Year: 2020

Management Notes

IT Act 2000 Salient features

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Salient Features of I.T Act

The salient features of the I.T Act are as follows:

  • Digital signature has been replaced with electronic signature to make it a more technology neutral act.
  • It elaborates on offenses, penalties, and breaches.
  • It outlines the Justice Dispensation Systems for cyber-crimes.
  • It defines in a new section that cybercafe is any facility from where the access to the internet is offered by any person in the ordinary course of business to the members of the public.
  • It provides for the constitution of the Cyber Regulations Advisory Committee.
  • It is based on The Indian Penal Code, 1860, The Indian Evidence Act, 1872, The Bankers’ Books Evidence Act, 1891, The Reserve Bank of India Act, 1934, etc.
  • It adds a provision to Section 81, which states that the provisions of the Act shall have overriding effect. The provision states that nothing contained in the Act shall restrict any person from exercising any right conferred under the Copyright Act, 1957.

Scheme of I.T Act

The following points define the scheme of the I.T. Act:

  • The I.T. Act contains 13 chapters and 90 sections.
  • The last four sections namely sections 91 to 94 in the I.T. Act 2000 deals with the amendments to the Indian Penal Code 1860, The Indian Evidence Act 1872, The Bankers’ Books Evidence Act 1891 and the Reserve Bank of India Act 1934 were deleted.
  • It commences with Preliminary aspect in Chapter 1, which deals with the short, title, extent, commencement and application of the Act in Section 1. Section 2 provides Definition.
  • Chapter 2 deals with the authentication of electronic records, digital signatures, electronic signatures, etc.
  • Chapter 11 deals with offences and penalties. A series of offences have been provided along with punishment in this part of The Act.
  • Thereafter the provisions about due diligence, role of intermediaries and some miscellaneous provisions are been stated.
  • The Act is embedded with two schedules. The First Schedule deals with Documents or Transactions to which the Act shall not apply. The Second Schedule deals with electronic signature or electronic authentication technique and procedure. The Third and Fourth Schedule are omitted.

Application of the I.T Act

As per the sub clause (4) of Section 1, nothing in this Act shall apply to documents or transactions specified in First Schedule. Following are the documents or transactions to which the Act shall not apply −

  • Negotiable Instrument (Other than a cheque) as defined in section 13 of the Negotiable Instruments Act, 1881;
  • A power-of-attorney as defined in section 1A of the Powers-of-Attorney Act, 1882;
  • A trustas defined in section 3 of the Indian Trusts Act, 1882;
  • A will as defined in clause (h) of section 2 of the Indian Succession Act, 1925 including any other testamentary disposition;
  • Any contract for the sale or conveyance of immovable property or any interest in such property;
  • Any such class of documents or transactions as may be notified by the Central Government.

Amendments Brought in the I.T Act

The I.T. Act has brought amendment in four statutes vide section 91-94. These changes have been provided in schedule 1-4.

  • The first schedule contains the amendments in the Penal Code. It has widened the scope of the term “document” to bring within its ambit electronic documents.
  • The second schedule deals with amendments to the India Evidence Act. It pertains to the inclusion of electronic document in the definition of evidence.
  • The third schedule amends the Banker’s Books Evidence Act. This amendment brings about change in the definition of “Banker’s-book”. It includes printouts of data stored in a floppy, disc, tape or any other form of electromagnetic data storage device. Similar change has been brought about in the expression “Certified-copy” to include such printouts within its purview.
  • The fourth schedule amends the Reserve Bank of India Act. It pertains to the regulation of fund transfer through electronic means between the banks or between the banks and other financial institution.

Intermediary Liability

Intermediary, dealing with any specific electronic records, is a person who on behalf of another person accepts, stores or transmits that record or provides any service with respect to that record.

According to the above mentioned definition, it includes the following:

  • Telecom service providers
  • Network service providers
  • Internet service providers
  • Web-hosting service providers
  • Search engines
  • Online payment sites
  • Online auction sites
  • Online market places and cyber cafes

Highlights of the Amended Act

The newly amended act came with following highlights:

  • It stresses on privacy issues and highlights information security.
  • It elaborates Digital Signature.
  • It clarifies rational security practices for corporate.
  • It focuses on the role of Intermediaries.
  • New faces of Cyber Crime were added.
Management Notes

Smart cards

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A smart card is a special type of card like device which contains an integrated circuit chip embedded on it. The IC chip can be a microprocessor with memory or just simple memory circuit. In simple layman’s words, a smart card is the card with which we can exchange the data, store it and manipulate data.

A smart card is connected to the host computer or controller via a card reader which gets information from the smart card and accordingly passes the information to the host computer or controller.

A smart card is a special type of card like device which contains an integrated circuit chip embedded on it. The IC chip can be a microprocessor with memory or just simple memory circuit. In simple layman’s words, a smart card is the card with which we can exchange the data, store it and manipulate data.

How does the Smart Card Works?

A smart card is connected to the host computer or controller via a card reader which gets information from the smart card and accordingly passes the information to the host computer or controller.

A smart card reader is a device to which the smart card is connected either directly or indirectly using RF communication. It interfaces with the PC or a microcontroller using USB port or RS232 serial ports. It can be a contact or contactless reader.

2 Types of Smart Card based on Connection to the Smart Card Reader

Contact Smart Card:  This type of smart card consists of electrical contacts which are used to connect to the card reader where the card is inserted. The electrical contacts are deployed on a conductive gold plated coating on the card surface.

