The Business Internet and Intranets:

Extract (7): Glossary of Terms: 
Internet Payment Mechanisms

Extract's Table of Contents:

• Internet Payment Mechanisms
• Figure 10 - The Internet's Place in Major Financial Transactions
• Segmentation of Smartcards

Internet Payment Mechanisms

Full-scale electronic commerce on the Internet will require the same range of payment instruments as is available in today's everyday, physical commerce environment. Without the equivalent of coins, small purchases will be too expensive to process. Without security, consumers will remain reluctant to use credit cards for purchases over the Internet.

Despite the flood of efforts to define, pilot, and market Internet payment mechanisms over the past few years, none has moved much beyond the experimental stage and none has, as yet, built a critical mass of consumers, merchants, or financial service providers. The mature electronic commerce market will likely support only a limited number of systems, reducing the potential successes of today's innovations. Firms seeking to establish business connections on the Internet face the problem of predicting who the winners will be and why. Among the current leading contenders with pilot projects and publicity building public name recognition, are Mondex, CyberCash, First Virtual Holdings, and Digicash. Around a dozen other players in the field have less prominent profiles. Figure 10 demonstrates their role in the existing pattern of financial relationships.

The figure simplifies what is in actuality a more complex relationship involving transactional intermediaries and combining manual and electronic processes. Perhaps the Internet has a chance to simplify what should be seamless transactions. Undoubtedly, the current confusion won't last forever. Three organizations have combined to attack the issue of Internet payments interoperability by providing a forum for collaboration among organizations. This joint alliance, the Electronic Payments Forum (EPF), includes the Financial Services Technology Consortium (FSTC), the Cross Industry Working Team (XIWT), and CommerceNet.

The EPF describes the components of the new world of payments as follows:

[A] variety of devices, both hardware and software, and digital representations of both paper and plastic instruments that will have to interoperate safely, reliably, and globally. They also include enabling technologies such as payment protocols and public key encryption. A legal and regulatory framework, a reference architecture, and standards for external interfaces must all be defined for this environment. ³⁹

The world of physical commerce offers a number of payment options: cash, checks, credit cards, traveler's checks, prepaid cards, debit cards, physical tokens, bank notes, secure wire transfers, money orders, letters of credit, and so on. None of these mechanisms is directly transferable to the Internet in unmodified form, however, mainly because each assumes a physical presence or equivalent and a delay in the processing of funds that allows detection of fraud.

The new Internet payment instruments must, of necessity, take other forms. ⁴⁰ Following are some examples:

• Digital Cash. Also referred to as electronic cash, digital cash is a "token-based" currency that is the direct equivalent of real currency units guaranteed by a bank. A trusted authority allows users to conduct and pay for transactions after establishing an identity and relationship. Interoperability standards are not yet in place for digital cash, which remains a protean concept with several forms.
  
  
• Smart Cards. Smart cards look like credit cards but contain computer chips that can store information, including a value representing money available for transactions. The stored value increases or decreases as deposits and purchases are made. Cardholders can use the Internet or other electronic connections to replenish the card with new money from remote locations. Some cards, rather than store a currency value, contain a private encryption key, a digital signature or electronic token that can be used to initiate an authentication process during a payment transaction, exactly like using a credit card to authorize a payment. A new generation of smart cards, referred to as relationship cards, store considerably more information and link to databases for updates. Useful for multiple applications, a single relationship card, such as the one recently demonstrated by the ImagineCard alliance (Hewlett-Packard/Informix/Gemplus), can accommodate functions such as an electronic purse, conference evaluation, logical and physical access, and registration with full customer accessibility and card-owner controlled authentication. Summarized below are the various types of smart cards and their emerging uses. Reusable smart cards can have either single or multiple functions.
  
