Electronic commerce and electronic business are the inevitable

mediums of exchange in an increasingly wired world. To better

understand the problems and perspectives of electronic

payment systems, it is wise to look at not only the current

systems in place, but to also examine what the future may

hold. This paper describes the characteristics of current

systems in place and provides a brief analysis of how each

works. Finally, it predicts the future of these systems and the

possible changes to the current structure of economic



For more than decade there have been predictions of the

elimination of physical cash as a transaction medium and the

substitution of one form or another of an electronic payments

system. Some forecasters view the prospect with delight,

looking on it as increasing the efficiency of the economy. Others

fear its rise, anticipating it to be another way in which the

security and privacy of our lives become subject to monitoring
and scrutiny. But no matter which side one may fall on, it is

clear that we're abolishing the physical need for money, one

step at a time. We're committing our futures, our families, our

societies, to cyberspace (Gleick). Because of this explosive

development of electronic commerce in recent years, the issue

of paying over open networks has become very important.

Electronic payment systems are required to bring the necessary

infrastructure to facilitate payments. They are an essential part

of the further development of commerce and business (Gleick).

Before taking a closer look at the different types of

payment systems, it is important to classify or categorize them

in order to get a better understanding of the characteristics and

properties of the systems. The first level in the categorization is

based on the way in which money transfer is organized.

Existing payment mechanisms can be divided into two groups:

electronic cash and credit-debit systems. Another approach,

based on the type of information that is exchanged,

distinguishes between account-based and token based

systems, in which the former corresponds to credit-debit

systems and the latter to electronic cash (Abrazhevich).To be

specific, electronic currency or cash is similar to conventional
cash where parties exchange electronic tokens that represent

value, just like paper money with respect to banks. The credit-

debit approach, in contrast, means that money is represented

by numbers in bank accounts and these numbers are

transferred between parties over computer networks. Going

one step further in the classification of account-based systems,

we can distinguish between debit and credit cards systems and

specialized ones, for example, those systems that use e-mail

for money transfer or notification. Electronic currency 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 cards and electronic purse systems

can be also included in this category (Abrazhevich).

Now that we have classified the payment systems, we can

take a more in-depth look at each of the categories. By

choosing a specific example from each, we can analyze the

specific functionality of each system and why its security allows

it to be either a promising new technology or an already

existing one. Under the scope of account based systems, we

will first see how credit cards work, then continue on to email-

based transaction systems, and finally a generic system such
as PayPal. Moreover, under the category of electronic currency,

we will take a look at both smart cards and E-Cash. Finally, we

will anticipate how new innovations and technologies such as

RF identifications will continue to morph the changing

landscape of electronic payment systems in the future.


Electronic payment system is the alternative to the coin or
paper based cash payment system to easy the user to make
payment for their purchased goods or services over the
network or internet and in absence of the physical (entity)
presence. Initially cheque in bank payment systems are used to
serve the purpose of the same but now in the era of internet
and e-commerce paying securely over the internet is important
task for the electronic payment system. Currently credit card
are also in use for the payments over the network but still users
are doubting about trustworthy and the security of their money
because of the increase in the frauds [38] which ultimately
causes loss of value(money) either of users, merchant or
participating banks.

Present electronic payment system are to far from ideal
payment system because of the higher transaction cost, more
fraudulent activities, and multiple parties are involved in the
payment processing simultaneously lacks users acceptance,
proper application plans and incompatible
standards/specifications. The good payment system should
satisfy the user’s acceptance and merchants in the mass scale.
Present electronic payment system can be divided in two group
electronic cash and credit/debit system [39] or token based and
account based system [40]. Tokens or electronic cash are like
the physical cash which represent the value and credit/debit or
account based system does not carry value but a message to
transfer value.

4.Characteristics of Electronic Payment System

Characteristics of electronic payment system are looked from
various points of view as technology, user, market and more.

