Chapter: 02 Literature review

2.1E- commerce: a study on the online payment system would not be complete without the
discussion of electronic commerce. So e-commerce refers is the buying and selling of goods and
services, or the transmitting of funds or data, over an electronic network, primarily the Internet.
These business transactions occur either business-to-business, business-to-consumer, consumer-
to-consumer or consumer-to-business. The terms e-commerce and e-business are often used
interchangeably. E-commerce is conducted using a variety of applications, such as email, fax,
online catalogs and shopping carts, Electronic Data Interchange (EDI), File Transfer Protocol, and
Web services.

2.2Online payment systems: many users make payments electronically rather than in person. So
online payment refers to money that is exchanged electronically. Typically, this involves use of
computer networks, the internet and digital stored value systems and an electronic payment system
is a way of paying for a goods or services electronically, instead of using cash or a check, in person
or by mail. Hundreds of electronic payment systems have been developed to provide secure
Internet transactions. Electronic payment systems are generally classified into four categories:
credit card and debit cards; electronic cash; micropayment systems; and session-level protocols
for secure communications. The categories are

2.2.1Credit and debit card: A credit card is a plastic card issued to the users to lent money for
purchase of goods and services. The customer type the card number, expiry date and billing address
on the order form and the vendor can verify the details and be confident of payment. A Debit card
is a banking card enhanced with Automated Teller Machine and point of sale features so that it
can be used at merchant locations. A Debit card is linked to an individual’s bank account, allowing
funds to be withdrawn at ATM and point of sale without writing a cheque. A Debit card holder
pay directly through bank for his purchases. It replaces physical cash and cheque. A debit card
holders need to deposit advance in the bank and withdraw in the purchase time.
2.2.2Electronic cash: e-Cash is purely software based, anonymous, untraceable, online token
payment system, available on Unix, Windows as well as Macintosh platform. When the tokens
purchased by customers, the e-Cash software stores the digital money on the customer’s personal
computer which is under signed by the bank. The users can easily spend digital money at any shop
accepting e-Cash without giving credit card details to the shopkeeper.
2.2.3Micropayment system: A micropayment system is a financial transaction involving a very
small sum of money and usually one that occurs online. A number of micropayment systems were
proposed and developed in the mid-to-late 1990s, all of which were ultimately unsuccessful. A
second generation of micropayment systems emerged in the 2010s. For example PayPal defines a
micropayment as a transaction of less than £5.
2.2.4Session level protocol for secure communication: it is protocol for the Open Systems
Interconnection. Session level protocols provide services for coordinating communication between
local and remote applications, establishing, managing and terminating connections.

2.2.5Secure Electronic Transaction (SET): Secure electronic transaction is a system of online

payments for ensuring the security of financial transactions on the internet. The SET specification
is an open, technical standard for commerce, developed by VISA and master card. It facilitates
secure payment card transactions over the internet. Digital certificate create a trust change
throughout the transactions, verifying cardholders and merchant validity.
2.2.6 Mobile Phone Payments
Several initiatives have emerged for initiating e-payments from mobile phones by using short
messages (SMS) or phone calls. These have also been referred to as m-payments (Vassiliou, 2004).
Vassiliou further indicates that most m-payments initiatives follow a simple model where the
customer (payer) first identifies him/herself to the merchant by providing his/her phone number or
by calling the merchant. The merchant forwards the payment and customer information to the
payment service provider (e.g. through the mobile network). The service provider then presents
the payment information to the payer for confirmation and upon confirmation (e.g. with a PIN
number) records the transaction. The communication between the customer and the payment
provider and/or merchant can take place through phone calls and/or short messages.

