The term “electronic payment systems” covers to a variety of payment mechanisms. Furthermore, this is domain is in a constant state of change with new schemes emerging and existing schemes being modified, often substantially. The principal classification of EPSs is based on the form of money representation and the principle of money transfer. Existing payment systems can be divided into two groups: electronic cash mechanisms (or electronic currency) and credit-debit systems, (Medvinsky & Neuman, 1993).
Electronic cash resembles conventional cash, when parties exchange electronic tokens that represent value, just as banknotes and coins determine the nominal value of conventional cash money. The credit-debit approach in the context of electronic payments means that money is represented by records in bank accounts, and this information is electronically transferred between parties over computer networks. Some writers put credit cards systems in a separate group (Medvinsky & Neuman, 1993); others consider them to be a variant of credit-debit system.
Going one step further in the classification in the group of account-based systems we can distinguish between debit and credit cards systems and specialized ones, e.g. those systems that use e-mail for money transfer or notification. Electronic currency, in its turn, can be divided on systems that support smart cards, and those that exist only in online environment. They can be called ‘online cash’ or ‘Web cash’. Prepaid card and electronic purse systems can be also included in this category.
According to Goldfinger (1999), a more generic approach is to distinguish between value-based and information-based systems. In the value-based systems, there is actual electronic transfer of value of between the parties to the transaction. E-cash is an example of such a system. In information systems, only data circulates on the Internet and actual transactions take place either off-line or on proprietary networks. These data provide transaction amount and account details and are extremely valuable. The bulk of payment systems are information-based in a double sense of the term, they use transaction data and to generate movement between accounts.
Another terminological approach offered by Wayner (1997), based on the type of information that is exchanged, distinguishes between ‘account-based’ and ‘token-based’ systems, which, respectively, corresponds to credit-debit systems and electronic cash in the definition of Medvinsky and Neuman. A similar distinction is found in Camp (1995), who distinguish between notational and token forms of money.
ACCOUNT-BASED SYSTEMS
The most common way of making electronic payments today is to directly transfer money between accounts. This is facilitated in a number of ways, for example by credit cards and debit cards, as well as cheques and money transfer. In a transaction using the account transfer system, no electronic value is generated. Instead, an authorization of a transfer of funds between two accounts is transmitted. The actual transfer of value is done at the bank. This system works well for high value transactions, but it is relatively expensive and slow. During the payment transaction, a connection needs to be established to the account of the payee, and it needs to be checked whether there are sufficient funds available. The system further implies unconditional traceability of all payments, and every amount has to be cleared (verified) online unless the system is combined with a credit mechanism.
Classification of Electronic Payment Systems (adapted from Abrazhevich (2001)) may be referred to for such an analysis.
TOKEN-BASED SYSTEMS
This concept involves the issuing of electronic tokens by a central entity, such as a bank. These tokens represent value, and can be stored locally on a user’s computer. Using this system, any token is valid for one use only, to ensure that it cannot be copied and used several times. As a consequence, such a token cannot be passed on between several parties as paper cash or coins can. Because a user has the tokens stored locally on his computer, and every token can have a particular denomination of value, the system resembles banknotes and coins in a purse. This is why these systems are often referred to as “electronic cash”.
A token in this system consists of a message stating its value, and the electronic signature of a central entity, e.g. a bank, to guarantee its authenticity. Further information is added for various reasons, including security, the possibility to identify a user, an automatically generated receipt for the payment, etc. Every token is limited to one use, and verified online at payment time. Prepaid token-based systems do not require the overhead of accessing account balance and transfer between accounts during transaction. A record of all transactions is usually not kept, further reducing administration overhead. Net risk of fraud is reduced as only the existing tokens are at risk, not the total balance. It is easily possible to group withdrawals and deposits, especially for small payments, thereby reducing transaction cost further.
Classification of ePayment Products and Systems
Finally, another classification is proposed by Piloura (1998), based on a survey on electronic payment systems on open computer networks which is as follows:
Token-based systems: these systems use tokens, objects that are generally agreed to carry value themselves. The value carried by the tokens is conventional, a matter of consensus. These systems are based on “prepayment “, i.e. drawing on one’s bank account in advance to get possession of payment instruments, token money, to be used in later transactions. We have two subcategories of token-based systems:
- Electronic cash: it attempts to replace paper cash as the principal payment vehicle in online payments.
- Electronic purse systems: they are based on smart cards, also called stored value cards, which use integrated circuit chips to store electronic money.
Notational systems: in these systems the transaction is directly or indirectly tied to value stored elsewhere. The three subcategories that we can distinguish here are:
- Electronic payment orders (debit/credit) transferred over the nets: the transaction is directly tied to value stored elsewhere (usually in a bank account). These systems are also called “pay now” systems because they transfer deposit money “immediately” after the initiation of a payment order. Examples: debit cards, checks and credit transfers.
- Credit card billing over the nets: the transaction is indirectly tied to value in that when you use it you undertake to become liable for the amount of the transaction. These systems are also called “pay later” systems and they are based on consumer credit and/or delayed debiting of the payer’s current account. They can be implemented in two ways: encrypted credit cards or third-party authorization numbers.
- Third-party authorization numbers: one solution to security and verification problems during financial transactions is the introduction of a third party to collect and approve payments from one client to another.
Smart card-based notational systems: these systems use smart card technology to store customer-specific information in an attempt to offer higher levels of protection than software-only notational systems.
These are few of the ways e-Payment systems are classified in the industry.