 Applicability: acceptance of the user where he/she can
use the method to buy goods or services.
 Easy to use: the system should not be complex
particularly in Indian context a user from the remote
area should be able to use the system.
 Security: is concerned with unforgeability of the
value(money). Creation, modification and over spending
of the value(money) should be protected. Integrity of
the value as well as authorization for value should be
spent by the concerned user only.
 Reliability: Smooth running of the system.
 Trust: degree of the confidence that the money and the
personal information is safe
 Scalability: system should be scalable by timely
changes in the underlying infrastructure
 Convertibility: money conversion may be possible from
one method to another like loyalty point convertible to
the money
 Interoperability: system should be operable in between
multiple service providers.
 Efficiency: reasonable cost of the handling micro-
 Anonymity: is basically privacy to protect the identity of
the user
 Traceability: traceability of the money in the system
who and when it occurs with anonymity cause to built
 Authorization type: whether offline or online
transactions can be made in same way.

5.Architecture/ Structure/Model of Electronic Payment

User a payers always spends the money and the merchant
receives the money for the goods or the services he has given
to users. In traditional system user spends his own physical
money and merchant receives direct physical money no third
party come in between transaction but in electronic payment
system variety of models are specified by different organization
/ researchers, which are summarized here. Ahmad-Reza
Sadeghi & Markus Schneider, in Electronic Payment Systems
presented four types of payment systems electronic cash,
Cheque or credit card, Remittance and Debit orders base
In cash base transaction users withdraw his e-cash or an
electronic token, from the bank where he has his account for
this bank debit same amount from users account. User does
purchase it as per his requirements and the need by using this
e-cash. Merchant receives the e-cash and deposit in bank on his
own account. Afterward its merchant bank, who sends the
request to user’s bank for transfer of money and deposit in
merchant account.

Users Bank Merchant Bank

1-Withdrawal 3-Deposit

User 2-Payment Merchant

Cash base Payment Model

In Cheque and credit card payment system user stage 1
withdrawal is not present, merchant deposit cheque or credit
card slip to bank settlement between banks transfer value in
respective merchant account.

Users Bank Merchant Bank


User 2-Payment Merchant

Cheque/Credit card based Payment
In other two types user and merchant give payment order to
their respective banks for transfer of money [42]. User bank
and merchant banks are called Issuer and Acquirer

6.Payment System Standards

MasterCard and Visa international have derived the standards
for the global application of smart card in payment system.
Initially started with EMV specification in 1996 and
subsequently updated with latest version EMV2000, This
specifies the specification for Card based on the ISO 7816
compliance, and further specification needed for electronic
payment/purse. It also specifies the security criteria for the and
authentication methods.

7.Electronic Payment System Specification/standards for

MIT report

Smars IIT Bombay

More transaction of lower value,??

8.Account-Based Systems: The Credit Card

A first step in the evolution of physical to electronic

payment systems, the credit card is a common piece of

innovation used by almost everyone in today’s society. In order
to understand future technology such as the viability of the

smart card, it is indeed beneficial to see how a credit card

actually works. In general, a credit card is a thin plastic card,

usually 3-1/8 inches by 2-1/8 inches in size that contains

identification information such as a signature or picture, and

authorizes the person named on it to charge purchases or

services to his account. These will be billed periodically. Today,

the information on the card is read by automated teller

machines, store readers, and bank and Internet computers

(how stuff works).

In order to authenticate these credit card transactions,

there are three basic methods of determining whether your

credit card will pay for what you are charging. Merchants with

only a few transactions each month can do voice authentication

using a touch-tone phone. Additionally, terminals allow users to

swipe their credit cards, easing the need for an additional

human being to be involved in the transaction (how stuff

works). For example, people often swipe their own card at the

checkout of stores these days. And finally, there are virtual

terminals for internet transactions. More specifically, the

protocol for credit card use starts with a cashier swiping the
card through a reader. This dials a stored telephone number to

