Concept of Digital Token and E-Payment Systems

None of the banking or retailing payment methods is completely adequate in their present form for the consumer-oriented e-commerce environment. Their deficiency is their assumption that the parties will at some time be in each other's physical presence or that there will be a sufficient delay in the payment process for frauds, overdrafts, and other undesirables to be identified and corrected. These assumptions may not hold for e-commerce and so many of these payment mechanisms are being modified and adapted for the conduct of business over networks.

Entirely new forms of financial instruments are also being developed. One such new financial instrument is "electronic tokens" in the form of electronic cash/money or checks. Electronic tokens are designed as electronic analogs of various forms of payment backed by a bank or financial institution. Simply stated, electronic tokens are equivalent to cash that is backed by a bank.

Electronic tokens are of three types:

  1. Cash or real-time: Transactions are settled with the exchange of electronic An example of on-line currency exchange is electronic cash (e-cash).
  2. Debit or prepaid: Users pay in advance for the privilege of getting information. Examples of prepaid payment mechanisms are stored in smart cards and electronic purses that store electronic money.
  3. Credit or postpaid: The server authenticates the customers and verifies with the bank that funds are adequate before purchase. Examples of postpaid mechanisms are credit/debit cards and electronic checks.

Concept of E-Cash

Electronic cash (e-cash) is a new concept in on-line payment systems because it combines computerized convenience with security and privacy that improve on paper cash. Its versatility opens up a host of new markets and applications. E-cash presents some interesting characteristics that should make it an attractive alternative for payment over the Internet.

E-cash focuses on replacing cash as the principal payment vehicle in consumer-oriented electronic payments. Although it may be surprising to some, cash is still the most prevalent consumer payment instrument even after thirty years of continuous developments in electronic payment systems. Cash remains the dominant form of payment for three reasons:

  • Lack of trust in the banking system,
  • Inefficient clearing and settlement of noncash transactions, and
  • Negative real interest rates paid on bank deposits

Now compare cash to credit and debit cards. First, they can't be given away because, technically, they are identification cards owned by the issuer and restricted to one user. Credit and debit cards are not legal tender, given that merchants have the right to refuse to accept them. Nor are credit and debit cards bearer instruments; their usage requires an account relationship and authorization system. Similarly, checks require either personal knowledge of the payer or a check guarantee system. Hence, to really create a novel electronic payment method, we need to do more than recreate the convenience that is offered by credit and debit cards. We need to develop e-cash that has some of the properties of cash.

What is electronic cash? : Electronic cash is one of the instruments that can be used to conduct paperless transactions. Paperless transaction is a term used to describe financial exchanges that do not involve the physical exchange of currency. Instead, monetary value is electronically credited and debited. Often called e-cash or digital money, this financial instrument is commonly used to conduct distant transactions, such as those between parties on the Internet and those between parties in different countries.

In most cases, e-cash is equivalent to paper currency and can therefore be exchanged among individuals or spent for any types of goods or services that a person wishes to acquire. This financial instrument has played a large role in the increasing popularity of telecommuting, which is an arrangement that allows people to work together in distant places.

Digital currency can allow a freelancer in Nepal to be paid for work that the he did for a contractor in Canada. This is possible due to a monetary exchange system. The value of that money is then credited to someone else in another place. The paper currency the sender presents or which is taken from his account is not physically sent and given to the receiver. Electronic cash is exchanged in a similar way. One major difference, however, is that transactions can often be conducted without a live middle man.

People involved in electronic cash transfers may never acquire any paper currency. They may receive their funds electronically and they may use them electronically. This does not mean, however, that it is impossible to get paper currency from electronic cash.

In many instances, electronic money can be converted into paper currency quite easily. This is possible because e-cash is commonly held in an account that can be accessed in several ways. For example, many have debit cards that can be used at an automated teller machine (ATM). Sometimes, a person can request that all or a portion of the money held electronically be made available by check.

There are a number of advantages of electronic cash. One of them is that it eliminates the apprehension that many people feel about carrying and exchanging paper currency.

Another advantage of electronic cash is that it is usually easily converted to another currency, making traveling and international business substantially easier.


                                                                    Fig: Transaction of Electronic Cash

The figure shows the basic operation. User A obtains digital cash "coins" from her bank (and the bank deducts a corresponding amount from her account). The user is now entitled to use the coins by giving them to another user B, which might be a merchant. B receives e-cash during a transaction and see that it has been authorized by a bank. They can then pay the cash into their account at the bank.

