ELECTRONIC PAYMENTS: RECENT TRENDS, CHALLENGES AND

EMERGING ISSUES

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR

MASTERS OF INFORMATION MANAGEMENT (MIM)
2014-2015

ROLL NO. 131

JAMNALAL BAJAJ INSTITUTE OF MANAGEMENT STUDIES

UNIVERSITY OF MUMBAI

Acknowledgement
This report is a culmination of my efforts during my fourth and fifth semesters of
Masters in Information Management Studies course at JBIMS, Mumbai. The
yearlong project has been a great learning experience for me and I have been
ably guided and supported in my endeavor by many people.
I am highly indebted to my Project Guide for his advice and guidance from the very
early stage of this project. His able supervision has nourished my intellectual
maturity that I will benefit from for the rest of my life.
I gratefully thank The Director, JBIMS for giving me an opportunity to undertake
such a useful thesis. I am also thankful to the respectable faculty members at
JBIMS for their teachings and thorough concept building in various managerial
disciplines which helped a lot during the course of my project.
I would like to thank everybody who has directly or indirectly helped me in
successful completion of my project.

TABLE OF CONTENTS
Sr. No.
1
2
3
3.1
3.2
3.3
4
5
5.1
5.2
6

6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9

7
7.1
7.2
8
8.1
8.2
8.3
9
10

Topic
EXECUTIVE SUMMARY
INTRODUCTION
THE INDIAN ELECTRONIC PAYMENT LANDSCAPE
TYPES OF ELECTRONIC TRANSACTIONS
ELECTRONIC PAYMENT MODELS
THE REGULATORY FRAMEWORK
KEY EVENTS AND E-PAYMENT INITIATIVES
CONERNS OVER E-PAYMENT MECHANISMS
CHALLENGES AND MITIGATION
FRAMEWORKS SUPPORTING SECURE E-PAYMENTS
RESEARCH METHODOLOGY
PURPOSE OF THE STUDY
RESEARCH OBJECTIVE
SCOPE OF RESEARCH
RESEARCH DESIGN
HYPOTHESIS
LIMITATIONS
DATA COLLECTION
SAMPLE DESIGN
TOOLS OF DATA ANALYSIS
DATA INTERPRETATION AND ANALYSIS
ANALYSIS OF PRIMARY DATA
ANALYSIS OF SECONDARY DATA
RESEARCH FINDINGS AND RECOMMENDATIONS
RESEARCH FINDINGS
RECOMMENDATIONS
CONCLUSION
REFERENCES
ANNEXURE

Page No.
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7
9
9
9
16
20
24
24
27
33
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33
33
34
34
34
35
35
36
37
37
42
45
45
46
51
52
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LIST OF FIGURES/TABLES/CHARTS
Sr. No.

2.1
3.2.1
3.2.2
3.2.3
3.2.4
3.2.5
3.2.6
3.3.1
7.1.1
7.1.2
7.1.3
7.1.4
7.1.5
7.1.6
7.2.1
7.2.2
7.2.3
7.2.4
7.2.5
7.2.6

Topic

Payment instruments in non-cash transactions

Growth of NEFT/RTGS in India
The retail electronic payment space
Volume of prepaid cards in Retail & Internet purchases
Market share of prepaid cards in Retail & Internet
purchases
Credit and Debit Card Spend Trends
Growth rates in Electronic Payments
Regulatory Framework
Percent of Survey Participants Using E-Payment Systems
Survey data of respondents using e-payment services
Respondents using e-payment methods
Survey data of type of e-payment service used
Payment service used by respondents
Likability of e-payment services
Electronic payment scenario in India
Number of Global E-Commerce Transactions
Number of Global M-Payments Transactions
Number of Global Prepaid cards Transactions
Transition difficulties for companies
Entities offering non-cash retail payment services

Page No.

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39
39
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41
42
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1. EXECUTIVE SUMMARY
Topic: Electronic Payments: Recent Trends, Challenges and Emerging Issues

Gone are the days when the customers had to stand in long queues for making
monetary transactions in India. Now with the proliferation of new age electronic
methods of payment, the monetary transactions have become much more
convenient. Though, the electronic payment sector in India has adjusted quite fairly
with the emerging environment and is trying to extend its reach and diversity, yet
greater challenges lie ahead.
The biggest challenges for next decade or more is to i nvol ve over 50%
population of this country to use the el ect roni c banking methodologies . The
primary challenges being faced in adoption of e-payments by a larger majority include
Security, Privacy, Inclusion, Financial literacy and Education.

Electronic payments are either debit or credit payments that are processed entirely
electronically, with the value passing from one bank account to another bank account. Credit
payments, often referred to as Electronic Credit Transfers (ECT) or Electronic Funds
Transfers (EFT), are where a customer instructs their bank to make a payment, electronically,
to another bank account. Debit payments, known as direct debits, are where a customer
instructs their bank to allow the payment to be charged to their bank account.

EFT is used for many types of payments these days, such as salary/wages paid directly into
bank accounts. Welfare payments, business-to-business payments, bill payments, expenses,

standing orders, government disbursements etc. are all increasingly being paid electronically,
directly to the bank accounts of the beneficiaries.

When it comes to payment options, nothing is more convenient than electronic payment. You
don't have to write a check, swipe a credit card or handle any paper money; all you have to
do is enter some information into your Web browser and click your mouse. It's no wonder
that more and more people are turning to electronic payment -- or e-payment -- as an
alternative to sending cheques through the mail. There are various methods for electronic
payment processing. However it is not clear as to which one will be the leader in the next 10
years. Hence it is very interesting to investigate the software growth and research that has
been done in this area and develop more efficient and better software.

In this study there is a focus on one aspect: secure electronic payment systems. As
such, an analysis is provided of current trends in electronic payment; we focus mainly
on the electronic payment mechanism, and not on transactions involved.

It also discusses the regulatory mechanisms and methods employed which make
electronic payment systems more convenient to the customers.

This study also is an attempt to provide a detail on the concerns and challenges/issues
of e-payment transactions as well as an insight into the future ahead.

Primary data was collected by means of a comprehensive survey. Based on these

responses the analysis has been done and inferences have been drawn.

