E-Money

Definition: All types of money which people deal with it electronically, far from traditional ways of payment like banks, cheques, paper money and coins, e-Money allow users through internet or wireless devices to pay the charges of their purchases directly from their bank accounts by electronical ways such as Smart cards, Digital wallets and micropayments

5.1. General Characteristics

Despite the somewhat confusing diversity of proposals that seem to offer quite different solutions, all electronic money schemes share a common basis of issues that they somehow have to address. Based on Lynch; Lundquist (1996), Matonis (1995) and Okamoto; Ohta (1991) six (structural) problem areas can be defined that have to be addressed by any system:

Independence: Is the electronic money independent of any physical condition? It has to be transferable though open networks and storable on different devices and in different locations inside and outside these networks. Cash, evidently, is dependent on its physical condition in so far as it equates the unit-value of money with the storage medium (paper, coins) in which it resides. It can not be transferred onto any other medium without ceasing to be cash. On the other hand, the cash economy is a truly open network which all forms of physical money can enter and exit quite freely. Even though the limits of the acceptance of specific cash clearly define different segments within the network , e.g. CDN$ are accepted inside Canada only, changing from one segment into the other is not only unproblematic but an essential, institutionalized feature of the network itself (currency exchange).

Security: Can it be copied (reused) and forged? This, obviously, must be prevented. Not only must the electronic money software be secure but also all the communication between the partners of a transaction must not be interceptible. Cash solves this problem based on its physical properties. A bill can be in only one place at any given time, therefore the question whether is has been duplicated can be decided locally, based on the thing. The transfer of cash is done normally in the presence of both parties and therefore unproblematic.

Privacy: What kinds of transactional information are generated and who has access to them? All levels of privacy are technically possible. Privacy is related to the encryption technology used in the security features of the system, however, there is no correlation between the two

Transferability: Who can pay and who can receive money? The cash must be transferable between users in all forms of "peer-to-peer payment". With cash this is no problem while with traditional credit cards this is impossible unless the payee has the privileged merchant status that is not intended to be available for everyone.

Divisibility: What are the payment units? The size of the units and the number of different units has to be defined. In contrast to cash, where the physical properties limit not only the size but also the number of units due to reasons of practicality, these constraints do not apply to electronic money. All sizes of units are, technically speaking, equal. The limits arise due to specific design properties.

Ease of use: What hardware, software and expertise is required? Electronic money has to be easy to use since the systems aim, at least theoretically, at the totality of the population addressing all kinds of individual expertise.

There are two different types of approaches to electronic money: on-line and off-line electronic money.

On-line means there is a need to interact with a bank or another "trusted third party" (via modem or network) to conduct a transaction. On-line systems prevent fraud by requiring merchants to contact the bank's computer with every sale. The bank's computer maintains a database that can indicate to the merchant if a given piece of electronic money is still valid. This is similar to the way merchants currently verify credit cards at the point of sale.

Off-line means that a transaction can be conducted without having to involve a bank directly. Off-line electronic money systems prevent fraud in basically two different ways. There is a hardware and a software approach. The hardware approach relies on some kind of a tamper-proof chip in a smart card that keeps a mini database. The software approach is to structure the electronic money and cryptographic protocols to reveal the identity of the double spender by the time the piece of e-money makes it back to the bank. If users of the off-line electronic money know they will get caught, the incidence of double spending will be minimized, at least in the theory.

On-line or off-line, those six characteristics( independence, security, privacy, transferability, divisibility, and ease of use(define the problem space that each electronic money system promoter attempts to solve for one goal: public acceptance wide enough to make the system profitable for those who run it.

5.2. Ways of payments:

There are many ways of electronic payment such that smart cards, micropayment and person-to person payment

5.2.1. Smart card:

A credit card with a built-in microprocessor and memory used for identification or financial transactions. Or a tool to save electronic money. When inserted into a reader, it transfers data to and from a central computer. It is more secure than a magnetic stripe card and can be programmed to self-destruct if the wrong password is entered too many times. As a financial transaction card, it can be loaded with digital money and used like a travelers check.

Today, there are fewer than one billion smart cards in use. Market researcher Dataquest forecasts that by the year 2001, 3.4 billion smart cards will be used worldwide. Smart card activities are growing at 30 percent a year, predominately outside the U.S. Over the next five years, the industry will experience steady growth, particularly in cards and devices to conduct electronic commerce and to enable secure access to computer networks. Within the same time frame, smart cards are expected to be used in 95 percent of the digital wireless phone services offered worldwide. Asia, Latin America and North America are areas believed to be of greatest potential in the next three years. Globally, the uses that have emerged so far are for payphones, wireless telephony, Internet access, banking, healthcare and pay TV.

Fig. 5.1 (Smart card)

The main two challenges that face the development of smart cards are: it needs a special device must be attached to the computer (Smart card reader). Some companies, which produce smart cards, offer a free reader with the card. The second is “Standards”. Standards are required to ensure that cards and card-accepting devices are built to uniform specifications. This ensures that cards manufactured and issued by one industry sector in one part of the world can be accepted by a device in another part of the world. These cards and devices may support .The International Organization for Standardization (ISO) has developed standards for smart cards. The goal is to ensure uniform standards for smart cards that will allow interoperability of cards among a wide array of industries. There are numerous standards developed by members of the Forum, and others, to support and promote smart card standards.

5.2.2 Micropayments:

Micropayments are payments of small sums of money, generally in denominations smaller than those in which physical currency is available. It is envisioned that sums of as little as 1/1000th of a cent may someday be used to pay for content access or for small quantities of network resources. Conventional electronic payment systems require too much computation to handle such sums with acceptable efficiency. Micropayment systems enable payments of this size to be achieved in a computationally lightweight manner, generally by sacrificing some degree of security.

The ways of payment can be in different forms, for example eCharge company allow to transfer the sum from an account in eCharge or add the bills to the telephone bill.

The most use of Micropayments is to sell music, photos, graphs, documents and even programs.

5.2.3 Person-to-Person:

A new e-money technology, is expected to be a rife way of payment. PayPal service is an example of this new way, this service allow user to send a sum of money from his bank account or credit card account through email to the bank account of another one. It appears firstly in auctions sites –like eBay- then spread quickly as it highly reduce the consumed time.

Terminology:

Automated clearinghouse: a secure net transfers money electronically; it connects all financial institutions in one country.

Authentication: A process for authenticate of identity of the user. In simple processes it occurs by entering user name and a password