Contactless Smart Card: This type of smart card communicates with the reader without any physical contact. Rather it consists of an antenna with which it is used to communicate using Radio Frequency band with the antenna on the reader. It usually receives power from the reader via the electromagnetic signal.

2 Types of Smart Cards based on their Functionalities and Configuration

Memory Cards: These are cards which only consist of memory circuits. It can only store, read and write data to a particular location. The data cannot be processed or manipulated. It can be a straight memory card which is only used to store data or a protected memory card with a restricted access to the memory and which can be used to write data. It can also be a rechargeable or a disposable card which contains memory units which can be used only once.

Microprocessor Based Cards: These cards consist of microprocessor embedded onto the chip in addition to the memory blocks. It also consists of specific sections of files with each file associated with a particular function. The data in files and the memory allocation is managed via an operating system which can be a fixed operating system or dynamic operating system. It allows for data processing and manipulations and can be used for multi functioning.

Advantages of Smart Card:

  • Might be promptly reconfigured
  • Reusable
  • Secure transactions
  • Gives more security
  • More tough and dependable
  • Permit numerous provisions to be saved in one card

Areas of Smart Card Applications:

  • Telecommunications: The most prominent use of smart card technology is in the development of SIM card or Subscriber Identity Module. A SIM card provides unique identification to each subscriber and provides network access to each subscriber and manages its authentication.
  • Domestic: The most frequently used smart card in domestic field is the DTH smart card. This card provides authorized access to the information coming from the satellites. In simple words the card with which we can get access to the Direct to Home TV services is nothing but a smart card. The information is encrypted and decrypted within a smart card.
  • Ecommerce and Retail: Smart card can be used to store information like a person’s account details, the transaction details and can be used in purchasing goods online by acting as a credit card. Some retailers can also use smart cards to store points for a particular customer and provide necessary incentives to repeated customers.
  • Banking Application: The most prominent use of smart card in banking application is the replacement of the traditional magnetic stripe based credit or debit card. An example is the MasterCard and VISA.
  • Government Applications: Smart cards are being used by Government to issue identity cards to individual, which contains all the details of the individual. An example is the recently started Adhar card scheme in India.
  • Secured Physical access: Smart cards can be used by Organizations or differed public areas to provide authorized access to the employees (members of the organization) or other persons to the secured areas. The smart card generally contains identity details of the individual which is scanned and checked.
Management Notes

Accumulating balance

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Accumulated Balance simply means sum total of gradually gathering or acquiring in an increasing number or quantity of. Accumulated balance is the total amount example if an investment or insurance, the investments currently holds, including the capital invested and the interest (gain) it has earned to date. Accumulated balance is important in the insurance field because it refers to the total acquired value of a whole (or universal) life insurance policy. It is calculated as the sum or total of the initial investment, plus interest earned to date. Accumulated balance is also referred to as accumulated amount or cash value.

If you are having purchased an asset on hire purchase (asset purchased in instalments), difference between your monthly payment and the actual amount is balance. The accumulated balance may be credit(overstated) or debit(understated).

And if you have accounting knowledge, then accumulated balance is used in trial balance which is derived from an asset, liability or capital account.

Accumulate means to add to, increase, or grow. So an accumulated balance is one that grows or has grown. For example, we took a total of $2000 in depreciation up to now. So right now, the accumulated depreciation account has a balance of $2000. If we took $100 in depreciation this month, that would bring the accumulated depreciation account balance up to $2100. So accumulated = another word for running total. And it stores amounts that increase as time goes by.

Accumulated depreciation is the cumulative depreciation of an asset that has been recorded. Fixed assets like property, plant, and equipment are long-term assets. Depreciation expenses a portion of the cost of the asset in the year it was purchased and each year for the rest of the asset’s useful life. Accumulated depreciation allows investors and analysts to see how much of a fixed asset’s cost has been depreciated.

Management Notes

B2B Payments

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When eCommerce is extended to supply chain management between and among businesses, we get a new concept, which is called Business to business (B2B). B2B area is nowadays growing much faster than B2C and about 80% of the e-commerce is this type.

Companies are able to manage different element along the supply chain like manufacturers, distributors and dealers. So B2B e-commerce is simply e-commerce between two or more companies. Main focus in B2B is on procurement where as B2C already focuses on selling and marketing.

There are two distinct aspects of B2B e-commerce that separate it from the more familiar business-to-consumer (B2C):

Flexibility in pricing: Transactions between businesses often require variability in the pricing of products between purchasers whereas B2C the price is same for everybody or varies rarely in the B2C marketplace.

Integration of business systems: to realize increased productivity and savings, businesses involved in B2B will integrate their internal systems together, enabling less human intervention.

B2B on the internet sounds very attempting, but before making any investment in B2B e-commerce, a company must identify the value created and the effort required for implementation under each of the three categories.

The relative position of the three categories will not be the same for all firms, and position will vary based on the supply chain strategy and competitive environment.

A company must tailor its e-commerce implementation to support categories where the value created is high relative to the cost of implementation.

