MAHARASHTRA NATIONAL LAW UNIVERSITY MUMBAI

E-Commerce and Business Management

Project Report

Payment Processing Models And How It Has Contributed To The

Success Of E-Commerce Businesses

Submitted to: Prof. Dr. Ranjith Krishnan

Submitted by: Sharlin Puppal

MBA 1st Year, 1st Semester

Enrolment no: 2023 MBA 01

Date of Submission : 17.12.2023

1
Introduction
The rapid increase in modernisation of technology and vast digitalisation has enhanced the usage of e-
commerce platforms around the world. The e-commerce platform has been revolutionized with the
advent of online payment systems to support businesses at large scale and to support consumers. The
success of e-commerce industry has been majorly because of the convenience of cost-effective and
interoperability of payments on real time basis. The emergence of e-commerce enterprises using online
payment systems has let to paperless monetary transactions.

With the use of advance technology across the globe, the use of digital transaction has been significant
in functioning of e-commerce. As per the economic survey report, India has the highest fintech adoption
rate of 87 percent and RBI’s digital payment index pertaining to India has shown consistent growth and
has gained third place in digital payments after China and US.1 Every industry is accessing opportunity
online through electronic medium and adapting ways to create valuable businesses or online shopping
applications online in the technology enabled era. Payment processing allows businesses to transact
with customers online. In the current scenario, payment systems are the main core function in any e-
commerce transactions. The market share of e-commerce industry is expected to grow at 8.1 trillion
dollars by 2026.2 The consumers all around the world are being condition by use of smooth and
frictionless user experience for payments.

There are multiple sources and payment mechanisms that are operated currently in e-commerce
industry. It has become inevitable to choose the right medium of payment which can ensure processing
of payment without any disruptions. The payment system has transformed from the traditional systems,
from cash payments to e-payments such as e-wallets, card payments to unified payment interface (UPI)
and many other medium financial transactions which are upgraded with change in time. It has been
become the imperative part in daily routine to access financial transaction through robust payment
mechanisms.

The use of electronic payment system has been increasingly popular amongst consumer, the major
reason being it is faster, convenient, economical and it saves time compared with tradition payment
systems the widespread use of the internet-based shopping applications. The financial exchange has
been contributing to the overall growth and development of the economy of several countries with the
use of various digital financial instruments that are available in the market.3

1
The Economic Survey Report 2023, https://www.indiabudget.gov.in/economicsurvey/
2
E-commerce statistics, accessed on 12th Nov, 2023, https://www.statista.com/topics/871/online-
shopping/
3
Khaled Al - Qawasmi, ‘The Proposed e-payment process model to enhance the quality of service
through maintaining the trust of availability’, Vol 8, No. 6 June 2020, International Journal of
Emerging trends in Engineering Research.

2
The online shopping model has changed the business payment models of various intermediaries across
the globe. The purchase of the product happens with enormous variety of stakeholder. The use of
different payment system has been critical and necessary factor in transaction on e-commerce platforms.
The e-payment systems are major subsets to the e-commerce industry for convenience of buyer and
seller offered through online mechanism.

Various payment processing models have emerged to facilitate online payments. The payment facilitator
and payment collaborators are operating widely now a days. They are reliable, less time consuming and
convenient method of payment. The online payment system is playing an important role in the e-
commerce industry and also contributing in financial world. The times have changed and the use of
technology in payment has been inevitable part in monetary transactions whether its within one country
or across the globe. The use of technology has become the necessary thing in various sectors for the
growth and sustenance of e-commerce platforms.

The e-commerce is a platform that tells the emergence of new payment systems taking place across the
world. New payment models are emerging that implements the availability various dimensions that
ensures a good quality of service to the consumers. There are several other payment systems which
have emerged apart from e-payments around the world such as blockchain technology and crypto-
currency that has emerged as fact, encrypted medium to secure transactions. The use of Artificial
Intelligence and, biometric detections systems have led to emerging of new payment services.

Overview of E-Commerce Payment Systems

An e-commerce payments or electronic payment mechanism is a system of enabling transactions for

reconciliation of financial transaction via transmission of monetary value. This consist of enormous
institutions, instruments, laws, procedure, technology that ensure feasibility of exchange of valuable
things that are resourced online.

These payment systems include several instruments that are sued for transaction such as debit cards,
credit cards, e-wallets, credit services, UPI payments, net-banking, several pre-paid instruments, virtual
currencies, and cash on delivery also which is still prevalent in some platforms as an optional source in
practice. The contemporary payment mechanism forms part of global transactions that consist of major
services given by banks and other financial institutions that involves integration of buying and selling
products online and delivers the service in an effective for both the businessmen and the consumers.4

Banks have also emerged along with e-commerce businesses in terms of providing discounts and credit
services in collaboration with several e-commerce platforms to facilitate payment systems and to
increase feasibility. They have developed as the credible source of payment for ease of exchange and

4
Ibid.

3
expansion of commerce with lower transaction costs and also ensures security and safety to many
consumers.