Also, at the end of this report, some recommendations are made for revising the
electronic payment framework.

2. INTRODUCTION
An electronic payment is defined as a payment services that utilize information and
communications technologies including integrated circuit (IC) card, cryptography, and
telecommunications networks.
The need for electronic payment technologies is to respond to fundamental changes in socioeconomic trends. The payment system is the infrastructure which comprised of institutions,
instruments, rules, procedures, standards, and technical, established to affect the transfer of
monetary value between all the parties. An efficient payment system reduces the cost of
exchanging goods and services, and is indispensable to the functioning of the inter-bank,
money, and capital markets.
The tasks to design payment system infrastructures become ever more complex as
competition and innovation push constantly to the limit the search for better combinations of
efficiency, reliability, safety, and system stability in the provision of payment services to
larger numbers of individual users and institutions. A plethora of new electronic technologies
are emerging, opening up new transaction opportunities.
Microchip-based payment devices, such as chip cards and other new technologies, such as
transponders, are being tested in many parts of the globe. The potential of digital wireless
transactions remains untapped, yet it is very likely to emerge as telecommunications and
computer technologies converge in devices. New technologies supporting the electronic
storage, transfer, and use of money could have significant implications for consumers,
merchants, governments and financial institutions. The electronic payment system consists of

Users who can in turn be subdivided into retailers and consumers depending on the
transaction model adopted.

Issuers banks and other financial institutions that are providing the actual
mechanisms or the means to integrate the mechanism into other financial systems.

Regulators who are concerned with issues ranging from assuring the integrity of the
mechanism and its operators, to the potential impact on the wider economy.

As such with the growth in research and adoption of electronic mechanisms, the share of
paper-based instruments in the volume of total non-cash transactions has seen a decrease
with an increase in usage of electronic payment instruments.

Fig.2.1. Payment instruments in non-cash transactions

3. THE INDIAN ELECRONIC PAYMENTS LANDSCAPE

3.1. Types of Electronic Transactions

An electronic payment is any kind of non-cash payment which includes credit cards, debit
cards, direct deposit, direct debit and electronic checks (e-checks).

For all these methods of electronic payment, there are three main types of transactions:

One-time customer-to-vendor payment - You type in your credit card information,

the site processes this information and sends you an e-mail notifying you that your
payment was received.

Recurring customer-to-vendor payment - when you pay a bill through a regularly

scheduled direct debit from your checking account or an automatic charge to your
credit card.

Automatic bank-to-vendor payment You log on to your bank's Web site, enter the
vendor's information and authorize your bank to electronically transfer money from
your account at each billing cycle.

3.2. Electronic payment models

There are various electronic payment models which could be classified broadly into:
A) Electronic Fund Transfer
The NEFT system, facilitating person to person payments via bank accounts gained
momentum, fueled by the rapid adoption of Internet Banking by customers of both public
sector and private sector banks in India.
9

Fig.3.2.1. Growth of NEFT/RTGS in India

10

The electronic payment machinery has seen a spur in growth over the last few years with the
oncoming of the newer electronic ways of payments, thereby resulting in a tremendous
increase in retail sector.

Fig.3.2.2. The retail electronic payment space

The upsurge in retail loans including mortgages, car loans and personal loans led increasing
use of the ECS facilities, wherein customers and banks preferred direct debits to their bank
accounts rather than cheque clearing mechanisms.

B) Prepaid Cards
Most banks had initially focused on foreign exchange cards denominated in USD, Sterling,
Euro and other leading currencies targeted at the international traveler and the domestic gift
cards market. Payroll and gift cards are also finding increasing traction, enabling both POS

11

and ATM cash withdrawal transactions. Operators such as Itz cash have addressed the gap in
the online payments space targeted at uncarded customers or even unbanked customers.

Fig.3.2.3. Volume of prepaid cards in Retail & Internet purchases

Payroll Cards continues to dominate. The market is expected to have grown by over 75%
rising from USD 2.19 billion to over USD 5 billion.

Fig.3.2.4. Market share of prepaid cards in Retail & Internet purchases

12

Axis Bank is a market leader with over 39% marketshare. Itz Cash stands out as a large nonbanking prepaid card issuer seeking to make payments on the Internet for purchasing railway
tickets and a host of other services.

However, the industry is besot with a myriad of opportunities and challenges:

Key Challenges:
a) Business Models: For Bank Issued Cards, Issuance, Top Up Fees, Transaction Fees, float
revenues and breakages constitute the key revenue streams. Though the forex cards offer a
high revenue per card opportunity, gift cards are limited by their typical single use nature.
b) Evolving Regulations: The norms issued by the regulator have imposed greater emphasis
on the Know Your Customer (KYC) norms to be adopted for customer acquisition card
issuance and limited the opportunities on both float revenues and breakage opportunities.
Prepaid payment instruments up to Rs 5000/- can be issued by accepting any 'Government
issued Identity Cards' as proof of identity, but no cash withdrawal.

C) Mobile Banking Transactions

The RBI introduced an Operative Guidelines for Banks for Mobile Banking Transactions in
India in October 2008 under the aegis of the Payments & Settlements Act 2007 with a few
revisions and clarifications outlined in subsequent releases. The key highlights:

Only banks with core banking solutions would be permitted to provide mobile
banking services.

Customer registration for mobile banking mandatory

13

To ensure inter-operability between banks message formats like ISO 8583 were to be
adopted

Transaction limits were placed with a daily cap of Rs. 5000/- per customer for funds
transfer and Rs.10,000/- per customer for purchase transactions

This has been followed up by the introduction of IMPS (Interbank Mobile Payments Service)
by the National Payments Council of India, allowing banks registered customers to transfer
funds between banks via their mobile phones. The earlier models allowed only transfers
between customers having accounts with the same bank

Customers required to register with the participating banks and receive a unique
seven digit MMID (Mobile Money Transfer Identified Number)

No requirement of an Internet connectivity or a personal computer

The service may be operated via SMS or a special applications developed installed on
the customers handset

24x7 real-time service

Seven banks have gone live with the service including Axis bank, Bank of India,
HDFC Bank, ICICI Bank, State Bank of India, Union Bank & Yes Bank

This model could possibly become the largest 24x7 real-time Interbank transfer facility in the
world!

