E Commerce
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Abstract
The growth of international interconnected computer networks and the pervasive trend in commerce of using these networks as a new field for business operations stimulated demand for new payment methods. These new methods needed to acquire unprecedented levels of security, speed, privacy, decentralization, and internationalization for digital commerce to be accepted by both consumers and businesses. Three such electronic payment methods are examined: 1. the generic, widely used electronic fund transfer, 2. the proposals for a digital cash standard, and 3. the real-world technology called Ecash. These methods are examined in terms of the dynamics of transaction clearance, and the effects on money supply and the macro economy.
INTRODUCTION
THE extraordinary growth of international interconnected computer networks and the pervasive trend in commerce of using these networks as a new field for business operations stimulated demand for new payment methods. These new methods had to acquire unprecedented levels of security, speed, privacy, decentralization, and internationalization for digital commerce to be accepted by both consumers and businesses. This report analyzes three such electronic payment methods:
*The generic, widely used electronic fund transfer
*The proposals for a digital cash standard
*The real-world technology called Ecash
These methods are examined in terms of the dynamics of transaction clearance; the effects on money supply and the macro economy; and their classification in terms of money and cash. This report does not go into detail on the countless encryption systems, protocols, algorithms, and other technical matters concerning the new systems. The need to pay for transactions is the root of all electronic payment systems. Nonetheless, electronic payment systems are simply logical evolutionary steps that began with recognition of the limits of bartering.
Electronic Fund Transfer
The electronic checking system for electronic payments has been in use since the late 1960s. For many consumer end users, electronic checking and electronic payment is the same thing, although the assertion does not apply in all cases. Electronic checking uses the existing banking structure to its fullest potential by eliminating paper checks. Electronic fund transfer and electronic checking are synonymous. Electronic fund transfer is an extremely varied system.
Examples include:
*Paying university fees through the banking automatic teller machine (ATM) network,
*Paying telephone bills through monthly bank account deductions, and
*Large-value (ranging from thousands to millions of dollars) interbank overseas fund transfers.
Conceptually, electronic checking, and almost all electronic payments, involves three agents-the buyer, the seller, and the intermediary. The buyer initiates a transaction with the seller, and the seller demands payment. The buyer then obtains a unique guarantee of payment (the virtual equivalent of a check) from the intermediary. This guarantee (in electronic form) debits the buyers account with the intermediary. The buyer then gives the guarantee to the seller and the seller gives the guarantee to the intermediary. The guarantee credits the sellers account with the intermediary. Schematically, the transaction is like a conventional checking transaction. Nevertheless, when conducted electronically, the certification is an electronic flow documented by the intermediary.
Since electronic checking is essentially checking, it can be analyzed as if it were conventional checking. Payments made via electronic checking would be conducted without cash and paper. Instead of sending a check or paying at a counter, the buyer would initiate an electronic checking certification via computer or point-of-sale terminal. If such a transaction is done as a substitute for paying cash, electronic checking could substantially reduce the transactions demand for money.
The technology of e-cash has ceased to be the main topic of discussion in the digital money world. The debate has moved on to the implications of the widespread use of e-cash in both business-to-consumer and business-to-business transactions. There are already more than 90 million e-purses in circulation in the EU and common standards are emerging: in addition, companies such as IBM and Digital are piloting a variety of Internet-based payment mechanisms. (Birch, 1999)
Instead of carrying wads of cash, consumers could initiate an electronic fund transfer at precisely the moment of the purchase. In essence, such a payment system is not electronic checking but electronic cash. However, if electronic checking becomes a substitute for conventional checking, the speed of the transaction would increase. From an economic standpoint, there is no difference in the dynamics of the checking process between electronic and normal checks, aside from the transaction cost and reductions in paper handling.
Electronic checking provides a number of advantages over paper checks:
Saved time. The instantaneous updating of account balances allows all financial players more financial flexibility. There is no clearing period for transactions to be finished, allowing large cost reductions and more opportunities in cases of large-sum arbitration, while giving even normal consumers and savers a great deal of financial freedom.
Reduced costs for paper handling. A Prime example would be Universities not being overwhelmed with paper checks at the beginning of each term; banks are not faced with unmanageable lines of people every payday; and government subsidies not needing large check printing and mailing facilities.
No bounced checks. Being virtually simultaneous, receipt of the certification and debiting and crediting of accounts ensures that no guarantee is made without the funds to back it up. Such payments could be done through an automatic confirmation of account status before the certification is issued.
Electronic checking bypasses the physical weaknesses of paper checks, although it is still, in essence, a check. A critical weakness of checks is privacy, since transactions must pass through the banking system. Moreover, the banking system is obligated to document the details of every transaction passing through it to comply with federal regulations governing documentation of electronic funds transactions, namely