The electronic payment systems can be defined as a system for paying for goods and service through
payment gateways to pay the amount and purchase the goods in exchange of payment in advance or
after the delivery of goods. Most importantly the payment is transferred from one bank account to the
other bank account of the seller from whom the goods are purchased. It does not involve any
intervention from third party and broadly offered through electronic fund transfer mechanisms.

The purchase of goods and services on an online platform is considered to be the preferred way of
transactions. Modern payment systems are the cash-substitutes mechanism to ensure transparency. The
basic applicability of e-payments system is applicability, ease of doing business, reliability, trust and
sustainability. The online systems are fast compared to conventional medium of transactions. In order
the ease the process of transaction in traditional payment system payment gateways are used as a
intermediary for payment transactions that connects with e-commerce for processing of payment.

The e-payment has been different in various countries, for example in few European countries, the use
of payment with cryptocurrency and bitcoins are now a days becoming increasingly popular, In USA e-
wallets such as Paypal, google pay or Apple pay etc are the most prominent. has been highly prominent,
In Asian countries such as India, the use of bank cards such as Visa, Mastercard, RuPay and several
other e-wallets like Patym, Mobikiwi, Google pay are the major players. 5

Payment Processing

Definition

A payment processor is an intermediary that links the Merchant seller with customers and their bank
accounts. It is efficient way of payment that allows funds transfer through secured medium. Payment
processing refers to the action of conducting transaction between two parties. It is basically the service
that enables merchants to accept payments from its customers, a merchant can also include any
individual or entity accepting payments for goods and services. The processing of payments involves
various activities such invoicing, payment gateway management, recurring billing, refunds, any
financial dispute handlings. It acts as the facilitator in communication between banks of the consumer
with the bank of merchant. It will authorize and verify the valid payments. The information is usually
relied back and forth between the issued customer account and the merchant’s account.

Payment processors has to carefully scrutinizes the PCI-DSS compliance and other security standards.
In selecting a payment processor, merchant should consider what types of payments the processor

5
Jakirat Kaur, ‘An Overview of E-payments systems’, International Journal of Research in
Engineering and Science (IJRES) ISSN (Online): 2320-9364

4
accepts, what fees will be charged and on what platforms the transactions can take place. The merchant
should prudently select the best payment facilitator to prevent any negative impact.6

Its major functions :

a) Reviewing and approving merchant application for payment processing

b) Providing the means to transmit sales transaction data from merchants to acquiring banks or
other financial institutions to merchants
c) Clearing, Settling or distributing proceeds of sales transactions from acquiring banks or
financial institution to merchants
d) Providing chargebacks or returned remotely created payment orders, remotely created check or
any debits.

The credit card processing is a system through which data through the customers credit card is
transmitted for approving of transaction from their banks account to the merchant account. Whereas,
the Online payment processing links the website with payment processing to connect with merchant
account to a credit card or debit issuer. Furthermore, merchant account can set up recurring payments
accept deposit or decline transaction according to pre-set parameter and process payments made with
currency. Merchant payment processing provider easily accept the credit and debit card payment and
all other forms of payment from customer. While merchant acquirers allow payment transaction that
are responsible for securely transmitting data related to financial transaction and offerings.7

Key Players in E-commerce Payment Processing

The e-commerce payment processing ecosystem involves several key players who facilitate online
transactions, ensuring the secure and efficient transfer of funds. These players work together to make
online payments possible. Understanding the roles and interactions of these key players is essential for
successful e-commerce payment processing. Firstly, the Merchants who integrate payment processing
solutions into their e-commerce websites or apps to receive payments from customers. Then the
customer who is the individual or entity making purchase through on e-commerce platforms. The
payment gateway service provider who are in the technology service that acts as an intermediary
between the e-commerce website or app and the payment networks. It securely captures and encrypts
customer payment information, sends it to the payment processor, and returns the transaction status to
the merchant.

The payment processors are responsible for authorizing and processing the actual payment transactions.
It communicates with the customer's issuing bank to check if there are sufficient funds, manage risk

6
Shahid Jamal Tubrazy, ‘E-Commerce payment processing – Legal and Regulatory Framework’, pg.
11, 2020
7
Ibid.

5
assessments, and handle fraud checks. Moreover the, issuing bank is the financial institution that issued
the customer's credit or debit card. It responds to the payment processor's authorization request,
indicating whether the transaction is approved or declined. The card networks that facilitate the flow of
information and funds between issuing banks and acquiring banks for e.g. the Visa or Mastercard,
American Express. The acquiring bank, or merchant bank, is the financial institution that holds the
merchant's account and processes payments on their behalf. It receives funds from the issuing bank and
deposits them into the merchant's account. The Digital wallet providers, like Apple Pay, Google Pay,
and PayPal, offer customers a convenient way to store their payment information for in-app and online
purchases.

