Roger Clarke's Intro. to Electronic Payment

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).

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Conventional Payment Mechanisms

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

Cash
- notes, which were until this century issued in many cases by banks, but during this century largely by national governments;
- coins; and
- unofficial tokens accepted as having value, e.g. sweets for small change in Italy in the 1960s and 1970s, when the intrinsic value of the metals in the coins exceeded their face value;
Documents
- bills of exchange;
- cheques drawn on a bank;
- money orders written by an accepted authority such as a national post office;
- letters of credit;
- payment card vouchers.

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:

debit-card transactions. These were a new form of value-transfer, whereby an account-holder, authenticated by the presentation of a token (a data-bearing card) and the keying of a PIN, uses a terminal and network to authorise the transfer of value from their account to that of a merchant;
credit-card transactions. These represent the automated capture of data about purchases against a revolving credit account, replacing what have hitherto been 'flick-flack'-generated hard-copy vouchers.

* 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:

direct credit. This involves an instruction by a payer to their financial institution to pay funds into a payee's account with that or another financial institution. A particular sub-class of the direct credit is the standing order, which is a payment instruction activated at regular intervals (e.g. monthly or quarterly);
direct debit. This involves a payer authorising a payee to initiate the collection of funds periodically, and is appropriate in circumstances where the amount of the payment varies from period to period (e.g. electricity and telephone bills);

* 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:

early (and highly insecure) forms include punched cards, edge-nicked cards and magnetic-stripe cards;
much more secure approaches are emerging which use chip-cards to store and pass tokens;
in more sophisticated implementations, the chip-card is able to not only store and pass value-tokens, but also perform the functions of a debit-card and credit-card. This is often referred to as an electronic purse or wallet;

* 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:

evolutionary approach:
- pre-registered credit / debit card numbers
revolutionary approaches:
- electronic cash-pool
- value-token creation and passing
integrated approach:
- stored-value card payment

Conclusions

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.

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