3. Transactions between consumer and company

Here, we focus on the payment system between consumers and companies, which involves a relatively small amount of commercial transaction compared with large size of transac tions from company to company. In addition, we overview the current and emerging payment system and examine its impact to the banking industry.

Current Transaction

In current system, payment between a consumer and a company is conducted by various kinds of methods. The major methods are cash, credit card, check, electronic funds transfer such as debit card and so on, although the most important and major method differs from country to country due to the difference in commercial customs. Each method has its own advantage and disadvantage, and so each plays a complementary role in the payment systems of an economy. Following is a table in which we summarize the advantage and disadvantage of each method according to some important issues:

Security indicates the level of safety and protection in the payment method. When one loses cash, there is no backup system to compensate for it. Checks and credit cards can be veri fied by authenticity of signature of the holder, but it is easily imitated by another person. How ever, a "checking" system will function when the holder of check or credit card realize that the unknown amount of money is billed to his/her account. Debit card or other electronic payment method will be relatively safe because this system will be worked only by the instruction of card holder with Personal Identification Number. Privacy and anonymity indicates how private is the use of this money; in other words, the "who, what, where, why, and when" of using money can be kept secret. In this sense, cash is the only method which has good privacy. With the other meth ods, some entities such as banks and credit card companies have information about customer's actions. Availability means the degree to which people can use the payment method widely. Surely cash can be used everywhere, but check and credit card can be used in only stores where check or credit card are accepted. From the view point of banks, there should be a lot of business opportunity in current pay ment system. If cash transactions play a main part in the payment system, banks have to deploy a lot of access points to customer such as ATM (Automated Tellers Machine) which make it possi ble for customers to get actual cash. In some countries, the cash transaction by ATM incurs a fee if one withdraws money after the bank's operating hours or uses another bank's ATMs. This brings about profit to banks through handling charges. In case of checks and debit card system, users have to keep their balance in checking account in order not to make a deficit. This means that banks can raise money fairly cheaply compared with the case where a customer puts all his/ her money into a savings account. Moreover, when a customer pays a company by using ordi nary electronic transfer, banks can obtain a remittance fee from customers. Finally, in case of credit cards, banks can find a business opportunity to give credit to customers who do not pay the billing amount at on time. People often decide their purchase activity based not only on money currently at their disposal, but also expected salary in the future. Therefore, banks can loan to them and gain interest income.

Future Transaction

Various kinds of changes has happened in the payment system due to the emergence of electronic payment system and drastic prevailing of electronic commerce on internet. Basically new emerging method can improve or completely overcome the disadvantages of current payment system which have been described in the previous section. However, the new trend will eliminate some of the business opportunities for banks and will enable other institutions to enter into the banking business. The emerging method of new payment method can be classified into some cat egories by its character. Here we categorize and overview each of them in the following way:

Expansion of credit card method

This method builds on the traditional credit card system. Some methods coexisting now are different from each other in the method by which the credit card information can be sent to company side. As frequently discussed, there are two types of method as follows.

Encryption method In this method, user can send his/her credit card number safely on the internet, because the credit card information are encrypted when users send it. The most famous method of encryption is the RSA method which utilize public key and private key to encrypt and decrypt of information. Visa and Microsoft agreed to use the same protocol called STT (Security Transaction Technol ogy). On the other hand, MasterCard cooperated with NetScape and IBM by using Terisa, which is joint venture of EIT (Enterprise International Technology) and RSA Data Security. They devel oped another protocol called SEEP. In the end, these two are combined by the agreement between Visa and MasterCard,and now this new protocol, called SET, is under testing.

Third Party method In this method, a third party which is neither the customer nor the credit card company plays an important role to solve security problems. For example, First Virtual, a typical company using this method, adopts the following method. At the beginning, customers inform their credit card information to First Virtual and First Virtual issues an unique ID number to customers. Cus tomers can use this ID number to buy something on internet without sending credit card informa tion. Company side receives this ID number and charges the purchase to First Virtual. First Virtual confirm this transaction to customer by e-mail and allow this transaction after customer intention to make this transaction is confirmed. Cybercash incorporates a similar kind of method including the encryption process and real time authorization on the Internet, without the issuing of an ID number.

