Electronic Payments

The different types of electronic payments are as below:

Electronic Credit Card on Internet 

Because credit cards are the dominant form of online payment, it is important to understand how they work and to recognise the strengths and weaknesses of this payment system. 

A Credit Card is a plastic card bearing an account number assigned to a cardholder with a credit limit that can be used to purchase goods and services and to obtain cash disbursements on credit, for which a cardholder is subsequently billed by an issuer for repayment of the credit extended at once or on an installment basis. Online credit card transactions are processed in much the same way that in-store purchases are, with the major differences being that online merchants never see the actual card being used, no card impression is taken, and no signature is available. 

Online credit card transactions most closely resemble Mail Order-Telephone Order (MOTO) transactions. These types of purchases are also called Cardholder Not Present (CNP) transactions and are the major reason that charges can be disputed later by consumers. Since the merchant never sees the credit card, nor receives a hand-signed agreement to pay from the customer, when disputes arise, the merchant faces the risk that the transaction may be disallowed and reversed, even though has already shipped the goods or the user has downloaded a digital product.

Parties involving in Credit Card Processing 

There are five parties involved in an online credit card purchase: 

1) Consumer,  

2) Merchant,  

3) Clearinghouse,  

4) Merchant bank (sometimes called the "acquiring bank"), and  

5) Consumer's card issuing bank.

 

In order to accept payments by credit card, online merchants must have a merchant account established with a bank or financial institution. A merchant account is simply a bank account that allows companies to process credit card payments and receive funds from those transactions. 

Steps of Online Credit Card Processing 

Figure 3.8 illustrates the online credit card purchasing cycle:

Following steps are involved in online credit card processing: 

Step 1) As shown in figure 3.8, an online credit card transaction begins with a purchase. When a consumer wants to make a purchase, he or she adds the item to the merchant's shopping cart. When the consumer wants to pay for the items in the shopping cart, a secure tunnel through the internet is created using SSL. 

Step 2) Using encryption, SSL secures the session during which credit card information will be sent to the merchant and protects the information from interlopers on the internet. SSL does not authenticate either the merchant or the consumer. The transacting parties have to trust one another.  

Step 3) Once the consumer credit card information is received by the merchant, the merchant software contacts a clearinghouse. A clearinghouse is a financial intermediary that authenticates credit cards and verifies account balances.

 Step 4) The clearinghouse contacts the issuing bank to verify the account information. 

Step 5) Once verified, the issuing bank credits the account of the merchant at the merchant's bank (usually this occurs at night in a batch process). 

Step 6) The debit to the consumer account is transmitted to the consumer in a monthly statement.

Advantages of Credit Cards

1) To Card Holder: The small and attractive plastic credit cards are very easy to carry and they have very much substituted currency notes. The credit cards have enabled the holder to go shopping, without the burden of carrying wards of currency notes with its inherent risks, inconveniences and dangers. Numbers of fringe benefits are available to the credit card holder. It has increased the purchasing power and has also become a status symbol to the holder. In short, it can be said that the cardholder has at his disposal 'instant credit' up to a fixed limit whenever he needs it.  

 

2) To Issuer: The credit cards enable the issuer to provide a fuller service to their customers. They are also useful marketing tools, as they open up relationship with merchants, retailers and consumers who are not previous customers to the issuer and thus credit cards potentially attract new business. As the cards enable the holders to exercise an enormous clout in purchases, it means increase in the business and thus an increase in the income to the issuer in the nature of commission and interest. In the case of issuing banks the credit cards have made it easy to handle small personal loan and installment loans for durable goods. The issuer gets publicity by the display of credit card acceptance by the member establishments.

3) To Member Establishments: There are distinct advantages to the member establishments, retailers and others who provide services and products under the credit card systems. The Acceptance of credit cards has become an economical and convenient method of offering credit to the clients. While previously a businessman had to operate his own credit plan, in assessing the credit worthiness of his clients, with the establishment and risk factors involved, by accepting credit cards he benefits enormously in terms of easing of cash flow, and in the reduction of bad debts and frauds and the unnecessary mental tension and wastage of man hours in recovery. Further, the difficult task of book-keeping is taken out of his hands. With the availability of 'instant money' the card holders are likely to buy more expensive items. Thus the enhancement in the turnover and quality of clients is a great advantage.

 

Disadvantages of Credit Cards

 

1) Waste of Money: It would be a waste of money to subscribe to a credit card if the card was not utilized.

 

2) Thoughtless Buying: Credit cards invariably encourage impulsive purchases. Since the user need not pay instantly, it may tempt the purchase of products/services that are not genuinely required.

 

3) Financial Problem: Use of credit cards may drag the user into financial problems including overdraft. This happens where repayment on the credit card account is not done promptly.

4) Mental Agony: The pressure tactics used by recovery agents appointed by some card issuers to collect outstanding dues may cause mental agony to the user.

 

5) Costly: The user invariably ends up paying more than the actual price of the product/service obtained from the merchant establishments. This is, because, often the price charged to card-customers is relatively higher than the charge to cash-customers.

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