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Roger Clarke

Revision of 24 May 1998

© Xamax Consultancy Pty Ltd, 1995, 1997, 1998

Available under an AEShareNet licence

This document is at http://www.rogerclarke.com/EC/EPMIntro.html

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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).

 

 
 

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

aV  
V notes, which were until this century issued in many cases by banks, but during
this century largely by national governments;
V coins; and
V 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;
aV Ö

V bills of exchange;
V cheques drawn on a bank;
V money orders written by an accepted authority such as a national post office;
V letters of credit;
V 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.


  
 

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:



  
 


 

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

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

aV 

. 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 
 !, which is a payment instruction activated
at regular intervals (e.g. monthly or quarterly);
aV 

. 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);

 


 

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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;

" # !"

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);


 
 

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:

aV early (and highly insecure) forms include   $! #  
 ! 
 
 ;
aV much more secure approaches are emerging which use    to store and pass
tokens;
aV 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 

 %


;



  

This is another form of automation of cash into electronic form. It addresses circumstances in
which the payer is  
 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:

aV evolutionary approach:
V  !


  
aV revolutionary approaches:
V 

   

V 

# 
    !
aV integrated approach:
V 
 
  

 
 
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.