There are five main ways to send and receive B2B payments:

  • Checks: This category includes traditional paper checks and electronic checks issued by a buyer to a seller. When the check is deposited, the seller’s bank will request payment from the buyer’s bank.
  • Wire transfers: These are funds transfers between banks that are routed through a financial network like SWIFT. Wire transfers usually deliver money within hours.
  • Electronic bank transfers: These are payments between banks that are routed through the Automated Clearing House (ACH). This is one of the safest and reliable payment systems, but bank transfers take a few days longer than wire transfers.
  • Credit cards (including one-time use virtual credit cards): Credit cards allow the seller to receive payment quickly, but the buyer can defer payment for one or more billing cycles.
  • Payment gateway: A payment gateway is an online payment platform that allows the buyer to pay for goods or services online during the checkout process.

Each option differs in ease of use for the sender and recipient, cost, and security. That said, most businesses are shifting away from paper checks and moving toward electronic and digital payments. Below, we’ll introduce you to some B2B payment products that cover the range of different payment processing options.

Management Notes

B2C Payments

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Business to Consumer concentrates to retail or sale side of the eCommerce. It is commerce between companies and consumers, involves customers gathering

information; purchasing physical goods like books or travel or information goods like downloadable digitized material content, such as software, music or electronic books.

As an example from in B2C field is Amazon.com which based on big variety of assortment is closer to a internet shopping mall. In B2C area there are working and non-working markets; three has been a great success at least in

following areas.

Real estate, consumers can have a several pictures or even 360 view of the apartments, or consumer can search by the price, area or by number of rooms, whichever is convenient for their purposes.

Adult entertainment, which is considered to be very discreet personal and business gains a lot of additional value by enabling non-physical contact when doing purchases over the internet.

Travelling; it is easy to enable imaginary view of paradise destination by showing pictures and 360 views of the beaches and accommodation facilities, and consumer being able to purchase the trip just by clicking mouse button. And of course consumer can easily seek for cheapest route or accommodation.

Auctions; being able to bid for a goods over the internet without being present and wait for that one particular object is being auctioned off. drive to the auction place and still there is a big risk that one is not able to get the good with a reasonable price (or not at all). Possible lot of time and effort wasted for nothing.

Banking or personal finance management is a great success, which pertains to the management of personal investments and finances with the use of online banking tools.

Customer support service is a must to have online. Take for example Microsoft. of consumer is where to call Microsoft every time they need information of support or even better Microsoft were to mail an update CD every time there were a security update or service pack.

Not so successful area for B2C are i.e. daily groceries which may work for elderly people but distribution in a large quantity could cause problems.

Other area is items that need “touch or trial” like clothes or luxury items.

Management Notes

Digital Cheques

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An electronic check, or e-check, is a form of payment made via the Internet, or another data network, designed to perform the same function as a conventional paper check. Since the check is in an electronic format, it can be processed in fewer steps.

Additionally, it has more security features than standard paper checks including authentication, public key cryptography, digital signatures, and encryption, among others.

An electronic check is part of the larger electronic banking field and part of a subset of transactions referred to as electronic fund transfers (EFTs). This includes not only electronic checks but also other computerized banking functions such as ATM withdrawals and deposits, debit card transactions and remote check depositing features. The transactions require the use of various computer and networking technologies to gain access to the relevant account data to perform the requested actions.

Electronic checks were developed in response to the transactions that arose in the world of electronic commerce. Electronic checks can be used to make a payment for any transaction that a paper check can cover, and are governed by the same laws that apply to paper checks.

Advantage

Faster Processing

Faster processing times provide a key advantage for business owners. Paper checks must go through numerous steps before the money moves from the customer’s account to the merchant’s, which can take several days. An electronic check often processes in half that time, which means the business gets its money faster. This allows businesses to more easily manage their bills and creates a more stable financial situation for the business.

Fee and Labor Reduction

Businesses that employ electronic checks spend less money on check processing fees, which lets them devote more financial resources to core operations. Electronic checks also require less hands-on labor by employees and management, which allows the business to either reduce its overall labor force or devote that employee time to customer service, inventory management and other mission critical efforts. It also reduces the need to raise product or service costs to offset the labor costs and fees associated with paper checks.

Customer Payment Options

Some customers do not possess a debit or credit card. This limit purchasing options, especially from online vendors. Business that accept electronic checks provide you with access to goods or services that might otherwise remain unavailable to you. For example, if you want to start a website, you need to buy a domain name and purchase web hosting services. If domain registrars and hosting services only accept credit or debit card payments and you can only provide a check, you cannot start your website. If they accept electronic checks, however, you get the chance to start your website without needing to get a credit or debit card.

Disadvantage

Fraud Potential

As computers process electronic checks, hackers can potentially get access to your banking information. Some fraudulent businesses also offer electronic checks as a means to get you to hand them your banking information. The Federal Trade Commission suggests you not provide electronic check information to businesses you do not know and trust, whether online or over the phone. Legitimate merchants typically provide you with transparent information about how they process electronic checks.

Errors and Reduced Float

The computer-driven nature of electronic checks also makes them subject to computer errors. For example, a glitch in the processing might lead to a double withdrawal on your account or an incorrect withdrawal amount. Electronic checks also limit the amount of “float,” the time between writing a check and when the business cashes it. If you write a check to cover your cable bill with the expectation that the check will not be cashed for a week, but the cable company performs an electronic check conversion three days later, you can find your account overdrawn.