D) Credit & Debit

The credit and debit card spends over last few years has been consistently increasing with the
improving financial inclusion of the society and raised standards of living.
14

Fig.3.2.5. Credit and Debit Card Spend Trends

The growth rates in spends have been consistently high, with a slight blip in credit card
spends in 2009-10, which have picked up again later on.

Fig.3.2.6. Growth rates in Electronic Payments

The decline in spends was also on account of the over 30% reduction in credit cards in

15

circulation in the period, as banks and financial institutions focused on profitable customers
and addressed customer delinquencies. The healthy onward surge of debit card spends
continues to
fuel the penetration and usage of plastic within the larger Indian population and promises to
soon be the torchbearer for retail spends in India.

3.3. The Regulatory Framework

The RBIs approach to electronic payments has been summarized in the below diagram:

Fig.3.3.1. Regulatory Framework - RBIs approach to electronic payments

16

Under the Payment Systems & Settlements (PSS) Act of 2007, two regulations have been
made by the Reserve Bank of India, the Board for Regulation and Supervision of Payment
and Settlement Systems Regulation (BPSS), 2008 and the Payment and Settlement Systems
Regulations, 2008. Both these Regulations came into force along with the PSS Act, 2007 on
12th August 2008. The BPSS would exercise the powers on behalf of the Reserve Bank, for
regulation and supervision of the payment and settlement systems under the PSS Act, 2007.
The Payment and Settlement Systems Regulations, 2008 covers matters like form of
application for authorization for commencing/ carrying on a payment system and grant of
authorization, payment instructions and determination of standards of payment systems.
This in essence permitted third party non banking entities to play the role of clearing &
settlement in financial networks, with the permission of the RBI. This was subsequently
followed by the establishment of the National Payments Council with the objective to
consolidate and integrate the multiple systems with varying service levels into nation-wide
uniform and standard business process for all retail payment systems.

Outlined below some trends and events that are likely to influence the e-payment space
1. Financial Inclusion
Allowing the underbanked customers the opportunity to walk into their neighborhood store to
both deposit and withdraw cash is the inflection point for penetration & adoption of
banking services. Allowing BCs to operate as access points across banking institutions and
widening the network of banks serviced could be the solution. A plan could be conceived,
allowing the creation of a default bank account for every unbanked UID holder with a
designated institution, hence assuring both identity and financial inclusion in one shot.
17

2. Domestic Payments Standards & Network

Though the structure and format is evolving, the country is poised to witness the formation of
a domestic transaction switching networks for POS, ATM and remittance transactions,
possibly inspired by China & Singapore. This network is likely to co-exist with the existing
global card networks of Visa, MasterCard and American Express. With ATM & POS device
costs already at possibly the lowest levels available globally, the case rests on reducing
switching & settlement costs & fueling card issuance by banks on the other end.

3. Device Penetration Levels

Low end card readers could be linked to mobile phones which would be the next step of
evolution for card acceptance. With cash withdrawal via POS machines already being
permitted for debit cards, the confluence of low cost card reading access devices linked with
mobile phones and the activation of the retail channel as BCs could spurn or limit the
requirements for large and expensive ATM devices. As the mobile no-frill account
ecosystem crystallizes, we are set to witness the creation of a non-card based ATM & POS
network which would surely catapault the payment device penetration levels into another
orbit.

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4. Role of Non Banking Entities in the Payments & Transfers Ecosystem

Apart from the BC network, the scope of opportunity for non-banking entities can clearly
extend beyond payment processing, network management and device installation and
support.
There have been several inroads provided with co-branded opportunities and the guidelines
on prepaid card issuance, allowing customer acquisition, issuance, reload and even
transaction processing to be undertaken by non-banking institutions. Other large categories
including the FMCG sector may be enthused to leverage their retail distribution networks as
well.

5. Micro Payments
A melee of technologies, standards, end uses and devices ranging from mobile, Internet,
NFC, smart cards, contactless targeting transit, grocery or even utility payments is going to
emerge in a heady concoction of ground up innovation. A payment system emerging from a
transit payment format would be the ideal approach for large scale card based micro-payment
proliferation, in the urban areas.

6. Incentivize Electronic Payments

The one large opportunity that remains is incentivization for usage of electronic payments.
Tax breaks for merchants and customers could be put in place, as in South Korea for card
payments. These incentives be extended across all electronic purchase transactions or even
on C2G payments.

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4. KEY EVENTS AND E-PAYMENT INITIATIVES

Outlined below is a snapshot of the key events and business models that have been witnessed
in the Indian electronic payments space in the recent past. These could potentially influence
and catalyze the course and development of the electronic payments landscape in this decade.

Unique Identification Authority of India (UIDAI): The government has commenced

implementation of UID (Unique Identifier) which sets the foundation for establishing
a unique national identifier and enabling identity authentication for every citizen, a
logical and imperative building block for financial inclusion. With MasterCard
having developed a payment solution for Aadhar (UID), the road has been paved
for integrated identification & payment solutions.

An Inter Ministerial Group (IMG) was constituted by the Cabinet Secretariat in 2009,
to enable finalization of a framework for delivery of basic financial services using
mobile phones. The framework envisages creation of Mobile Linked No Frills
Accounts enabling a basic set of transactions via a mobile PIN based system using
Mobile Banking POS or through bio-metric based micro ATMs" of the BCs (or
the sub-agents of BCs).

Prepaid has come of age. Banks have seen the opportunity served by prepaid in
addressing the gap left between the debit and credit customer base. Over 14 non
banking corporate entities have been granted permissions to issue prepaid cards in

20

card based, paper based and other electronic formats including virtual / mobile
wallets till date.

With the operationalization of large scale transit projects including metros, toll roads,
organized parking and other emerging urban transit systems, electronic transit
payment systems have become the norm. Large transit payment products (contactless
cards largely) are already flourishing across major metro towns eg. Delhi Metro,
Gurgaon-Delhi toll road & Mumbai Suburban Rail.

