Comparative evaluation of electronic payment systems

INFOR, Feb 2002 by David Wright

Merchants can have access to the banking network for validating credit cards, but they do not have access to the ACH for validating electronic checks. Only banks and other financial institutions have access to the ACH. Thus in the case of a credit card transaction, the merchant has the choice of processing it using software on its own web server or using an e-payment service provider, whereas in the case of an electronic check transaction, the function must be outsourced to a service provider.

2.3 Digital Cash Systems

Digital cash can be issued by financial institutions and other organizations, against a deposit in an account, e.g. [11]. Figure 3 illustrates digital cash as a string of bits representing a $ value, including a reference number and the digital signature of the issuer of the cash. In these respects it is very similar to a physical bank note, Table 2.

The digital signature identifies the issuer of the cash, and provides assurance that this string of bits will be accepted for the dollar value. However, it does not prevent counterfeiting of the digital cash. Whereas a physical bank note contains features that make it difficult to copy, any string of bits can be copied by a computer including the digital signature. It is at this point that digital cash is different from physical cash. Digital cash must be cleared through the issuer, to check that the cash with the same reference number has not previously been spent, whereas a physical bank note can be passed around from one person to another without returning to the issuer until it is so worn out that it is not acceptable for transactions.

Digital cash systems can be centralized, involving a single organization for issuing and redeeming digital cash, e.g. PayPal, [12]. Alternatively they can involve multiple financial institutions, e.g. Royal Bank of Canada, National Bank of Canada and Canadian Imperial Bank of Commerce have a joint initiative to issue digital cash. When a central organization is involved, all customers and merchants need to establish accounts with that organization. When multiple banks are involved, a customer with an account in one bank can send digital cash to someone with an account at another bank. The funds are transferred between banks using an electronic funds transfer via the banking network. In the following description, we address the more general case of multiple financial institutions collaborating in a single digital cash system.

Figure 4 illustrates how digital cash can be obtained and spent. First, the customer and the merchant need to establish accounts with on-line banks. The customer deposits funds into the account, e.g. by credit card, to backup the digital cash that the online bank issues. In order to obtain digital cash, the customer authenticates themselves to the bank and asks the bank to issue digital cash worth a specified value using a reference number provided by the customer. The bank issues and signs the digital cash, and debits the customer's account for the corresponding amount.