These wallets may also facilitate contactless payments at physical point-of-sale locations. The various
alternative payment methods, such as the UPI transfers. These methods offer alternatives to traditional
credit and debit card payments. The Payment Aggregators and Facilitators, they are aggregate
transactions and allow multiple businesses to use their platform to accept payments. The companies
specializing in security and fraud prevention, such as CyberSource and Signified, provide tools and
services to help merchants protect against online payment fraud. These companies offer international
payment solutions, currency conversion, and cross-border transaction support for e-commerce
businesses looking to expand globally. The government agencies and regulatory bodies that oversee the
e-commerce payment processing industry to ensure compliance with laws and regulations, protect
consumers, and prevent fraud. 8

The Stages of Payment Processing

Understanding e-commerce payment processing is crucial for online businesses that want to accept
payments from customers. Payment processing involves the entire flow of accepting, authorizing, and
transferring funds for online transactions.

Here are the key components and steps involved in e-commerce payment processing:

1. Firstly, the customer initiates the payment by providing their payment information at the point of
sale when through e-commerce platform.
2. Payment Gateway: A payment gateway is the first initial point of contact between the e-commerce
website or application for the payment network. It securely captures and encrypts customer payment
information and sends it to the payment processor. For example, the popular payment gateways
include Bill Desk, Razorpay, PayU, Cashfree etc.

8
The global payment report, accessed on 16th Nov 2023, https://www.fisglobal.com/en/-
/media/fisglobal/files/campaigns/global-payments-
report/FIS_TheGlobalPaymentsReport2023_May_2023.pdf

6
3. Customer Payment Information: When a customer makes a purchase on the website or
application, they the payment information is entered first, which typically includes credit card
details of the card number, expiration date, CVV number, billing address, and sometimes additional
information like their identity and contact details. The payment gateway encrypts the customer's
payment data to ensure that it's transmitted securely over the internet, protecting it from security
threats.
4. Authorization: The payment processor determines which can be the part of the payment gateway
service or a separate entity that communicates with the customer's issuing bank (the bank that issued
their credit or debit card) has to check if there are sufficient funds or credit available in the account,
otherwise the payment would fail in the process. This process also involves fraud checks and risk
assessments.
5. Payment Approval or Decline: The issuing bank will respond to the authorization request with
either an approval or decline. If approved, the transaction proceeds; if declined, the customer is
informed, and the transaction is terminated. Once the payment is authorized, the payment gateway
captures the funds. This step is often separate from authorization because some businesses,
especially in industries like travel, may capture funds at a later date.
6. Settlement: After capturing funds, the payment processor initiates the settlement process, where
the funds are transferred from the customer's bank to the merchant's account.
7. Funds Availability: The time it takes for the funds to become available in the merchant's account
can vary. It may take few times or days or more, depending on the payment processor used in the
transaction and the terms of the agreement.
8. Notification: Both the customer and the merchant will receive notifications regarding the
successful transaction. The customer receives an order confirmation, and the merchant receives a
payment confirmation.
9. Reconciliation: Merchants must reconcile their records with the payment processor's statements
and manage any chargebacks, refunds or disputes that may arise.
10. Security and Compliance: the e-commerce payment processing must adhere to strict security and
compliance standards, regulatory norms of particular country including (Payment Card Industry
Data Security Standard) PCI DSS and other sensitive data and other relevant regulations depending
on the region or country.
11. User Experience: A user-friendly payment process is crucial for safe and secured transaction
ensure a positive customer experience. 9

Therefore, it is essential to choose a reliable payment gateway and processor, as well as to be aware of
transaction fees, where is transaction is complete successfully or not, refund process, chargeback

9
How does the payment processing works, accessed on 13th Nov, 2023,
https://stripe.com/in/resources/more/payment-processing-explained

7
processes, and any additional features such as recurring billing or subscription management that may
be required for the specific business model. Understanding the nuances of e-commerce payment
processing, including security and compliance, is essential for protecting both business and the
customers' financial information.

Analysis of Payment Processing Models

Payment Models and Methods Payment models and methods refer to the various ways individuals and
businesses can exchange money for goods, services, or other financial transactions through digital
payment systems. The success of the business is largely dependent how effective and efficient is the
payment model supporting the financial transaction in the businesses and how satisfactory has been the
user experience in the e-commerce market. The payment processing choice is critical for any
functioning of businesses but it also depends of variety of factors such as the choice form the customers,
the volume of the business, the place and amount of transaction for the business. The payment models
and methods have evolved significantly with advancements in technology and changes in consumer
behaviour. Here are some common payment models and methods:

Payment Models

1. One-Time Payment Model: In a one-time payment model, the customers make a single payment
for the goods and services. This is commonly used for retail purchases, utility bills, and many online
transactions.
2. Subscription Model: Under the subscription model, the customers have to pay recurring fees at
regular intervals to access a product or service. This is commonly used for software, streaming
services, and magazines. Eg. Auto-pay services, monthly and yearly subscriptions.
3. Pay-Per-Use Model: In this model, customers are charged based on their actual usage of a product
or service. Examples include pay-per-view TV, pay-as-you-go cell phone plans, and utility meters.
4. Free and Premium Model: The free and premium offerings from the service providers. Here the
basic features or content are free, while advanced or premium features require payment. Mobile
apps and software often use this model. Eg, Amazon Prime subscription or Flipkart subscriptions.
5. Tiered Pricing Model: In the tiered pricing model, customers can choose from different packages
or tiers, each offering varying features or various levels of service at different price points. Eg. The
SaaS software solutions and cloud storage services.
6. Dynamic Pricing Model: Dynamic pricing models tries to adjusts prices based on real-time market
conditions, demand, or customer behaviour. Service providers of Airlines industry, hotels industry
, and ride-sharing services industry etc. use dynamic pricing method. 10

