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THE EMERGENCE OF ELECTRONIC PAYMENT SYSTEMS FOR THE GROWTH OF E-BUSINESS

Mircea Georgescu University Al. I. Cuza, Department of Business Informatics, Faculty of Business Administration, Iai, Romania Iuliana Georgescu University Al. I. Cuza, Department of Accounting, Faculty of Business Administration, Iai, Romania

ABSTRACT The transfer of founds electronically is a major component of any e-business venture, whether B2B, B2C or B2G. In the past five years the emergence of Electronic payment systems (EPS) revolutionized the way we buy and sell goods and services. In this paper we try to explore the various types of electronic payment systems currently in use and some that are now being mooted, and explain how they operate in a B2B and B2C context. Electronic Payment Systems can vary from simple transactions using magnetic-stripe cards, in which customers details are exchanged for goods or services and an account is sent, to more complex systems where an online purchasing system can debit existing bank accounts of the purchaser and credit bank accounts of the seller. This new form of purchasing has reduced the importance of cash or money as the only form of transaction or exchange of value. Key words: Electronic payment systems, e-business, e-cash, Internet JEL classification: E41, G20, L21,O00, O30, O33

1 INTRODUCTION The societal implications of new information and communications technologies are profound. Building the information society is a challenging process for all the economies, not only for the emerging economies. Information and communication technologies are the main tool for the large-scale use of information by organization and people. These technologies bring organizational change, changes in everyday life, and finally larger scale societal changes implementing the Information Society and on a longer run the Knowledge Society. Some macro trends are visible: mobile applications spread over; the web becomes the primary information source; web services becomes a main business transaction platform;

electronic marketplaces are a fact of life and are becoming more prevalent every day. ebusiness becomes almost a rule for the success companies; the emergence of electronic payment systems for the growth of ebusiness.

Electronic commerce is already developing dramatically in inter-business trading, with companies undertaking major restructuring of their operations in almost all of the sectors. Business-to-business and business-to-consumer e-commerce transactions surpass 7 trillion $ annually by 2005. With the rapid expansion of the Internet, there are a number of initiatives underway for the creation of a secure cost-effective payment system, which will be able to support growing commercial activities on the network. However, the development of money has been inextricably associated with the growth of trade and commerce. Money and monetary systems have also been strongly linked to the role of the state. Is the situation now the same? 2. LITERATURE REVIEW Electronically based payment systems have been in operation such the 1960s and have been expanding rapidly as well as growing in complexity. However, in most of the major industrialized countries, an inverse relationship exists between the volume and the number of transactions handled electronically. Typically, of business payments around 85-90% or more of monetary value will be processed electronically, while less than 5-10% of the total number of payment transactions will be handled in this way (Crede, A., 1996: 2). This has been due to four related factors: proprietary closed networks were developed by banks to handle large and increasingly internationally based payments systems; large value payments are increasingly associated with foreign exchange and global securities transactions; large value payment systems were not designed nor are they costeffective for small value payments; paper-based non-automated payment systems remain an established part of accepted business practice for varying institutional reasons, thereby ingrained in the economic system. The Internet is experiencing rapid growth which is being largely driven by new commercial users of network. Other commercial on-line services provided by companies such as CompuServe, America On-line and Prodigy are also expanding rapidly. The Internet and other global on-line networks are creating new commercial opportunities for networked commerce. However, to date development has been limited by the lack of a payment infrastructure. But, in the 1990s the emergence of electronic payment systems revolutionised the way we buy and sell goods and services. The transfer of funds electronically is a major component of any e-business venture, whether business-to-consumer, business-to-business, or business-to-government. But, what is an electronic payment system (EPS)? An electronic payment system is a process that describes how value (usually money) is exchanged for goods, services or

