EMERGENCE OF PAYMENT SYSTEMS IN THE AGE OF

ELECTRONIC COMMERCE: THE STATE OF ART

ABSTRACT The emergence of e-commerce has created new financial needs that in many
cases cannot be effectively fulfilled by the traditional payment systems. Recognizing this,
virtually all interested parties are exploring various types of electronic payment system and
issues surrounding electronic payment system and digital currency. Broadly electronic
payment systems can be classified into four categories: Online Credit Card Payment System,
Online Electronic Cash System, Electronic Cheque System and Smart Cards based Electronic
Payment System. Each payment system has its advantages and disadvantages for the
customers and merchants. These payment systems have numbers of requirements: e.g.
security, acceptability, convenience, cost, anonymity, control, and traceability. Therefore,
instead of focusing on the technological specifications of various electronic payment systems,
the researcher have distinguished electronic payment systems based on what is being
transmitted over the network; and analyze the difference of each electronic payment system
by evaluating their requirements, characteristics and assess the applicability of each system.

INTRODUCTION:
As payment2 is an integral part of mercantile process, electronic payment
system is an integral part of e-commerce. The emergence of e-commerce
(table 1) has created new financial needs that in many cases cannot be
effectively fulfilled by traditional payment systems. For instance, new
types of purchasing relationships-such as auction between individuals
online-have resulted in the need for peer-to-peer3 payment methods that
allows individuals to e-mail payments to the other individual. Recognizing
this, virtually all interested parties (i.e. academicians, government,
business community and financial service providers) are exploring various
types of electronic payment system and issues surrounding electronic
payment system and digital currency. Some proposed electronic payment
systems are simply electronic version of existing payment systems such
as cheques and credit cards, while, others are based on the digital
currency technology and have the potential for definitive impact on
today‟s financial and monetary system. While popular developers of
electronic payment system predict fundamental changes in the financial
sector because of the innovations in electronic payment system (Kalakota
& Ravi, 1996). Therefore, electronic payment systems and in particular,
methods of payment being developed to support electronic commerce
cannot be studied in an isolation. A failure to take place these
developments into the proper context is likely to result in undue focus on
the various experimental initiatives to develop electronic forms of
payment without a proper reflection on the broader implications for the
existing payment system.

Concept and Size of Electronic Payment:

Payment systems that use electronic distribution networks constitute a
frequent practice in the banking and business sector since 1960s4, especially
for the transfer of big amounts of money. In the four decades that have
passed since their appearance, important technological developments5 have
taken place, which on the one hand have expanded the possibilities of
electronic payment systems and on the other hand they have created new
business and social practice, which make the use of these systems
necessary. These changes, naturally, have affected the definition of
electronic payments6, which is evolving depending on the needs of each
period. In its, most general form, the term electronic payment includes any
payment to businesses, bank or public services from citizens or businesses,
which are executed through a telecommunications or electronic networks
using modern technology. It is obvious that based on this definition, the
electronic payments that will be the objects of present result, are the
payment that are executed by the payer himself, whether the latter is a
consumer or a business, without the intervention of the another natural
person. Furthermore, the payment is made from distance, without the
physical presence of the payer and naturally it does not include cash. By
providing such definition for the electronic payment system, researcher
include the transfer of information concerning the accounts of the parties
involved in the e-commerce transactions, as well as the technological means
of distribution channels through which the transactions is executed.
Size of Electronic Payments: Electronic payment system is conducted in
different e-commerce categories such as Business-to-Business (B2B),
Business-to-Consumer (B2C), Consumer-to-Business (C2B) and Consumer-to-
Consumer (C2C). Each of which has special characteristics that depend on
the value of order. Danial, (2002) classified electronic payment systems as
follows:

Micro Payment (less than $ 10) that is mainly conducted in C2C and B2C e-
commerce.

Consumer Payment that has a value between $ 10 and $ 500. It is conducted

mainly in B2C transactions.

Business Payment that has the value more than $ 500. it is conducted mainly
in B2B e-commerce .

B2B transactions account about 95% of e-commerce transactions, while

others account about 5% (Turban et al, 2004). P2P, which is related to the
C2C category transactions, is relatively small due to its stiff usability. Further,
Cavarretta and de Silva (1995), identify three classes of typical electronic
transactions:

Tiny value transactions: below $1.