10
Shahid Jamal Tubrazy, ‘E-Commerce payment processing – Legal and Regulatory Framework’, pg.
11, 2020

8
7. Analysis of Business Payment Models (Business-to-Business Payment Model, Business to
Consumer Payment Model, Customer to Customer Payment Model)

The Payment models in this context of commerce, whether business-to-business , business-to-consumer

or consumer-to-consumer , determine how the financial transactions occur between different parties.
Each of these models has distinct characteristics and payment methods. Here's an overview of these
payment models:

a) Business-to-Business Payment Model

B2B transactions involve businesses buying products or services from other businesses. These
transactions often occur on a larger scale and involve more complex payment methods. The payment
method is more complex and the businesses issue purchase orders to request products or services, and
payments are typically made through invoices or check payments. payments may involve electronic
fund transfer, wire transfers, or automated clearing house (Electronic Fund Transfer) payments for large
sums. Large businesses often use commercial credit cards to make purchases and receive a monthly
statement for payment. Also does it involves trade credit, where payment is deferred for later date.
Moreover, the payment terms in these transactions are longer, allowing the purchasing business time to
process and make payments.

b) Business-to-Consumer Payment Model

In this type of model, the transactions involve businesses selling products or services directly to
individual consumers. These transactions are often simpler and more frequent than the previous
transactions. This type of business largely involves transactions commonly for credit or debit card
payments, either in-person or online. Many consumers use digital wallet services like Apple Pay,
Google Pay, or PayPal for online purchases. The online marketplaces and e-commerce websites often
offer a variety of payment options, including credit cards, digital wallets, any other pre-paid payment
instruments and alternative payment methods. In some regions, the cash on delivery model allows
consumers to pay in cash upon delivery of their goods. The transactions are typically immediate, with
payment made at the time of purchase. However, credit may be offered through payment plans or
financing options for more expensive items.

c) Consumer-to-Consumer Payment Model

These transactions involve individual consumers buying and selling products or services directly to and
from one another. These transactions often take place in online marketplaces or peer-to-peer platforms.
The peer-to-peer payments user friendly mobile payment apps like Google pay, Phone Pe, PayPal,

9
Venmo, Cash App, or Zelle, and marketplaces platforms like eBay and Craigslist may offer various
payment methods, including bank transfers, and in-person cash payments. It can also involve cash
payments for in-person exchanges.11

8. Full Acquiring Model

This model is specially for businesses who choose for the end-to-end service providers to merchants
and the Acquirer act as an intermediary between merchants and acquiring banks, providing a range of
services that include merchant account set-up, payment gateway integration, transaction processing and
settlement. The Acquirer has to obtain license to procure a banking licences in a particular region and
they are termed as payment institution that work as a substitute to banks and they also perform
authorization, compliance, clearing, and settlement of payment transactions along with due diligence of
risk management.12 The risk is managed by the service provider and proceeds the transaction effectively,
This model is best suited when the transaction deals are higher for businesses and when the business is
working at many places globally. It involves licensing and settling payments directly with the banks.
The cost-effectiveness of this model varies depending on the transaction volume and the fees charged
by acquirer. The value-added services here is included which involves reporting, fraud detection and
chargebacks management. 13For example, M-PESA, Paysafe or Checkout.com operational in UK and
other European countries.

The role and responsibility of service providers:

1. Payment Authorization: Authorization of payments that involves confirming the payment balance
and identification of customer that ensure transactions are complied with rules and regulations.
2. Payment Settlement: Once the payment is authorized the acquirer is responsible for settling the
transaction, which involves transferring funds from customer bank account to merchant bank
account which involves, reconciling transactions, resolving discrepancies and refunds.
3. Risk Management: Acquirer are responsible for managing risk associated with payment
processing, which involve monitoring fraud transactions, and prevent financial losses.
4. Compliance: It requires maintaining the anti-money laundering and know your customer
requirements and maintaining appropriate records.
5. Technology and Infrastructure: Moreover, responsible for customer support, maintaining proper
infrastructure and technology and managing of merchant settlement accounts. 14

11
The business payment model, accessed on 13 Nov
2023https://www.evolvepayment.com/blog/difference-between-b2b-and-b2c-payments/
12
Payment processing models: Decoding the Differences for Your Business
, accessed on 12th Nov, 2023, https://www.linkedin.com/pulse/payment-processing-models-decoding-
differences-your-business-saigal/
13
Ibid.
14
Ibid.

