In this literature review, we will describe several aspects of e-payment system. The literature review will start by the definitions followed by theories. Next, it would continue by some dimensions of e-payment system which include the types and usages of e-payment system, processes, usage trends, benefits and risks and management of e-payment system. Finally, the literature review will conclude by the conclusion.
From online encyclopedia TriasWiki (2010), e-payment or Electronic payment is any digital financial payment transaction involving currency transfer between two or more parties.
Velmurgan,R.J. and Senthil,M. (2008) defined that an electronic payment is a payment services that utilize information and communications technologies including integrated circuit (IC) card, cryptography, and telecommunications networks. From the Velmurgan,R.J. and Senthil,M. (2008), the electronic payment consists of users who can in turn be subdivided into retailers and consumers depending on the transaction model adopted, issuers which included banks and other financial institutions that are providing the actual mechanisms or the means to integrate the mechanism into other financial systems, and regulators who are concerned with issues ranging from assuring the integrity of the mechanism and its operators, to the potential impact on the wider economy.
According to Nochex.com (2010), e-payment is defined as an electronic payment is a payment services that utilize information and communications technologies including integrated circuit (IC) card, cryptography, and telecommunications networks.
Based on Hartmann,M.E. (2006), in principle, e-payments may be defined as all payments that are initiated, processed and received electronically. One can distinguish between e-commerce retail payments (business-to-consumer or B2C payments) and e-payments amongst consumers (Private-to-Private or P2P payments), as well as electronic adoptions of “traditional” banking services (electronic transactions between a bank and its customers. For example, e-payments included paying for an article with a click of your mouse; settling an auction purchase via your e-mail account; buying an electronic ticket using your mobile phone.
Acoording to Odlyzko (2003), e-payment is a subset of an e-commerce transaction to include electronic payment for buying and selling goods or services offered through the Internet. Generally, electronic payments referred to online transactions on the internet.
Nordea Bank Finland (2005) explained that e-payment is an electronic payment method in which a buyer selects purchases and pays them within a single Internet session. The payment can be transferred to the seller immediately or on a later date.
According to Basir,A.A. (2009), the e-payment usage among the consumers and its usage trends show the acceptance level of the e-payment system. The increases in the non-cash retail transactions reflect the increases acceptance of e-payment system among consumers in Malaysia. Thus, from the Basir,A.A. (2009), it shows the relationship between the usage among consumers and acceptance level of the e-payment systems. The usage and the acceptance level of e-payment systems have a linear relationship, which means that when the usage of e-payments among consumers increase, the acceptance level of e-payment systems will also increase. In other words, the higher the usage of e-payment system among consumers, the higher the acceptance level of e-payment systems among consumers.
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Basir,A.A. (2009) stated that the payment systems in Malaysia have been undergoing changes in recent years. Among the notable changes is the emergence of electronic-based payment systems. Both value and volume of transactions per capita use of e-payment instruments had increased in recent years. Next, we will start the literature review from the types and usages of e-payment systems.
4.1 Types and usages of e-payment systems
There have appeared different types of electronic payment system in the last few years. At least dozens of electronic payment systems proposed or already in practice are found (Murthy, 2002). Murthy (2002) explained six types of electronic payment systems: PC-Banking, credit cards, electronic cheques (i-cheques), micro payment, smart cards and E-Cash. Maurer,B (2007) identified 4 types of electronic payment systems: debit and credit card, interne-based payments, mobile payments, mobile wallet, e-purses and payment through a third party. Thus, electronic payment system can be broadly classified into 5 types:
Online Credit Card Payment System
Singh Sumanjeet (2009) stated that this type of electronic payment system has been widely accepted by people in the world, and it is the most popular method of e-payment especially in the retail markets. This type of system is widely accepted by public, because it offers convenience for both the customer and the seller. This form of payment system has several advantages, which were never available through the traditional payment systems. Some of the most essential elements are privacy, integrity, compatibility, good transaction efficiency, acceptability, convenience, mobility, low financial risk and anonymity (Singh Sumanjeet, 2009). The process of online credit card payment system is very simple. If consumers want to purchase a product or service, they can send their credit card details to the service provider involved then they will handle this payment like any other (Singh Sumanjeet, 2009).