With 2 new credit bureaus being set up, in addition to the existing CIBIL, the quality
and depth of credit history and analysis is expected to grow multifold in the coming
years, resulting in enhanced quality of credit scoring and recoveries. The remarkable
transformation has been the increased consumer awareness of the importance and
impact of their credit histories.

Debit cards have been opened up for Internet transactions, potentially providing a
tipping point for ecommerce transactions. With cash withdrawal at POS machines
now a reality, the seeds for wide adoption and use have been sowed.

The India Card initiative as an alternative domestic payment network and system
could potentially take the Indian card payments into another orbit.

21

ATM access fees have been normalized by the RBI enabling easier and cheaper
access for banked customers across all bank ATMs. Though stressing the cost lines of
banks, the lower charges should result in an explosion in ATM usage across India.

Payback acquired iMint, Indias largest coalition loyalty programme which in turn
was subsequently acquired by American Express. This potentially changes the
contours, creating a fine meshing of payments and loyalty systems.

The RBI has introduced Interbank Mobile Payment Service (IMPS) enabling
seamless mobile based transfers between bank account holders. The cornerstone of
interoperability has been established with this measure.

With the formal launch of 3G in India a deluge of service offerings across customer
segments is expected to fuel purchases and transactions on the mobile.

The BC model has received a quantum push, with both retailers and non banking
entities now being permitted to work with banks as extensions of their branch
counters. This virtually opens up the opportunity of converting over 10 million retail
outlets in India into bank branches.

Nokia Money underwent a silent launch in Pune and Chandigarh with Yes Bank.

22

Citibank, in conjunction with Vodafone & Nokia conducted an NFC based mobile
payments trial in Bangalore, which met with considerable success. However the
scalability would be dependent on the proliferation and adoption of NFC enabled
handsets and acceptance capabilities at merchant outlets.

FINO, ATOM, Eko, ALW are some of the players who are operating financial
inclusion models offering a bouquet of deposit, cash withdrawal, payment and
transfer transactions via the mobile.

Paymate, an SMS based mobile payments service launched Green Money with a
leading mobile operator Tata Indicom and Corporation Bank, allowing person to
person transfers.

With the imminent entry of mobile operators, fueled by the success of MPesa, and a
host of other global players, in the arena of payments & transfers, the market is
poised to witness several interesting and possibly unique business models and
consumer propositions.

A joint venture between Airtel & SBI and Vodafone & ICICI has been set up that
envisages opening bank accounts, cashless transfers, cashless spending & payment
facilities through a mobile phone platform.

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5. CONCERNS OVER E-PAYMENT MECHANISMS

5.1. Challenges and Mitigation
Here, we analyze the problems faced by the customers and offers suggestions for improving
the payment systems. Three main issues have been identified: 1) Security issues; 2) Low
interest among businesses; 3) Heavy reliance on traditional payment methods.
A) The Security framework:
Since the present century is the century of information and data, every technology which is
working with, they are in exposure of data theft, stealing, and fraud. For so many companies
and even individuals, the secrecy of information about the financial data and their accounts is
highly important. Generally, security is a set of procedures, mechanisms and computer
programs to authenticate the source of information and guarantee the integrity and privacy of
the information (data) to abstain this circumstance to lead to a hardship (economic) of data or
network resources. Three basic building blocks of security mechanisms are used:

Encryption: provides confidentiality, authentication and integrity.

Digital signatures: provide authentication, integrity protection and non-repudiation.

Checksums/hash algorithms: provide integrity and can authentication.

B) Fraud Risk:
After sloping by around half between 1991 and 1995, plastic fraud losses have risen steadily
and are estimate of plastic fraud doubling in the next two years and with recorded fraud
24

statistics rising. As organizations struggle to remain competitive in a global marketplace, the

business is more complex, systems are left open to employee manipulation and without a
finely tuned internal control system, and the opportunity for significant loss is always
present. There are several internal forces which can make electronic money fraud more likely
in the organization, such as poor internal controls, poor personnel policies and practices, and
poor examples of honesty at the top levels of an organization.

C) Money Laundering:
Money laundering is defined as the act of disguising the origin or ownership of illegally
gained funds to make them appear legitimate. The process of transferring funds through
electronic messages between banks is known as wire transfers. It acts as the primer step in
money laundering where the profits from gambling, real estate fraud, and tax evasion are
somehow slipped into the banking systems before it can be safely spent. It is the duty of the
bank staff to report any detection of potential money laundering via direct telephone
notification to the bank regulators and financial enforcers. The high number of transaction
and the flow of wire transfer through fully automated systems have made it hard for it to be
detected by law enforcements and confuse audit traits.

D) Privacy & Anonymity:

With the increasing usage of the Internet, the fears of privacy abuse become a top concern of
most of the Internet users. Nonetheless, the anonymity of an Internet user is mainly

25

compromised through the payment method that is employed widely on the Internet credit
card, since most of the information is being collected on the Internet when users enter their
credit card purchasing details. As consumers prefer to keep the details of their transaction
private, conversely merchants and issuers in favor to ensure they capture and possess enough
an appropriate and sufficient record of their transactions. Then privacy may become a thorny
issue here. Last but not least, privacy must be regarded as a political right that consumers
enjoy and ought to be respected. At the same time, precautions need to be put in place to
ensure that electronic money systems are not used as a means to thwart existing laws.

E) The Technical Problems:

Every new technology, when exposes and comes to the public, it faces to so many
difficulties. It takes time that people getting familiar with it. The other point is that since the
technology like e-payment is new, there should be so many thing invented and prepared as a
base for expanding of e-payment. The other important problem is not having good
infrastructure to extend and expand the e-payment sequentially e-commerce. Most of
equipments of e-payment are expensive and not easy and simple to anybody to apply them.
The other problem is to expand and grow the other part that are engage in or are part of ecommerce, like telecommunication and their services. In the case of e-commerce and epayment every end user (home or office user) must have at least one phone line and the
connection to the Internet. As to be integrated system in all over the world, the infrastructure
should be well developed in all country to have a real integration in this field.

26

F) The cultural problems:

Most people still like to do their businesses in traditional form as before. These people like to
touch the documents and money in hand and doing the process physically and manually.
They believe in every dealing and business, physically rather than virtually. There are many
people even in the 21st century, who are not agree and accept the all new technologies. They
are always not certain and assured to the technologies. One reason is because of so many
malfunctions, fraud, and unavailability of devices in the time of need. Every defection makes
the public opinion divert from the advantages of new technologies.