Digital Check and Internet Banking

A second type of new emerging electronic payment would be digital check and internet banking in which users can send a kind of instruction to banks to make a payment. Digital check Digital check should be widely accepted by consumers, especially for people who do not have any credit cards, because a banking account can be held by almost anyone, for it is not nec essary to check the confidence of users as a credit card company does. It also provides some con venience for purchases with small amount of money, for which some businesses would not allow a consumer to use a credit card. In this method, users can issue their digital check on the Internet like an ordinary type of check, and the company side forwards the received digital check to a third party which accepts this check and sends it on to the appropriate bank. This method incorporates the encryption process at the customer side and the decryption process by a third party. The main provider of this method is NetChex and Check Master. In Japan, Bank of Tokyo-Mitsubishi and Dai-ichi Kangyo Bank is now conducting tests to issue this digital check on the Internet. Users issue digital checks for shopping in the internet "malls", and the issued checks are stored in a "vir tual bank" on the net. The aggregate amount of purchases is settled monthly. Internet banking Internet banking is a new method of banking trisection, but it should not be categorized as electronic payment system specifically. However, this will bring about significant change to banks so it is worth mentioning here. Home-banking has been rapidly accepted because of the technical progress in this area. Internet banking strengthens the advantages of home-banking in the sense that it does not rely on specific devices or software and therefore makes it possible for users to access it from anywhere in the world. According to the recent survey of BancTechnology group, the current percentage of banks which launched PC-based home banking products is 12%, and will be 76% within next three years. Another recent survey conducted by the Jupiter Corpo ration also suggests that in 1995, 754,000 households were banked by computer and estimates that PC banking will be preferred by 13 million households by the year 2000. In fact, over 100 US banks has homepage on internet. Not only are major money center banks such as BankAmer ica, Chemical Bank, Citi Corp. finding new business on the web, but also small banks can find their opportunity to inform consumers of their existence and display their merits. According to the study of TowerGroup, a consulting company for banking technology, SFNB (Security First National Bank), which was the first bank on internet that did not have any physical branch net work, has gained 7,100 accounts, $20.2 million in deposits, and 700 new accounts monthly.

Smart Card and Digital Money

The last category is Smart Card and Digital Money. Ordinary, these two are discussed in a separate method or category, but here we include them here because the technology which enables theses types of transactions between them are being strongly advanced by the vendors of these methods. For example, Mondex has investigated payment methods using the Internet, and Digi cash has proceeded its CAFE project in cooperation with Simens and France Telecom, in which e- cash is transferable between smart cards.

Smart Card : As we see the section for consumer and consumer transaction, Mondex is a typical system, but it can also be used for customer to company trnsactions. Other trials of smart cards are Visa Cash (US), Avanto (Finland), GertoCarte (Germany), Proton (Belgium), FISCard (Taiwan)

Digital Money : The typical system of Digital Money is E-cash developed by Digicash in Holland. E-cash has almost same character which real money has (please refer to Figure 1). First of all, a customer who wants to open an E-cash account must open an account in bank which deals with E-cash (1). Bank which deal with E-cash (herein after E-cash bank) opens another account called "E-cash Mint" for E-cash only (2). Then customer can download his/her E-cash from =93E-cash Mint=94 (3) and can purchase goods from company by paying with E- cash (4). The company who received the E-cash from the customer then sends it to the E-cash bank in order to verify its validity. E-cash banks examines the E-cash, decreases that amount from the customer's E-cash Mint account and increases the account of company. E-cash also brings another profit opportunity. In case of Mark Twain Bank, the first bank which introduced and authorized the exchange of E-cash with real money, is charging a $3.00 fee for transactions from a normal account to an E-cash Mint account and 5% of the total amount of a transaction from an E-cash Mint account to a normal account. The E-cash system has a superior structure in order to maintain its anonymity and security. Each E-cash "bill" has a particular serial number which is assigned to it upon issuance. An E-cash bank can verify that this E-cash has not been used before by checking a database which stores all the serial numbers. Moreover, owing to the technology called "blind signature",an E-cash bank will not know the person who has a particular number of E-cash at its issuing, but the bank will know whether or not the returned E-cash is valid and has only been used one time.

Figure 1 : Typical system of Digital Money

Impact on Banks

Here, we mention how the change in electronic payment systems between consumer and company will effect banks:

Expansion of credit card system

In case of the expansion of the credit card system, it would be expected there will not be such a big change, because a change will happen only at the point that credit card availability will drastically increase on Internet. Rather, opportunities to make loans to consumers due to the increase of credit card use will probably increase.

Digital Check and Internet Banking

Digital check can motivate consumer to open account at a bank which can deal with digital checks. Therefore it will also make business chances for banks. On the other hand, normal types of money transfer from consumer to company will decrease and the handling charge from these transactions will decrease. Internet banking will bring about new opportunities for banks to gain handling charge from customers. It also enable customer to access bank from overseas, which means the customer base for each bank will be significantly expanded. Since only the traditional interface between banks and customers will be substituted by the Internet, banks do not have to worry about the possibility of loosin all information and fees which they have acquired until now. Moreover, it will reduce the operational cost of banks drastically. According to the survey of McKinley Consulting , multi-media banks which use internet banking can reduce its operating cost by 30 - 40 % relative totraditional retail banks. However, it should be noticed that due to the emergence of internet banking, all banks stand at the same start line, in some sense. Although tra ditional physical branch and ATM networks will play important roles in the future, all banks can enter this new dimension of competition, and banks which fails to make strategy about internet banking will decline.

Smart Card and Digital Money

As we mentioned above, banks can enjoy new opportunity to gain handling charges to deal with digital money. And in the further future, if private bank is allowed to issue its private cur rency, banks can gain seignorage. On the other hand, this systems may incur strong damage to banks. For example, imagine a case where a company manages a cyber mall on the Internet and issues original currency which can be used only in this mall. Participants of this mall can pay by the new currency. If the final settlement (which means the exchange) of this new cyber currency and real money is conducted only once in a month or year, banks loose real-time information on its customer's behavior and handling charges. In the case that this mall is very small, the problem will not be so big. In the future, however, there may be large malls which include one whole industry, or one whole regional community. There should be another possibility that the company issuing the currency can give credit to participants by simply loaning currency to them. In this case, banks will lose credit business too.

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