What are the risks in Electronic payment systems?

 Risks in Electronic payment systems

1)Tax Evasion:- Businesses are required by law to provide records of their financial transactions to the government so that their tax compliance can be verified. The electronic payment however can frustrate the efforts of tax collection. Unless a business discloses the various electronic payments it has made or received over the tax period, the government may not know the truth, which could cause tax evasion.

2)Fraud:-  Electronic payment systems are prone to fraud. The payment is done usually after keying in a password and sometimes answering security questions. There is no way of verifying the true identity of the maker of the transaction. As long as the password and security questions are correct, the system assumes you are the right person. If this information falls into the possession of fraudsters, then they can defraud you of your money.

3)Impulse Buying:-  Electronic payment systems encourage impulse buying, especially online. You are likely to make a decision to purchase an item you find on sale online, even though you had not planned to buy it, just because it will cost you just a click to buy it through your credit card. Impulse buying leads to disorganized budgets and is one of the disadvantages of electronic payment systems.

4)Payment Conflict:- Payment conflicts often arise because the payments are not done manually but by an automated system that can cause errors. This is especially common when payment is done regularly to many recipients. If you do not check your payslip at the end of every pay period, for instance, then you might end up with a conflict due to these technical glitches, or anomalies.

                           OR,

Electronic payments allow you to transfer cash from your own bank account to the bank account of the recipient almost instantaneously. This payment system relies heavily on the internet and is quite popular due to the convenience it affords the user. It would be hard to overstate the advantages of electronic payment systems, but what about the risks? Certainly, they exist, both for financial institutions and consumers.

The Risk of Fraud

• Electronic payment systems are not immune to the risk of fraud. 

• The system uses a particularly vulnerable protocol to establish the identity of the person authorizing payment. 

• Passwords and security questions aren’t foolproof in determining the identity of a person. So long as the password and the answers to the security questions are correct, the system doesn’t care who’s on the other side. 

• If someone gains access to your password or the answers to your security question, they will have gained access to your money and can steal it from you.

The Risk of Tax Evasion

• The law requires that businesses declare their financial transactions and provide paper records of them so that tax compliance can be verified. 

• The problem with electronic systems is that they don’t fit very cleanly into this paradigm and so they can make the process of tax collection very frustrating for the Internal Revenue Service. 

• It is at the business’s discretion to disclose payments received or made via electronic payment systems in a fiscal period, and the IRS has no way of knowing if it’s telling the truth or not.

•  That makes it pretty easy to evade taxation.

The Risk of Payment Conflicts

• One of the idiosyncrasies of electronic payment systems is that the payments aren’t handled by humans but by an automated electronic system. 

• The system is prone to errors, particularly when it has to handle large amounts of payments frequently with many recipients involved. 

• It’s important to constantly check your payslip after every pay period ends to ensure everything makes sense. 

• Failure to do this may result in payment conflicts caused by technical glitches and anomalies.

The Risk of Impulse Buying

• Impulse buying is already a risk that you face when you use non-electronic payment systems. It is magnified, however, when you’re able to buy things online at the click of a mouse. 

• Impulse buying can become habitual and makes sticking to a budget almost impossible.

                                    OR,

1. From Customer's Perspective:

• Stolen Payment credentials and passwords.
• Dishonest merchants for financial service providers.
• Disputes over the quality of services and products.

a) Fraud

Electronic payment systems are prone to fraud. The payment is done usually after keying in a password and sometimes answering security questions. There is no way of verifying the true identity of the maker of the transaction. As long as the password and security questions are correct, the system assumes the right person. If this information falls into the possession of fraudsters, then they can defraud the money.

b) Impulse Buying

Electronic payment systems encourage impulse buying, especially online and customers are likely to make a decision to purchase an item they find on sale online because it will cost just a click to buy it through a credit card. 

Impulse buying leads to disorganized budgets and is one of the disadvantages of electronic payment systems.

2. From Merchant's Perspective:

• Forget payment.
• Insufficient funds in customers' accounts.
• Slow Financial service providers.

3. From Financial Service Providers Perspective:

• Stolen customer or service credentials.

c) Tax Evasion

Businesses are required by law to provide records of their financial transactions to the government so that their tax compliance can be verified. The electronic payment however can frustrate the efforts of tax collection. Unless a business discloses the various electronic payments it has made or received over the tax period, the government may not know the truth, which could cause tax evasion.

d) Payment Conflict

Payment conflicts often arise because the payments are not done manually but by an automated system that can cause errors. This is especially common when payment is done regularly to many recipients. If you do not check your payslip at the end of every pay period, for instance, then you might end up with a conflict due to these technical glitches, or anomalies.

                                                         OR,

According to The NCUA Report:

As electronic payments grow to play much larger roles in credit union operations, NCUA has detailed key risks associated with these transactions and shares advice for CUs. 

Credit risk: There is a risk to a transaction if a party cannot provide the necessary funds for a settlement to take place. This can occur if an originator goes bankrupt or returns come in after settlement. Weaknesses such as a lack of appropriate exposure thresholds or limits, and inadequate originator credit analysis, elevate the potential for credit risk.

Fraud risk: There is the potential that a new transaction will be added to the processing stream for illicit reasons, or an existing transaction will be intentionally altered in an attempt to misdirect or misappropriate funds, NCUA wrote. Inadequate internal controls over physical security, data security, change controls, and operational controls increase the potential for fraud and possible losses to a credit union.

Compliance risk: There is the possibility a credit union will fail to comply with regulatory requirements, including—but not limited to—the Electronic Funds Transfer Act, the Bank Secrecy Act, and requirements of the Office of Foreign Assets Control.

Liquidity risk: There is a possibility a credit union will be unable to settle an obligation for full value when it is due, cautioned the agency. This can occur when the credit union chooses not to warehouse ACH items (making funds available prior to the effective date of the transaction), there are ineffective controls over overdrafts or management lacks a risk assessment on high-risk activities.

Systemic risk: There is the potential one or more participants in the clearing and settlement network will be unable or unwilling to settle its commitments. This could cause other participants to be unable to settle their commitments on one or more other payment networks.

Operational and transaction risk: There is a possibility that a credit union will have inadequate or failed internal processes, people, and systems, stated NCUA. The potential for a non-posting or erroneous posting to a member account is something a credit union’s management must be prepared for. Many financial institutions process payments across different retail and wholesale payment systems. The industry has identified this additional complexity as “cross-channel risk.” In cross-channel risk, fraud can take place across multiple channels or access points a member does business through, such as the branch, call center, debit card, ATM, voice response unit, or mobile banking site or application.

Strategic risk: There is the potential for risk when a credit union grows its payment services without adequate planning or offers new payment services without proper vendor due diligence.

Reputation risk: There is a possibility that a credit union will be unable to meet customer expectations with the delivery of retail payment services. Accounting for and mitigating these potential risks can be difficult for even the most seasoned of managers, NCUA explained. Those who are considering providing one or all of these services to their members for the first time face even greater challenges.