Ideal properties of a Digital Cash system should be:

  1. Secure. Alice should be able to pass digital cash to Bob without either of them, or others, able to alter or reproduce the electronic token.
  2. Anonymous. Alice should be able to pay Bob without revealing her identity, and without Bob revealing his Moreover, the Bank should not know who Alice paid or who Bob was paid by. Even stronger, they should have the option to remain anonymous concerning the mere existence of a payment on their behalf.
  3. Portable. The security and use of the digital cash is not dependent on any physical The cash should be able to be stored on disk or USB memory stick, sent by email, SMS, internet chat, or uploaded on web forms. Digital cash should not be restricted to a single, proprietary computer network.
  4. Off-line capable. The protocol between the two exchanging parties is executed off-line, meaning that neither is required to be host-connected in order to proceed.
  5. Wide acceptability. The digital cash is well-known and accepted in a large commercial With several digital cash providers displaying wide acceptability, Alice should be able to use her preferred unit in more than just a restricted local setting.
  6. User-friendly. The digital cash should be simple to use from both the spending perspective and the receiving Simplicity leads to mass use and mass use leads to wide acceptability. Alice and Bob should not require a degree in cryptography as the protocol machinations should be transparent to the immediate user.

Here is the summary of the pros and cons of the online electronic cash system:


  • Provides fully anonymous and untraceable digital cash.
  • No double spending problems (coins are checked in real time during the transaction).
  • No additional secure hardware required.


  • Communications overhead between merchant and the bank.
  • Huge database of coin records -- the bank server needs to maintain an ever- growing database for all the used coins’ serial numbers.
  • Difficult to scale, need synchronization between bank servers.
  • Coins are not reusable.

Concept of E-Cheque

When you write a check, you may assume that the piece of paper you write on will be deposited at a bank and processed manually. Electronic check conversion makes that process less and less likely. Instead of processing the piece of paper, some businesses prefer to turn your paper check into an electronic check.

How Electronic Checks Work? How does a piece of paper become an electronic check? The business you write the check to slips the check into a machine that reads information from your check. That information is all the business needs to collect money from your bank account.

With E-Checks, a check imager is connected to a small printer through a credit card terminal directly at the point of sale. When a customer presents a check, the check is scanned by the imager, the magnetic data (MICR) indicating the bank routing number and account number are read, and the dollar amount of the check is entered. The E- Check process verifies the check by comparing the check's bank account and the customer’s driver’s license with a national negative database to determine if the account has a fraud history, is closed, or has had insufficient funds (NSF) problems. If the check is approved, a receipt is printed for customer signature. The check and a copy of the signed receipt are returned to the customer. The captured data is used in the electronic transfer of money through the Automated Clearing House (ACH) system.


                                                                       Fig: Electronic Check Format

Merchant benefits of converting checks to an electronic form:

  • Saves you time with your deposits - no more bank runs or long teller lines.
  • Lowers traditional bank fees, like per item deposit and returned item fees.
  • Funds you quickly, usually within 2 business days of the original transaction.
  • Secures your customer’s personal and bank account information by returning the original item to the check writer.
  • Provides your customers complete transaction information for easy bank reconciliation, as well as providing sales information, like store name and location.
  • Expandable equipment is simple and user friendly.


Impact of Electronic Checks

Electronic checks allow businesses to process payments more quickly. As a result, the money will come out of your checking account sooner than you might expect. You need to make sure you have enough money in your account when you write a check, and you can’t rely on ‘float’ time as much as you might have in the past. Keep a balanced checkbook and consider some type of overdraft protection plan. Since you’re paying electronically anyway, you now have even less reason to write checks the old fashioned way.

Where Electronic Check Conversion Happens?

Your paper checks may be converted to electronic checks right in front of you, or it may happen when you mail a check to somebody to pay a bill. Either way, they’re making an electronic check so that they can process your payment electronically.

Electronic Check Disclosure and Identification

Businesses are supposed to notify you that they’re making an electronic check. If you’re in a store, there should be a sign near the register that says they’ll turn your paper check into an electronic check. If you’re mailing in a check to pay a bill, the company probably disclosed their electronic check policy somewhere in the fine print of an agreement or on the back of your statement. If the cashier drops your check into a machine and hands it back to you when you make a purchase, they’ve used an electronic check.