Payment Systems

Chapter 5

Payment System

5.1. From Barter to money

5.2. Requirements of Internet-based payments

5.3. Electronic payment media: Credit cards, Debit cards, Smart cards, e-wallets

5.4. Issues and implications of payment systems

5.5. Latest trends in payment systems

 5.1. Journey from Barter System to Money

Since the beginning of known history, humans have directly exchanged goods and services with one another in a trading system called bartering. The history of bartering dates back to 6000 BC.

Traditionally, bartering systems were used within the local community. For example, a farmer with eggs and milk can trade them to the local baker for a birthday cake and bread. The baker then uses the milk and eggs to bake more bread, which she gives to the appliance repairman as payment for repairing her oven. Bartering makes it easier to negotiate but lacks the flexibility of a currency system

Money became a medium of exchange for goods and services, displacing the barter system. Under the barter system, the transacting parties must have a demand for the goods or services each offers to facilitate the transaction. If needs are mismatched, no exchange takes place, leaving parties unfulfilled.

The barter system often creates an unbalanced system of trade, where parties are unable to find others willing to trade. The barter system also lacks a common unit of measurement for goods and services.

As currency systems progressed over time, coins and paper notes evolved to support their economies and to encourage trade within the region. Coinage usually had several tiers of coins of different values, made of copper, silver, and gold.

There is no universal currency. Therefore, to purchase goods and services in a different country, one must convert their currency to that of the other nation, and most governments impose exchange rates for these conversions.

History of Barter Trade in India

India has a rather very interesting history when we talk about the ancient Barter Trade practices that were carried on. During the Vedic age, Cows, Shell and Beads, and even various Metals were used as a medium of exchange. Due to the limitations and risks involved with respect to animals and shells, much later, metal started gaining precedence as a stable medium of exchange. And as metal started gaining popularity, coins were developed. This resulted in the decline of the Barter trade practice.

Does Anyone Still Use the Barter System?

·       The Internet has revived the barter system, allowing participants to trade goods and services. In some countries, like Thailand and Iran, bartering has proven beneficial.

·       Thailand is the world's largest exporter of rice, and Iran has an abundance of oil. Both nations need what the other has in abundance, and therefore, have agreed to trade these goods under the barter system.

·    Communities in rural India have been practising barter for centuries. In states such as Assam, where barter was extremely popular during the pandemic, it has been celebrated in the form of a fair called Jonbeel Mela for more than five centuries now.

    Barterweek.com is allowing budget hotels (also referred to as Bed and Breakfast accommodation) all across the globe to tie up with them. B&Bs have listed themselves and agreed to provide free accommodation to guests who can exchange goods or services matching their specific wish list.

For instance, people who want to travel can offer their collection of comic books, dance lessons, exotic culinary knowledge, marketing advice, professional photographs, etc. B&Bs from all across India (Rajasthan, Goa, Karnataka, Kerala, etc.) are liking this concept and accepted to be part of this Barter deal.

Today, advances in technology and transportation make it possible for modern society to barter on a global level. Currency systems were developed to eliminate this hassle.

 

5.2. Requirements of Internet based payments

Internet payment/ Digital Payment or 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. 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 check 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 businesses and consumers are still wary of conducting extensive business electronically.

An electronic payment typically involves the following phases:

1. Registration: This phase involves the registration of the payer and the payee with the issuer and acquirer respectively. Most electronic payments designed require

registration of payers and payees with their corresponding banks so there is a link between their identities and their accounts held at the bank.

2. Invoicing: In this phase, the payee obtains an invoice for payment. This is accomplished by either browsing and selecting products for purchase from the merchant’s (payee’s) website in case of purchases made through the internet or obtaining an electronic invoice using other electronic communication medium like email. This phase typically is performed in an unsecured environment and normally excluded while designing payment protocols. The importance of this phase is that, it sets the mandatory and optional data variables that should be included in a payment protocol.

3. Payment selection and processing: In this phase the payer selects type of payment, (card based, UPI etc.) based on the type of payment the payee accepts. Based on the selection, the payer then sends the relevant payment details like account number, unique identifiers of the payer to the payee along with accepted amount based on the invoice. Certain protocols might also require the payer to obtain preauthorized token (like bank drafts) from the issuer before the payer sending the payment information to the payee.