10
9. Gateway Only Model

The payment aggregator is the intermediaries that offer merchant onboarding services and with the
payment aggregator, merchants can accept multiple modes of payment. . The payment gateway are the
one who provide technology infrastructure to facilitate online payment. The payment aggregator and
the gateway network in this type of model acts as the intermediary between the merchant and banker
and it secures connection between the merchants’ websites and the payment network. They use the their
own payment gateways and payment processors and allows merchants to receive card payment without
any separate bank account and they offer a unified solution for payment acceptance. This is model
which provides a secured connection between the merchant’s website and payment network
connections. In this model the pre-transaction fees are used as gateway service charges and also service
fees are levied to merchants as well. It authorizes and facilitates settlement of payments and it does not
hold funds or settle the transactions themselves.

The payment aggregator is responsible for providing payment gateway that merchants can ensure to
accept online payments. As per RBI guidelines in India, it is the responsibility of the payment aggregator
to check the background and antecedent check of the merchant to prevent any kind of fraud from
merchants side and also the verify terms and conditions. They are required to develop a software and
get license, facilitating transactions and flow of funds, ensuring compliance, providing customer
support, managing relationship with the stakeholder of the payment ecosystem, this may involve
monitoring performance to ensure gateway operates effectively. Overall, the main responsibility is to
provide the reliable and secured and compliant, fully integrated solution that merchants can use to
accept the online payments. 15 for example, instaMojo, PayU, Bill Desk, Razorpay, CCavenue, cashfree,
payZapp etc.

10. Payment Facilitation Model

In this model, the payment service provider acts as the master of merchant and allows sub-merchants
to process transactions through their own merchant accounts. The sub-merchants are supposedly small
owners of business who lack recourses and relevant infrastructure to establish merchant accounts.
Therefore, here the payment service provider takes the responsibility of underwriting and monitoring
the sub-merchants, as well as assuming the risk of any fraudulent activity. Eg. Paypal for partners
operating in more than two hundred countries, wherein the service provider acts as the main merchant
for the payment processing services to its sub-merchants, here the Paypal service provider is responsible
for processing of payments, settlement and authorization of payments, moreover, they charge fees for
each transaction processed based on the percentage of transaction amount.

15
Payment gateway business model, accessed on 16th dec, 2023, https://akurateco.com/blog/payment-
gateway-business-model

11
The role and responsibility:

1. The payment service provider is responsible for on-boarding of sub-merchants to ensure necessary
compliance of identity, and other regulatory requirements.
2. They are responsible for all processing all transactions on behalf of sub-merchants. This includes
authorisation and settling payments as well as managing chargebacks and refunds.
3. They are responsible for the managing underwriting and risk management, that involves setting
appropriate transaction limits and fraud preventions measures to minimise the risk of fraud.
4. They are responsible for settling of funds and providing accurate reconciliation reports. 16
11. The White Label Solution Processing Model

Under this model, the services are made under the merchant brand name, allowing the merchant to
maintain a consistent brand identity throughout payment process. This gives the merchant additional
control over user experience over payment, it handles all the aspect of payment processing from
payment gateway integration to transaction settlement and customer service and order fulfilment. This
form of model is vanishing from the market and lesser in use compared to other models. Further, this
model has been integrated with the previous payment facilitation model that is hybrid combination of
both the models. Eg. Strip-connect platform used in European countries and Australia Canada Japan
etc. 17

12. Direct Payment Model and Digital Wallet Model

In direct payment model that payment is processed directly from the payer’s account to the payee’s
account. This can be done through various means such as bank transfers, credit or debit functions and
the payment is directly done through credit card or debit card. In this type of model there is no
intermediary involved and the payment is completed in real-time. Eg. Google Pay, Phone Pe, UPI -
BHIM aap, debit cards of all bank, credit cards, Rupay debit cards, Bharat Pe, SBI Yono, etc.

On the other hand, the digital wallet model refers to the payment method, where the funds are stored
digitally and can be accessed because its pre-loaded in the wallet. A digital wallet account can also offer
additional features such as discounts or cash-backs. The major difference here is the funds are stores in
a e-wallet applications and the digital payments are linked directly with the bank account and payments

16
Payment Facilitator Model, accessed on 15th dec, 2023, https://infinicept.com/payment-
facilitator/learn/get-started/what-is-the-payment-facilitator-model/
17
Payment processing models: Decoding the Differences for Your Business
, accessed on 12th Dec, 2023, https://www.linkedin.com/pulse/payment-processing-models-decoding-
differences-your-business-saigal/

12
are made directly. Eg, Patym wallet, Mobikwik, Paypal, freecharge, Apple pay, Amazon Pay, pre-paid
instruments. 18

The RBI Master Circular “Policy Guidelines on Issuance and Operation of Pre-paid Payment
Instruments in India” has laid down the comprehensive rules for prepaid payment instruments in India.
It identifies three types of payment instruments such as closed system payment instruments , that is
issued by an entity for facilitating the purchase of goods and services from that entity only and this
payment system do not permit the cash withdrawal, for example paper vouchers, gift cards etc. The
second is semi-closed system payment, this requires RBI authorization and they are used for purchase
or remittances facilities, no cash withdrawal is allowed, for example paytm wallet. The open system
payment instruments are issued only by banks and facilitate cash withdrawal at ATMs, debit card, credit
card etc.19

Evaluation of Various Payment Models and its Contribution in the Success of E-Commerce
Business (Key findings and Observations)

The changing face of the digital and global landscapes, along with increase in consumer demand has
resulted has heightened the need for the businesses to adopt and develop the robust digital payment
system. 20The global e-commerce market share is expected growing at 6.3 trillion dollars in the current
year.21 The amount of financial transactions that are happening and revenue that is generated is
tremendous for e-commerce businesses.