Electronic Cheque Payment System
Nowadays, millions of businesses use electronic cheque payment system, which replace the traditional paper cheques with the other vendors, consumers and government (Singh Sumanjeet, 2009). It functions using the same mechanisms as paper cheque, but in an electronic format. E-cheque transactions take place in the ways that the consumer “writes” the eCheque and “gives” the eCheque to the seller electronically. Then the seller “deposits” the eCheque, receives credit, and the seller’s bank “clears” the eCheque to the paying bank. Finally, the paying bank validates the eCheque and then “charges” the check writer’s account for the cheque. E-cheque payment system offers numerous advantages like safe bank transactions on the Internet, unlimited information carrying capacity, reduced fraud risk, and automatic verification of content and validity. But, this type of payment also has several disadvantages. These include their relatively high fixed costs, their limited use only in virtual world and the fact that they can protect the users’ anonymity (Singh Sumanjeet, 2009). Therefore, it is not appropriate system for the use by consumers, although it’s useful for the government and B2B operations because the latter transactions do not require anonymity, and the amount of transactions is generally large enough to cover fixed processing cost.
Electronic Cash Payment System
Electronic cash (e-cash) is a new concept in electronic payment system because it combines computerized convenience with security and privacy that improve on paper cash (Singh Sumanjeet, 2009). The primary function of e-cash is to facilitate transactions on the Internet. Many of these transactions may be small in size and would not be cost efficient through other payment mediums such as credit cards. While it appears superior to other forms, E-cash will not completely replace paper currency. Use of E-cash will require special hardware, and while most people will have access, but not all will. Singh Sumanjeet identified some advantages for this electronic payment system like authority, privacy, good acceptability, low transactions cost, convenience and good anonymity. However, e-cash also has many limitations like poor mobility, poor transaction efficiency and high financial risk, as people are solely responsible for the lost or stolen (2009).
A smart card is similar to a magnetic stripe card but contains a microprocessor chip. The first smart cards that created were prepaid telephone cards. Owing to their considerable flexibility, they have moved on for a wide range of functions like highway toll payment, student cards, electronic purses and also our identity cards: MyKad. Smart cards are essentially credit card sized plastic cards with the memory chips in them so as to serve as storage devices for much greater information than credit cards (Singh Sumanjeet, 2009). With the emergence of e-commerce, smart cards had become a particularly appropriate method to execute online payment system and it has greater level of security than credit cards. Singh Sumanjeet also states that smart cards are better protected from misuse than credit cards because the smart card information is encrypted by enter a personal identification number (PIN) code (2009). The advantages of smart cards are almost same as electronic cash payment system, its included good anonymity, transfer payment between individual parties, and low transactional handling cost. Most of the developing countries rely more on smart cards based electronic payment system although credit card is the most popular in the world.
Payment through a Third Party
Third party payments are person to person transactions. This type of payment is very convenient as money can be transferred without disclose any personal or financial information. All transactions happen in real time so sellers can see payments reflected in their accounts at once. When a customer intends to pay through a third party, the third party will transfers money from the account of the buyer to the seller. All this is done for a certain fee.
Kannen,M., Leischner,M. and Stein,T. (2003) have examined the figure of process oriented phase model for electronic payment. There are 5 phases in this model which are initialization, deployment, negotiation, payment and post payment. Generally, the first 2 phases that initialization phase and deployment phase are only function once, whereas the rest of phases have to be repeated during each payment transaction.
In initialization phase, customers and merchants involve in selection of payment methods, consider the contract agreement to obtain a credit card, and choosing payment scale for billing, or the settlement of a mail order agreement according to their requirements. This method makes the participants of the payment method in the legal sense. Before signing the contract, the participants have to consider the provisions of information for the various payment operations and as well as acquire individual consultation for the specialist.
In order to make e-payment system operational, customers and merchants integrate the payment methods into their existing environment technically and organizationally in deployment phase. An e-payment system provider supply technical requirements, such as software or a smart card reader, assist the participants in the system configuration through a phone hotline or on site configuration, integrate various interfaces in the merchant’s present IT infrastructure with important payment data.
During negotiation phase of an e-payment system, customers and merchants negotiate a precise payment transaction. They can negotiate the types of payment methods based on the payment amount, cash discount, payment date, part payment options such as deposit and outstanding payment after a faultless supply, the integration of bonus systems, and the possibility of splitting the amount between various payees. This negotiation phase is relying on trustfulness between both parties, which lead to the successful of the transaction.
The actual payment takes part in the payment phase. It undertakes the settlement of the payment according to the agreements in the negotiating phase. First, the participants need to authorize and confirm the payment transaction. After that, the payment data will transfer to particular payment participants such as the credit card company.