call an acquirer. An acquirer is an organization that collects

credit authentication requests and provides the merchants with

a payment guarantee. When the acquirer company gets the

credit card requests, it checks the transaction for validity and

the record on the stripe for merchant ID, valid card number,

expiration date, credit card limit, and card usage. Single dial-up

transactions are processed at 1,200 to 2,400 bits per second

(bps), while direct Internet attachment uses much higher

speeds via this protocol. In this system, the cardholder enters a

personal identification number (PIN) using a keypad (how stuff


The PIN is not on the card, it is rather encrypted in a

database. For example, before you get cash from an ATM, the

ATM encrypts the PIN and sends it to the database to see if

there is a match. The PIN can be either in the bank's computers

in an encrypted form or encrypted on the card itself. The

transformation used in this type of cryptography is called one-

way. This means that it's easy to compute a cipher given the

bank's key and the customer's PIN, but not really feasible to

obtain the plain-text PIN from the cipher, even if the key is
known. This feature was designed to protect the cardholder

from being impersonated by someone who has access to the

bank's computer files. Likewise, the communications between

the ATM and the bank's central computer are encrypted to

prevent hackers from tapping into the phone lines, recording

the signals sent to the ATM to authorize the dispensing of cash

and then feeding the same signals to the ATM to trick it into

unauthorized dispensing of cash (how stuff works).

Now that we’ve seen how a credit card works, the

advantages are quite apparent. This system of electronic

payment provides ease of use and scalability. As long as it can

use the existing networks and terminals, there is no need for

creating new hardware or infrastructure. All that needs to be

tracked is what new accounts have been created.

9.Account-Based Systems: E-mail Based Systems

E-mail is an inherently insecure medium. Whereas

traditional bank paper and other payment systems have levels
of security built in, e-mail does not. E-mail payment systems

use e-mail for notification and traditional banking systems to

transfer funds. However, the actual security of payments

remains relevant and can be divided into two main concerns:

transaction-level security and user authentication. The first is

more straightforward and concerns the guarding of sensitive

payment details while in transit. This can be addressed by 128-

bit data encryption in a secured socket layer (SSL), which is

widely accepted and is generally believed to be adequate

protection even for large-value transactions (Finance Asia). This

communication protocol, which also is used for web-based

credit card payments, works in a series of steps:

 Client enters a merchant site which uses SSL;

 Web browser and merchant server contact themselves
(handshake process):

o Web browser and Merchant server establish the
cipher suite;

o Web browser authenticates the server thanks to its
digital certificate (and optional client authentication);

o Web browser chooses a symmetric key, encrypts it
with server’s public key which he has obtained with
server’s certificate and finally sends it back;

o Merchant’s server decrypts it and the handshake is
 The server performs the following steps:

o Computes the hash value (digest) of requested data;

o Encrypts data and hash value with a symmetric key
which was chosen during handshake process;

o Sends it to the client.

 The client’s browser proceeds as follows:

o It decrypts message with the chosen key;

o It crates message digest from the original message;

o It compares both digests;

o If they are equals it presents the data.

 The client fills in a form (e.g. the credit card number and
order information)

 The client’s browser sends the form to the merchant’s
server after proceeding following operations:

o Computing the digest of the data;

o Encrypting the data and the digest with the
symmetric key

 The merchant’s server:

o Decrypts the message;

o Calculates the digest of the original data;

o Compares both digests;

o If they are equals it continues process… (Stabla).

Authentication is trickier and is a justified reason why

large-value payments will probably not be conducted using e-
mail for some time. It is technically feasible to build a public

key infrastructure and an e-mail payment system to

authenticate parties to a transaction. This would in turn provide

strong authentication. But this is not necessarily a good user

experience and is certainly not an established practice.

So in the end, electronic transmission of funds using e-

mail can provide significant benefits. Convenience is of course

first and foremost in this category. It could also provide viable

security and possible cost savings. As it happens, it is not

something that is truly necessary in the short term. It is

possible however in the future that it may become more


10. Account-Based Systems: PayPal

One of the more generic account based systems is PayPal.