The e-commerce payment system became increasingly popular because of the fast, convenient, cost -
effective way of processing payment procedures. Due to rise in popularity of e-commerce application,
the payment has been playing a major role in today’s world. The electronic system has revolutionized
the e-commerce industry majorly because of its user-friendly way of mechanism and its cost
effectiveness and that has helped many businesses to grow at faster pace.22

Initially, when electronic payment systems where flourishing the use of the payment facilitation model
was amongst few prominent options for e-commerce business earlier, it was used massively to improve

18
The digital payment and e-wallet payment model, accessed on 16th Nov,
https://corporatefinanceinstitute.com/resources/cryptocurrency/digital-wallet/
19
RBI Master Circular “Policy Guidelines on Issuance and Operation of Pre-paid Payment
Instruments in India 2017,
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/58PPIS11102017A79E58CAEA28472A94596CFA7
9A1FA3F.PDF
20
The digital wallet Model, accessed on 13th Dec, 2023, https://www.apexon.com/blog/benefits-of-
digital-wallets-in-financial-management-for-businesses/
21
The e-commerce business statistics, accessed on 13 Dec, 2023,
https://www.forbes.com/advisor/business/ecommerce-statistics/
22
Raj Garg, Importance of E-commerce payment system in Less paper work’, Volume II, Issue 11,
April 2016, International Journal of Business Quantitative Economics and Applied Management
Research.

13
client boarding process and the businesses were able to earn more from the networking and transaction
fees.23

The e-wallet payment method and digital payment model has been the most effective and successful
model of payments. Currently, the use of e-wallet payment methods has been accounted for online
transactions for around 50 percent currently24 successful all over the world because of its fast, reliable
and secure way of transaction functioning and businesses are able to launch products allowing them to
scale faster and generate more revenue and enhance customer loyalty.

Moreover, by streamlining payment systems businesses has also customer experience resulting in better
sales. This has also helped businesses to have lesser dependence on traditional pay sources. It is
considered to be the most sophisticated medium widely used globally. 25

The Gateway only model has been effective enough to meet the functionality needs of the businesses.
These Gateway platforms has been growing exponentially as merchants diversified channels also, they
maintain safety and standards to protect them from any financial risk.

The method of payment is highly dependent on which kind of business model the Companies are
following. When we look at business to business payment model the size, scale and frequency this
model of business is large, here more payment mechanism requires mechanism which have higher
transaction value, the payment mechanism for this model would only be possible through automated
clearing house payments, credit cards, debit cards, net-transfers etc. Whereas, in business to consumer
payment model, the transaction value is considerably lower which are automated through UPI
payments, e-wallets, pre-paid instruments etc. 26

Moreover, Models such as white label solutions have helped businesses to retain their brand and
maintain consistency in identity, which helped the customer to be more reliable and improve customer
loyalty. The full acquiring model has helped many businesses to develop a complete solution for
payment solution, this eradicated the problem of sub-letting contracts to other payment aggregators and

23 Payment Facilitation Model, accessed on 13th Dec, 2023, https://www.agilepayments.com/payment-

facilitation/
24
The e-wallet statistics globally, accessed on 13th Dec, 2023,
https://www.statista.com/statistics/1271701/share-of-digital-wallets-payments-in-e-commerce-by-
region/#:~:text=In%202021%2C%20Worldpay%20estimated%20that,to%2053%20percent%20by%2
02024
25
The digital wallet Model, accessed on 13th Dec, 2023, https://www.apexon.com/blog/benefits-of-
digital-wallets-in-financial-management-for-businesses/
26
The business-to-business payment model, accessed on 13 Dec, 2023,
https://www.evolvepayment.com/blog/difference-between-b2b-and-b2c-payments/

14
increase more transparency, at the end of it the business is able to make money sufficiently at the same
time it ensures security.27

In India, the digital payment system has evolved rapidly over the last few years from traditional cash
payment system to digital economy. The UPI’s rapid growth has once again demonstrated India’s ability
to build a world-class payment Infrastructure which have been adopted by more than 200 banks. The
use of QR Codes and digital money transfer has been over more than 50 percent. 28 The most popular
digital payment applications are Google Pay, Phone Pe and Patym. This has been encouraged through
government and regulatory policies as well as the demand from Indian markets. 29 The UPI system
played a key role in financial inclusion, promotion of digital literacy and had significant impact on small
business in India. The NPCI authority in India is bringing innovation for wider reach of digital payment
systems in India.

