Electronic payment systems are becoming central to on-line business process innovation as companies look for ways to serve customers faster and at lower cost. Emerging innovations in the payment for goods and services in electronic commerce promise to offer a wide range of new business opportunities.
Electronic payment systems and e-commerce are intricately linked given that on-line consumers must pay for products and services. Clearly, payment is an integral part of the mercantile process and prompt payment (or account settlement) is crucial. If the claims and debits of the various participants—individuals, companies, banks, and nonbanks—are not balanced because of payment delay or, even worse default, then the entire business chain is disrupted. Hence an important aspect of e-commerce is prompt and secure payment, clearing, and settlement of credit or debit claims.
But on-line sellers face a problem: How will buyers pay for goods and services? What currency will serve as the medium of exchange in this new marketplace? Everyone agrees that the payment and settlement process is a potential bottleneck in the fast-moving electronic commerce environment if we rely on conventional payment methods such as cash, checks, bank drafts, or bills of exchange. Electronic replicas of these conventional instruments are not well suited for the speed required in e-commerce purchase processing.
For instance, payments of small denominations (micropayments) must be made and accepted by vendors in real time for snippets(pieces) of information. Conventional instruments are too slow for micropayments and the high transaction costs involved in processing them add greatly to the overhead. Therefore new methods of payment are needed to meet the emerging demands of e-commerce. These new payment instruments must be secure, have a low processing cost, and be accepted widely as global currency tender.
We will examine these demands by looking at the following issues:
- What form and characteristics of payment instruments—for example, electronic cash, electronic checks, credit/debit cards—will consumers use?
- In on-line markets, how can we manage the financial risk associated with various payment instruments—privacy, fraud, mistakes, as well as other risks like bank failures? What security features (authentication, privacy, anonymity) need to be designed to reduce these risks?
To answer these questions, we will draw on examples of various electronic payment systems that have been proposed, prototyped, or actually deployed (implemented).
Types of Electronic Payment Systems
Electronic payment systems grow rapidly in banking, retail, health care, on-line markets, and even government—in fact, anywhere money needs to change hands. Organizations are motivated by the need to deliver products and services more cost effectively and to provide a higher quality of service to customers. Let’s briefly describe the pertinent developments in various industries to provide an overall picture of electronic payment systems of the present.
Research into electronic payment systems for consumers can be traced back to the 1940s, and the first applications—credit cards—appeared soon after. In the early 1970s, the emerging electronic payment technology was labeled electronic funds transfer (EFT). EFT is defined as "any transfer of funds initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape. EFT utilizes computer and telecommunication components both to supply and to transfer money or financial assets.
Work on EFT can be segmented into three broad categories:
1. Banking and financial payments
- Large-scale or wholesale payments (e.g., bank-to-bank transfer)
- Small-scale or retail payments (e.g., automated teller machines and cash dispensers)
- Home banking (e.g., bill payment)
2. Retailing payments
- Credit cards (e.g., VISA or MasterCard)
- Private label credit/debit cards (e.g., C. Penney Card)
- Charge cards (e.g., American Express)
3. On-line electronic commerce payments
- Token-based payment systems
Electronic cash (e.g., DigiCash)
Electronic checks (e.g.; NetCheque)
Smart cards or debit cards (e.g., Mondex Electronic Currency Card)
- Credit card-based payment systems
Encrypted credit cards (e.g., World Wide Web form-based encryption) Third- party authorization numbers (e.g., First Virtual)
Retail payments and large-scale payments between banks and business are widely recognized as the pioneering efforts in electronic commerce that involve the extensive use of EDI for transferring payment information.
Risks Associated with Electronic Payment System
Electronic payment is a popular method of making payments globally. It involves sending money from bank to bank instantly-- regardless of the distance involved. Such payment systems use Internet technology, where information is relayed through networked computers from one bank to another. Electronic payment systems are popular because of their convenience. However, they also may pose serious risks to consumers and financial institutions.
Businesses are required by law to provide records of their financial transactions to the government so that their tax compliance can be verified. 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.
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.
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.
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 on a regular basis to many recipients. If you do not check your pay slip at the end of every pay period, for instance, then you might end up with a conflict due to these technical glitches, or anomalies.