It is a widely used online payment solution that works solely off

of the existing financial infrastructure. Once a user has a PayPal

account and has entered information about the bank accounts

they wish to draw from, they can send money to anyone with

an e-mail account. The money is then taken from the sender

and placed in a PayPal account for the recipient. Basically,
PayPal can be thought of as a middle man for credit card

transactions. All transactions between consumers take place

indirectly through PayPal. Currently the payment method of

choice for auction such as eBay, PayPal has shown itself to be a

viable payment solution for individuals. Similar to other web

based transactions, PayPal automatically encrypts confidential

information in transit from the consumer’s computer to the

merchant’s using the Secure Sockets Layer protocol (SSL) with

an encryption key length of 128-bit. However it does not have

the security features that are needed for larger business

transactions. Once again though, similar to the credit card

itself, the advantages of PayPal are both primarily ease of use

and scalability since it does not need to create a new

infrastructure in order to go through with transactions.

11. Account-Based Systems: General

As stated earlier, account based systems use the SSL

protocol in order to create a secure transaction between the

consumer and merchant. But as the internet marketplace

continues to expand, there is no safe standards-based payment

system. With this protocol, the card number is safely passed on

to the merchant and protected from stealing or changing
information during transmission. But, neither non-repudiation

nor fraudulent use of card numbers are fully protected against,

since merchants stock all confidential account information

about his clients on his server. In the case of an SSL transaction

the purchaser has no certainty that merchant will guard

properly payment card information. Moreover he or she has no

assurance that merchant is authorized to accept credit card

payments. On the other hand, the merchant has no assurance

that client is legible to use the payment card.

Secure Electronic Transaction (SET) is a payment protocol

developed by VISA and MasterCard based on the RSA

algorithm. It helps to ensure security of data during financial

transactions over the Internet. Very similar to SSL, SET mainly

depends on cryptology and digital signature technologies. With

SET, the cardholder uses software called an “electronic wallet”,

in which the credit card numbers and digital certificate are

stored. The merchant will acquire a digital certificate from a

financial institution. Both the cardholder and the merchant will

present their digital certificates to each other in order to verify

their identities when conducting transactions over the Internet.

During an SET transaction, the cardholder’s credit card number
is not be seen by the merchant, as an encrypted code of the

credit card number is sent to the credit card issuer, which

approves the transaction for the merchant (Secure Electronic

Transaction). In this way, unauthorized viewing and data

corruptions will be prevented during transmission. SET is simply

a better version of SSL.

Now that we’ve examined the functionality of account

based systems we can turn our attention to electronic cash or


12. Electronic Currencies: Smart Cards

You can think of the smart card as a "credit card" with a

"brain" on it, the brain being a small embedded computer chip.

This card-computer can be programmed to perform tasks and

store information. Smart cards currently are used in telephone,

transportation, banking, healthcare transactions, and the

Internet. Smart cards are already being used extensively in

Japan and Europe and are gaining popularity in the U.S.


The reason we classify them as an electronic currency is

because systems that employ smart cards like Chipknip,
Chipper, Belgium Proton, Mondex, and Visa Cash represent

money as a number on the card. With this in mind, they act like

an electronic purse. The value is stored on a card and if the

card is lost the money is gone, in a fashion similar to cash


The advantages of smart cards are numerous. First, they

are more reliable than a magnetic stripe card. They can also

store a hundred times more information than a magnetic stripe

card. In terms of security, they are more difficult to tamper with

than magnet stripes. Furthermore they can be disposable or

reusable. And finally they can perform multiple functions in a

wide range of industries because of their compatibility with

portable electronic devices such as phones, PDAs, and PCs


13. Electronic Currencies: E-Cash

”Electronic money is broadly defined as an electronic store of
monetary value on a technical device that may be widely used
for making payments to undertakings other than the issuer
without necessarily involving bank accounts in the transaction,
but acting as a prepaid bearer instrument” (European Central

“Electronic money products are defined […] as stored value or
prepaid products in which a record of the funds or value
available to the consumer is stored on a device in the
consumer’s possession. This definition includes both prepaid
cards (sometimes called electronic purses) and prepaid
software products that use computer networks such as the
internet (sometimes called digital cash)” (Bank for International
Settlement ).