information. There are many ways to pay for goods electronically, such as by using credit cards, e-cash, e-cheques and stored value cards. The most popular form of payment over the Internet is via credit card. Banks all over the world have invested in magnetic strip card technology to ensure that processing credit cards and cheques is done efficiently, securely and quickly. Attempts to establish universal international payment systems, which can be used costeffectively for the full range of transactions, have to date been unsuccessful. A failure to agree on common standards has meant that a major proportion of the instructions which are sent by banks follow a free messaging format. When messages are on free format, recipients have to interpret and to rekey them involving higher levels of cost, more time and making the system much open to the introduction of errors. At the same time there is a countervailing pressure to settle transactions, particularly those relating to securities, more quickly. 3. METHODOLOGY AND FIDINGS Because the technology for business-to business transactions is already known, we will look especially at electronic payment systems and the technology behind them in a business-to-consumer environment. The most used are the credit cards. A credit card is an instruction by a customer for funds to be transferred into a businesss account and charged against the customers account. The customer gives the instruction to the seller directly, by handing over the card by telephoning, emailing or faxing details such as card number, name, type of card. The steps involved are shown in next figure. Figure 1 Steps in credit card transaction

1 Authority to charge.
Merchant

Customer
6. Information

2. Authority to charge

5.Autorisa tion

Customers financial institution

3. Authority to charge

Merchants financial institution

4. Value Credit card numbers can be sent over the Internet encrypted or unencrypted. All Internet browsers provide some level of data security. A 40-bit Secure Sockets Layer

(SSL) is typical for most browsers available worldwide and is adequate for most common data transfer situations. A 128-bit SSL, is used by financial institutions and Internet-capable software suppliers. It s necessary that Web sites inform buyers that their credit card is protected by encryption. Unencrypted dealings with credit cards are analogous to giving your credit card number over the phone. The vast number of international retail payments on the Internet are made using credit cards, usually involving the safety features coming with standard browsers (e.g. SSL), but also completely unencoded or by such means as fax or the telephone. While there is interest from the side of the credit card organisations and some merchants in the SET protocol, adoption has been very slow and it is presently difficult to convince customers of its benefits. For domestic purchases, Internet buyers tend to use those national access products which are also used most frequently for other purposes, in particular for conventional mail-order purchases. There is an astonishing variety of ways to pay within Europe and there are remarkable differences between countries. Prodigy Internet and MasterCard have been specially developed for online and offline purchases. The Prodigy card guarantees online fraud protection and offers a pointsbased reward program that allows credit card holders to redeem points for free Prodigy Internet Access. The next table shows how credit cards work on the Internet. Table 1 How credit cards work on the Internet Types of merchants Offline merchants How to deal Open a merchant account with a bank; accept only point-of-sale transactions or those that occur when you present credit card at the store Processed by banks or third party services (examples www.cybercash.com, www.icat.com) For example, Trintech (specialist software company) offers online credit card transaction capabilities (for e-business and mobile e-business)

Special Internet merchant account

Specialised software

Source: (Deitel ; 2000: 136) Electronic funds at point of sale (EFTPOS) refers to when the purchaser is physically at the point of sale, such as the checkout in a supermarket or in a gas station. This system operates on either credit or debit cards, immediately debiting the value of the exchange against an existing bank account. On credit cards, EFTPOS system check the validity of the card status and then credit the value of the exchange against the credit card account for future payment by the cardholder. This method of payment is the most used by the virtual shoppers, but also by the online shops. Another modality used in most of the countries is the electronic cheque. This modality operates as though you were being issued a set of numbers from the bank each