Medium value transactions: between $ 1 and $ 1,000

Large value transactions: above $ 1,000.

Systems that can support tiny value transactions have to trade-off between
conveniences of transactions (the major part of a cost in an extremely cheap
transaction) vs. the security or durability of transactions. On the other side of
the amount range, large value transactions will require highly secure
protocols whose implementations are costly: be on-line and/or carry
traceability information. Finally, nearly all the system can perform medium
value transactions.

Process of Electronic Payment System:

Electronic payment systems have been in operations since 1960s and have been
expanding rapidly as well as growing in complexity. After the development of
conventional payment system, EFT (Electronic Fund Transfer) based payment system
came into existence. It was first electronic based payment system, which does not
depend on a central processing intermediary9. An electronic fund transfer is a
financial application of EDI (Electronic Data Interchange), which sends credit card
numbers or electronic cheques via secured private networks between banks and
major corporations. To use EFT to clear payments and settle accounts, an online
payment service will need to add capabilities to process orders, accounts and
receipts. But a landmark came in this direction with the development of digital
currency10. The nature of digital currency or electronic money mirrors that of paper
money as a means of payment. As such, digital currency payment systems have the
same advantages as paper currency payment, namely anonymity and convenience.
As in other electronic payment systems (i.e. EFT based and intermediary based) here
too security during the transaction and storage is a concern, although from the
different perspective, for digital currency systems double spending, counterfeiting,
and storage become critical issues whereas eavesdropping and the issue of liability
(when charges are made without authorizations) is important for the notational funds
transfer. Figure 2 shows digital currency based payment system.

TYPES OF ELECTRONIC PAYMENT SYSTEMS:

With the growing complexities in the e-commerce transactions, different
electronic payment systems have appeared in the last few years. At least
dozens of electronic payment systems proposed or already in practice are
found. The grouping can be made on the basis of what information is being
transferred online. Murthy (2002) explained six types of electronic payment
systems: (1) PC-Banking (2) Credit Cards (3) Electronic Cheques (i-cheques)
(4) Micro payment (5) Smart Cards and (6) E-Cash. Kalakota and Whinston
(1996) identified three types of electronic payment systems: (1) Digital Token
based electronic payment systems12, (2) Smart Card based electronic
payment system13 and (3) Credit based electronic payment systems14. Dennis
(2001) classified electronic payment system into two categories: (1)
Electronic Cash and (2) Electronic Debit-Credit Card Systems. Thus, electronic
payment system can be broadly divided into four general types (Anderson,
1998):

*Online Credit Card Payment System

*Electronic Cheque System

*Electronic Cash System and

*Smart Card based Electronic Payment System

Online Credit Card Payment System: It seeks to extend the functionality

of existing credit cards15 for use as online shopping payment tools. This
payment system has been widely accepted by consumers and merchants
throughout the world, and by far the most popular methods of payments
especially in the retail markets (Laudon and Traver, 2002). This form of
payment system has several advantages, which were never available through
the traditional modes of payment. Some of the most important are: privacy,
integrity, compatibility, good transaction efficiency, acceptability,
convenience, mobility, low financial risk and anonymity. Added to all these, to
avoid the complexity associated with the digital cash or electronic-cheques,
consumers and vendors are also looking at
credit card payments on the internet as one of possible time-tested
alternative. But, this payment system has raised several problems before the
consumers and merchants. Online credit card payment seeks to address
several limitations of online credit card payments for merchant including lack
of authentication, repudiation of charges and credit card frauds. It also seeks
to address consumer fears about using credit card such as having to reveal
credit information at multiple sites and repeatedly having to communicate
sensitive information over the Internet. Basic process of Online Credit Card
Payment System is very simple. If consumers want to purchase a product or
service, they simply send their credit card details to the service provider
involved and the credit card organization will handle this payment like any
other.

