric
payments involve using fingerprints as the identification and access tool, though companies like
Visa International are piloting voice recognition technology and retina scans are also under
consideration. Essentially, a biometric identifier such as a fingerprint or voice could replace the
plastic card and more securely identifies the person undertaking the transaction. The electronic
payment is still charged to a credit card or other account, with the biometric identifier replacing
the card, cheque or other transaction mechanism.
4.2.9 Electronic Payments Networks
Various countries have electronic payments networks that consumer can use to make
payments electronically. ACH (Automated Clearing House) in the US, domestic EFTPOS

94
networks in Australia and Singapore, and other networks enable electronic payments between
businesses and between individuals. The consumer can go online, to a financial service kiosk or
use other front-end devices to access their account and make payments to businesses or other
individuals.
4.2.10 Person-to-Person (P2P) Payments
P2P payments enable one individual to pay another using an account, a prepaid card or
another mechanism that stores value. PayPal in the US, which was recently purchased by Ebay,
is one of the most frequently used P2P mechanisms. P2P payments can be made through a
variety of means, including services like PayPal, transfers using card readers, or other. In the
future other devices, such as mobile phones or PDAs, could also be used to enable P2P electronic
payments.

Source www.epayment.com

95
 Types of E-payment and Initiatives

4.3 REQUIREMENTS FOR E-PAYMENTS

For making e-payments effective and successful the following requirements are essentials:
Critical mass
The success of a payment scheme depends on the number of users, both as regards
merchants and consumers, as financial institutions. Especially merchants play a crucial role in
the development of payment schemes, as their acceptance of e-payment systems creates the
market for such schemes. Providers face the so-called "chicken and egg" problem, as merchant
acceptance equally depends on customer acceptance.
Adoption at the EU-level
In order to foster cross-border payments in the Internal Market, it is essential that
payment schemes are developed that apply across the EU. Merely national payment schemes will
not increase cross-border e-shopping, because foreign customers cannot pay abroad with these

96
national schemes. Payment schemes that are limited to the national level, should at least try to
enter into cross-national associations to gain customer and merchant recognition.
Limited costs
The cost of using an electronic payment system should be limited to a minimum, so as to
increase merchant and customer acceptance. This particularly holds true for low-value
transactions, which must be facilitated by low transaction costs. (For example, the online
purchase of a ringtone of 1 EUR should not result in the need to pay an additional 0,40 EUR for
transaction costs.)
User friendly / low effort
Electronic payment systems should be user-friendly and should allow users to personalise
the system to integrate their everyday activities and personal financials. Simplicity is key to
gaining wide acceptance, especially to persuade new Internet users who lack both experience and
confidence to cope with complicated protocols. In Japan, for example, most electronic payment
systems only require the user to enter a unique set of 16 digits for authentication and payment
finalisation purposes.
Speed
Electronic payment systems should be able to process transactions very rapidly. Their
speed allows them to be differentiated from other (offline) payment schemes such as credit cards,
which are often subject to transaction terms of several days. Settlement of transactions in real
time allows customers to be informed of their available funds at any moment.
Security
Fraudulent payment card transactions represent losses of roughly 1 billion EUR per year
in the SEPA area. Moreover, given their virtual nature, e-payment schemes do not allow to see
the money physically represented, which often results in the feeling of having no control. It is
therefore essential that e-payment systems provide a sufficient level of security, both on a
technological level as on a psychological level.
Balance of interests
The current financial crisis has demonstrated the importance of controlling financial
institutions. Payment instruments which transfer substantial amounts of money, should be strictly
regulated, regardless of the fact whether they constitute online or offline payment systems.
However, there also is a need for balance. Strict compliance requirements could cripple the

