With the advent of online shopping, most modern businesses have invested a considerable amount to be able to ply their goods and services to consumers without the latter having to leave the comfort of their homes or go to a business establishment for a product or service that they need. Since E-Commerce has become prevalent, businesses have had to come up with ways to facilitate payment electronically. The types of electronic payment systems are discussed in this paper, as well as how each mode of payment plays a part in E-Commerce nowadays.
The advantages and disadvantages of these types of electronic payment systems to both the consumer and the businesses are also discussed.
Classifications of Electronic Payment Systems
Abrazhevich (2001), classified electronic payment systems into two major categories; electronic currency systems and credit-debit systems. Electronic currency is similar to that of the regular money that we use.
Abrazhevich (2001) likened electronic cash as “tokens” that represent actual monetary value, much like banknotes affect the value of the actual paper money that we use. With this system, the customers use smart card systems and online cash systems to pay for whatever goods or services they wish to buy online. Mondex, Chipper, and Proton are some examples of smart card systems while Netcash, Ecash, and Millicent are examples of online cash systems.
Electronic Currency Systems
Smart cards are similar to credit cards but they contain a chip embedded in the card which stores the customer’s account information, as well as how much electronic cash is left on the smart card. Customers are generally required to charge money into their smart cards in advance, either by transferring money from their bank account or purchasing token credits by depositing actual money to their smart card account. This particular feature has helped smart cards slowly gain popularity because it runs less of a risk for the customer to accumulate thousands of dollars in debt, either by overspending, or if their card falls into the wrong hands.
Online cash systems, or e-cash are similar to smart card system except that they were developed primarily to provide anonymity for the customer. With it, online shoppers can purchase goods or services without having to divulge any more information about themselves than they have to. The lax security requirements of online cash systems can pose several problems for financial establishments, particularly money laundering issues. The banks also have to maintain a massive database, which generally impedes growth and popularity of these types of systems.
Credit-debit systems are described by Abrazevich (2001) as being represented by numbers in a customer’s bank account. These numbers are then transmitted between the business and the customer in an electronic manner, typically using the internet. This type of system can further be subdivided into generic systems, specialized systems, and credit-debit systems. Paypal, NetCheque and NetBill are kinds of generic systems. Specialized Systems can also be referred to as e-mail based systems. MasterCard, Cirrus, and Visa Electron are some examples of credit-debit systems.
Generic credit-debit systems like Paypal, for example, performs payment processing for online merchants and other commercial establishments on the internet for a certain fee. Online merchants avail of these kinds of services since it is relatively cheaper than having their own electronic payment processing system installed.
Specialized systems mainly use email and money transfer for the facilitation of their online transactions. The online merchant notifies and communicates with the customer through email and gives the customer instructions on how to pay for the goods or services that the customer availed of.
Credit-debit systems, or credit cards and debit cards are probably the most commonly used means of payment for E-Commerce transactions. Abrazhevich (2001) however wrote about the drawbacks of using credit and debit cards for online transactions:
The history of credit cards, on the other hand, demonstrates different problems. Though being broadly used in many applications and even competing with cash in some countries, credit cards could not avoid the reputation of an insecure and untrustworthy payment method. This is happening due to continuous issues of fraud and counterfeiting of credit cards that result in many losses for card owners, banks, vendors, piling up to huge numbers of credit cards frauds every year. Therefore, it is no surprise that this results in low trust of vendors and consumers of credit cards as a payment method. (p. 82)
Financial Mediating Systems
Abrazhevich (2001) generally describes mediating systems as “systems that provide bill payments for companies and end users”. These financial mediaries offer their own payment mechanism solutions to allow online vendors to accept payments from customers via the internet. Abrazhevich (2001) wrote the following about mediating solutions:
The payment process in this case is transparent to users of the site, who perceive that they are paying at it, while in reality a mediating service provider ‘intercepts’ payments from users, processes them and charges accounts of the owner of the site when the authorization and transactions are completed. (p. 84)
Security in Electronic Payment Systems
For online sellers, simply adapting some form of electronic payment system would not suffice. There are several issues to consider when obtaining some form of electronic payment system. The main thing to consider would have to be security for both the business and the customer. All the types of electronic payment systems have some sort of security matter that the both the business and the customer have to take into consideration. Although credit cards are the primary means of conducting business online, the threat of fraud, and counterfeiting of credit cards still pose a major threat. The threat is perhaps the only keeping the use of credits cards from replacing actual paper money. No matter what guarantee of security the banks and the online merchants assure them, consumers are still hesitant to freely use their credit cards to purchase goods and services online.
It’s nice to think of the convenience that online shopping brings to the consumer. With just the click of a mouse, consumers can sit at the comfort of their own homes and pay for whatever goods or services that they wish to avail of. However, it is extremely daunting that somewhere else in the world, someone is also at the comfort of his or her own home and gaining access to you credit card information. The fear of hackers intercepting their credit card information while they are shopping online is probably what is keeping online business to flourish. Although online businesses are very successful nowadays, it cannot be denied that these kinds of businesses would thrive more if the threat of online fraud would be eliminated.
Although generally proven to be a secure means to transact business online, financial mediating systems still are not immune from security threats. As long as hackers are in existence, no information shared over a network connection is ever safe. The financial mediating systems constantly have to find new means of securely encrypting the information shared between the businesses and the consumers in order to fully gain their trust and to allow E-Commerce to burgeon.
Abrazhevich, D. (2001). Classification and Characteristics of Electronic Payment Systems. In Electronic Commerce and Web Technologies: Second International Conference, EC- Web 2001 (pp. 81-84). Munich: Springer.
Papameletiou, D. (1999). Study on Electronic Payment Systems for the Committee on Economic and Monetary Affairs and Industrial Policy of the European Parliament. Sevilla: I.P.T.S.
Gollmann, D. (1994). An Efficient Electronic Payment System Protecting Privacy. In Computer Security – ESORICS 94: Third European Symposium on Research in Computer Security, Brighton, United Kingdom 1994 Proceedings (pp. 207-210). U.K.:Springer Verlag