5.2. Frameworks supporting secure e-payments

The following shows some payment mechanisms that are either commercially or in a pilot
version available today or have been published recently. The following analysis does not
cover an exhaustive list of all available mechanisms, but illustrates the main options and their
associated features.
A) Traditional money transactions:
These systems have the characteristics normally associated with credit card and bank card
transactions. They are mainly used for identification of the user, so they are not anonymous
since the credit card company or the bank has a record of all transactions. As a result of the
on-line clearing, total cost is fairly high. There are several systems that facilitate secured
credit card transactions over the Internet, the below mentions a few.
1) SET
IBM, Netscape, GTE, CyberCash, MasterCard, Microsoft and Visa have cooperatively
27

developed the Secure Electronic Transactions Protocol (SET) for securing on-line
transactions. SET secures card- holder account and payment information as it travels across
the network, preventing interception of account numbers and expiration dates by
unauthorized individuals. Payment information and authentication is ensured by the use of
digital signatures.
2) PCT
The Private Communication Technology (PCT) protocol, defined by Microsoft, provides
privacy between two communicating applications, and authenticates at least one of the two
to the other. A higher level application (e.g. HTTP, FTP, etc.) can layer on top of the PCT
protocol. PCT uses a symmetric session key for the encryption of messages during a
connection, and performs the requested authentications based on asymmetric public keys.
3) iKP
iKP is an IBM proposal for a family of public key protocols supporting secure presentation
of credit card information. The iKP technology is designed to allow customers to order
goods, services, or information over the Internet, while relying on existing secure financial
networks to implement the necessary payments. The iKP technology is based on RSA
public-key cryptography.
4) First Virtuals InfoCommerce System
In this system the credit card information is given to First Virtual via phone only when the
account is opened. Thereafter, purchases are made using user account ID. During purchase,
the client gives the vendor his clients ID. The vendor sends a transaction report to First
Virtual, on which it e-mails a report to the client for confirmation. If the client confirms, the

28

clients credit card order is processed.

B) Credit-debit payments:
1) Millicent
Typical schemes for performing commercial transactions require at least a digital signature
per transaction. Millicent seeks to reduce the costs, increase the transaction rate, and
provide online levels of certainty to vendors by introducing the notion of vendor-specific
digital scrip: vendor-specific to make it easy to verify that it hasnt been doubly-spent, and
generated according to local criteria, so that it can be easily verified for authenticity. A
typical method for generation might be to use a secret key to encrypt a serial number; the
encrypted value and index of the key form the scrip. When the scrip is received by the
vendor, it is decrypted in order to verify that it encodes a valid, previously unspent index.
2) NetCheque
NetCheque is a distributed accounting service supporting the credit-debit model of payment.
It works in much the same way as a conventional checking account: account holders write
electronic documents that include the name of the payer, the name of the financial institution,
the payers account identifier, the name of the payee, and the amount of the check. A
NetCheque payment bears a signature, and must be endorsed by the payee, using another
signature, before the cheque will be paid. The system is based on the Kerberos system.
3) UEPS
UEPS, the Universal Electronic Payment System, is an electronic funds transfer product
based on off-line operation. It is designed around smartcard based electronic wallet and

29

chequebook functions. A customer loads his card with money from a card held by a bank
teller or installed in an ATM; he then makes purchases by transferring value to a merchant
card; and the merchant in turn uploads his takings to his bank via an ATM or terminal.
The security of UEPS is based on two levels of authentication. The core is an electronic
cheque which carries two digital signatures: one generated with a key known only to the
issuing banks security module and the customer card, and one generated with a key which is
controlled by the clearing house and loaded by them to the card before it is supplied to the
bank. Only the cards embedded in bank and merchant terminals possess a set of universal
secrets, and the customer cards have keys derived from their serial numbers using these
master keys. The payment protocols implement both message chaining and double
encryption.

C) Digital currency:
1) DigiCash
The DigiCash system involves the creation of electronic coins in the form of digitally
signed numbers in exchange for real money from the users bank account. Each of these
coins can be spent, once and only once, with a service provider who accepts them. When the
coin is spent it is immediately sent by the recipient to the issuing bank for on-line verification
and logging (to ensure it is not spent again) before confirming receipt to the payer, who then
discards the used coins. The appropriate amount is credited to the recipients bank account.
This system uses blinding techniques to ensure that the coin can be verified without
revealing the identity of the payer to the payee or the bank.

30

2) NetCash
NetCash tries to find a balance between unconditionally anonymous electronic currency,
and signed instruments analogous to checks that are more scalable but identify the principals
in a transaction. Currency issued by a currency server is backed by account balances
registered with NetCheque to the currency server itself and the NetCheque system is used to
clear payments across servers and to convert electronic currency into debits and credits
against customer and merchant accounts. Though payments using NetCheque originate from
named accounts, with NetCash the account balances are registered in the name of the
currency server, and not the end user.
3) CAFE
CAF provides a high security of all parties concerned without being forced to trust other
parties (so called multi-party security). It uses a combination of tamper-resistance devices
and hence, it is impossible to spend money more than once. If tamper-resistance of the
device is broken, users who spend electronic money more than once are identified, and the
fraud can be proven to them. Since CAFE aims at the market of small everyday payments
that is currently dominated by cash, payments are off-line, and privacy is an important
issue.
4) Mondex
The Mondex system is based on a tamper-proof smart card that holds the cash (in multiple
currencies) and the software to make and receive payments. The system preserves
anonymity in that only the chip on the card has a complete record of transactions, and
therefore only the cardholder has access to this information. The chip on the card provides
immediate control at the time of any transaction. Peer to peer transactions are possible,
31

providing both parties have access to the necessary hardware. The system can be used for
any amount, and should be relatively fast and reliable.
5) Brands off-line electronic cash system
In this system a tamper-resistant smart card, issued by the bank and trusted by the user,
controls a counter that represents the amount of electronic cash carried by the user. The use
of a counter ensures that the computation and communication complexity for paying an
amount are independent of the specific amount due, and that conversions between multiple
currencies can be made at payment time. Smart cards can transfer electronic cash to POS
terminals that need not be physically secured by the bank without needing on-line
verification. Cryptographic software in the user controlled computer ensures that payments
are untraceable and unlinkable.