97
further development of e-payment systems, particularly if small money transfer would also be
subject to such requirements. Hence, a balance between innovation incentives and the protection
of consumers is required.
Protection of privacy
As is possible with cash payments, consumers will want to have at least the option of
remaining anonymous in relation to e-payments. Moreover, the possibilities of profiling based on
financial transaction data should be limited. For example, the use of transaction-related data
outside the initial business context, of the sale of such data to third parties could lead to customer
discrimination. Such practices should therefore be contained by legal privacy provisions.
Transparency
Electronic payment schemes must be transparent to consumers, in particular with respect
to their personal financial data being handled by both merchants and financial institutions.
Transparency requires merchants and financial institutions to describe the way in which an
electronic payment system works, and how they intend to process any transactions requested by
consumers.
Predictability
For adapted legal rules to be effective, it is required that e-payment systems are generally
intelligible, clear and predictable to all actors involved. Any laws applicable to e-payment
systems must therefore clearly establish which services do and which do not fall within their
scope.
Trust
Both the electronic payment schemes themselves and the applicable legal framework
must present a trustworthy system. Customers and merchants will refrain from using such
payment schemes if the applicable laws cannot guarantee the protection of their interests.
Equally important is the need to address the issue of perceived trust: the public must be
convinced that cyber-cash is unforgettable.
Reliability
The legal framework applicable to electronic payments must be consistent in its effects
on all participants. In case of a dispute, the application of such laws should be predictable, and
the expected outcome of the dispute should be reliable

98
4.4 DIGITAL TOKEN BASED PAYMENT SYSTEM
The digital token based payment system is a new form of electronic payment system
which is based on electronic tokens rather than e-cheque or e-cash. The electronic tokens are
generated by the bank or some financial institutions. Hence we can say that the electronic tokens
are equivalent to the cash which are to be made by the bank.
Electronic tokens are three types:
1. Cash or Real-time
In this mode of electronic tokens transactions takes place via the exchange of electronic
currency (e-cash). Example: on-line currency exchange is electronic cash (e-cash).
2. Debit or Prepaid
In this electronic payment system the prepaid facilities are provided. It means that for
transactions of information user pay in advance. This technology is used in smart card, electronic
purses etc. Example: prepaid payment mechanisms are stored in smart cards and electronic
purses that store electronic money.
3. Credit or Post-paid
These types of electronic token based on the identity of customers which issue a card,
their authentication and verification by a third party. In this system the server authenticates the
customers and then verifies their identity through the bank. After all these process the transaction
takes place. Example is E-Cheques. Example: post-paid mechanisms are credit/debit cards and
electronic cheques.
The Digital Token based system has following issues:
1. Nature of transaction for which instrument is designed:
In this category, the design issues of token take place. It may be designed to handle micro
payments. It may be designed for conventional products. Some tokens are designed specifically
and other generally. The design issue involve involvement of parties, purchase interaction and
average amount.
2. Means of Settlement:
The Digital Tokens are used when their format must be in cash, credit, electronic bill
payments etc. Most transaction settlement methods use credit cards while other used proxies for
values.

99
 3. Approach to Security, Anonymity and Authentication:
Since the electronic token are vary from system to system when the business transaction
take place. So it is necessary to secure it by intruders and hackers. For this purpose various
security features are provided with electronic tokens such as the method of encryption. The
encryption method uses the digital signatures of the customers for verification and
authentication.
4. Risk Factors:
The electronic tokens may be worthless and if the customer have currency on token than
nobody will accept it, if the transaction has long time between delivery of products and payments
to merchants then merchant exposes to the risk. so it is important to analysis risk factor in
electronic payment system.
Benefits of Utilizing an Electronic Payment System:
Many large global organizations are reaping the benefits from employing an electronic
payment system, which include:
1. Day Sales Outstanding (DSO) Improvements:
For suppliers, an electronic payment system can immediately improve DSO numbers by
allowing them to electronically receive and process payments from commercial customers.
2. Processing Cost Reduction:
A feature-rich electronic payment system lowers associate process time by automatically
initiating and processing payments.
3. Minimize Overdue Payments:
A best-in-class electronic payment system accelerates credit and collections by giving
customers, collections groups and internal customer service departments greater visibility into
payment status.
4. Simplify Dispute Management:
With an electronic payment system, companies enjoy improved data accuracy and
automated disbursement, receipt and payment processing to streamline vendor dispute
management.
5. Increased Compliance:
An electronic payment system makes it easier to track and monitor data to ensure
adherence to complex compliance regulations and all business rules.

