Introduction to Electronic Payment Mechanisms

Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Fellow, Department of Computer Science, Australian National University

Revision of 24 May 1998

© Xamax Consultancy Pty Ltd, 1995, 1997, 1998

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The purpose of this document is to provide a brief background to the rapid emergence of methods which use electronic means to transfer value, or to facilitate the transfer of value. Some of these are operational (e.g. EFT/POS, F-EDI and stored-value cards), whereas others are in trial or on the drawing boards (e.g. electronic cash, especially of the 'milli-cent' variety).

To provide feedback, please email to the convenor, Roger Clarke, using the subject heading EPM (to ensure that my email filter places it in the right in-tray).

Conventional Payment Mechanisms

Value has been conventionally transferred using a variety of techniques, including:

These mechanisms have various characteristics, such as the extent to which the parties are identified, the traceability of the transaction, and the taxability of the transaction. The reason that so many mechanisms exist is that there are many different circumstances in which value is exchanged, and each of the mechanisms has niche-markets in which it is perceived by at least some parties to have advantages.

Electronic Payment Mechanisms

Information technology has created, and continues to create, many new possibilities for value-exchange. Some of the new techniques represent automation of existing methods, whereas others are novel or revolutionary.

The following mechanisms exist, are in pilot, or are being designed:

* electronic funds transfer at point of sale (EFT/POS)

EFT/POS involves the use of plastic cards in terminals on merchants' premises. It actually comprises two distinct mechanisms:

* direct data entry transactions

Direct data entry provides a less circuitous path for transaction data than is the case with cheques. It is also of two types:

* financial electronic data interchange (F-EDI)

F-EDI involves the transmission of payment transaction data, and associated remittance advice data, from a payee to their bank, for onforwarding (via banks and/or value-added network operators) to the payee's bank and the payee;

* 'home banking'

This term is used for a variety of related methods whereby a payer uses an electronic device in the home or workplace to initiate payment to a payee. In addition to computer technology, it can be performed using the telephone and interactive voice response (IVR);

* stored-value cards

This is a form of automation of cash, in which the tokens are not physical (like notes and coins), but electronic. It is targeted at circumstances in which the card-holder is present at a point of sale or service. There are several variants:

* electronic cash

This is another form of automation of cash into electronic form. It addresses circumstances in which the payer is *not* present at the point of sale or service, but has electronic communications facilities available, e.g. is connected to the Internet, or to some other manifestation of the emergent global information infrastructure, such as a cable-TV installation with enhanced capabilities.

A (very provisional) classification of the kinds of schemes for electronic cash is as follows:


A competitive battle is raging between conventional and electronic payment mechanisms, and among the various new schemes. It is unlikely that cash payment will die out, because of its ease of use, flexibility, anonymity, and robustness in the face of technical difficulties. On the other hand, some venerable documentary methods may quickly disappear, because one or more electronic mechanisms that address the same niche appear likely to be much more efficient.

Enormous changes are taking place in commerce, and it is important that the issues be subjected to careful analysis from the viewpoints of corporations, regulatory agencies, the economy, society and individuals.

Next Steps

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Created: 24 December 1995

Last Amended: 24 May 1998; addition of FfE licence 5 March 2004

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