Banks now provide cash management services to help business make the most of their money
and here is a sample of what is available:

a. E-Banking for Business - real-time access to your accounts

b. Sweep accounts - automatically transfer cash to interest bearing accounts
c. Lockbox Service - quick way to convert receivables to cash
d. Account Reconciliation - manage your checking accounts more efficiently
e. Wire Transfer Services - quick and secure method to send and receive funds
f. Electronic Funds Transfer - economical way to send and receive funds for next day
availability.

32

6. RESEARCH METHODOLOGY
6.1. Purpose of the Study:
The purpose of study is to understand the electronic payment systems and analyze the
challenges faced by it. The study would also include analyzing the trends in usage of epayment mechanisms and its concerns.

6.2. Research Objective:

The objectives of this research are as follows:

To identify and explain the role and importance of e-payment system.

To study and examine the characteristics of the most current types of e-payment and
protocols.

To analysis the problems and the obstacles for developing infrastructure and
integrating the whole systems.

To understand e-payment usage pattern as well as finding out its related concerns and
provide suggestions to lessen their impact.

6.3. Scope of Research:

The scope of this research is to analyse the e-payment systems in use today and
understand the concerns over their use.
33

6.4. Research Design:

The research design used for this research is Hypothesis testing. The primary reason for the
same is the responses of the questionnaire will provide the awareness and willingness of
general population in using e-payment mode of transactions. Based on the responses and
their analysis, an inference could be derived.

6.5. Hypothesis:

Majority [more than 50%] of the adult population living in cities regularly use the
modern electronic methods for their payments (at least once in 3 months).

Purchasing on credit is more popular now than payment involving direct debit.

Salaried individuals are more active in using e-payment systems than other
professions.

Customer age group does not have any effect on the e-payment usage pattern.

6.6. Limitations:

Various parts of the country being different in terms of standard of living and
technological reach, availability of electronic modes of payments is not ensured at
every location of India.

34

Success of e-payment mechanisms in rural area depends on expanding the modern

information and communication technologies to reach them and thereby promote
them through education and financial inclusion.

Customers from different professions across India are having different requirements
of payment for purchased products/services. The same payment mechanisms cannot
serve all customers across India.

6.7. Data Collection:

Primary Data Collection: The primary data for this research is collected through
questionnaires. A structured questionnaire was designed to find out the awareness and usage
patterns as well as willingness of general population in the cities of Mumbai and Thane to opt
for e-payment mechanisms.
**A copy of questionnaire, which is used to collect the primary data from the respondents, is
attached in the annexure**
Secondary Data Collection: The sources of secondary data include the banking websites,
Internet, articles and various surveys conducted in the market by recognized agencies.

6.8. Sample Design:

A) Target Population: The target populations selected for the survey are those residing in the
cities of Mumbai and Thane.

35

B) Sampling Frame: The sampling frame is the adult population of Mumbai and Thane area,
the children from the target population are not considered for the purpose of sampling.
C) Sampling Unit: The sampling unit is an individual resident of Mumbai or Thane city.
D) Sampling: The sampling method used for the research is non-probability judgment
sampling. The sample included equal number of respondents from each age group given in
the questionnaire. Judgment sampling was considered for the reason, having respondents
from each age group would give sufficiently accurate responses representing the target
population.
E) Sampling Size: The sample size (p) selected for the purpose of the research is 100
respondents.

6.9. Tools of Data Analysis:

A) Significance Level: The significance level chosen in hypothesis testing is 0.01
B) Method of Hypothesis testing used: Hypothesis test of proportion

36

7. DATA INTERPRETATION AND ANALYSIS

7.1. Analysis of Primary Data
A) Usage of e-payments by respondents:
Eighty-four percent of survey participants answered yes to the question, Have you done
electronic payments in the last 3 months?

Fig.7.1.1. Percent of Survey Participants Using E-Payment Systems

Usage
Used
Not used

Observed Freq.
84
16

Total

100

p = sample proportion = 0.84, q = 1-p = 0.16

m = hypothesized population proportion = 0.5
Sp = estimate for the standard error of the proportion
Null hypothesis - The number of respondents having used e-payment atleast once in last 3
months is equal to the number having not used it even once in the last 3 months.

37

H0: m = 0.5
Alternate hypothesis - The number of respondents having used e-payment atleast once in last
3 months is more than the number having not used it even once in the last 3 months.
H1: m > 0.5
This is a right-tailed test
Sp = sqrt(pq/n)
= sqrt[(0.84*0.16)/100]
= 0.03666
Z(obs) = (p-m)/Sp
= (0.84-0.5)/0.03666
= 9.2744
Level of significance = 0.01
Z(critical) = 2.33
Since, Z(obs) > Z(critical), the null hypothesis can be rejected.
Therefore, the alternate hypothesis is true.

38

B) Respondents using e-payment services

Gender
Male

Female

Age
20 to 30
30 to 40
40 to 50
50 to 60
20 to 30
30 to 40
40 to 50
50 to 60

Total

Professional
Service
Business
4
3
5
5
5
0
5
0
6
0
7
3
0
1
0
0
32
12

Salaried
6
7
6
4
8
9
2
2
44

Others
1
2
2
3
2
1
1
0
12

Fig.7.1.2. Survey data of respondents using e-payment services

The above survey responses show that the salaried persons use the newer electronic payment
systems than others.
x = Total number of female/male respondents in the certain age group using an epayment service, n = Total number of respondents using an e-payment service

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Others
Salaried
Business
Professional Service
20 to 30 to 40 to 50 to 20 to 30 to 40 to 50 to
30
40
50
60
30
40
50
60
Years years years years Years years years years
Male