100
6. Enhanced Security:
An electronic payment system is highly secure, safeguarding cardholder data and
preventing payment fraud better than paper-based payments can achieve.
7. Improved Workflow Efficiencies:
Increased automation is a key feature of a robust electronic payment system, enabling
less reliance on time-consuming and costly manual business processes.
8. Greater Visibility into Financial Supply Chain:
With access to reports and comprehensive corporate financial history, an electronic
payment system gives management and other authorized users easy access to snapshots and
detailed reports to improve decision-making and process efficiency.
4.5 CREDIT CARDS AS E-PAYMENT SYSTEM
Payment cards are all types of plastic cards that consumers use to make purchases, viz,
 Credit cards: Such as a Visa or a MasterCard, has a preset spending limit based on the
user’s credit limit.
 Debit cards: Removes the amount of the charge from the cardholder’s account and
transfers it to the seller’s bank.
 Charge cards: Such as one from American Express, carries no preset spending limit.
Advantages:
 Payment cards provide fraud protection.
 They have worldwide acceptance.
 They are good for online transactions.
Disadvantages:
 Payment card service companies charge merchants per-transaction fees and monthly
processing fees.
Payment Acceptance and Processing
 Open loop (such as VISA) and closed loop (such as American Express) systems will
accept and process payment cards.
 A merchant bank or acquiring bank is a bank that does business with merchants who
want to accept payment cards.
 Software packaged with your electronic commerce software can handle payment card
processing automatically.

101
Types of Credit Cards
There are two types of credit cards on the market today-
Credit cards are issued based on the customer's income level, credit history, and total
wealth. The customer uses these cards to buy goods and services or get cash from the
participating financial institutions. The customer is supposed to pay his or her debts during the
payment period; otherwise interest will accumulate. Two limitations of credit cards are their
unsuitability for very small or very large payments. It is not cost-justified to use a credit card for
small payments. Also, due to security issues, these cards have a limit and cannot be used for
excessively large transactions. There are two types of credit cards on the market today:
1. Credit cards issued by credit card companies (e.g., MasterCard, Visa) and major banks
(e.g. Is Bankasi, Ziraat Bankasi, Yapi Kredi, etc.)
2. Credit cards issued by department stores (e.g Boyner), oil companies (e.g. Shell)
Businesses extremely benefit from these company cards and they are cheaper to operate.
They are widely issued to and used by a broad range of customers. Businesses offer
incentives to attract customers to open an account and get one of these cards.

Credit card payment process:

Step Description
1 Bank issues and activates a credit card to customer on his/her request.
2 Customer presents credit card information to merchant site or to merchant from
whom he/she want to purchase a product/service.
3 Merchant validates customer's identity by asking for approval from card brand
company.
4 Card brand company authenticates the credit card and paid the transaction by
credit. Merchant keeps the sales slip.
5 Merchant submits the sales slip to acquirer banks and gets the service chargers paid
to him/her.
6 Acquirer bank requests the card brand company to clear the credit amount and gets
the payment.
7 Now card brand company asks to clear amount from the issuer bank and amount
gets transferred to card brand company.