Summing these up, one can state that e-money is not like

anything that has been attempted before. It creates new sub-

category of money. It constitutes, at the same time, payment

instrument, monetary value and account units, making it

operate just like cash would (Stabla).

There are two types of e-money: identified and

anonymous. Identifiable e-money operates similar to bank

products because the identity of the user and the way of

spending is well known to financial institutions and the latter

can easily track the circulation of e-money in the economy.

Anonymous e-money is totally untraceable and to create it a

blind signature is needed. The process of the blind signing is

a modification of the traditional digital signing process (Stabla).

To understand the process we must first keep in mind that

special software by the issuer creates an e-banknote upon a

user’s request and after verification. In essence, the prepared

message or e-banknote is multiplied by a random factor and
thereby the receiver (issuer) knows nothing about the content

except that it carries the user’s digital signature (to identify

user’s account for deduction). After the issuer signs the e-

banknote to confirm its validity, it returns to the user who

divides the e-banknote by the same factor. Now he can use it

keeping whole anonymity while the issuer does not know

anything about the blind factor (Stabla). The following diagram

provides some structure about how the E-Cash system in

general works.

14.Electronic Currencies: General

Smart Cards and E-Cash provide distinct advantages and

disadvantages when compared to account based systems.

Smart Cards could be seen as a large advancement over the

system of credit cards. In terms of E-Cash, similar to physical
cash, there is an ability to create anonymity during financial

transactions. In effect, it could be untraceable if done with a

blind signature. A significant disadvantage, however, is that a

large database of past transactions need to be kept to prevent

double spending when it comes to E-Cash. Because E-

Banknotes would be quite easy to duplicate, systems need to

be in place to keep track of all notes that have been issued, but

not yet deposited. This obviously reduces the scalability and

ease of use for the system. Furthermore, there may be a

necessity to purchase and install extra hardware and software

adding burden to both the merchant and consumer. These are

probably the reasons that such promising companies like

DigiCash fell flat to the ground.

After looking at the present, both the account based

systems and electronic currencies, we can now examine what

the future holds in the world of electronic payment systems.

15.Security efforts

Security remains the main concern about online payment
systems, particularly the use of credit cards for purchases
made over the Internet. Although media reports tend to
concentrate on the effect of security breaches on consumers,
credit card fraud affects merchants as well. For example, when
hackers infiltrate a company's computers, steal thousands of
customer credit card numbers, and use them to charge
fraudulent purchases, the online retailer's reputation suffers
severe damage. In addition, companies are sometimes left
without recourse when they accept a credit card order and ship
the merchandise, only to have the customer claim that they
never ordered or received it.
But many e-commerce analysts claim that transmitting credit
card numbers online does not have to be any less secure than
handing a card to a salesperson at retail store. Within the
United States, credit card numbers sent over the Internet can
be protected by sophisticated encryption technology which is
often invisible to parties involved in the sale. In fact, encryption
capability is built into many popular Web browsers used by
consumers, and the software needed to decrypt messages is
widely available to online merchants at a reasonable price.
As Emery explained, encryption reassures the merchant that
the customer's order has not been altered and that the
customer's personal and financial data has not been
intercepted and copied. Further-more, if a digital signature is
attached, the merchant can verify that the order was actually
sent by the person who claimed to have sent it. Encryption also
assures the customer that their personal and financial data
remains confidential. Of course, it is vital that the online retailer
never decrypt or store credit card numbers on any computer
that is connected to the Internet.
For small businesses that operate their Web sites on a server
belonging to an Internet Service Provider (ISP) or other host, it
is still possible to accept credit card payments online. Many
hosts will collect customer financial data and pass it along to
their clients in encrypted form. Small businesses that do not
have access to a secure Web server can also go through a
company like Versanet, which allows companies to call their
own secure order page on the Versanet server to process credit
card transactions. Experts recommend that companies unable
to use encryption (for example, companies that are located in
countries where encryption is illegal) either not accept credit
card orders online or use a two-stage order process that
separates credit card numbers and expiration dates into chunks
or data that would be difficult for hackers to identify.
As of 2000, a number of organizations were working to address
the problem of security in e-commerce, including Visa,
American Express, major software vendors, Better Business
Bureaus, and the national organization of Certified Public
Accountants. Many of these groups provided recommendations
and security certification programs for online merchants. Still,
some experts claimed that the future of Internet payment
systems might lie in an entirely new technology. One possibility
is biometrics, which uses physical identifying features such as
fingerprints and voice scans to authenticate customers.
"User authentication is the weakest link in e-commerce, and
biometrics could not only solve that problem, it could eliminate
online fraud," Anne Chen wrote in PC Week. Currently used in
the financial and health care industries for the authentication of
transactions and drug purchases, biometrics might be the wave
of the future. But it needs to overcome people's reluctance to
provide something as personal as a fingerprint, which is often
viewed as an invasion of privacy.
16.Future of Electronic Payment Systems: RF-Ids