Female

Fig.7.1.3. Respondents using e-payment methods

39

C) Type of payment services used by respondents

Gender
Male

Female

Age
20 to 30
30 to 40
40 to 50
50 to 60
20 to 30
30 to 40
40 to 50
50 to 60

Debit
2
5
5
4
3
5
1
1
26

Total

Credit
6
7
3
2
6
7
0
0
31

NetBanking
4
6
3
5
4
6
0
1
29

Others
2
1
2
1
3
2
3
0
14

Fig.7.1.4. Survey data of type of payment services used

The above survey responses show that the younger generation is most conversant with using
e-payment methods and most of the transactions are credit-based.
f = Number of respondents using a specific e-payment service, n = Total number of
responses received, Percent of respondents using a specific e-payment service =

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

100

Others
NetBanking
Credit
Debit
20 to 30 to 40 to 50 to 20 to 30 to 40 to 50 to
30
40
50
60
30
40
50
60
Years years years years Years years years years
Male

Female

Fig.7.1.5. Payment service used by respondents

40

D) Likability of e-payment services:

Based on the data collected about the likability of the services of e-payments,
10% respondents strongly agreed and 76% respondents agreed to have liked the
services.

Chart Title
Very satisfied

Satisfied

1%

Neutral

Dissatisfied

Very dissatisfied

12% 1% 10%

76%

Fig.7.1.6. Likability of the e-payment services

41

7.2. Analysis of Secondary Data

Although large value payment systems have mostly shifted to electronic payment mode,
retail payment remains rather paper-centric.

Fig.7.2.1. Electronic payment scenario in India

Global levels of e-transactions are seen in a state of continuous increase over the years.

Fig.7.2.2.Number of Global E-Commerce Transactions (Billion), 20102014F

42

Fig.7.2.3. Number of Global M-Payments Transactions (Billion), 20102014F

Fig.7.2.4.Number of Global Prepaid cards Transactions (Billion), 20092014F

Most of the companies have moved from traditional paper cheque based payments to modern
electronic methods of payments, the below figure shows their response related to transition
difficulties faced while moving to e-payments from the traditional methods.

43

Fig.7.2.5. Transition difficulties for companies

Current day market has many players (both government and non-government) offering noncash retail payment services to the general public; the following graph lists out the entities
with the majority of services provided by Banks.

Fig.7.2.6. Entities offering non-cash retail payment services

44

8. RESEARCH FINDINGS AND RECOMMENDATIONS

8.1. Research Findings:

Majority of the customers living in cities are using the e-payment services, especially
those offered by banks.

The younger generation is most conversant with using e-payment methods and most
of the transactions are credit-based.

All commercial banks have progressed far in automation of their core services. But,
e-payment services of banking reaches only 40% of the total population of India, this
has resulted in more than 60% of the financial transactions being cash based.

One of the major issues related to e-payment services and rural banking is the
customization of the available products. Most of the products have been designed
keeping in mind the urban and metro customers.

While India takes pride in its GDP growth rate, people below poverty line continue to
languish. About 24% of Indian population is in this category. 60% of the population
and 51% of the cultivator population are out of the ambit of the banking system. The
number of people using the banking e-payment services can easily be doubled
through vigorous financial inclusion efforts.

45

8.2. Recommendations
1) Revise the role of issuers and consumers to hinder security threats
Issuers role: Issuers of electronic payments will need to take great care to ensure that the
danger of counterfeiting is minimized and they must be very vigilant in monitoring their
systems and operations so that fraud can be detected quickly when it occurs. Issuers should
emphasize on a well-written and prominently displayed assurance of security encryption.
Enhancement on every sophisticated security systems should be done at least every month, to
prevent hackers from stealing both money and personal information. Higher priority must be
given to the enhancement of encryption mechanism in order to maintain security and privacy.
They should constantly upgrade hardware and software whenever a new feature of enhancing
security becomes available. Besides, issuers should create the possibility of having face-toface interactions to ensure institutional and customers trust is maintained. Highly confidential
information such as customers personal identity number or other code should not be
revealed to anyone other than the owner itself. It is definitely necessary to allow details of
transactions to be identified throughout the process.
Issuers must collect personal information directly from the concerned consumers. This
personal information must be used for intended purpose only and must not be held for longer
than required. Consumers must be made aware of the information being collected and the
purpose for which the information is being collected. Issuers are advised not to use any
information unless it is accurate, up to date, complete, relevant and not misleading.
Therefore, they must ensure that consumers update their information at least two months
once. It is the issuers responsibility to assure the consumers that no one else can divert the

46

payment in order to steal funds or use them for nefarious purposes. Safety can be assured by
sending critical information such as a credit card number through a separate medium such as
telephone. Besides, issuers can make use of all the fraud prevention mechanism available in
the market, such as public key crypto-systems and digital signatures. During payment, at
least one digital signature must be created to verify the process. Digital signatures can be
used both to assure integrity of the data and the identity of the originator. On the other hand,
privacy can be assured by avoiding from revealing any of the identification of a consumer in
the payment mechanism.
Customers role: The willingness to use the electronic payments is directly proportional to
the frequency of usage. Customers should get themselves exposed to electronic payment
systems in order to gain experience and increase trust on the existing security. In case of any
confidential information which is yet to be revealed, customers should clarify the request
with the issuers beforehand or consult those who have experienced the system beforehand. If
consumers feel insecure over certain electronic payments, they may wish to send confidential
details separately by telephone. Besides, attending seminar/workshops/talk on the healthy
usage of electronic payments is very much encouraged, especially for those
machine/computer illiterates.
Customers must also be able to keep track on the balance, protect identity/code number from
publics view, update personal information at least once every two months and notify the
issuer of the loss/theft of the e-payment instrument (EPI) immediately.
As a precaution, consumers must always remember not keep their code/pin number
somewhere that is not easily accessible by the public. It is also very much advisable to carry

47

along an electronic payment card, which has lesser credit limit. For example, consumer can
open two separate accounts in the same bank with different amount banked in into each
account. As for daily usage, the consumer can bring along the card that has lesser amount of
money. This way, in any case of physical emergency, the other account can be saved.