102
Figure: Online Credit Card (VISA) Transaction Process
Processing a Payment Card Order

103
4.6 SMART CARD CASH PAYMENT SYSTEM
Smart Cards based Electronic Payment System “Smart cards‟ are receiving renewed
attention as a mode of online payment. They are essentially credit card sized plastic cards with
the memory chips and in some cases, with microprocessors embedded in them so as to serve as
storage devices for much greater information than credit cards with inbuilt transaction processing
capability.
This card also contains some kinds of an encrypted key that is compared to a secret key
contained on the user’s processor. Some smart cards have provision to allow users to enter a
personal identification number (PIN) code. Smart cards have been in use for well over the two
decades now and have been widespread mostly in Europe and Asian Countries. Owing to their
considerable flexibility, they have been used for a wide range of functions like highway toll
payment, as prepaid telephone cards and as stored value debit cards. However, with the recent
emergence of e-commerce, these devices are increasingly being viewed as a particularly
appropriate method to execute online payment system with considerably greater level of security
than credit cards. Compared with traditional electronic cash system, smart cards based electronic
payment systems do not need to maintain a large real time database. They also have advantages,
such as anonymity, transfer payment between individual parties, and low transactional handling
cost of files. Smart cards are also better protected from misuse than, say conventional credit
cards, because the smart card information is encrypted. Currently, the two smart cards based
electronic payment system- Mondex and Visa Cash are incompatible in the smart cards and card
reader specification.
Smart cards have been in existence since the early 1980s and hold promise for secure
transactions using existing infrastructure. Smart cards are credit and debit cards and other card
products enhanced with microprocessors capable of holding more information than the
traditional magnetic stripe. The smart card technology is widely used in countries such as France,
Germany, Japan, and Singapore to pay for public phone calls, transportation, and shopper loyalty
programs.
A smart card is about the size of a credit card, made of a plastic with an embedded
microprocessor chip that holds important financial and personal information. The microprocessor
chip is loaded with the relevant information and periodically recharged. In addition to these
pieces of information, systems have been developed to store cash onto the chip. The money on

104
the card is saved in an encrypted form and is protected by a password to ensure the security of
the smart card solution. In order to pay via smart card it is necessary to introduce the card into a
hardware terminal. The device requires a special key from the issuing bank to start a money
transfer in either direction.
Smart cards can be disposable or rechargeable. A popular example of a disposable smart
card is the one issued by telephone companies. After using the pre-specified amount, the card
can be discarded. Smart-card technology can be used to hold information on health care,
transportation, identification, retail, loyalty programs and banking, to name a few.
Kalakota and Whinston (1996), classified smart cards based electronic payment system as
(1) relationship based smart cards and (2) electronic purses. Electronic purses, which may
replace money, are also known as debit cards.
Relationship-Based Smart Credit Cards
 It is an enhancement of existing cards services &/ or the addition of new services that a
financial institution delivers to its customers via a chip-based card or other device
 These services include access to multiple financial accounts, value-added marketing
programs, or other information card holders may want to store on their card
 It includes access to multiple accounts, such as debit, credit, cash access, bill payment &
multiple access options at multiple locations
Electronic Purses
To replace cash and place a financial instrument are racing to introduce “electronic
purses”, wallet-sized smart cards embedded with programmable microchips that store sums of
money for people to use instead of cash for everything
The electronic purse works in the following manner:
1. After purse is loaded with money at an ATM, it can be used to pay for candy in a vending
machine with a card reader.
2. It verifies card is authentic & it has enough money, the value is deducted from balance on the
card & added to an e-cash & remaining balance is displayed by the vending machine.
Further Diwan and Singh (2000) and Sharma and Diwan (2000), classified 38 smart cards
into four categories. These are: (1) memory cards: this card can be used to store password or pin
number. Many telephone cards use these memory cards (2) shared key cards: it can store a
private key such as those used in the public key cryptosystems. In this way, the user can plug in

105
the card to a workstation and workstation can read the private key for encryption or decryption
(3) signature carrying card: this card contains a set of pre-generated random numbers. These
numbers can be used to generate electronic cash (4) signature carrying cards: these cards carry a
co-processor that can be used to generate large random numbers. These random numbers can
then be used for the assignment as serial numbers for the electronic cash.
Smart cards are broadly classified into two groups:
Contact: This type of smart card must be inserted into a special card reader to be read
and updated. A contact smart card contains a microprocessor chip that makes contact with
electrical connectors to transfer the data.
Contact-less: This type of smart card can be read from a short distance using radio
frequency. A contact-less smart card also contains a microprocessor chip and an antenna that
allows data to be transmitted to a special card reader without any physical contact. This type of
smart card is useful for people who are moving in vehicles or on foot. They are used extensively
in European countries for collecting payment for highway tolls, train fares, parking, bus fares,
and admission fees to movies, theatres, plays, and so forth.

