Wednesday, May 4, 2011

Online Purchase - Play behind the scenes

Geeks, I always used to wonder how does the electronic payments meet the real money value. Say, if I pay Rs. 1000/- online using my credit/debit card number to IRCTC towards train ticket booking, without the actual transfer of paper money, how do they convert it to the real money value instantly? 

Here is the play behind the scenes:

Here comes 3 parties in this deal: The Customer, The Store and The Bank. There are 5 actions in this process:
  1. PAY : This is the action done by the customer when he urges to purchase something online. He should own a credit/debit card in order to purchase online.

    When the customer hits this action, the bank offers him an electronic file in his name called 'Money file' which is transferred to The Store.

  2. REDEEM: Upon receiving the money file, The Store needs to verify if the received money file is not forged. Hence, store does an action called 'REDEEM'. That is, the store transfers the received money file to the bank and requests to redeem(convert) the money file in the name of the store itself.

    In case it is found that the money file is fraudulent, the store will not send the product to the customer.

  3. TRANSFER: When the store requests to redeem, the bank converts the money file in the name of the store and TRANSFERS it to the store's account.

  4. SHIP: Only after the store finds the received amount is real and it is redeemed back to their account, they ship the product to the customer.

  5. CANCEL: Once after paying the money, the customer may change his decision and attempt to cancel the payment. Note that there will be proper protocols in this process such that the customer cannot cancel payment after the shipping action is done by the store.

Some important issues to be noted:
  • There will be some powerful encryption policies followed by the bank to ensure that the customer could not use the same money file twice to purchase two different products.
  • The money file transferred across in this trade contains encrypted bits of data, which will be an illogical jibber-jabber if it is caught in the wrong hands who may tend to steal that money.

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