The benefits of implementing online payment system

Online payment offers a lot of benefits to the organizations that implement it. The technology
could improve cash flow management and operating efficiencies, increase company’s participation
in customers acquisition process, compares the business cycle of the company and intensity the
company’s relationships with its business partners.(Ratnasingham 1998)
Online payment technology is also said to be able reduce cost, increase the number of customers
for the company, enhance the relationship between the customers and the company and improve
the company image. The bottom line is increase in revenue and consequently in the profitability
of the company.
Perhaps the most interesting benefits of the online payment is the ability to couple it with online
bill presentment or electric billing systems (e- billing). E- Billing systems automate both the
delivery and the payment sides of the billing cycle with the entire exchange taking place over the
internet ( Radecki and Wenninger,1999). E-billing eliminates the conversion of the computerized
information to and from paper and replace the physical delivery of the documents.
There are numerous benefits for organization that implement online billing delivery and payment.
Merchants can save printing and mailing cost. E- Billing also has the potential to reduce the time
it takes to deliver bills and receive payment, which means that organization can receive the
payment earlier and invest it somewhere. The organization could also retain their current
customers meanwhile, customers can obtain a wealth of information about their account. It is also
an added convenience to the customers and enable the customers to save postage or check
processing fees.
Survivability could also be a factor that thrust the companies into using online payment. For the
time being, not many companies, either the suppliers or the business clients of the companies use
online payment. However, things might change in the future and many companies might adopt
online payment. When this happens, the companies that deal with these companies have no other
choice but to use online payment. If not, they would lose the business and this spells disaster to
the companies. Therefore, the use of online payment systems by suppliers and business clients
would push the companies to use online payment.

Barriers and challenges of implementing online payment system

Online payments despites it numerous benefits comes with its own challenge even in the developed
world. We will look at the general challenges and later on focus on specific challenges in
developing economies. The identified challenges as revealed by previous research works are
Security, Infrastructure, Regulatory and Legal issues and Socio-Cultural challenge.

Lack of Security
Online payment systems for the internet are an easy target for stealing money and personal
information. Customers have to provide credit card and payment account details and other personal
information online. This data is sometimes transmitted in an un-secured way, (Kolkata and
Whinston, 1997). Providing these details by mail or over the telephone also entails security risks
(Guttman, 2003, Laudon and Traver, 2002).

Infrastructure
Proper Infrastructure for electronic payments is a challenge now-a-days world. Electronic
payments communication infrastructure includes computer network such as the internet and
mobile network used for mobile phone. In addition, banking activities and operations need to be
automated. A network that links banks and other financial institutions for clearing and payment
confirmation is a pre-requisite for electronic payment systems (Taddesse & Kidan,2005). So
proper infrastructure is necessary for the successful implementation of electronic payments.

Regulatory and legal issue: National, regional or international set of laws, rules and other
regulations are important requirements for the successful implementation of e-payment schemes.
United Nations commission on international trade law (UNCITRAL) has formed a working group
on electric commerce to prepare uniform rules on digital signature and certification authorities
(smedinghoff et all). This should ease the problem on doing online business globally. On the local
front, laws have been passed to regulate e-commerce and online communications. The computer
crime bill (1997), is an act to provide for offences relating to the misuse of computers. The most
important law passed thus far concerning e-commerce is digital signature act(1997). The act is a
comprehensive act to regulate the licensing and duties of certification authorities, plus the
regulation of the use of the use digital signatures.
Socio-Cultural Challenges
Cultural and historical differences in attitudes and the use of different forms of money (e.g. use of
credit card in North America and use of debit cards in Europe) complicate the task of developing
an electronic payment system that is applicable at international level (Taddesse & Kidan, 2005).
According to Taddesse & Kidan (2005), difference in the degree of the required security and
efficiency among people of different cultures and level of development aggravates the problem.
Consumer’s confidence and trust in the traditional payments system has made customers less likely
to adopt new technologies. New technologies will not dominate the market until customers are
confident that their privacy will be protected and adequate assurance of security is guaranteed.
(Taddesse & Kidan, 2005). New technologies also requires the test of time in order to earn the
confidence of the people, even if it is easier to use and cheaper than older methods.

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Issues and Challenges of Electronic Payment Systems