Some of the advantages of smart cards include the following:

1. Stored many types of information • Not easily duplicated
2. Not occupy much space
3. Portable
4. Low cost to issuers and users
5. Included high security
Disadvantages:
1. Low maximum transaction limit (not suitable for B2B or most B2C)
2. High Infrastructure costs (not suitable for C2C)
3. Not (yet) widely used
4. Lack of universal standards for their design and utilization.
Smart Card Applications
• Ticketless travel
– Seoul bus system: 4M cards, 1B transactions since 1996
– Planned the SF Bay Area system

106
 • Authentication, ID
• Medical records
• E-cash
• Personal profiles
• Government
– Licenses
• Mall parking

4.7 MİCRO-PAYMENT SYSTEM

A micropayment is an e-commerce transaction-type with a low financial amount.
Micropayments are typically used to purchase online products and services such as e-books,
music and memberships.
A Micropayment is a financial transaction involving a very small sum of money, and
usually one that occurs online. Micropayments were initially devised as a way of allowing the
sale of online content as a way to pay for very low cost network services. Micropayments were
envisioned to involve small fractions of a currency. Micropayments would enable people to sell
content on the Internet, and this would be an alternative to advertising revenue.

107
 The term “micropayment” can be defined as a small sum of payment ranging from a
couple of dollars to a fraction of a cent in exchange for intellectual property or web-based
content. Micro-payments are becoming a popular form of payment in the e-commerce sales
sector. Many companies are providing their clients the option to pay for inexpensive transactions
through financial firms such as Paypal, Visa, Mastercard, etc. Each company has its own
maximum amount of money used in a micropayment transaction, for example for Paypal it is less
than $12 USD, and for Visa it is less than $20 USD.
“Micropayment system” is the name given to the online payments system, enabling
people to charge relatively small amounts of money for their online content or services. These
systems were developed during the 1990’s, however they are not efficiently implemented. Back
then, there are only a few websites that accept micropayments and implements this kind of
system. As the era changes, the term micropayment is commonly used to refer to the sale of
virtual goods.
Many consumers have the preference to pay these small sums of money online, as it is
timesaving and more convenient. Mobile technologies such as tablets running on the Android or
iPad system are also advancing rapidly and are incorporating applications from their app stores
to support micro-payments. Examples would include the eBay, Amazon, and Paypal applications
which allow users to make purchases online. EBay gives you the option to pay via Visa,
Mastercard, and Paypal. This new form of technology will change how we value money and
consider our purchases. This new convenience will accelerate our use of e-commerce and add
higher benefits to the end user by saving transportation costs
The key benefit to this process is the payment provider's ability to serve as a single secure
payment contact for sellers and buyers. Sellers can provide multiple websites and/or products
without the overhead of a merchant account, and buyers can pay many different sellers under one
secure transaction umbrella. Easy and secure adaptability is at the core of e-commerce growth at
the micro level.
How does this work?
With a prepaid system, cash, cheque, or credit payment is made to the online company
sponsoring the micropayment system; your online account is then credited with a commensurate
sum. You may then purchase goods or services online using this account. Often the purchases are

108
digital in nature, and include, artwork, photos, images, audio, and video clips, privileges, perks,
virtual goods, and titles.
When you first setup your account, your contractual agreement, sensitive financial, and
personal account information, is transferred to the company you wish to do business with via an
encrypted link.
At the time you are setting up your account, your account information is scrambled using
a cipher code uniquely designed to protect that information and that information is then
transmitted encoded to the online company that is sponsoring the micropayment system... There,
your sensitive financial information is decoded, and your account is setup. That is the way
micropayment accounts are supposed to work.
Once your account is setup, you may then make micropayments at any time, simply by
selecting an item or payment option, and confirming your choice. This also usually occurs in a
secured online environment setup by the company sponsoring the micropayment system, and
often involves the purchaser verifying his or her identity prior to the purchase using a password,
access code, or a digital or physical key of some sort.
Advantages and Disadvantages of Micro Payment system:
Advantages:
1. Anonymity
Setting up an online account with a micropayment service provider allows one to conduct
financial transactions online with some anonymity.
2. Speed
Micropayment accounts allow for quick and convenient purchase of real and virtual
goods and services.
3. Scalability
Micropayment systems can grow easily to accommodate additional trades, and new
products, or services.
4. Security
Fewer online transfers of actual payment leads to fewer opportunities for actual theft or
abuse. It is much easier to contain the scope of theft or abuse using a micropayment system.
Disadvantages:
1. Insecure Data

