Electronic Payment System

Electronic payment systems are extensions of the already existing payment systems for settling accounts, which include credit cards, debit cards, automated teller machines, prepaid cards, etc. In an electronic payment system, accounts are credited or debited between banks and concerned individuals or institutions depending on the information transmitted following a transaction.

For corporate and individuals, cheques are still the most preferred route for payment, but in the developed countries, the monetary value of transactions made through cheques in comparison to that of made through the electronic payment systems is very low. For example in the US, even though less than 5% of all transactions ware done through electronic payment systems, these transactions accounted for more than '88% of the total value. The various payment clearance mechanisms used in the US are the Fedwire of Federal Reserve, Clearing House Interbank Payments System (CHIPS) of New York Clearing House and Automated Clearing House (ACH). Fedwire and CHIPS are used for large value transactions by banks and businesses. Banks settle their end of the day transactions through Fedwire and businesses us CHIPS for foreign exchange transactions. ACH uses private networks for transferring funds between businesses and their suppliers. Therefore, transactions through ACH are of high volume and low value in nature.

There are a large variety of methods, standards and protocols for payment over the Internet. Electronic payment systems need to support web purchasing, be secured from attacks or break ins, be cost effective for low value transactions, etc. The standards used are Anonymous Internet Mercantile Protocols by AT&T Bell Labs, and Secure Electronic Transaction promoted by Master Card and Visa. The software and hardware products used for e payment systems include Cybercash, Digicash, Mondex, NetBill, Netcheque, etc. The electronic payment systems can be broadly categorized into three types: payment using electronic currency, payment using electronic funds, and payment through an intermediary. Intermediaries like credit card services and cheque clearing firms help in adjusting accounts of both the parties involved. To settle non cash payments, information is needed at various levels like

Payment Clearing Services: The identities of buyers, sellers and the instruction to settle payments.
Notational Fund Transfer: The credit card numbers and bank account numbers.
Digital Currency Payment Systems: The actual value of digital currency.

The conventional payment methods include locating a seller, choosing a product, giving a quote, striking a deal and agreeing on payment terms, validating the identity and payment mechanisms and shipment of goods. But these functions don't exist in electronic payment systems. Therefore, there have to be methods that ensure a secure fund transfer in e commerce. The various intermediaries should provide security, identification authentication and payment support for electronic transactions.

Need for electronic payment systems Though credit cards, debit cards, etc. are now widely used and accepted by the sellers, the number of transactions by cash outnumbers the number of transactions made through these instruments. Therefore, there is a need for an equivalent of cash in the digital world.

Anonymity in transactions

Digital currencies can preserve the privacy of the user in a better way than the trusted third party method. (explained earlier) because payment information is separated from the buyer identification in digital transactions. This is possible because the bank, which issues the digital currency, keeps track only of the serial numbers of the currency to authenticate it. Digital coins carry encrypted messages about the user, which will be revealed only if the coin is double spent and through legal means.

Micropayments and the Internet

The need for reducing transaction costs especially in small value transactions is driving the use of digital currency. As explained earlier, non cash devices requi re the verification of buyer's identity to authenticate them. This process is an inefficient method for small value transactions. As the cost of authorization and handling the transactions is high, there is a need to reduce the transaction costs to increase the usage of electronic based payment systems. Therefore, increase in the usage of noncash payment systems totally depends on the reduction in the transaction costs. As PCS and NFT are not suitable for small value transactions, digital currency needs to be fully developed for information trading.

The transferability of value

Another factor that may help increase the usage of digital cash is the removal of third party intervention. A user should be able to complete a transaction without the intervention of the third party. Non cash payment systems usually involve one or more than one party for transaction settlement. It is equivalent to the client server system in which the third party functions as a server and has the authority to validate and authenticate the transaction. On the contrary, a transferable system supports peerto peer transactions and the role of the third party is merged with the digital currency. It is not necessary to have transferable system for the settlement of transactions between two parties, because the involvement of the third party delays the settlement process and increases the cost of transactions. A transferable currency can be used for both online and offline transaction.

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