number represents a cheque. This is a virtual chequebook without the physical cheques. You use each set of numbers only once, like a cheque. Electronic wallets have been designed to make it easier to shop on-line. If customers sign up for e-wallet, later when they shop on-line they need to enter their billing and shipping information only once. The e-wallet software will then instantly fill out online order forms with a click of a mouse. Since June 1999 was launched Electronic Commerce Modelling Language (ECML) a universal format for online checkout form data fields. ECML provides a simple set of guidelines for web merchants that enables digital wallets from multiple vendors to automate the exchange of information between consumers and merchants. At a more experimental level, increasing use of the Internet and Web for commercial transactions is creating a need for another type of electronic payment system digital cash. Digital cash has the advantage of being weightless, since it is really just a series of zeros and ones that can be transported at high speed across the Internet. It is represented by a small string of encrypted digits, or electronic tokens, that can be used as a substitute for money to purchase various goods and services in an electronic environment, usually the Internet. Digital cash replaces money in the transaction but depends on an institution, such as a bank, to provide the monetary value for the digital transaction. For example, Yahoo offers PayDirect at its web site at www.Paydirect.yahoo.com. This system allows consumers to: send money to anyone in the United States with an email address; pay for an auction item they have won; create custom links on their web page to expedite direct payment by creditors; send a group bill to collect money for a party. Another area that looks promising is prepaid cards. Prepaid cards that are used for online payments are typically distributed as simple scratch-off, embossed plastic or magnetic strip cards. Research is being undertaken by CommerceNet (see www.commerec.net). Prepaid cards that are used for online payments are typically distributed as simple scratch-off, embossed plastic or magnetic stripe cards. The cards are available in different denominations and can be purchased from a retailer with any payment mechanism, but most typically using anonymous cash. When distributed to retailers the cards are inactive; they must be activated prior to use as a payment instrument (Jones, 2001) The principal advantage of prepaid cards is that they are easy to source, brand and distribute. Prepaid cards offer an attractive alternative to credit cards, especially for young people who are eligible for a credit card. One of the problems with using digital cash is the need to ensure the security of the payment being made. Three major protocols have been developed to try to ensure that all electronic payments made over the Internet are secure. These protocols are: STT developed by Microsoft and Visa, STT use a two keyed autentification and encryption system that enables purchases to be completed using credit cards in a method similar to offline credit card usage. Each user is

autentificated by an electronic certificate or credential that is unique to them. Any transaction must be verified by this credential; SEPP developed by IBM, MasterCard, Netscape, Verisign, RSA, Terisa Systems and CyberCash, using existing credit card procedures. However, SEPP differs fom STT in that he offers forms of communication and other existing and private networks, as well as the Internet, to process the exchange of value involved in the transaction. In effect, it uses Electronic found transfer infrastructure to operate; SET was developed by both of the major credit card providers Visa and MasterCard to establish a uniform, secure communication standard for Internet commerce and is designed to become the standard for e-commerce. SET uses the Internet rather than existing Electronic found transfer.

The following points illustrate the advantages of SET: provides interoperability; enables bankcard payment on the WWW; ensures privacy of financial data; provides for special security needs; supports end-user choice of payment card; hides bankcard number from most merchants; sustains existing relationship cardholders with their banks, merchants with their banks; provides links to existing systems. However, the uptake of SET has been slow, and it appears that SSL, has become the de facto standard. One of the important offers for this type of transaction is Authorize.Net. Authorize.Net, an InfoSpace service, is the preferred global payment-processing service for ecommerce, enabling merchants to process secure transactions in real time, 24 hours a day. Authorize.Net Payment Solutions process credit cards and electronic checks, and work with any business model, including Internet, broadband, wireless, call centers, and retail. To compete in the Internet and mobile commerce world, businesses need to process transactions quickly and securely. Authorize.Net's global payment solutions ensure both speed and security, providing: unlimited transactions from nearly anywhere in the world; scalability -- We'll grow with your business by supporting an unlimited number of transactions and any business model -- Internet, call center, broadband, wireless and retail; unrestricted number of users with one account -- ideal for large sales forces; experienced technical support 7 days a week 365 days a year. Figure 2 Authorize.Net solutions

Payment diagram: 1. The customer places an order with the merchant via a website, call center, retail location, or wireless device; 2. Authorize.Net receives the transaction via the Internet, securely encrypts it, and submits an authorization request to the customer's Credit Card Issuer to verify both the account and funds availability; 3. The authorization (or decline) response is returned via Authorize.Net to the merchant. Round trip this process averages less than 3 seconds; 4. Upon approval, the merchant fills the customer's order; 5. Authorize.Net sends the settlement request to the Merchant Account Provider; 6. The Merchant Account Provider deposits settlement funds into the merchant's account. Since 1996, Authorize.Net has rapidly become a leading provider of Internet-based transaction services, with thousands of online and traditional business customers around the world. Authorize.Net has also formed strategic alliances with leading financial institutions and technology partners to deliver the most comprehensive online authorization and processing services in the industry. 4. DISCUSSIONS In the last years new digital cash products are entering the market. These products are being marketed for a variety of reasons: people like the anonymity of digital cash as opposed to credit cards; many people do not have access to credit cards: young people for example do not qualify for a credit card; auctions and consumer-to-consumer e-commerce have also created a need for online payment systems between individuals other than via credit card; merchants might find digital cash more convenient since credit card costs cut into merchants revenue. Therefore, sites selling small items, such as a single song, need to be able to accept micropayments ranging from a tenth of a cent to 100$. Some of the new digital cash techniques are: consumers can now store value in an online account and deduct from it the price of small purchases; for example Trivnet and Ipin use ISPs to track customers online spending and add it to their bill; Qpass makes no initial charge but accumulates payments and deducts the final amount from a credit card; various online bartering schemes such as BarterTrust and BigVine; PayPal has been developed by Confinity to enable people to open an account at the web site and then email dollars to other people; Oakington - a british firm has developed software that allows for the automatic payment of taxes and time escrow so that a transaction does not clear until the goods arrive.

