Electronic Payment Systems - Study Notes

Chapter Summary

Every trade needs a way to pay, and money is the medium of exchange. For online trade, payment has to happen quickly over computer networks, so a number of electronic payment methods have been developed. They move money from one bank account to another without anyone visiting a bank counter, and they follow agreed rules and standards so that banks, merchants and customers can trust them.

Electronic payment systems are divided into micro and macro systems according to the amount involved and the cost of processing. Micro electronic payment systems handle small, frequent online purchases and use simple, low-cost security. Macro electronic payment systems handle large amounts and use stronger public-key cryptography. The main methods are card-based payments (credit, debit and stored value cards), electronic account transfers (ECS, NEFT and RTGS), and mobile payment through the Unified Payments Interface (UPI).

Learning Objectives

• Explain what an electronic payment system is and how such systems are classified.
• Compare credit cards, debit cards, stored value cards and smart cards.
• Distinguish between the account transfer systems ECS, NEFT and RTGS.
• Explain electronic cash, including cryptocurrencies and digital wallets.
• Describe mobile and internet banking, especially the Unified Payments Interface.

Key Concepts and Definitions

• Electronic Payment System: A system that transfers money between accounts by electronic means, without bank staff handling each transaction.
• Micro-Payment: A payment system for very small amounts, built to keep processing cost low, so it uses lighter security.
• Macro-Payment: A payment system for larger amounts, which uses stronger cryptographic checks.
• Credit Card: A card that lets the holder buy now and pay the issuing bank later. Interest is charged only if the bill is not paid in full by the due date.
• Debit Card: A card that takes the amount straight from the holder's linked bank account at the time of purchase.
• Stored Value Card: A prepaid card loaded with a fixed amount of money in advance. It does not need a linked bank account; a gift card is an example.
• Smart Card: A card with an embedded microchip, such as an EMV chip, that can store data, verify the user and process transactions.
• Electronic Clearing Service (ECS): A system for bulk payments or collections that repeat, such as salaries or monthly bills, processed in batches.
• Electronic Funds Transfer (EFT): Moving money electronically through a bank network. In India this is done through NEFT, started by the RBI in November 2005.
• Real Time Gross Settlement (RTGS): A system in which each transfer is settled on its own, immediately, and which is meant for large-value transfers.
• Cryptocurrency: A decentralised digital currency that uses cryptography and blockchain technology to secure transactions. Bitcoin is the best-known example.
• Unified Payments Interface (UPI): A real-time mobile payment system that transfers money instantly between bank accounts using a virtual payment address.

Worked Methods

1. Verification of Card Numbers using Luhn Algorithm

The last digit of a payment card number is a check digit, added to catch typing mistakes. To check a number with the Luhn algorithm, start from the rightmost digit and double every second digit moving left. If doubling gives a number above 9, subtract 9 from it. Then add all the digits. If the total is divisible by 10, the card number is valid.

2. UPI Transaction Addressing Scheme

To send money through UPI, you use a Virtual Payment Address (VPA), which looks like an email address, for example name@bankname. The VPA is linked to your bank account, so you do not have to share your account number or IFSC with the other person.

Common Exam Traps

• NEFT vs. RTGS: Many students think NEFT is real-time. It is not: NEFT transfers are settled in batches at fixed intervals (half-hourly at present). RTGS settles each transaction separately and immediately.
• Credit vs. debit vs. stored value: A credit card is pay later, a debit card is pay now, and a stored value card is pay before.
• VPA vs. bank details: A VPA is only an alias for your account. It takes the place of the account number and IFSC, so these details stay private.

Exam Tips

• Remember that payment cards follow the ISO/IEC 7810 ID-1 size: 85.60 mm by 53.98 mm.
• Know the parties in a card payment: the cardholder (bearer), the merchant, the acquirer (merchant's bank), the issuer (cardholder's bank) and the card network.
• The IFSC is an 11-character code: the first four letters identify the bank, the fifth character is 0, and the last six identify the branch.
• ECS works both ways: ECS Credit pays many people at once (salaries, dividends), and ECS Debit collects from many people (electricity or phone bills).