E-Commerce - Payment Systems
E-commerce sites use electronic payment, where electronic payment refers to paperless monetary transactions. Electronic payment has revolutionized the business processing by reducing the paperwork, transaction costs, and labor cost. Being user friendly and less time-consuming than manual processing, it helps business organization to expand its market reach/expansion. Listed below are some of the modes of electronic payments −
- Credit Card
- Debit Card
- Smart Card
- Electronic Fund Transfer (EFT)
Payment using credit card is one of most common mode of electronic payment. 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 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.
Credit Card Payment Proces
|Step 1||Bank issues and activates a credit card to the customer on his/her request.|
|Step 2||The customer presents the credit card information to the merchant site or to the merchant from whom he/she wants to purchase a product/service.|
|Step 3||Merchant validates the customer's identity by asking for approval from the card brand company.|
|Step 4||Card brand company authenticates the credit card and pays the transaction by credit. Merchant keeps the sales slip.|
|Step 5||Merchant submits the sales slip to acquirer banks and gets the service charges paid to him/her.|
|Step 6||Acquirer bank requests the card brand company to clear the credit amount and gets the payment.|
|Step 6||Now the card brand company asks to clear the amount from the issuer bank and the amount gets transferred to the card brand company.|
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 a debit card and a credit card is that in case of payment through debit card, the amount gets deducted from the card's bank account immediately and there should be sufficient balance in the bank account for the transaction to get completed; whereas in case of a credit card transaction, there is no such compulsion.
Debit cards free the customer to carry cash and cheques. Even merchants accept a debit card readily. Having a restriction on the amount that can be withdrawn in a day using a debit card helps the customer to keep a check on his/her spending.
Smart card is again similar to a credit card or a debit card in appearance, but it has a small microprocessor chip embedded in it. It has the capacity to store a customer’s work-related and/or personal information. Smart cards are also used to store money and the amount gets deducted after every transaction.
Smart cards can only be accessed using a PIN that every customer is assigned with. Smart cards are secure, as they store information in encrypted format and are less expensive/provides faster processing. Mondex and Visa Cash cards are examples of smart cards.
E-Money transactions refer to situation where payment is done over the network and the amount gets transferred from one financial body to another financial body without any involvement of a middleman. E-money transactions are faster, convenient, and saves a lot of time.
Online payments done via credit cards, debit cards, or smart cards are examples of emoney transactions. Another popular example is e-cash. In case of e-cash, both customer and merchant have to sign up with the bank or company issuing e-cash.
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 the same bank or different banks. Fund transfer can be done using ATM (Automated Teller Machine) or using a computer.
Nowadays, internet-based EFT is getting popular. In this case, a customer uses the website provided by the bank, logs in 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 the amount to other account if it is in the same bank, otherwise the transfer request is forwarded to an ACH (Automated Clearing House) to transfer the amount to other account and the amount is deducted from the customer's account. Once the amount is transferred to other account, the customer is notified of the fund transfer by the bank.