The adaptation of digital wallets or e-wallets has brought revolutionary transformation in the global
payments industry. Globally, the use of e-wallets accounted for about 2.8 billion users, nearly half of
them were Asia-pacific region, including China. The use of credit cards is more in North American
region, Japan and South Korea.30 Moreover, the rapid growing market signifies opportunities for digital
payment vendors and to maximise their potential. The digital wallets has been the driving force behind
the success of e-commerce industry across all countries.

Overview of Payment Regulations

E-commerce payment processing is subject to a comprehensive legal and regulatory framework to

ensure the security of financial transactions and protect the rights and interests of consumers and
businesses. There is legal framework based on the region and there are challenges in various countries.
Globally, the Payment Card Industry Data Security Standard (PCI-DSS) certification is the set of
security standards designed to protect credit card details and this authorization is a pre-condition for
service providers. Businesses which accept credit card payments must comply with PCI-DSS
requirements to secure customer information. Moreover, globally there are Laws such as the European
Union's General Data Protection Regulation (GDPR) are international norms that apply to govern the

27
Full Acquiring Model, accessed on 13th Dec, 2023, https://www.thoughtworks.com/en-
in/insights/blog/technology-strategy/transformation-merchant-acquiring
28 Niti Kiran, Indians embrace e-payments, but prefer security to discounts,

https://www.livemint.com/industry/banking/indians-embrace-e-payments-but-prefer-security-to-
discounts-11663525002101.html
29
The Rise of New Era in Digital Payments’, accessed on 13th Nov,
https://static.pib.gov.in/WriteReadData/specificdocs/documents/2021/oct/doc2021101211.pdf
30
The use of e-wallets global approach, accessed on 14th Dec, 2023,
https://www.statista.com/topics/4872/mobile-payments-worldwide/#topicOverview

15
collection, processing, and protection of personal data, including payment-related data. Businesses must
ensure they handle customer data in compliance with these regulations.

In India, the RBI has created strong regulatory framework with several recommendations and
regulations for digital payment including Know your customer standards, two factor authentication and
transaction amount restrictions. There are prevention of anti-money laundering laws and know your
customer Master directions 2016 and master direction for Pre-paid Instruments guidelines have been
designed to safeguard and to maintain the safety and security of digital transactions. All digital payments
are governed under Payment and settlement Act, 2007 for monitoring digital payment service providers
and protecting rights of the customers. Moreover, there are RBI Guidelines on Regulation of Payment
Aggregator and Payment Gateways to prevent any sort of disruptions in payment methods and requires
specific compliances. Moreover, it is the responsibility of payment aggregator and payment gateway
that they must verify customer identities and monitor transactions to comply with these regulations.
Recently, the Digital data protection Act 2023 was brought recently to protect the digital personal data
determines the obligation of data fiduciaries and rights and duties of data principals.31

The Consumer protection laws govern various aspects of e-commerce transactions, including refund
and return policies, disclosure of terms and conditions, and transparent pricing. The Payment Card
networks like Visa, Mastercard, and American Express have their own rules and regulations that
businesses accepting their cards must follow as a part of self-regulation. These rules cover transaction
handling, chargebacks, and dispute resolution. These regulations define the rights and responsibilities
of merchants and customers in cases of disputes, such as unauthorized transactions or issues with
products or services. The central bank is usually the regulatory body for the new emerging payment
mechanism, the need for a special regulatory body to manage and handle payment mechanism is
required to tackle new emerging challenges and to manage the financial risk of service providers.

The e-commerce businesses accepting digital wallets or cryptocurrencies must adhere to specific
regulatory frameworks by the respective countries, however in India the RBI has not allowed this
transaction and are under the preview of government. There are e-commerce businesses often enter into
contracts with payment processors, banks, and financial institutions. The Taxation laws and IT laws can
vary significantly by region, and e-commerce businesses must understand their tax obligations, Goods
and Services Tax. Therefore, the Compliance with these regulations is essential to protect both the
business or payment service provider from financial fraud and secure the customers. 32

31
The digital data protection Act, 2023, accessed on 15th dec, 2023,
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1947264
32
Mr. Tanai Khainorangao, Fintech and Payments Regulation: Analytical Framework, May 2020.

16
Conclusion

The rapid growth of electronic payment models has influenced drastically in the Indian market’s
ecosystem. Electronic payment has played a pivotal role in the success of e-commerce by providing
convenient, secure and efficient way for customer to make transactions online. Many businesses have
flourished because of the convenience of e-payments system. The efficacy of payment processing has
enabled e-commerce industry to grow at faster rate. It has enabled seamless financial transactions,
reduce friction in the purchasing process and facilitate transaction, reduce friction in the purchasing
process and facilitate global commerce. The payment processing goes through series of stages, from
processing payment through a gateway, then after authorization and settlement till reconciliation. Each
payment processing model has contributed for the success of e-commerce business, the e-wallet has
been a major player in improving the standards of payment effectively. As discussed above, India and
many other Asian countries have adopted Unified payment interface mechanism successfully and it’s a
government backed system to promote financial inclusion and transforming India into digitally
empowering country. Many businesses have flourished globally because of the convenience of e-
payments system.

