What is an Electronic Payment System, & How Does It Work?
7 min read
The digital revolution has made it possible to send money to anyone-anytime-anywhere for any need with just a few clicks. There is no need to go to the bank or wait for cheques to be cleared for payments. All transactions, whether peer-to-peer, individual-to-business, or B2B, are now conducted online, with funds transferred instantly. As of December 2023, India has surpassed 100 billion digital transactions, and the electronic payment ecosystem is growing. It facilitates instant fund transfers, overcoming the inefficiencies of traditional payment systems.
The electronic payment system is the foundation of modern commerce. It streamlines the transaction process by making it faster, easier, and more secure, responding to the growing needs of consumers and businesses alike. Let’s explore what an electronic payment system is how it works.
What is an Electronic Payment System?
An Electronic Payment System (EPS)allows businesses and customers to complete financial transactions using online channels, thereby replacing cash or cheques. This helps the customer by ensuring quick and safe payment during the buying and selling process, be it online or in-store. The purpose is to simplify transactions through efficient digital fund transfers, improving the overall customer experience.
Today, individuals need not wait in long lines at the bank or reach out for cash to transfer money to another individual or business. Instantaneous transactions can be done digitally through the digital payment infrastructure. Even the growth of the e-commerce sector is explosive in India, mainly due to the improved electronic payment ecosystem.
Major Contributors to the Electronic Payment System
The electronic payment system is a fast-growing sector with many key players providing various digital transaction platforms and solutions. These players range from traditional banks to fintech companies, each offering different services to meet the needs of consumers and businesses alike. The following is a brief discussion of the different types of payment methods available in the electronic payment system landscape:
UPI (Unified Payments Interface): UPI is one of India’s most popular payment systems, offering real-time inter-bank transactions. It is operated by the National Payments Corporation of India (NPCI) and facilitates secure peer-to-peer and merchant payments through mobile devices.
Mobile Wallets: One of India’s largest mobile wallets, PhonePe facilitates mobile payments, money transfers, and more. It offers users a wide range of services, such as money transfers, bill payments, and online shopping. You can also link bank accounts to your mobile wallet and load some money in it for future payments to merchants using the mobile wallet.
Payment Gateways: A leading payment gateway service provider in India, PhonePe PG, offers businesses solutions to accept, process, and disburse payments, supporting various modes like cards, wallets, UPI, and net banking. It is responsible for end-to-end payment processing, making it easy for merchants to accept various payments.
Credit & Debit Cards: Major credit card companies like Visa, Mastercard and RuPay dominate the global market by enabling secure online and point-of-sale payments. These platforms often integrate with payment processors like PhonePe to process transactions.
Banks: Many traditional banks also play a key role in electronic payments by offering services like Internet banking, mobile banking apps, and real-time transfer systems (e.g., RTGS, NEFT, and IMPS).
How Do Electronic Payment Systems Work?
Understanding electronic payment systems is essential for both businesses and consumers. The following is a step-by-step explanation of the same:
Step 1: Customer Makes Payment The customer selects the product or service to buy and pays, either through an online platform or in-store
Step 2: Authentication If opting for online payment, the system verifies the customer’s details by authenticating card details or mobile wallets to validate security credentials.
Step 3: Payment Gateway The request for payment goes to the payment gateway, which links the customer’s payment method with the business’s bank.
Step 4: Authorisation The gateway contacts the issuing bank to confirm whether such funds or credit are available for the transaction.
Step 5: Transaction Approval Once approved, the bank confirms the transaction both for the customer and the business.
Step 6: Settlement This process is complete once money is transmitted from the customer’s bank account or wallet to the merchant’s account, thus settling the transaction efficiently. Electronic payment systems streamline all these steps to make transactions faster and safer.
Electronic payment systems have transformed how businesses and consumers manage transactions. As digital commerce grows, businesses must offer diverse payment options to meet customer preferences. Here’s an overview of the most common types of electronic payment systems:
Credit and Debit Card Payments
Credit and debit cards are widely used for online and offline transactions. Credit cards allow customers to borrow funds, while debit cards are linked to bank accounts for payments up to the available balance. PhonePe supports both credit and debit card payments for a seamless checkout experience.
Mobile Wallets
Mobile wallets store payment information securely on smartphones, allowing fast transactions. PhonePe’s wallet enables users to store money and make online and offline payments via QR codes or tap payments with just a few taps.
UPI (Unified Payments Interface)
UPI enables instant money transfers between bank accounts using mobile apps, available 24/7. PhonePe integrates UPI, allowing users to make smooth, secure, and instant payments directly from their bank accounts without needing cash or cards.
Bank Transfers
Bank transfers involve moving funds directly between accounts, using methods like NEFT, RTGS, and IMPS for personal and business payments. PhonePe offers seamless integration for bank transfers, making sending and receiving money securely easier.
Contactless Payments
Contactless payments allow quick, secure transactions by tapping a card or smartphone near a POS terminal using NFC technology. PhonePe supports contactless payments through Point-of-Sale (POS) terminals, enabling customers to make swift payments with their cards or smartphones and enhancing overall convenience.
Security Features in Electronic Payment Systems
Since the information related to the exchanged finances is sensitive, security measurements in electronic payment systems are crucial. Therefore, businesses must offer their clients a safe platform to make payments without feeling uncertain or worried about the security of their finances. The following security features help enhance trust in a payment gateway platform for both businesses and consumers:
Encryption: This encodes payment information and sends it to the bank securely so that the third party who is not authorised cannot read it
Two-Factor Authentication (2FA): 2FA protects the account from hackers by requiring users to provide two verification forms, such as a password and a code sent to the mobile phone.
Tokenisation: This replaces sensitive card information with a unique identifier, keeping payment details safe.
PCI-DSS Compliance: PCI-DSS compliance ensures that payment systems comply with universal security standards for card-based transactions.
Benefits of Using Electronic Payment Systems
With the widespread use of mobile phones and the internet in India, businesses incorporating electronic payment systems can be leaders. This is because electronic payment systems bring the following benefits:
Convenience: Customers are able to make real-time transactions regardless of their location.
Speed: Electronic transfers are subsequent to instant. In fact, waiting times are reduced to negligible times compared to other payment methods.
Security: Advanced encryption and authentication methods protect sensitive financial data from breaches.
Global Reach: The systems facilitate businesses to accept payments from customers around the world, which expands their market.
Automation: Electronic payment reduces human error with minimal manual processing, which improves the overall efficiency of transactions.
How to Implement an Electronic Payment System?
Implementing a payment gateway can be straightforward, especially when partnering with a service like PhonePe. Here’s a simplified process:
Choose a Payment Gateway: Select a payment provider like PhonePe that supports multiple payment methods (UPI, cards, wallets, etc.) to cater to diverse customer needs.
Integration: Payment gateway integration is typically done by embedding the gateway’s SDK/API into your website, mobile app, or POS systems. This step allows you to accept online and in-store payments seamlessly.
Compliance and Security: Ensure your payment gateway is PCI-DSS compliant and uses industry-standard encryption and security protocols (e.g., 2FA) to protect sensitive customer information. In most cases, the gateway provider handles these security measures on behalf of the merchant.
Test and Go Live: Before launching the system, conduct thorough testing to ensure all payment methods work as expected, and the payment gateway integrates smoothly with your platform.
Electronic payment systems simplify transactions for businesses and consumers. Convenience, speed, and security are unparalleled elements of such systems, making them indispensable for the significantly digital-first environment of today. To respond to your customer’s needs and stay competitive in the digital business world, adopt a reliable payment gateway such as PhonePe PG to facilitate the online payment process.
