Week 5 submission for blog

Dear Sir,

Please find below my Week 5 submission for blog:

Online Payments

It is extremely difficult to replicate the advantages that accrue due to the use of cash in offline payments. Some of the benefits of cash are:

·         There is a zero chance of refusal of payment. Unlike credit card payments, cash transactions once done are final and complete with no chance of refusal to pay.

·         It is easy to maintain anonymity with cash transactions. For this very reason NGOs suffered a setback because the anonymity was lost with online payments.

When it comes to online payment, building trust is the most important factor.

Bank transfers can be replicated online easily by allowing the banks to communicate. RBO sought to create trust in online transactions by implementing various measures. The use of OTP's was protested by the e-tailers for the reason that the increased complexity of online payments resulted in lost sales for them. Despite their resistance, RBI implemented made it mandatory to use an OTP to protect the interest of the online shoppers.

Payment through credit cards

Buyer-> Buyer's bank->Bank account->credit card

1.       In case of the offline scenario that the customer is present for the payment, the following are the requirements for the merchant:-

·         Merchant-> Merchant's Bank-> Current Account and a Merchant Account (very difficult to obtain)->Needs a device linked to the merchant account

·         In this scenario, the merchant pays the cost of the PDC device, pays a maintenance fee and also maintains a security deposit.

2.       In case of an online payment, the merchant requires an online merchant account. The merchant needs to establish a payment gateway and thus, he pays an upfront cost to setup the gateway and also pays an annual fee.

Both the systems must be integrated seamlessly and must supplement each other.

The following picture depicts how an online transaction is carried out:

The approval time for a transaction is T+3, which implies that the merchant's account is settled after 3 days of the day of the transaction. However, considerable amount of risk is involved in an online payment using credit card since banks provide 50 day interest free credit. If in a scenario the customer may refuses to pay after the bill has been raised, then the merchant's bank bears the loss since it already settled the account three days after the transaction took place. Since, the merchant's bank bears the maximum risk; the major share of transaction fee belongs to the merchant's bank. However, to prevent such frauds from happening, banks take preemptive actions by using analytics to determine the transactions that may show signs of fraudulence.

Now the easiest way for an e-tailer to avoid all this complexity, is to use a service like CC Avenue which acts like an agent on behalf of the e-tailer and creates the merchant's account. Such services charge differently for their offerings. For ex- they charge the maximum for their economy services since the risk is higher considering that the merchant are unknown in most cases.

 

Thanks and Regards

Samriddhee Khanna

12IB-069

Section B