The last phase in the e-payment process is post payment phase that an assigned payment is processed and completed. The after payment services includes all services, which are necessary and preferable for the further settlement of payment transactions. As an e-payment provider, it needs to verify the clearing of the payment transaction, the recording of the payment transaction, which can be seen and tracked by the user, the currency reconciliation of the merchant, the clearing of the bookkeeping entry by the merchant, the documentation of all transactions and the cancellation of consisting payment transactions by the user.
Singh Sumanjeet (2009) examined that digital currency based payment system. The intermediary in this figure plays the role as an electronic bank. It converts outside money (RM) into inside money (e cash), which is circulated within electronic markets. Intermediary acts as a centralized commerce enabler maintaining membership and payment information for both sellers and buyers. A buyer need only send the seller his identification number assigned by the intermediary.
Trust and security are important in every stages of e-payment process. As an initial prerequisite, all participants should have absolute trust in the process. This fundamental attitude must be underlined during each payment process again and again. The trust is essential and important for the acceptance of electronic payment. The transaction security means that the secure and reliable payment in the handling of electronic media according to defined rules. Therefore, by implementing these two elements, the successful of e-payment process can be achieved.
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4.3 Usage trends of e-payment systems
Gerdes,G.R. (2008) conducted surveys to estimate the number and value of electronic payments originated in the United State in 2006 by means of commonly used payment instruments. He sent the questionnaires to 73 well-established electronic payment networks, card issuers, and card processors. 89 percent of established entities had responded with information and he found that the number and value of payments processed by the non-respondents were likely very small. Thus, most of the established entities were having large number and value of electronic payments. Since the usage of electronic payments is high, the acceptance level of electronic payments by the established entities is also considered as high.
Besides, Gerdes,G.R. was also sent the questionnaires to 33 emerging payments companies and the surveys were returned by 16 companies. He got the results of the reported totals for emerging payments are lower bounds for the national totals. It means that the national in United States haven fully accept the emerging payments such as the online bill payment transactions since the usage trends of emerging payments among them still low.
Basir,A.A. (2009) examined the e-payment usage trends in Malaysia. According to Basir,A.A. (2009), the e-payment system has seen increasing acceptance among consumers in Malaysia since the usage and the usage trends of e-payments increased. He found that he volume of non-cash retail transactions per capita increased from 13.8 to 32.5 and the e-payment’s share of the total non-cash retain payments increased from 3% to 7% (from 2003 to 2007). There are several reasons caused the use of e-payment instruments increasing such as cost saving, safety and the confidence conferred from security measures of e-payment instruments. Thus, these benefits encourage more people to use the e-payment instruments and also encourage the acceptance level of e-payments by consumers.
Based on the Basir,A.A. (2009), the major e-payment instrument in use in Malaysia are credit cards, internet banking and others. First, Basir,A.A. found that the usage trend of credit cards is high. Both the value and volume of transactions per capita have increased from RM1159 and 5.8 to RM2 047 and 8.7, respectively (from 2003 to 2007). Credit card is the oldest e-payment instrument in Malaysia and the consumer demand for credit made it has the high usage level. Thus, the acceptance level of credit cards relatively higher than other e-payment instruments.
From the research of Basir, A.A. (2009), the usage trend of internet banking growth rapidly. The value and volume of transactions per capita increased from RM403 and 0.3 to RM2,047 and 1.5 respectively (from 2003 to 2007). In addition, the use of internet banking among internet subscribers in Malaysia increased from 59% to 85% (from 2003 to 2007). Since there are increasing trend in use of internet banking, thus the acceptance level also increase among the consumers.
Charge cards, e-money and debit cards are also included to the e-payment instruments. According to Basir,A.A. (2009), the value of transactions per capita for charge cards increased from RM74.9 to RM81.7 and RM22.4 to RM59.0 for e-money. The volume of transactions per capita for e-money increased from 7.6 to 22.3, but volume of transactions per capita for charge cards was flat. Furthermore, the value of transactions per capita for debit cards showed a significant increase from RM3.5 to RM42.9. However, the volume of transaction per capita remained static. Thus, the usage of these e-payment instruments showed increased, means that the usage trends are high. It showed that the acceptance level of consumers is also high. E-payments provided many benefits to consumers and it encourages them to use these e-payment instruments and caused the acceptance level increased.
According to Wilson,U. (2009), electronic payments have grown rapidly in several forms. The usage of debit cards has exploded for 27 percent of total non-cash payments in 2006. He also found that credit cards and ACH transactions have also grown dramatically. Thus, it reflected the consumers’ acceptance level towards e-payments systems have increasing.