Management Notes

Digital wallets

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A digital wallet also known as “e-Wallet” refers to an electronic device, online service, or software program that allows one party to make electronic transactions with another party bartering digital currency units for goods and services. This can include purchasing items on-line with a computer or using a smartphone to purchase something at a store. Money can be deposited in the digital wallet prior to any transactions or, in other cases, an individual’s bank account can be linked to the digital wallet. Users might also have their driver’s license, health card, loyalty card(s) and other ID documents stored within the wallet.

The credentials can be passed to a merchant’s terminal wirelessly via near field communication (NFC). Increasingly, digital wallets are being made not just for basic financial transactions but to also authenticate the holder’s credentials. For example, a digital wallet could verify the age of the buyer to the store while purchasing alcohol. The system has already gained popularity in Japan, where digital wallets are known as “wallet mobiles”. A cryptocurrency wallet is a digital wallet where private keys are stored for cryptocurrencies like bitcoin.

E-wallet is a type of electronic card which is used for transactions made online through a computer or a smartphone. Its utility is same as a credit or debit card. An E-wallet needs to be linked with the individual’s bank account to make payments.

E-wallet is a type of pre-paid account in which a user can store his/her money for any future online transaction. An E-wallet is protected with a password. With the help of an E-wallet, one can make payments for groceries, online purchases, and flight tickets, among others.

E-wallet has mainly two components, software and information. The software component stores personal information and provides security and encryption of the data. The information component is a database of details provided by the user which includes their name, shipping address, payment method, amount to be paid, credit or debit card details, etc.

For setting up an E-wallet account, the user needs to install the software on his/her device, and enter the relevant information required. After shopping online, the E-wallet automatically fills in the user’s information on the payment form. To activate the E-wallet, the user needs to enter his password.

Once the online payment is made, the consumer is not required to fill the order form on any other website as the information gets stored in the database and is updated automatically.

E-wallet has mainly two components, software and information.

Software component stores personal information and provides security and encryption of the data whereas information component is a database of details provided by the user which includes their name, shipping address, payment method, amount to be paid, credit or debit card details, etc.

Types

There are two types of digital wallets: hot wallets and cold wallets. Hot wallets are connected to the internet while cold wallets are not. Most digital wallet holders hold both a hot wallet and a cold wallet. Hot wallets are most often used to make quick payments, while a cold wallet is generally used for storing and holding your money, and has no connection to the internet. Another difference that is apparent when comparing the types of digital wallets, or e-Wallets, is the price. While most hot wallets are free, cold wallets can be expensive.

Security

Along with their different capabilities, these two types of digital wallets also come with a difference in security considerations. As a hot wallet is connected to the internet, they are more susceptible and vulnerable to cyberattacks from hackers. This makes them less secure and open to attack. On the other hand, cold wallets, are much more secure as they do not have an internet connection.

ECML

Digital wallets are designed to be accurate when transferring data to retail checkout forms; however, if a particular e-commerce site has a peculiar checkout system, the digital wallet may fail to properly recognize the form’s fields. This problem has been eliminated by sites and wallet software that use Electronic Commerce Modeling Language (ECML) technology. Electronic Commerce Modeling Language is a protocol that dictates how online retailers structure and set up their checkout forms.

Management Notes

E-Payments Systems, Types

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E–Payment Systems are digital platforms and methods that allow individuals and businesses to make financial transactions electronically without using physical cash or checks. These systems facilitate the transfer of funds for goods, services, or other obligations through the internet, mobile devices, or dedicated electronic networks. E-payment systems encompass various methods, including credit and debit cards, digital wallets, online banking, UPI, mobile payments, and electronic fund transfers. They provide convenience, speed, and accessibility, enabling consumers to pay anytime, anywhere, and allowing businesses to collect payments efficiently. Security is a crucial component, with encryption, tokenization, and authentication protocols protecting sensitive financial information. E-payment systems also support automated record-keeping, real-time tracking, and integration with accounting software, enhancing transparency and reducing manual errors in transactions.

The adoption of e-payment systems has transformed commerce by streamlining financial interactions in both B2B and B2C contexts. They reduce the reliance on physical cash, minimize transaction time, and support global trade by facilitating cross-border payments. E-payment systems encourage digital inclusion, promote financial literacy, and improve operational efficiency for businesses. By offering multiple payment options, secure processing, and instant confirmation, they enhance customer experience and trust. As technology advances, emerging innovations like blockchain-based payments, contactless transactions, and AI-driven fraud detection are further strengthening e-payment systems, making them an integral part of modern digital commerce and the global economy.

Types of E-Payment Systems:

  • Credit/Debit Card Payments

Credit and debit card payments are one of the most widely used e-payment methods. Consumers can make online or in-store purchases by providing card details, which are processed through secure gateways. Credit cards offer short-term financing, while debit cards deduct funds directly from a bank account. These payments are fast, convenient, and globally accepted, making them suitable for both B2C and B2B transactions. Security measures such as encryption, two-factor authentication, and PCI DSS compliance protect sensitive data. Card payments also provide transaction records and facilitate accounting and reconciliation. Their popularity stems from ease of use, instant processing, and widespread merchant acceptance.

  • Digital Wallets

Digital wallets, also called e-wallets, store funds or link bank accounts to enable instant payments. Popular examples include PayPal, Google Pay, Apple Pay, and Paytm. Users can pay online, in-store, or via mobile apps without entering card details each time. Digital wallets provide convenience, speed, and enhanced security through encryption and tokenization. They often support multiple accounts, loyalty points, and transaction tracking. For businesses, digital wallets reduce payment friction, increase conversions, and streamline reconciliation. They are especially useful for small-value, frequent transactions in B2C scenarios, as well as recurring payments for subscriptions and services.