Radio barcodes embedded into billions of different things

which have value sending out radio signals about what they are

and where they are. They cannot communicate with each other

directly, but can exchange information through base stations

that send and receive information. These devices are tiny

micro-computer systems which already cost as little as a

quarter and are used in such companies as Wal-Mart. They

already allow retail outlets to know what goods are going in out

of their doors. They provide absolute precision about what
remains in stock. The future of electronic payment systems

could be walking through a terminal with products and services

ranging from bottles of wine to travel tickets using a card that

never leaves your pocket. All the terminal needs to do is get

the pulses emitted from the radio barcodes on each item and

send a signal to the card in your pocket. The transaction will

automatically occur without the need of a clerk or a register. In

theory, RFIDs could enable a person to read all the numbers

and expiration information on the credit cards in your pocket as

you walk by, as well as where you do most of your clothes

shopping, and the model of the portable computer you are

carrying in your briefcase, simply by hacking into the ID

communication system (Dixon). Obviously there are a lot of

security details that need to be taken care of, but this is just a

glimpse of what could possibly be the next step in the evolution

of electronic payment systems, from paper bills to credit cards

to digital cash to RF-ids? The answer lies within the ability of

RFID creators to create a system that is highly scalable and

easy-to-use for the consumer so it doesn’t have the same

roadblocks that E-Cash finds itself having.

After highlighting both account based systems and

electronic currencies we have seen both advantages and

disadvantages. Account systems provide both ease of use and

scalability but don’t allow the same freedom of anonymity that

physical cash allows. In contrast, electronic currencies can

provide this freedom but fall short when it comes to an

implementation of their systems without a lot of overhead and

change in infrastructure. The system that enjoys the most

success are clearly those that don’t force the consumer to

make drastic changes leaving credit card based transactions as

the most viable alternative to physical cash at the moment. But

with technology continuing to evolve one thing is for sure, it is

clear that there will be a continued movement towards the

elimination of physical cash. Ongoing work needs to be done to

figure out the most feasible solution in this 21 st century effort.

Though much more research needs to be done, perhaps RF-Ids

are that killer innovation that people will come to accept.


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DiGiorgio, Rinaldo. “Smart Cards: A Primer.” Java World. Dec.




Dixon, Dr. Patrick. "RFIDs: Great New Logistics Business or

Brave New World." Global Change. Jan. 2004.


Gleick, James. “The End of Cash.” New York Times Magazine. 16

Jun 1996.

Griffith, Reynolds. “Cashless Society or Digital Cash?”

Southwestern Society of Economists. Mar. 1994.


Stabla, Witold. "Electronic Payment Systems." 2001.


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