2) Identify ways to increasing interests among businesses

Most electronic payments cost only around one-third to one-half as much as a paper-based
non cash payment and it is clearly understood that the cost of a payment system could be
considerably reduced if it is shifted to electronics. Therefore, bank should provide payment
services according to their differential costs of services, so users may choose the payment
instrument with the lowest net price/non price cost. If the banks can move their account
holders from using paper cheques to using electronic debit cards, their costs will be reduced,
revenue will be enhanced and consequently profitability will be increased. In addition, for
consumer-to-business point-of-sale and bill payments, electronic payments will reduce the
need for business working capital associated with the delay in processing paper-based noncash payments. Research studies have also proved that people have different preferences for
using various types of payment instruments. For example, ATM, debit card use and PC
banking are more prevalent among those who use direct deposit than among others.
Consumers with similar education, income, and age share similar preferences for payment
methods. Therefore, the banks role here is to facilitate and encourage overall payment
system efficiency by continuing to offer currency as just one payment technology amongst

48

several. Alternative payment technologies can be provided freely and users are allowed to
choose amongst those competing technologies.
Some industries, such as financial services have characteristics that lend themselves to
electronic payments, such as sophisticated systems, while others such as construction are
hindered by the nature of their business to require signatures. Companies in the focus groups
expressed that some of their smaller customers are not sophisticated enough for electronic
payments and would most likely not comply with any requests for electronic payments.
Larger companies are more likely to be using electronic payments and Electronic Data
Interchange (EDI). They can choose any payment mechanism that they think is acceptable in
the real world, which is very much dependent on the nature of their business.
In the case of new electronic payments arrangements, it is likely that the statute law, common
law, contractual arrangements and industry codes of practice will have some role to play. The
new technologies should be subjected to some market protection mechanisms including
minimum capital requirements and limitations on the investments, which can be made with
the real money exchanged for electronic money. Businesses should look deeply into the
characteristics of transactions that could affect the requirements of an online system. A
proper standardization will help to increase participation of more businesses to invest in
electronic payments.

3) Reduce the usage of traditional payment methods

The traditional payments, where the clumsy and expensive way to handle coins and notes is
being replaced by efficient electronic payments initiated by various types of plastic cards.
49

This is a tantalizing prospect for the twenty-first century. Both the costs and the prices of
paper-based payments are higher than their electronic counterparts. Traditional payment is
not the preferred method of payment, particularly for higher value transactions since use of
currency involves handling, storage and security costs that may not arise to the same extent
with other methods. Clearly, some substitution will take place, but the nature and extent of
this substitution will depend on a number of factors. People will tend to prefer to use
payment technologies, which are cheaper, more convenient and less risky than available
alternatives. Many will probably prefer methods which can be used for multiple purposes,
rather than having to utilize a variety of methods to meet different needs. The level of
acceptance of particular payments by retailers, merchants and other suppliers will obviously
have an important influence on the take-up of new approaches.
The system of money is abstract, impersonal and symbolic. But electronic money is virtual
compare to cash and cheques and the payments instrument or channel is no longer physical.
Electronic money is likely to have extra benefits that cash cannot deliver. Retailers are
generally attracted to electronic payments because it offers them another service
enhancement and it reduces their costs of cash holding and handling. For example, debit
cardholder presents the card at the point of sale (PoS) to pay for the goods and services
consumed and to receive cash, which as with the debit card payment, is immediately
deducted from the cardholders account. Persuading customers that plastic card payments are
more convenient, easier and more secure than cash or cheques requires consistent marketing
about the advantages of paying by plastic and getting the cardholders to consolidate their
various accounts on to the one card may require considerable attention to relationship
marketing.
50

8.3. Conclusion:
There are a wide variety of payment systems available to a consumer today. However there
arises a need to provide a single universal payment system that provides the advantages of all
the existing payment system. In an effort towards this direction, an organization called Joint
Electronic Payment Initiative (JEPI) has been formed. The objective of this group is to define
a set of protocols and interfaces that can support the use of a wide variety of payment
methods for network commerce.
It is clear that Credit Card Payments have adopted SET as a standard for payment
transactions. However, no protocol is currently available for electronic check payment.
Financial Service Technology Consortium (FSTC) is working towards bringing in a standard
for electronic checks. FSML has been introduced to develop secure financial documents like
checks. However, it is yet to be accepted as an industry wide standard. Electronic Cash
products like Ecash that do not make use of banking infrastructure are finding it difficult to
push into the market. However smart card systems like Mondex are not popular in the market
because of not being backed up by major banking institutions. We should try to develop
systems that are not proprietary and inflexible but instead are open-ended.
Electronic Payment Industry has an extensive potential for growth considering the growth of
Internet. We should take advantage of this and make the best use of available technology for
the betterment of mankind. Ensuring a profitable business model for e-payments across the
rural areas remains elusive as there still needs to expand the reach of modern information and
communication technologies to the remote areas and promote financial inclusion.

51

9. REFERENCES

Indian settlement systems - Wikipedia

A strategic review of India's emerging payments market - Mckinsey

World Payments Report 2013 - Capgemini

Payment and Settlement Systems - Reserve Bank of India

"Indian Banking Paradigm Shift in Public Policy", BIS Review No.3, Bank for
International Settlements.

Reserve Bank of India, Report on the Financial System

Reserve Bank of India, Report on Banking Sector Reform.

Research Methods for Business A Skill Building Approach by Uma Sekaran.

52

10. ANNEXURE - Questionnaire:

Gender: Male

Female

Age Group:
1) 20 to 30 years
2) 30 to 40 years
3) 40 to 50 years
4) 50 to 60 years

Profession:
1) Professional Service
(e.g. Doctor, Lawyer, etc)
2) Business
3) Salaried
4) Others

Are you aware of e-payment services?

Yes

No

Have you done at least one electronic payment in the last 3 months?
Yes

No

Approximately how many times have you done e-payments in last 3 months?

Options: 1-4, 5-9, 10+

53

Which payment method do you use the most?

Debit Cards
Credit Cards
E-cash cards
NetBanking
Digital Cheques
Others

How satisfied are you with the following payment methods?

Very satisfied

Satisfied

Neutral

Dissatisfied

Very dissatisfied

Credit Cards
Debit Cards
E-cash cards
NetBanking
Digital Cheques
Others

Have you ever faced an issue with any of the e-payment services?
Yes

No

If yes, what was the issue, how it was solved and how much time it took?

54