Research on digital cash has concentrated on trying to resolve the technical and social difficulties that exists. As a result, a number of new alternatives are being developed. For example, in 1995 at the University of Newcastle, Monetary System Engineering Group developed Millicent, an account-based transaction protocol for low value transactions that allows a vendor to verify a transaction without contacting a central authority and without expensive encryption. Millicent uses brokers and scrip. Brokers look after account management, billing and establishing accounts with merchants. Scrip is electronic cash that is valid only for a specific vendor. There are two main topics for the development of electronic payment systems: the regulation of issuing electronic money and the regulation of digital signatures. The main trend in the regulation of issuing electronic money in all countries is that only banks should be allowed to do so. This is in line with the position of the ECB and the EU commission. But there are still some differences between the covered countries and within these countries. Mainly those countries with an early introduction of electronic purses issued by non-banks (Denmark and Finland) wish to retain this regulation. Apart from this they all agree that more or less strong surveillance measures are essential. But it is also true, that in all countries one can find spokesmen who argue for more competition in the field of payment systems and more chances for non-banks too. These positions are held mainly by technology providers and merchants. However, in our impression,they have no great impact on the ongoing policy measures. 5. CONCLUSIONS The paper suggests that the creation of an Internet electronic payment system will provide opportunities for the creation of completely new sets of global and national trading relationships. The Internet offers the possibility of an open systems payment and settlement system which operates in parallel to existing more traditional bank based networks and which is particularly suited to meet the currently unsatisfied requirements for processing low value payment electronically. However, the institutional framework to exploit these opportunities does not yet exist For resolve the problem its necessary that a firm put in place portofolios that deal with five initial areas: infrastructure (EDI, network management and related infrastructure services); financial service (payments, echeck); trust and security (public key infrastructure, security showcase and encryption); information access (catalogues, directories, agencies and search interoperability); architecture and markets (iMarkets, vertical markets). The Internet has enabled consumers to access many products and services that can be selected, ordered and paid for electronically. Electronic catalogues are being developed that will allow businesses and consumers to order anything from automobile to flowers. Electronic payment systems using smart cards, online EFTPOS type systems and digital money systems enable businesses and consumers to pay electronically.

EPS can vary from simple transactions using magnetic stripe cards, in which customers details are exchanged for goods or services and an account is sent, to more complex systems where an online purchasing system can debit existing bank accounts of the purchaser and credit bank accounts of the seller. This new form of purchasing has reduced the importance of cash or money as the only form of transaction or exchange of value. REFERENCES Crede, A., (1996), Electronic Commerce and the Banking Industry: The Requirement and Opportunities for New Payment Systems Using the Internet, Science Policy Research Unit University of Sussex, JCMC, Vol 1, no 3 Deitel, H. M., Deitel, P. J., Nieto, T.R., (2000). E-business and E-commerce How to Program, Prentice Hall, New Jersey Fleishman, D., Schweiger, C., Lott, D., Pierlott, G., (1998) TCRP Report 32, Multipurpose Transit Payment Media (Washington, D.C.: National Academy Press ITS America Electronic Payment Systems Task Force, (2001) Introduction to Electronic Payment Systems and Transportation, at http://www.itsa.org Jones, R., (2001). Prepaid Cards: An Emerging Internet Payment Mechanism, Lawrence, E., Newton, S., Corbitt, B., Brathwaite, R., Parker, C., (2002) Technology of Internet business, John Wiley Ltd, Milton http://www.isi.edu/people/bcn/tutorials/sndss98/ www.commerce.net/research/ebusiness-strategies www.ecml.org