  

  Segmentation of Smart Cards
  Consumables (Use once, throw away)	Reusables (Use, reload, reuse)
  Vending machines Telephone calls Retailer specific	Identification Electronic access Device control Physical access Ticketing Loyalty programs Health records Cash value
  Source: CYBERManagement Inc. 1996

The Mondex smart wallet is one of the leading smart card mechanisms for Internet commerce. Other innovations are:

• Encrypted Credit Cards. Various methods have emerged to encrypt Internet credit card transactions, with SET (Secure Electronic Transactions) holding the most promise. Internet transactions require, at a minimum, confidentiality of information, payment integrity, and authenticated identities for both the merchant and the cardholder. Digital signatures may augment the transaction, both to ensure nonrepudiation and to further establish the authenticity of the originator. CyberCash leads this field and is likely to establish itself in the mainstream of Internet commerce.
  
  
• Electronic Checks. Electronic checks are the equivalent of paper checks, but they are written during onscreen dialogues that result in a payment. Authentication and verification are usually achieved instantaneously using digital signatures and time-stamping controls, CheckFree is the main player here.
  
  
• Internet Financial EDI. Internet Financial EDI will be used by businesses that were already doing financial EDI via VANs (value-added networks). One of the first large organizations to demonstrate the validity of this method and fully embrace it was the Lawrence Livermore National Laboratories, in cooperation with Bank of America. Lawrence Livermore is reported to have processed $300 million in 1996 using this method. Chase Manhattan Bank and Diamond Shamrock have also engaged in large financial EDI transactions via the Internet.

All of the above possibilities (except financial EDI) dictate several systems and implementation methods not universally supported. Each is trying to secure a beachhead or to carve its own niche, without regard for interoperability with other instruments. Several of these systems have their own proprietary application program interfaces to allow integration with the merchant and banking systems. Acknowledging that this new era of electronic payments needs some order, the U.S.Treasury formed a task force in 1997 to study and guide the government in supporting and regulating the electronic money revolution. This task force also seeks the participation of other industrialized nations, since these changes affect the financial industry across borders.

Many obvious and not yet obvious criteria exist for choosing Internet instruments. Organizations need to view the payments issue as an infrastructure module of electronic commerce, not as an add-on, and they must offer their customers several alternatives. Understanding the inner workings of each of today's existing payment instruments is unimportant. It is important, however, to understand the implementation requirements and costs of any payment mechanism under consideration for integration into a firm's electronic storefront or back office.

Managers facing the choice of an Internet payment mechanism should consider the following questions:

• Will the system need to handle microtransactions (small purchases of a few cents or even a fraction of a cent)?
  
  
• Is a real-time cash, a debit, or a credit option best?
  
  
• Who will process the financial charges? The firm itself or, for a fee, a third party?
  
  
• Which is preferable? A smart card system or a token-based, software-only set-up?
  
  
• Should any smart card used be simply a digital signature enabler (for credit or debit) or should it store real cash value?
  
  
• Should the system require preregistration from sellers and buyers?
  
  
• Should the system charge fees to the buyer, seller, or transaction processor?
  
  
• Is the firm comfortable enough with financial EDI transactions to move on to Internet financial EDI?

Among current vendors of payment systems are NetChex, NetBill, NetCash, CheckFree, CyberCash, DigiCash, First Virtual Holdings, Mondex, Europay, VeriFone, Millicent, PayWord, MicroMint, KLEline, GCTech, and Blue Money.

Today, most Internet payment mechanisms require a prior arrangement with an issuing entity and participation is limited to an established pool of banks or financial institutions. In the near future, more interoperability will prevail, with organizations such as CheckFree incorporating CyberCash in its CheckFree Wallet or the establishment of joint standards, such as Visa and MasterCard's SET. But the field is only beginning to develop, and a specific storefront should avoid being limited to a particular cash or encryption solution that may serve only a segment of its potential customers or to a list of only a few potential financial partners. A standard is reached when a critical mass of users is online and committed to using a specific mechanism. For backend transactions, emerging practices may well rely on extending the existing financial networks.

39.Ibid., 52.  40. Marlow, Web Visions, 50. Order from: Order from: