Introduction
It is estimated that an increasing amount of commerce will take place via the Internet in both business-to-business and business-to-consumer markets in the coming years (a recent Forrester Research study estimates on-line commerce to equal almost $7 billion out of $2.1 trillion in overall retail spending by the year 2000). Not only is there increased convenience for the consumer by being able to purchase via the Internet, but it also means reduced transaction costs for merchants-- it is estimated that the cost of taking a customer order electronically is one-sixth of processing the same order with human intervention. However, for electronic commerce to take place, a method of payment must be developed for use on the Internet-- an electronic payment system.
Currently, there are several proposed electronic payment systems vying for dominance as a preferred system, and they can be classified under one of two categories. The first category is the cash-like or debit payment system, where the customer prepays money to receive tokens with intrinsic value that can be used for purchases at a later time. Examples of this first category include DigiCash, Millicent, and Mondex. The second category is the check-like or credit payment system, where the customer receives an identifying designation that allows them to make purchases-- the identifier has no intrinsic value on its own. It is only at the time of the transaction, or shortly after, that money is taken from the customer's possession. Examples of this second category include First Virtual Holdings, CyberCash, and the Electronic Check.
The potential market for electronic payment systems is huge-- according to a study by Killen & Associates, 1 billion electronic cash transactions were made in 1995, and this number is expected to grow to 30 billion by the year 2005. One school of thought suggests that the Internet will probably reflect the diversity of payment options available in the real world with different electronic payments systems being accepted, much like how real world merchants accept credit cards, debit cards, checks, and cash. However, it has also been postulated that the market leader will gain the lion's share of transaction fees in the growing electronic market place, much like how Microsoft and Intel have dominated the personal computer market, and there will only be room for no more than two major payment systems and a few niche players. But which payment system would meet all the needs of both merchants and customers for electronic commerce?
Criteria for Evaluating the Payment Systems
The electronic payment systems examined will be evaluated under the following criteria (with a maximum score corresponding to the relative importance of the criterion):
The payment system should require the least amount of effort, special equipment, and time for both the customer and the merchant to process the transaction, such as an on-line authorization process. In contrast, a less convenient system would require the customer and/or the merchant to go off-line in order to process the transaction with a significant time delay. Not only does convenience have an impact on the ease of on-line commerce, but it would also have an effect on impulse purchases.
The greatest deterrent for customers embracing Internet commerce is the possibility of fraud-- the Mastercard, Visa, and Verifone study found that the greatest concern for Internet commerce transactions was the possibility of credit card fraud. Furthermore, a study by Forrester Research estimates that for every $1000 of business transactions carried out over the Internet, $1 of it is fraudulent. The payment system should be secure, covering four aspects of the transaction. First, the customer must be positively identified such that all financial transactions are carried out with the correct customer. Second, information related to the customer, such as credit card numbers, bank account numbers, or passwords, must be protected from unauthorized access. The data should be protected from alteration or manipulation as it is transmitted via the Internet. There must also be a means by which the customer can receive authentication from the merchant to ensure that the merchant has been authorized to process the payment. Finally, both the merchant and the consumer should be protected in the event of a loss, either from the result of a system failure or fraud. Some electronic payment system providers have guaranteed payment to merchants for processed transactions and offered coverage for consumers who lose their electronic currency.
Another concern of on-line consumers is the confidentiality of transactions-- keeping payment activities private and preventing third-parties from observing and tracking spending habits. Given some of the questionable material available on the Internet for sale, certain consumers will prefer untraceable cash-like payment systems. However, on the other hand, governments and law enforcement agencies would prefer to have an audit trail to trace the passage of funds to prevent money laundering and tax evasion, and there may be legislation covering this aspect of electronic commerce in the future.
The payment system should have as few constraints on its use to allow adoption by any customer or merchant, regardless of what browser software they use or what country they are in. Internet merchants and consumers will gravitate to the most convenient and widely-accepted electronic payment system or systems, to avoid the hassle of requiring different sets of electronic currency for different transactions and to ensure the liquidity of the electronic currency in their possession.
Micropayments are a series of small-denomination payments that are made in rapid succession, that would be used in a pay-per-play kind of environment, such as on-line gaming or for the payment of per-page service fees. It has been suggested by Jules Street, the vice-president of a Palo Alto, California-based research firm that it is the need for micropayments that will drive the growth of electronic payment systems, given the rapid commercialization of Internet services and the increasing acceptability of fee for content. Keeping track and billing for numerous small payments, such as in a pay-per-play environment (on-line gaming) or a pay-per-page environment (news, stock quotes, etc.), is tedious, slow, and costly with conventional payment systems, especially when the cost of doing the transaction (such as credit card fees) would exceed the value of the transaction itself. In order to successfully handle micropayments, an electronic payment system must have speed, convenience, and low cost.
The cost of a payment system, to both the customer and the merchant, should be inexpensive, especially if micropayments are supported.
Cash-like Payment Systems
DigiCash
Originating from the Netherlands and having undergone trials since 1994, DigiCash is a pure electronic currency, not requiring any special hardware (other than an Internet-capable PC). The consumer buys DigiCash coins of various denominations from an issuing bank and are then stored on the consumer's hard drive. Each one of these coins is an encrypted number with an encoded signature of the issuing bank to serve as a check against unauthorized duplication or counterfeiting. When a sale is made, the customer encrypts a sum of the DigiCash and transmits it to the merchant, either by e-mail or via the merchant's web site. DigiCash is so flexible that, if needed, the currency can be printed on paper or saved onto a disk to be sent to the merchant.
Convenience (10/20) On the plus side, in addition to not having any special hardware requirements, any merchant can accept DigiCash without having to undergo a lengthy qualification process. However, both the merchant and the customer must have WorldCurrency Access accounts at the Mark Twain Bank of Missouri. However, because of the exact denominations of the coins, consumers may have to deal with the accumulation of spare change.
Security (10/15) DigiCash uses 64-bit encryption to make each coin unique and in the event of fraud, each coin can be split into its component parts to determine the issuing source of the coin-- a feature that government legislators favor. Furthermore, the customer is protected in the event of loss or theft, in a fashion similar to travelers checks. And while the merchant is paid immediately with little risk upon acceptance of DigiCash, there is only one bank in North America that buys and sells DigiCash, the Mark Twain Bank in St. Louis-- if that bank goes out of business, then DigiCash could be worthless without a bank to redeem them
Anonymity (10/10) All DigiCash transactions are untraceable by both the merchant and the issuing bank.
Universality (5/20) DigiCash is recognized internationally, and it is currently accepted at over one hundred Internet vendors. However, only two banks in the world issue DigiCash, the Mark Twain Bank in the United States and the Merita Bank of Finland, which will limit its international adoption.
Micropayments (20/20) Micropayments are supported by DigiCash.
Cost (0/15) Though the cost per DigiCash transaction is less than $ 0.01, though there are other more significant fees, such as bank account setup fees (approximately $11-25 US), monthly service fees ($1-5 US), transfer fees ($1-3 US), and conversion fees (4-5% of amount being converted).
Total Score (55/100)
Millicent
Millicent was created by Digital Equipment Corporation and was intended to be an industry standard for micropayments. Under the Millicent payment system, merchants generate their own currency, called 'scrips', which are good for purchases at their own web sites. These scrips are then sold in bulk to brokers, from where the customer can purchase them with credit cards. Once purchased, the scrips reside in the customer's browser and are automatically downloaded from the browser to the merchant whenever the customer uses a web site that charges by the scrip.
Convenience (10/20) Though the customer doesn't have to set up an account with the merchant to transact business, they still have to find a broker that will sell the relevant scrip. And with scrip being merchant-specific, there are concerns of consumers being left with odds and ends-- fortunately, Digital has offered to buy back 'leftover' scrip in exchange for new scrip.
Security (15/15) Scrips have many security features built-in: tamper-resistance, difficult to counterfeit, spendable only by its owner, vendor-specific serial numbers, expiration dates, and the use of unique digital signatures.
Anonymity (0/10) Since the owner's identity is coded into the scrip, anonymity is not possible. However, the creators of Millicent feel that it is an inconsequential feature, since it will primarily be used by customers for use on web sites that charge 'by-the-byte'.
Universality (0/20) As mentioned before, each merchant's scrip is only usable on the merchant's web site, making Millicent easily supplanted if a more universal micropayment system were to come along.
Micropayments (20/20) Scrip as small as a penny can be purchased.
Cost (15/15) The cost of a Millicent transaction is less than $ 0.001, making it possible to charge in fractions of pennies, if the need arises.
Total Score (60/100)
Mondex
The Mondex payment system started out as a smart-card for use in cafeterias (cheekily called 'Byte'), and eventually evolved into a universal smart card-based payment system. The future prospects of this system look bright, given the 51% ownership by Mastercard, the collaborative effort between major banks (including Chase Manhattan and Wells Fargo) and credit card companies to have a full roll-out close to the turn-of-the-century, and a high consumer acceptance rate in test market studies. The Mondex smart cards hold a preprogrammed amount of value, and consumers can pay for items in the real world by swiping the cards through specially-designed kiosks at retailers. Online consumers can also use their Mondex cards for Internet purchases if their PC is outfitted with a smart card reader.
Convenience (5/20) Though Mondex requires the customer to have a smart card reader, 'reloading' a spent card can be done quickly and easily. There are several channels in development for reloading the Mondex card: via the Internet with the customer's bank, over the phone, from card-to-card (from a willing lender), or from automated banking machines (ABMs).
Security (10/15) The security and encryption on the smart cards and the readers is of paramount importance to the creators of the Mondex system, since it is designed to allow value exchange between merchants and customers (or even customer to customer) without intervention of an authorizing authority (such as the bank). Concerns have been raised about the possible creation of 'rogue wallets' that will be able to dispense cash at will, however, Mondex CEO Tim Jones has assured skeptics that the smart cards and readers were designed to thwart hacking. Finally, electronic money stored on the Mondex cards can be exchanged for government currency any time at a bank or an ABM, an advantage over the DigiCash and Millicent systems.
Anonymity (10/10) Because all transactions are carried out in an off-line basis, they are untraceable (though Privacy International has evidence to the contrary).
Universality (20/20) The greatest advantage of the Mondex system is the ability to use it in real world, giving it the most versatility and liquidity of any electronic payment system. Furthermore, market studies have shown a higher acceptance of the Mondex system when customers see the Mastercard logo on the cards. Furthermore, the Mondex smart card is portable and able to handle multiple currencies and multiple applications (ABM card, credit card, loyalty program cards, etc.) simultaneously.
Micropayments (20/20) Micropayments are supported by the Mondex system
Cost (15/15) The cost per Mondex transaction is $0.01.
Total Score (80/100)
NetCash
NetCash is the electronic payment system being offered by the NetBank, and is designed to support low-value exchanges on the Internet. A customer must first set up a US checking account in order to buy NetCash coupons of exact denominations-- each coupon is a serial number with an exact value. When a purchase is made, the customer must pay the merchant in exact change by e-mailing the serial numbers and values of the coupons being used.
Convenience (10/20) Much like the DigiCash system, NetCash can become messy if customers have lots of 'spare change', though there is a 'change' function where the customer or the merchant can have their loose bills and change consolidated into higher denominations. Furthermore, NetCash transactions are cumbersome given the need for exact change in carrying out sales transactions, and the use of e-mail.
Security (0/15) NetCash relies on the security of the browser or the e-mail program being used, since it has no encryption of its own. And though NetBank scrutinizes all transactions to ensure that coupons are not being used more than once, the onus is on merchant to check validity of every coupon received with NetBank for authenticity. Furthermore, there is a time delay for reimbursement of the merchant, and penalties for low-value redemptions encourage merchants to allow their NetCash reserves to accumulate before redeeming, further increasing the time delay.
Anonymity (10/10) All NetCash transactions are anonymous.
Universality (0/20) NetCash is currently not for global use since customers must have a US checking account to buy or redeem. However, this can be circumvented by spending one's accumulated NetCash coupons on other web goods and services.
Micropayments (10/25) NetCash can be used for payments as low as $0.25.
Cost (10/15) There are no transaction fees for the use of NetCash, though there is a 2% conversion fee (either way) with a $2 minimum ($4 minimum for merchants). The advantage of this system is that if the customer or the merchant keeps the NetCash in the on-line world (such as using it towards other goods and services), no penalty is incurred. Though merchants do not require to have an account with NetBank to accept NetCash, a bank account is required to redeem NetCash, which costs $19.95 to set up.
Total Score (40/100)
Check-like Payment Systems
CyberCash
CyberCash acts as an intermediary between the Internet merchant and the bank and authorizes the payments directly from the customer's bank account or credit card. A CyberCash customer must first open an account with CyberCash, after which they are given 'electronic wallet' software that contains an encrypted copy of the customer's credit or debit card information. When a purchase is made, a payment request is sent to CyberCash, which then contacts the customer's bank and transfers the funds to the merchant's own account.
Convenience (10/20) Both the merchant and the customer must have CyberCash accounts set up.
Security (15/20) Once the payment is approved by CyberCash, the payment to the merchant is guaranteed, though the merchant is made liable for any fraudulent transactions. To reduce the possibility of diversion, all credit or debit card numbers are transmitted over closed-system dedicated banking networks, as opposed to the Internet, an open system.
Anonymity (5/10) In the eyes of the merchant, the customer is anonymous, with only a deposit appearing in the merchant's account. However, the customer's bank receives detailed info on transactions.
Universality (20/20) The CyberCash software is universally available, can be downloaded from the company's web site for free, and is supported by all browsers. Furthermore, the CyberCash payment system also accepts major credit cards in lieu of banking information, so it is not necessary to have a US bank account to use this system.
Micropayments (5/20) Though CyberCash currently on supports payments equal to or greater than $1, the new CyberCoin product offering will allow for purchases as low as $0.25.
Cost (5/15) Transaction fees for the CyberCash system are $0.20 plus two per cent of the value of the item purchased. If the customer uses a credit card instead of a bank account, there is also an additional credit card authorization charge of $0.05.
Total Score (60/100)
First Virtual Holdings
First Virtual Holdings has implemented an off-line system for payment that does not require credit card numbers to be transmitted across the Internet. Provided that both merchants and customers have established accounts with First Virtual accounts, the customer provides the merchant with their First Virtual account number (called a VirtualPIN) when a payment is to be made. The merchant then contacts First Virtual Holdings with the details of the sale and the customer's account number. An e-mail is then sent to the customer to confirm the charges, and upon confirmation, a charge is put on the customer's credit card. However, according to Visa, this third-party authorization of credit cards may be in contravention of the law.
Convenience (5/20) The setting up of the accounts and the use of e-mail to confirm payments is time-consuming and cumbersome. However, First Virtual Holdings has automated the process as much as possible, with all the information collection being done at their web site and one phone call for provision of the credit card number.
Security (10/15) Since credit card numbers are never transmitted over the Internet, no encryption is required. Onus is on the customer to stop any unwanted transactions by responding to their e-mails. For the merchant, payment is delayed as all transactions are passed through an automated clearinghouse
Anonymity (5/10) While the merchant will only know the customer by their account number, First Virtual Holdings keeps detailed records of all purchases.
Universality (20/20) Any customer anywhere in the world can set up an account to receive a VirtualPIN, provided they have Internet access and a major credit card.
Micropayments (0/20) The cost of each credit card transaction and the need for e-mail confirmation from the customer make this payment system too costly and too slow for use in a micropayment environment.
Cost (10/15) The cost of each transaction to the merchant $0.29 plus two per cent of the value of the item purchased. For the consumer, there is no charge for each transaction, though there is a yearly $10 renewal charge.
Total Score (50/100)
Secure Electronic Transactions (SET)
This payment system, a security protocol for the express purpose of safely communicating credit card numbers over the Internet, was the result of a joint effort by MasterCard, Visa, GTE, IBM, Microsoft, Netscape, SAIC, Terisa, and Verisign. The Secure Electronic Transactions system grew from the merging of two competing systems that were separately championed by Mastercard and Visa. Under SET protocol, the merchant presents to the customer a digital certificate proving that they are an authorized SET merchant. The customer then encrypts a digital payment slip with the dollar amount and the credit card number, which is then sent to the merchant, which is then authorized. This payment system is growing in popularity, and even plays a role in other electronic payment systems.
Convenience (20/20) Convenience is the strength of this electronic payment system, with no need to set up accounts, no prior relationship required between the merchant and the customer, and many Internet merchants already using it to process payments. However, one disadvantage of SET is that the security algorithms used by system requires a lot of computing power, which requires the use of dedicated servers, making implementation of SET very expensive.
Security (15/15) Though the possibility of fraud is reduced with this system, it is still the responsibility of the customer to check their credit card statements for unauthorized charges. Also, there is an added degree of assurance in the security of SET with the involvement of high profile financial services and information technology suppliers. However, to become successful, SET must use consumer education and marketing to overcome the entrenched perception of the extreme risk of placing one's credit card number over the Internet. In reality, it is probably easier to have your credit card number stolen at a restaurant or a gas station-- a recent fraud ring uncovered in Waterdown, Ontario is evidence of this. However, one caution for SET is the lack of customer identification-- one could easily place a fraudulent order with the knowledge of someone else's credit card number.
Anonymity (0/10) Like any regular credit card transaction, detailed records of activity are kept by both the merchant and the credit card issuer.
Universality (20/20) SET is perhaps the most universal of all electronic payment systems, taking advantage of the wide proliferation of credit cards, and being designed to work with any software or hardware platform.
Micropayments (0/20) With a lower payment threshold of $5 and the amount of computing power required for each authorization, SET is no amenable to micropayments.
Cost (10/15) For the customer, the cost of each transaction will be the typical charge for a credit card transaction, if any. For the merchant, typical credit card processing fees will apply (usually 1.5%-3% of the transaction), though set-up costs for the equipment and software are high. However, some third-parties have begun providing SET transaction processing to online merchants, which charge a slightly higher transaction fee in exchange for providing access to SET hardware and software.
Total Score (65/100)
FSTC Electronic Check Project
The Electronic Check was developed by the Financial Services Technology Consortium, an organization formed in 1993 which includes banks, financial services companies, technology suppliers, government labs, etc. It is essentially an electronic version of a paper check, which contains all the information necessary to process a payment without requiring the intervention of an authorizing financial institution to complete the transaction. Authentication of the electronic check is done via digital signatures from a smart card-based device.
Convenience (5/20) On the positive side, no previous relationship would be required between the merchant and the customer to process an electronic check payment, the electronic checks are portable, and any bank would honor them, since they are designed to be compatible with the existing financial services information infrastructure. However, for a customer to 'write' electronic checks, they require a smart card reader.
Security (15/15) The electronic check incorporates security elements that can authenticate both the check and the signer, and detect any tampering that has occurred while the check was 'in transit'.
Anonymity (0/10) Because of the rich information found in an electronic check, anonymity is not possible.
Universality (20/20) As mentioned previously, the electronic checks are designed to be able to be cashed by anyone at any financial institution.
Micropayments (20/20) Unknown, but should be comparable to the abilities of Mondex.
Cost (15/15) Unknown, but should be comparable to that of Mondex.
Total Score (75/100)
Which Electronic Payment System is Best?
The score for the various payment systems are as follows:
|
|
DigiCash |
Millicent |
Mondex |
NetCash |
CyberCash |
FVH |
SET |
FSTC |
|
Convenience (/20) |
10 |
10 |
5 |
10 |
10 |
5 |
20 |
5 |
|
Security (/15) |
10 |
15 |
10 |
0 |
15 |
10 |
15 |
15 |
|
Anonymity (/10) |
10 |
0 |
10 |
10 |
5 |
5 |
0 |
0 |
|
Universality (/20) |
5 |
0 |
20 |
0 |
20 |
20 |
20 |
20 |
|
Micropayments Support (/20) |
20 |
20 |
20 |
10 |
5 |
0 |
0 |
20 |
|
Cost (/15) |
0 |
15 |
15 |
10 |
5 |
10 |
10 |
15 |
|
Total Score |
55 |
60 |
80 |
40 |
60 |
50 |
65 |
75 |
The top three electronic payment systems, as determined by the established criteria, were Mondex, the FSTC Electronic Check, and SET. Though Mondex falls short in the area of convenience, due to its requirement for the consumer to have a smart card reader hooked up to their PC, the excellent security, guarantee of anonymity, support for the emerging area of micropayments, and integration into the real world banking system will ensure adoption by both Internet consumers and merchants. Furthermore, the 51% ownership by Mastercard and high levels of encryption should increase consumer confidence in this payment system. The FSTC Electronic Check is comparable to Mondex, also requiring the consumer to possess a smart card reader. However, it fails in the area of consumer anonymity and traceability.
The third electronic payment system, SET, is hindered only by its lack of micropayment support. The SET system maximizes on convenience (no accounts to set up, software to buy, or peripherals to hook up), is the most universal (can be used by anyone, anywhere in the world, who has a credit card), and is analogous to a real world payment system, thereby increasing the chances of customer and merchant acceptance. And though the anonymity of purchases is no-existent with the SET system, it is no different in terms of anonymity than any credit card payment done in the real world. Finally, if the issue of micropayments is removed from the criteria, SET becomes the highest-ranking payment system. In the event that the proliferation of micropayments does not achieve the popularity as currently envisioned, SET has a good chance of becoming a preferred payment system. Even if micropayments capture a significant proportion of Internet commerce, it is likely that many online consumers will keep SET as a secondary payment option.
Bibliography