  • Net Banking / Online Bank Transfers

Net banking allows consumers and businesses to make direct transfers from their bank accounts through secure online portals. Methods include IMPS, NEFT, RTGS, and UPI, depending on the country. Payments are authenticated through credentials, OTPs, or two-factor verification, ensuring security. Net banking is suitable for high-value transactions, bill payments, and subscription services. It provides transparency, traceability, and real-time settlement. Businesses benefit from reduced cash handling and efficient fund management. For users, it offers convenience without needing physical visits to banks, making it a widely adopted e-payment system in both domestic and international commerce.

  • Mobile Payments

Mobile payments leverage smartphones, tablets, or wearable devices to facilitate transactions. Consumers use apps, QR codes, or NFC technology for instant payments in-store or online. Examples include Samsung Pay, Apple Pay, Google Pay, and region-specific apps. Mobile payments offer convenience, speed, and integration with loyalty programs or digital wallets. Security is ensured through encryption, tokenization, and biometric verification. This method supports peer-to-peer transfers, bill payments, subscriptions, and small-value purchases efficiently. Businesses benefit from faster settlement, reduced cash handling, and enhanced customer experience. The rise of mobile payments reflects the growing adoption of digital technology in everyday commerce.

  • Contactless Payments

Contactless payments allow users to make transactions by tapping a card, smartphone, or wearable device on a point-of-sale terminal. This method uses Near Field Communication (NFC) or Radio Frequency Identification (RFID) technology for quick, secure, and convenient payments. It reduces physical contact, which is especially beneficial in retail environments and during public health concerns. Contactless payments are fast, typically completing transactions within seconds, and support low- to medium-value purchases. Security features include tokenization, encryption, and one-time dynamic codes. Retailers benefit from faster checkout, higher customer throughput, and improved customer satisfaction, while consumers enjoy speed, convenience, and reduced reliance on cash.

  • Cryptocurrency Payments

Cryptocurrency payments use digital currencies like Bitcoin, Ethereum, or stablecoins to conduct transactions over blockchain networks. They provide decentralized, secure, and transparent payment methods without intermediaries. Cryptocurrencies enable international payments with minimal fees and near-instant settlements. They rely on encryption and digital signatures to protect transactions, making them resistant to fraud or chargebacks. Businesses accepting cryptocurrency can attract tech-savvy consumers and tap into global markets. However, price volatility and regulatory uncertainties pose challenges. Cryptocurrency payments are increasingly used in e-commerce, digital services, and international trade, offering innovative alternatives to traditional banking and enhancing financial inclusion in the digital economy.

  • Buy Now, Pay Later (BNPL)

BNPL allows consumers to purchase products immediately and pay in installments over a set period, often interest-free. This system integrates with e-commerce platforms, offering convenience and flexibility for consumers who want to manage cash flow without immediate full payment. It encourages larger purchases, increases conversion rates, and enhances customer satisfaction. Businesses benefit from higher sales and improved customer loyalty. BNPL services conduct credit checks and assume risk for delayed payments. Widely used in retail and online shopping, BNPL has become a popular e-payment solution, bridging the gap between consumer needs for financial flexibility and business goals of sales growth.

  • Prepaid and Gift Cards

Prepaid and gift cards are loaded with a specific monetary value and used for purchases at participating stores or online platforms. They allow consumers to manage spending, budget, and gift money conveniently. Digital prepaid cards can be integrated with e-wallets, enabling instant online transactions. These cards provide security, as funds are separate from personal bank accounts, and reduce the risk of fraud. Businesses benefit from upfront payments and promotion opportunities. Gift and prepaid cards enhance customer engagement, encourage repeat purchases, and streamline B2C payment processes. Their versatility makes them suitable for retail, e-commerce, and corporate gifting solutions.

Management Notes

Online Stored Value Payment Systems

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Stored value systems are a form of electronic payment technology. They coexist with credit and debit technology and principally target the low value transactions. Online stored value systems have very low transaction cost. Stored value systems are based on creating a form of electronic value, for example on smart cards or as computer files. The value can be bought (withdrawn) anytime and spent in optional parts at a later date.)

History

In the first half of the 1990s online stored value systems were developed. In the beginning the usage of stored value systems was low and it was unclear whether and when they will play a relevant role in the payments system market.

Today “Stored Value Cards (SVC) are one of the most dynamic and fastest growing products in the financial industry”.

SVC as a type of business model are necessary for low value payments. In addition, SVC can only aggregate low value transaction cost-effective.

Examples of typical applications

Typical applications of stored value systems are Stored Value Cards (SVC). An SVC is a smart card with a microchip or a plastic card with a magnetic strip which registers the accounting balance. One leading difference between SVC and prepaid debit cards is that prepaid debit cards are usually issued in the name of the account holders. In contrast Stored Value Cards are usually anonymous. The notion “stored value” means the funds and data which is stored on the card.)

SVC are used as fare cards, telephone prepaid calling cards or for micropayment in shops and vending machines.

How Stored Value Cards work

It is necessary to differ between two types of Stored Value Cards:

Closed system prepaid cards

Closed system prepaid cards have substituted the traditional gift certificate and are known as merchant gift cards. “Closed system” means that the cards are only accepted at a single merchant. These cards are also referred to as “closed loop” or “single-purpose” cards. Purchasers buy a card for a fixed amount and can only use the card at the merchant that issues the card. The cards have often an expiration date or a service fee. In addition most closed system cards cannot be repaid in cash.

Open system prepaid cards

Open system prepaid cards have nothing in common with credit cards. The issuer doesn’t allow a credit to the cardholder. Stored Value Cards use magnetic stripe technology to store information about funds that have been prepaid to the card. The value is not physically stored on the card. With the aid of the card number it is possible to identify the record in a central database. These cards are similar to closed system prepaid cards but they are connected with a retail electronic payments network such as Visa, Visa Electron, MasterCard or Maestro. Different to gift cards they can be used anywhere where debit cards with the same logo are accepted. They are very similar to debit cards except that they don’t require a bank account and can be used to make debit transactions or to withdraw cash from ATM’s.

Management Notes

Secure Electronic Transactions (SET) Protocol, Functions, Requirements, Participants, Process

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Secure Electronic Transactions (SET) Protocol is a standard designed to ensure secure and confidential payment processing for online credit card transactions. Developed by major companies like Visa and MasterCard, SET provides a framework for authenticating both the cardholder and the merchant while protecting sensitive financial data during e-commerce transactions. The protocol uses encryption and digital signatures to maintain data integrity, confidentiality, and non-repudiation. By separating payment information from order details, SET ensures that sensitive card data is only accessible to the payment processor. Its implementation reduces fraud risk, instills consumer confidence, and promotes secure online shopping. Although adoption has been limited compared to modern payment gateways, SET laid the foundation for secure electronic commerce.

Functions of SET Protocol:

  • Cardholder Authentication

SET protocol verifies the identity of the cardholder during online transactions. Using digital certificates and encryption, it ensures that only authorized users can initiate payments. This authentication prevents unauthorized use of credit cards, reducing the risk of fraud. The process involves validating the cardholder’s credentials and confirming that the payment request is legitimate. By securely confirming identity before processing, SET enhances consumer confidence and ensures that merchants only receive authorized payments. Cardholder authentication is a fundamental function that establishes trust between the buyer, seller, and payment processor in electronic commerce.

  • Merchant Authentication

SET also authenticates merchants to ensure that buyers are transacting with legitimate businesses. Using digital certificates, it verifies that the merchant is registered and recognized by the payment system. This prevents fraudulent or fake websites from accepting payments, protecting consumers and their financial data. Merchant authentication assures cardholders that their information will be handled securely and that the transaction is valid. By confirming the identity and legitimacy of the merchant, SET fosters trust in online commerce and reduces the risk of fraud, contributing to a safer and more reliable digital payment ecosystem.

  • Data Confidentiality

SET maintains the confidentiality of sensitive information, such as credit card numbers, by encrypting it during transmission. Both order and payment information are encrypted separately, ensuring that unauthorized parties cannot access or tamper with the data. This prevents fraud, data breaches, and identity theft. By safeguarding private information, SET enhances consumer trust in electronic transactions. Confidentiality also ensures that only intended recipients—merchants and payment processors—can view the data, protecting both buyers and sellers. Maintaining strict confidentiality is a core function of SET, making online credit card transactions safer and more secure.

  • Data Integrity

SET ensures that the transaction data is not altered or corrupted during transmission. Using digital signatures and cryptographic methods, it verifies that the information sent from the cardholder to the merchant or payment processor remains intact. Data integrity protects against tampering, fraud, or accidental errors, ensuring that both parties receive accurate and consistent transaction details. This function helps in dispute resolution and maintains trust in online commerce. By guaranteeing that order details, payment amounts, and cardholder information remain unchanged, SET provides a reliable framework for secure electronic payments.

  • Non-Repudiation

SET provides non-repudiation by ensuring that neither the cardholder nor the merchant can deny a transaction once it has been completed. Digital signatures create a verifiable record of the transaction, linking it to both parties. This prevents disputes over payment authorization or receipt of goods and services. Non-repudiation establishes accountability, ensuring that transactions are legally binding and traceable. It enhances trust in e-commerce by guaranteeing that all parties are responsible for their actions, reducing the risk of fraud, chargebacks, and unauthorized claims, thereby creating a secure environment for online credit card payments.

  • Payment Authorization

SET ensures that payments are properly authorized before completion. The protocol verifies that the cardholder has sufficient funds or credit and that the payment request is legitimate. Authorization occurs through secure communication between the cardholder, merchant, and payment processor. This prevents overdrafts, fraudulent transactions, or unauthorized charges. By providing secure and reliable payment authorization, SET guarantees that only valid transactions are processed. It enhances confidence for both consumers and merchants, ensuring that payments are verified, funds are available, and the transaction proceeds smoothly without errors or delays.

  • Interoperability

SET supports interoperability between different financial institutions, card networks, and e-commerce platforms. It standardizes the way payment information is transmitted, ensuring compatibility across banks, merchants, and payment processors. Interoperability allows consumers and businesses to use different cards, gateways, and systems without facing technical barriers. This function promotes widespread adoption and facilitates seamless electronic commerce, as diverse participants can transact securely. By maintaining consistent standards, SET enables global transactions, reduces technical conflicts, and supports integration with various hardware and software systems, making online payments more efficient and accessible.