Electronic Cheque Payment System: Electronic cheques16 address the

electronic needs of millions of businesses, which today exchange traditional
paper cheques with the other vendors, consumers and government. The e-
cheque method17 was deliberately created to work in much the same way as
conventional paper cheque. An account holder will issue an electronic
document that contains the name of the financial institution, the payer‟s
account number, the name of payee and amount of cheque. Most of the
information is in uncoded form. Like a paper cheques e-cheques also bear the
digital equivalent of signature: a computed number that authenticates the
cheque from the owner of the account. Digital chequing payment system
seeks to extend the functionality of existing chequing accounts for use as
online shopping payment tools. Electronic cheque system has many
advantages: (1) they do not require consumers to reveal account information
to other individuals when setting an auction (2) they do not require
consumers to continually send sensitive financial information over the web
(3) they are less expensive than credit cards and (4) they are much faster
than paper based traditional cheque. But, this system of payment also has
several disadvantages. The disadvantage of electronic cheque system
includes their relatively high fixed costs, their limited use only in virtual world
and the fact that they can protect the users‟ anonymity. Therefore, it is not
very suitable for the retail transactions by consumers, although useful for the
government and B2B operations because the latter transactions do not
require anonymity, and the amount of transactions is generally large enough
to cover fixed processing cost. The process18 of electronic chequing system
can be described using (figure 4) the following steps. . Step 1: a purchaser
fills a purchase order form, attaches a payment advice (electronic cheque),
signs it with his private key (using his signature hardware), attaches his
public key certificate, encrypts it using his private key and sends it to the
vendor. Step 2: the vendor decrypts the information using his private key,
checks the purchaser‟s certificates, signature and cheque, attaches his
deposit slip, and endorses the deposit attaching his public key certificates.
This is encrypted and sent to his bank. Step 3: the vendor‟s bank checks
the signatures and certificates and sends the cheque for clearance. The
banks and clearing houses normally have a private secure data network. Step
4: when the cheque is cleared, the amount is credited to the vendor‟s
account and a credit advice is sent to him. Step 5: the purchaser gets a
consolidated debit advice periodically.

Electronic Cash Payment System: Electronic cash (e-cash)19 is a new

concept in online payment system 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 is an
electronic or digital form of value storage and value exchange that have
limited convertibility into other forms of value and require intermediaries to
convert. E-cash presents some characteristics like monetary value20,
storability and irretrievability21, interoperability22 and security23. All these
characteristics make it more attractive payment system over the Internet.
Added to these, this payment system offers numerous advantages like
authority, privacy24, good acceptability, low transactions cost, convenience
and good anonymity25. But, this system of payment also has many limitations
like poor mobility26, poor transaction efficiency27 and high financial risk, as
people are solely responsible for the lost or stolen. Gary and Perry (2002),
just like real world currency counterpart, electronic cash is susceptible to
forgery. It is possible, though increasingly difficult, to create and spend
forged e-cash. E-Cash Structure: e-cash structure could be identified as a
string of bits that represents certain values such as reference number and
digital signature, which could be used for the security purpose to prevent
forgery and criminal use (Wright, 2002). But, the structure proposed by
Wright (2002) needs some extension to make e-cash more secure.

CONCLUDING REMARKS :
Technology has inarguably made our lives easier. It has cut across distance,
space and even time. One of the technological innovations in banking,
finance and commerce is the Electronic Payments. Electronic Payments (e-
payments) refers to the technological breakthrough that enables us to
perform financial transactions electronically, thus avoiding long lines and
other hassles. Electronic Payments provides greater freedom to individuals in
paying their taxes, licenses, fees, fines and purchases at unconventional
locations and at whichever time of the day, 365 days of the year. On the
basis of present study, first remark is that despite the existence of variety of
e-commerce payment
systems, credit cards are the most dominant payment system. This is
consequences of advantageous characteristics, most importantly the long
established networks and very wide users‟ base. Second, alternative e-
commerce payment systems are some countries are debit cards. In fact, like
many other studies, present study also reveals that the smart card based e-
commerce payment system is best and it is expected that in the future smart
cards will eventually replace the other electronic payment systems. Third,
given the limited users bases, e-cash is not a feasible payment option. Thus,
there are number of factors which affect the usage of e-commerce payment
systems. Among all these user base is most important. Added to this, success
of e-commerce payment systems also depends on consumer preferences,
ease of use, cost, industry agreement, authorization, security, authentication,
non-refutability, accessibility and reliability and anonymity and public policy.