In a nutshell, the usage trends of e-payments are increasing among the consumers due to various benefits provided by the e-payments instruments. It also showed the acceptance level of e-payment systems has followed increasing since the usage and its usage trends of e-payment are increasing.
4.4 Benefits of e-payment systems
With the growth of the Internet, electronic payment has become a popular way for consumers to pay bills and manage their accounts in home. Consumers are eliminating the trouble that often comes with filing paperwork and mailing cheques, and these substitute by keeping their records online through secure networks. Electronic payments services not only increase efficiency of businesses, but also wider choices, save cost, reduce late payments, consolidating bank relationship and provide a greener business solution to customers.
Businesses and customers can choose from a range of payment instruments and channels such as credit cards, debit card, e-cash and e-cheque. The increase in the variety of electronic payment methods afford the SMEs more choices from which to choose a channel or instrument that best suits that firm’s market size and the level of technological, capital and labor intensity (Basir,A.A. 2009). Electronic payments also allow businesses to send invoices electronically and accept payments through Internet. This is extremely helpful for businesses that send out invoices monthly and creating a more efficient billing cycle.
Basir,A.A. states that the establishment of electronic payments and other services by the government could reduce the cost of conducting business in Malaysia (2009). Besides that, eliminating paper billing altogether will reduces paper and mailing costs. The amount of savings depends on each business’s daily routines such as receiving incoming cheques and making deposits (Wilson,U. 2009). On the other hand, e-payments services also reduce cost of the consumers. With the appearance of this service, consumers can cut down transportation costs for trips to the bank.
Electronic payment services have the reminders and notifications function for customers to pay their bill. A business can set up weekly or monthly reminders to their customers and clients to remind them when a bill is due. By this function that provide by e-payment service can reducing the amount of late payments that the company receive. Online payments also allow for quicker transactions, eliminating the waiting period required for a mailed check to arrive.
If an organization dispersed its companies in different location, then the banking relationship will be complicated. Geographically dispersed companies often establish a bank account at each location, because this can provide convenience for their daily banking routines (Wilson,U. 2009). But an additional cost will incurred for company to maintain accounts in all its locations. Electronic payment system can removes geographic boundaries. It then eliminates the extra cost of maintaining separate accounts at different locations.
Last but not least, electronic payment services are providing a greener business solution. By sending and receiving bills online, customers and businesses alike are reducing the amount of paper tossed and doing their part to help save the environment.
Risks and Risk Managements
E-payment system is currently continued to develop and expand in the financial market of our country, but there are some risks existing as the e-payment expanding widely. A healthy development of the system will require the cooperation by different role that include central bank, bank and customer to manage the risk and challenges.
E-payment system is currently continued to develop and expand in the financial market of our country. A healthy development of the system will require the cooperation by different role that include central bank, bank and customer to manage the risk and challenges.
Basir, A.A. (2009) studied how Central bank promote the development of e-payment schemes. After adopted liberalization policy, the central bank required migration to the Europay-MasterCard-Visa standard for credit cards as a crucial step to reduce fraud. Although this can curb the use of cloned domestic credit cards, however, it is less effective against credit card fraud arising from purchases made over the internet or by telephone (Bank Negara Malaysia 2007). On the other hand, central bank has issued a set of guidelines on managing fraud and risks on credit card operations to all banks. Generally, they are improving the policy and the implementation continuously in order to enhance public confidence towards the payment system.
Fraud is also a risk faced by internet banking users. To mitigate it, the central bank issued guidelines that outline the minimum risk management requirements for all forms of electronic banking. In addition, government also established the Internet Banking Task Force, comprising the leading banking institutions, cyber security agency, polices and also Internet service provider company. Specific requirements were also issued to banks, such as the requirement to implement two-factor authentication for internet banking transactions. Recognizing that controls are needed to address risks facing the public from using e-money, the central bank is formulating a regulatory framework for the electronic money business. The central bank also extended its regulatory oversight to cover nonbank remittance operators as remittances that sent abroad by foreign workers in the Malaysia is correspondingly high.
As part of its efforts to mitigate systemic risk in the payment system, MEPS conducts a disaster recovery exercise for three of its core service networks: the shared ATM network, e-Debit, payment for goods or services through cashless methods such as credit cards or online purchases, and Interbank GIRO (IBG), a funds transfer payment system operated by MEPS that enables consumers to transfer funds through banks across Malaysia (Bank Negara Malaysia 2007). The live disaster recovery exercise is to serves to familiarize the MEPS disaster recovery team, financial institutions and related service providers with the disaster recovery process. Various measures has been taken by Central Bank to make sure that the system can be maintained in a standard level and can be follow by other banks in our country.