  • Fraud Prevention

One of the core functions of SET is preventing fraud in online transactions. By combining cardholder and merchant authentication, encryption, digital signatures, and secure communication channels, SET minimizes risks such as identity theft, unauthorized payments, and tampering. It ensures that only legitimate transactions are processed and that sensitive financial information remains protected. Fraud prevention enhances consumer confidence in electronic commerce and encourages adoption of online payments. By reducing financial and operational risks for both buyers and merchants, SET plays a critical role in creating a safe and trustworthy e-payment ecosystem.

Requirements in SET Protocol:

  • Cardholder Digital Certificate

A cardholder must have a digital certificate issued by a trusted certification authority. This certificate verifies their identity and ensures secure participation in online transactions. It contains encrypted information about the cardholder, including public key data, which is used to authenticate and encrypt payment details. The certificate enables secure communication with merchants and payment processors, ensuring that only authorized users can initiate transactions. Having a valid digital certificate is essential for maintaining confidentiality, integrity, and trust in the SET protocol.

  • Merchant Digital Certificate

Merchants must also possess a digital certificate issued by a recognized certification authority. This certificate authenticates the merchant’s identity to the cardholder and the payment processor. It ensures that consumers are interacting with a legitimate and verified business, reducing the risk of fraud. The merchant certificate is used for encrypting transaction details and verifying digital signatures. Compliance with this requirement enables secure exchange of order and payment information, establishing trust and confidence in the e-commerce ecosystem facilitated by the SET protocol.

  • Payment Gateway Integration

SET requires merchants to integrate with a secure payment gateway that supports the protocol. The gateway facilitates the encrypted transmission of payment information between the cardholder, merchant, and acquiring bank. It ensures that funds are authorized, verified, and settled safely. Payment gateways must support digital certificates, encryption, and authentication procedures to comply with SET standards. This integration is crucial for seamless and secure processing of online transactions, protecting sensitive financial data and maintaining trust between all parties in the electronic commerce process.

  • Certification Authority (CA)

SET requires a trusted Certification Authority to issue and manage digital certificates for both cardholders and merchants. The CA verifies identities and ensures that certificates are valid, preventing unauthorized access or fraudulent transactions. It acts as a third-party authority, providing public key infrastructure (PKI) services such as certificate issuance, renewal, and revocation. By ensuring the authenticity and integrity of certificates, the CA establishes trust between all participants in the transaction process, which is essential for secure electronic commerce under the SET protocol.

  • Encryption Standards

SET mandates the use of strong encryption to protect sensitive payment information during transmission. Data such as credit card numbers, personal details, and transaction specifics must be encrypted using secure cryptographic algorithms. This prevents interception, tampering, or unauthorized access by malicious entities. Encryption ensures confidentiality and integrity of transactions, allowing cardholders and merchants to exchange information safely. Compliance with established encryption standards is a key requirement for SET, making electronic payments secure, trustworthy, and reliable in the digital commerce ecosystem.

  • Digital Signatures

Digital signatures are required in SET to validate the authenticity and integrity of transaction data. Cardholders and merchants sign payment and order information digitally, enabling verification by the recipient or payment processor. This ensures that the data has not been altered in transit and that the sender is legitimate. Digital signatures provide non-repudiation, preventing parties from denying participation in a transaction. They are crucial for building trust, securing transactions, and enabling reliable electronic commerce through the SET protocol.

  • Secure Payment Infrastructure

SET requires a robust and secure payment infrastructure, including payment gateways, servers, and networks capable of handling encrypted transactions. The infrastructure must support authentication, encryption, and digital signature verification to maintain confidentiality and integrity. It ensures that cardholder and merchant data are processed safely and that transactions are authorized correctly. A secure infrastructure prevents unauthorized access, fraud, and data breaches, providing a reliable environment for electronic commerce. Compliance with these standards is essential for the effective implementation of the SET protocol.

  • Compliance with Standards

All participants in SET must comply with established security and payment standards, including PCI DSS and SSL/TLS protocols. Compliance ensures uniform handling of sensitive data, secure encryption, authentication, and authorization across merchants, cardholders, and banks. Adhering to these standards reduces the risk of fraud, data breaches, and financial loss. It also ensures interoperability between different systems and platforms, maintaining trust in online transactions. Standard compliance is fundamental for SET to function efficiently and securely in a global e-commerce environment.

  • User Education and Awareness

SET requires that cardholders and merchants understand the importance of security practices, such as safeguarding passwords, private keys, and certificates. Educated users reduce risks like phishing, unauthorized access, and fraudulent transactions. Awareness ensures that participants properly use digital certificates, encryption, and authentication mechanisms. Training and clear guidelines help in the correct implementation of SET protocols. User education is essential for maximizing the security benefits of SET, fostering trust, and ensuring smooth and safe electronic commerce operations.

Participants in SET Protocol:

  • Cardholder

The cardholder is the consumer or buyer who initiates the purchase in an online transaction. They use a SET-enabled system to securely send payment information to the merchant. The cardholder must possess a valid digital certificate issued by a trusted certification authority, which authenticates their identity and ensures secure communication. Payment details are encrypted and digitally signed, protecting sensitive data from interception. The cardholder interacts with the merchant and payment gateway through the SET protocol, ensuring confidentiality, integrity, and non-repudiation throughout the transaction, while receiving verification and confirmation of payments made.