4. Payment authorization and confirmation: In this phase, the acquirer on receiving payment details from the payee authorizes the payment and issues a receipt containing the success or failure of the payment to the payee. The payee based on the message may also issue a receipt of payment to the payer.

 

5.3.      Electronic payment media: Credit cards, Debit cards, Smart cards, e-wallets

 

Credit cards

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 known as grace period after which he/she can pay the credit card bill. It is usually credit card monthly payment cycle.

 

Following are the actors parties involved in the credit card system.

·       Cardholder: The holder of the card used to make a purchase; the consumer.

Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands. Cards issued by banks to cardholders in a different country are known as offshore credit cards.

·       Merchant: The individual or business accepting credit card payments for products or

services sold to the cardholder.

·       Acquiring bank: The financial institution accepting payment for the products or

services on behalf of the merchant.

·       Independent sales organization: Resellers (to merchants) of the services of the

acquiring bank.

·       Merchant account: This could refer to the acquiring bank or the independent sales

organization, but in general is the organization that the merchant deals with.

·   Credit Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.

·       Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.

 

Debit Card

A debit card is a plastic payment card that provides the cardholder electronic access to their bank account(s) at a financial institution. Some cards may bear a stored value with which a payment is made, while most relay a message to the cardholder's bank to withdraw funds from a payer's designated bank account. 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.

Some examples are as RuPay debit card in India, Germany (Geldkarte), Austria (Quick Wertkarte), the Netherlands (Chipknip), Belgium (Proton), Switzerland (CASH) and France (Moneo), Visa, Maestro debit cards issued by banks.

 

SMART Card

Smart card is again similar to credit card and debit card in apperance 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 cards can be either contact or contactless smart card. Smart cards can provide personal identification, authentication, data storage, and application processing. Smart cards may provide strong security authentication for single signon (SSO) within large organizations. Some Example of smart card in india are as Go India from railway, Metro card, driving license, adhar card. Automatic Ticket Vending Machines (ATVM) was introduced by Indian Railways to reduce passengers queuing up at the ticket counters at Railway stations. ATVMs are touch screen based ticketing kiosks operated using Smart Cards. The passengers can purchase and recharge Smart Cards from ticket counters. The Smart Card has to be placed on a slot in the ATVM and user has to select the route and destination using the touchscreen. After confirming the details, the ticket is printed and delivered.

 e-wallets or Mobile Wallet

A mobile wallet is a way to carry cash in digital format. You can link your credit card or debit card information in mobile device to mobile wallet application or you can transfer money online to mobile wallet. Instead of using your physical plastic card to make purchases, you can pay with your smartphone, tablet, or smart watch. An individual's account is required to be linked to the digital wallet to load money in it. Most banks have their e-wallets and some private companies. e.g. Paytm, GooglePay, Freecharge, Mobikwik, Oxigen, mRuppee, Airtel Money, Jio Money, SBI Buddy, itz Cash, Citrus Pay, Vodafone M-Pesa, Axis Bank Lime, ICICI Pockets, SpeedPay etc.

5.4. Issues and implications of payment systems

Customer support - banks will have to create a whole new customer relations department to help customers. Banks have to make sure that the customers receive assistance quickly if they need help. Any major problems or disastrous can destroy the banks reputation quickly an easily. By showing the customer that the Internet is reliable you are able to get the customer to trust online banking more and more.

Laws - While Internet banking does not have national or state boundaries, the law does. Companies will have to make sure that they have software in place software market, creating a monopoly.

Security: customer always worries about their protection and security or accuracy. There are always questions whether or not something took place. Other challenges: lack of knowledge from customers end, sit changes by the banks etc.

5.5.      Latest trends in payment systems

 

ADHAR Enabled Payment

AEPS is a bank led model which allows online interoperable financial transaction at PoS (Point of Sale / Micro ATM) through the Business Correspondent (BC)/Bank Mitra of any bank using the Aadhaar authe ntication and Aadhaar to Aadhaar funds transfer.

Unified Payments Interface (UPI)

It is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience. Each Bank provides its own UPI App for Android, Windows and iOS mobile platform(s).