Bibliography

❖ The Economic Survey Report 2022-2023, https://www.indiabudget.gov.in/economicsurvey/

❖ E-commerce statistics, accessed on 12th Nov, 2023, https://www.statista.com/topics/871/online-
shopping/
❖ Khaled Al - Qawasmi, ‘The Proposed e-payment process model to enhance the quality of service
through maintaining the trust of availability’, Vol 8, No. 6 June 2020, International Journal of
Emerging trends in Engineering Research.
❖ Payment Processing, accessed on 11th Nov, 2023, https://www.lawinsider.com/dictionary/payment-
processing

❖ Payment processing models: Decoding the Differences for Your Business, accessed on 12th Nov,
2023, https://www.linkedin.com/pulse/payment-processing-models-decoding-differences-your-
business-saigal/
❖ Jakirat Kaur, ‘An Overview of E-payments systems’, International Journal of Research in
Engineering and Science (IJRES) ISSN (Online): 2320-9364
❖ The digital wallet Model, accessed on 13th Dec, 2023, https://www.apexon.com/blog/benefits-of-
digital-wallets-in-financial-management-for-businesses/
❖ The e-commerce business statistics, accessed on 13th Dec, 2023,
https://www.forbes.com/advisor/business/ecommerce-statistics/

17
❖ Raj Garg, Importance of E-commerce payment system in Less paper work’, Volume II, Issue 11,
April 2016, International Journal of Business Quantitative Economics and Applied Management
Research.
❖ Payment Facilitation Model, accessed on 13th Dec, 2023, https://www.agilepayments.com/payment-
facilitation/
❖ The e-wallet statistics globally, accessed on 13th Dec, 2023,
https://www.statista.com/statistics/1271701/share-of-digital-wallets-payments-in-e-commerce-by-
region/#:~:text=In%202021%2C%20Worldpay%20estimated%20that,to%2053%20percent%20b
y%202024
❖ The digital wallet Model, accessed on 13th Dec, 2023, https://www.apexon.com/blog/benefits-of-
digital-wallets-in-financial-management-for-businesses/

❖ The business-to-business payment model, accessed on 13 Dec, 2023,

https://www.evolvepayment.com/blog/difference-between-b2b-and-b2c-payments/
❖ Full Acquiring Model, accessed on 13th Nov, 2023, https://www.thoughtworks.com/en-
in/insights/blog/technology-strategy/transformation-merchant-acquiring
❖ Niti Kiran, Indians embrace e-payments, but prefer security to discounts, accessed on 14th Dec,
2023, https://www.livemint.com/industry/banking/indians-embrace-e-payments-but-prefer-
security-to-discounts-11663525002101.html
❖ The Rise of New Era in Digital Payments’, accessed on 13th Nov,
https://static.pib.gov.in/WriteReadData/specificdocs/documents/2021/oct/doc2021101211.pdf
❖ The use of e-wallets global approach, accessed on 14th Nov, 2023,
https://www.statista.com/topics/4872/mobile-payments-worldwide/#topicOverview
❖ RBI Master Circular “Policy Guidelines on Issuance and Operation of Pre-paid Payment
Instruments in India
2017,https://rbidocs.rbi.org.in/rdocs/notification/PDFs/58PPIS11102017A79E58CAEA28472A94
596CFA79A1FA3F.PDF
❖ The use of e-wallets global approach, accessed on 14th Dec, 2023,
https://www.statista.com/topics/4872/mobile-payments-worldwide/#topicOverview
❖ The digital data protection Act, 2023, accessed on 15th dec, 2023,
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1947264
❖ Niti Kiran, Indians embrace e-payments, but prefer security to discounts,
https://www.livemint.com/industry/banking/indians-embrace-e-payments-but-prefer-security-to-
discounts-11663525002101.html
❖ The Rise of New Era in Digital Payments’, accessed on 13th Nov,
https://static.pib.gov.in/WriteReadData/specificdocs/documents/2021/oct/doc2021101211.pdf

18
❖ The e-commerce business statistics, accessed on 13 Dec, 2023,
https://www.forbes.com/advisor/business/ecommerce-statistics/
❖ Raj Garg, Importance of E-commerce payment system in Less paper work’, Volume II, Issue 11,
April 2016, International Journal of Business Quantitative Economics and Applied Management
Research.
❖ Payment Facilitation Model, accessed on 13th Dec, 2023,
https://www.agilepayments.com/payment-facilitation/
❖ The e-wallet statistics globally, accessed on 13th Dec, 2023,
https://www.statista.com/statistics/1271701/share-of-digital-wallets-payments-in-e-commerce-by-
region/#:~:text=In%202021%2C%20Worldpay%20estimated%20that,to%2053%20percent%20b
y%202024

19