109
 If sensitive account information is compromised, the account holder is left vulnerable to
more than just the losses from the investment in the account, often secondary or tertiary accounts
may be compromised as a result.
2. Dishonesty
Account holders may lose their investment in the micropayment system if the payment
processing company is dishonest, or otherwise deceptive.
3. Excessive, Taxes, Fees, and Charges
Individual transactions end up costing the buyer more over the long term as individual
taxes, fees, and charges, when combined and compared with a single larger purchase, reveal that
the purchases actually cost more than if a single large purchase was made.
4. Excessive Maintenance Costs
With the explosion in the sheer number of micro transactions, actually auditing or
reviewing such transactions quickly becomes extraordinarily expensive. Proportionally the
number of customer disputes over failed or undesired individual purchases increase as well.
In the next years the market for low value products such as online music and videos and
the role of micropayment systems for selling such products are expected to grow substantially.
4.8 Electronic Cash
Electronic cash is a general term that describes the attempts of several companies to
create value storage and exchange system that operates online in much the same way that
government-issued currency operates in the physical world.
Electronic cash (also called e-cash or digital cash) is any value storage and exchange
system created by a private (non-governmental) entity that does not use paper documents or
coins and that can serve as a substitute for government-issued physical currency. Since e-cash is
issued by many private companies, we need common standards for all e-cash issuers so that they
are accepted by each other. Until now those common standards were not met. Every issuer has its
own standards and e-cash is not universally accepted compared to government-issued physical
currency.
Electronic Cash (E-Cash) or electronic money are playing more significant role in our
daily life due to the rise of internet usage. Most of the money form today is in electronic.
However with new invention of tool doesn’t mean that it will bring all positive results as nothing
is perfect in this world.

110
 Concerns about electronic payment methods include privacy and security, independence,
portability, and convenience. Privacy and security issues are probably the most important issues.
E-cash has its unique security problems. E-cash must have two important characteristics
in common with physical currency. It must be spent only once and it must be anonymous.
E-cash is independent and portable. E-cash is independent, if it is not related to any
network or storage device. It is portable, if it can be freely transferable between any two parties.
Credit and debit cards are not portable. In a credit card transaction, the credit card recipient must
have an account established with a bank unlike the case in e-cash.
The most important characteristic of cash is convenience. If e-cash requires special
hardware or software, it will not be convenient for people to use.
Properties of Electronic Cash:
There are many ways that exist for implementing an e-cash system, all must incorporate a
few common features.
Features of E-Cash
1. Consumer buys e-cash from Bank
2. Bank sends e-cash bits to consumer (after charging that amount plus fee)
3. Consumer sends e-cash to merchant
4. Merchant checks with Bank that e-cash is valid (check for forgery or fraud)
5. Bank verifies that e-cash is valid
6. Parties complete transaction: e.g., merchant present e-cash to issuing back for deposit once
goods or services are delivered
Specifically, e-cash must have the following four properties:
1. Monetary value
2. Interoperability
3. Retrievability
4. Security
Electronic Cash in Action
• Electronic Cash is based on cryptographic systems called “digital signatures”.
• This method involves a pair of numeric keys: one for locking (encoding) and the other for
unlocking (decoding). (Through public key and private key)
Purchasing E-cash from Currency Servers