Norges Bank Report (2009) show that the new electronic payment services will involve lengthy automated processes between payers and payees. This increases complexity and involves a risk of errors that may delay or prevent completion of payments. At the same time, payment services are expected to be available at all times. Secure and stable IT operations have therefore become a major challenge for participants in the E-payment system. Ensuring rightful access to means of payment and preventing counterfeiting and fraud has always been demanding. New payment solutions pose new challenges, also with regard to security. Payment services are provided via networks. The risk for one participant is influenced by the other participants in the network, but the other participants may have little motivation for taking measures to reduce the risk of events that do not affect them. A participant’s willingness and capacity to reduce payment fraud thus largely depends on the extent to which the participant bears the costs involved. When the participant best able to reduce fraud must also cover the cost of the fraud, the willingness to invest in measures to mitigate the risk is probably strengthened. This is taken into consideration when deciding customers’ liability for compensation in connection with card fraud. The less a loss can be blamed on the customer, the larger the share of the loss that must be covered by the bank. With better information concerning the extent of fraud and how it occurs, appropriate measures to reduce fraud are more likely to be implemented. Financial Supervisory Authority in some country has tightened reporting requirements for financial institutions concerning incidents that occur in the payment system (Norway- Finanstilsynet).
Pin code and the contents of the card’s magnetic stripe are easily stolen from point-of-sale terminals, and the information would then be used for fraudulent withdrawal or goods purchases. To overcome this issue, we can see that chip card and chip-enabled terminals has been used globally in a tremendously speed because its posses a stronger security and functions. When such events are detected, the issuing banks block the cards concerned, contact the customer and issue a new payment card. There has been a significant increase in card data theft in many countries. Losses have been low, but inconvenience to the customers and banks concerned has been substantial. Operating incidents can also give rise to problems and losses. For example, shops and other merchants will make fewer sales if customers do not have access to major payment services. For example that was happened in Norway, on Saturday 24 October 2009, the BankAxept system was inoperative for 13 minutes. This affected all merchants and all cards using BankAxept during a very busy period of trading. Inadequate control of account balances has also given rise to problems in connection with card use in point-of-sale terminals and ATMs. Such events generally only affect certain types of cards, certain ATMs or certain merchants.
Online banking payment services are work under complex operating environments. Most of the time, it will share IT resources with other services. Any disruption that caused to the services will directly affect the procedures of payment. Access to online banking requires users to identify themselves and be authenticated before being able to make payments or carry out other operations. To guarantee a more secure and smooth transaction, banks have to spend investment in technology by providing a stable and reliable service in websites that available currently. One of the ways includes technical improvement, which is requiring customers to re-authenticate their identity for each payment.
A number of new payment methods with different channels have been introduced in recent years. One example is payment via mobile telephones. Based on this concept, customer authentication can also be made more secure by combining use of mobile telephones and online banking. If an identity code is sent via the mobile telephone network, a fraudster must obtain access to data sent both via the mobile telephone network and the Internet. However, this system will become more complex when payment services are provided via a number of channels. Setting up agreements between bank and customer is challenging as different suppliers are responsible for providing different services to the same mobile telephone. From the report, it was suggested that combination of new payment method is only applicable by achieve agreements from bank, customer and the supplier.
We know that payment services are dependent on uninterrupted availability of IT systems, telecommunications and power supply. Cash and various paper-based system will become basic point if the backup solutions fail when disruption occur. In that time, banks must able to handle a sufficient number of paper-based forms for payment purposes in a crisis. If cash is used as a backup solution, each participant must include capacity and procedures for increased supply of cash and cash handling in its contingency plans. Banks are obliged to allow customers to withdraw their deposits when they so request or when time deposits fall due. This obligation applies both in normal situations and in crises. Thus, a considerable plan should be build on the basis that an increased supply of cash should be able to cover a large share of purchases normally paid for by card. Besides, Central Bank must also have the capacity and availability to meet an increased demand for cash from banks.
In conclusion, e-payment systems have provided various types of benefits to consumers and businesses. Although there are some risks by using the e-payments systems, but the risks are controls by the risk management strategies. Thus, the usage trends of e-payment systems are increasing among the consumers because it is a convenient and secure payment system to use by consumers.
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