  • Merchant

The merchant is the seller or business offering goods or services online. They receive orders and encrypted payment information from the cardholder through the SET protocol. Merchants must also have a valid digital certificate to authenticate their identity and gain consumer trust. They encrypt order and payment data before sending it to the payment gateway, ensuring security. The merchant coordinates with the bank to complete the financial transaction and confirms the order to the cardholder. Their role is critical in providing products or services while maintaining the integrity and confidentiality of payment data.

  • Acquiring Bank

The acquiring bank, also called the merchant bank, receives payment requests from the merchant via the payment gateway. It verifies the transaction, processes the payment, and ensures that funds are transferred from the cardholder’s bank account to the merchant’s account. The bank relies on SET’s secure communication, encryption, and authentication protocols to maintain confidentiality and integrity of financial data. By confirming and settling payments, the acquiring bank guarantees that the merchant receives funds while reducing risks of fraud or errors, making it an essential participant in the SET e-commerce ecosystem.

  • Issuing Bank

The issuing bank, also known as the cardholder’s bank, authorizes or declines the payment request based on account balance and credit status. It verifies the cardholder’s digital certificate, approves funds, and communicates securely with the payment gateway. The issuing bank ensures the transaction complies with SET security standards, maintaining confidentiality and integrity. Its approval confirms that the cardholder has sufficient funds or credit for the transaction. By providing authorization, the issuing bank protects both the consumer and merchant from unauthorized or fraudulent transactions in the SET framework.

  • Payment Gateway

The payment gateway acts as a secure intermediary between the merchant, cardholder, and banks. It receives encrypted payment requests, validates digital certificates, and forwards authorization requests to the acquiring and issuing banks. The gateway ensures secure communication, encryption, and digital signatures, preventing interception or tampering. It also confirms transaction approvals or declines and provides settlement instructions to the banks. By managing authorization, encryption, and secure routing, the payment gateway plays a pivotal role in maintaining the integrity, confidentiality, and reliability of SET-based e-commerce transactions.

  • Certification Authority (CA)

The Certification Authority is a trusted third-party entity responsible for issuing, validating, and revoking digital certificates for cardholders and merchants. The CA verifies identities before certificate issuance, ensuring that only legitimate participants can engage in SET transactions. It maintains public key infrastructure (PKI) and enables authentication, encryption, and digital signatures. By certifying participants, the CA establishes trust and prevents fraudulent access. Its role is crucial for the security and credibility of SET transactions, as all parties rely on certificates issued by the CA to verify identities and secure the exchange of sensitive payment information.

Secure Electronic Transaction Process:

  • Cardholder Initiates Payment

The cardholder selects goods or services online and chooses to pay via a SET-enabled system. They enter payment information, which is encrypted and signed using their digital certificate. This ensures the cardholder’s identity is authenticated and transaction data remains confidential. The encrypted payment request is sent securely to the merchant, preventing interception or tampering. By initiating the transaction with proper authentication and encryption, the cardholder ensures that the payment process starts safely within the SET protocol framework.

  • Merchant Receives and Encrypts Order

The merchant receives the cardholder’s order and payment information separately. Using the SET protocol, the merchant encrypts order details and digitally signs them before sending the payment request to the payment gateway. This protects sensitive card information from unauthorized access and ensures data integrity. The separation of payment and order details prevents merchants from accessing card numbers directly, enhancing security. By following SET encryption and authentication rules, merchants guarantee that transactions are processed safely and accurately.

  • Payment Gateway Authorizes Payment

The encrypted payment request reaches the payment gateway, which verifies the cardholder’s and merchant’s digital certificates. The gateway checks card validity, available funds, and compliance with security standards. Once authorized, the transaction is encrypted and sent to the acquiring bank for settlement. This step ensures that only legitimate payments proceed, reducing fraud and errors. The gateway acts as a secure intermediary, maintaining confidentiality, integrity, and non-repudiation, thereby safeguarding both the cardholder and the merchant throughout the transaction process.

  • Bank Settlement

Once the payment gateway authorizes the transaction, the acquiring bank receives the encrypted payment details. The bank verifies the cardholder’s account and transfers the funds to the merchant’s account. Transaction records are maintained for auditing and dispute resolution. The use of encryption and secure communication ensures that sensitive financial data is protected throughout the process. Bank settlement completes the financial aspect of the transaction, guaranteeing that merchants receive payment and cardholders’ funds are accurately debited, maintaining trust and reliability in the SET framework.

  • Merchant Confirms Order

After receiving payment confirmation from the bank, the merchant verifies the transaction and prepares the goods or services for delivery. The merchant then sends a confirmation receipt to the cardholder, often digitally signed to ensure authenticity. This step ensures that the buyer knows the transaction is successful and the order will be fulfilled. By confirming the order securely within the SET protocol, the merchant maintains transparency, reinforces consumer trust, and completes the transactional cycle efficiently while adhering to security standards.

  • Cardholder Receives Goods/Services

Finally, the cardholder receives the purchased goods or services. They can verify the order and ensure that it matches the payment made. SET ensures that all transaction information remains secure throughout delivery, protecting both the buyer and merchant. The combination of authentication, encryption, and digital signatures throughout the process prevents fraud, unauthorized access, or disputes. This step concludes the SET process, reinforcing trust in e-commerce by ensuring that cardholders receive their orders safely and that merchants receive verified payments.

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