111
The purchase of e-cash from an on-line currency server (or bank) involves two steps:
• Establishment of an account and
• Maintaining enough money in the account to bank the purchase.
Some customers might prefer to purchase e-cash with paper currency, either to maintain
anonymity or because they don’t have a bank account.
Using the Digital Currency
• Once the tokens are purchased, the e-cash software on the customer’s PC stores digital money
undersigned by a bank.
• The users can spend the digital money at any shop accepting e-cash, without having to open an
account there or having to transmit credit card numbers.
• As soon as the customer wants to make a payment, the software collects the necessary amount
from the stored tokens.
Electronic Cheques
• It is another form of electronic token.
• Buyers must register with third-party account server before they are able to write electronic
cheques
• The account server acts as a billing service.
Electronic Cash Storage
There are two methods of e-cash storage system. They are;
 On-line
o Individual does not have possession personally of electronic cash
o Trusted third party, e.g. e-banking, bank holds customers’ cash accounts
 Off-line
o Customer holds cash on smart card or electronic wallet
o Fraud and double spending require tamper-proof encryption
How a typical e-cash system works:
Similar to regular cash, e-cash enables transactions between customers without the need
for banks or other third parties. When used, e-cash is transferred directly and immediately to the
participating merchants and vending machines. Electronic cash is a secure and convenient
alternative to bills and coins. This payment system complements credit, debit, and charge cards

112
and adds additional convenience and control to everyday customer cash transactions. E-cash
usually operates on a smart card, which includes an embedded microprocessor chip.
A customer or merchant signs up with one of the participating banks or financial
institutions. The customer receives specific software to install on his or her computer. The
software allows the customer to download “electronic coins” to his or her desktop. The software
manages the electronic coins. The initial purchase of coins is charged against the customer's bank
account or against a credit card. When buying goods or services from a web site that accepts e-
cash, the customer simply clicks the “Pay with e-cash” button. The merchant's software
generates a payment request, describing the item(s) purchased, price, and the time and date. The
customer can then accept or reject this request. When the customer accepts the payment request,
the software residing on the customer's desktop subtracts the payment amount from the balance
and creates a payment that is sent to the bank or the financial institution of the merchant, and
then is deposited to the merchant's account. The attractive feature of the entire process is its
turnaround time which is a few seconds. The merchant is notified and in turn ships the goods.
Advantages and Disadvantages - Electronic Cash
Advantages:
We can transfer funds, purchase stocks, and offer a variety of other services without
having to handle physical cash or cheques as long as bank is providing such services online. The
significant effect is we do not have to queue in lines, thus saving our time.
Debit cards and online bill payments allow immediate transfer of funds from an
individual's personal account to a business's account regardless the designated place (around the
globe) by few clicks without any actual paper transfer of money. This bring convenience
individual like us and businessmen.
Consumers will have greater privacy when shopping on the Internet using electronic
money instead of ordinary credit cards.
 More efficient, eventually meaning lower prices
 Lower transaction costs
 Anybody can use it, unlike credit cards, and does not require special authorization
 Electronic cash transactions are more efficient and less costly than other methods.
 The distance that an electronic transaction must travel does not affect cost.
 The fixed cost of hardware to handle electronic cash is nearly zero.

113
  Electronic cash does not require that one party have any special authorization.
Disadvantages:
E-cash and E-Cash transaction security are the major concern. Frauds on E-Cash are on
the catch recent years. Hackers with good skill able to hack into bank accounts and illegally
retrieve of banking records has led to a widespread invasion of privacy and has promoted
identity theft. There are many other tricks including through phishing website of certain banks
and emails.
Money flow and criminal/terrorist activities are harder to be traced by government. With
the continued growth of E-Cash, money flow in and out of countries at immediate speed without
being traced will weaken the government's ability to monitor and income in tax. Money
laundering and tax evasion could be uncontrollable in e-cash systems as criminals use
untraceable internet transaction to hide assets offshore.
E-Cash is not for everyone. Low income groups without computer and internet access are
unable to enjoy the usage of E-Cash. This issue shall be resolved so that E-Cash could be
implemented widely.
There is also a pressing issue regarding the technology involved in electronic cash such
power failures, internet connection failure, loss of records and undependable software. These
often cause a major setback in promoting the technology.
 Susceptible to forgery
 Electronic cash provides no audit trail.
 Because true electronic cash is not traceable, money laundering is a problem.
 Electronic cash is susceptible to forgery.
 So far, electronic cash is a commercial flop.
E-Cash Concept

114