Introduction to E-Commnerce and Electronic Financial Transactions

Over the last few years the expansion in electronic commerce has been immense. Through the development of Internet technologies and telecommunications links it has became possible to develop real business solutions to common payment systems problems. Internet based commerce becan through simple use of existing media, inparticluar credit cards. To accompany Internet developments companies began to develop Internet interfaces for their product catalogues, letting users enter their credit card details onto a screen and receive goods in exchange. Although this method of payment transfer was simple it did pose a number of problems for the user as well as the financial clearing houses. The use of credit cards is awkward and requires numerous particulars to be input, they are not suitable for small payments and their charge dates are inflexible. That is to say you do not know exactly when the payment will be debited. The credit card customer's privacy is not maintained as transaction data is divulged to the credit card company or bank. They are one-way in that only the cardholder can pay the site, whilst the site cannot credit the holder with payment. The business opportunity of 'virtualising' money and thus financial transactions is obvious and has been taking place since the dawn of the interchangeable monitory signifier (cash, as we now know it). A development of the credit card system was therefore necessary so as to incorporate some sort of digital ambiguous wallet. The future of electronic commerce and more importantly the financial infurstructure behind front end applications will be determined by the standards and schemas developed to control transactions. An example of how one such transaction could take place is through the use of an electronic wallets, pioneered by Mondex and currently being developed by Microsoft. One such electronic transaction is detailed below.

Stage 1 The customer gives an amount of money to the currency issuer.

Stage 2 The issuer then loads the customer's electronic wallet or appropriate computer program with the bits representing the digital value of the amount purchased. For example, if £100 is paid to the issuer, it will transfer 100 virtual pounds to the customer (or a similar amount, depending on other variables such as commision and currency exchange rates).

Stage 3 At the same time the issuer keeps the money that it has received from the customer in a suspense account until it needs to convert the bits which it has sold into legal tender.

Stage 4 The customer then makes payments with the digital money. Since it is a substitute for cash, he can purchase cheap products (e.g. a newspaper) or valuable services (e.g. an insurance policy).

Stage 5 The merchant which has received the cash can return it to the issuer and convert it into legal tender or it can in turn pay it to another trader which honours the same digital payment mechanism and so on until the bits find their way back to the issuer which will convert them into real money.

Stage 6 If the digital money has been given identification numbers, the issuer will now mark those numbers as used currency. From then on digital currency bearing the same numbers will not be re-used. In this way the risk of forgery is reduced, as a unique identifyer has been given animosity levels are decreased. In order to overcome this problem blind signature techniques could be developed which enable the issuer to sign the digital currency through a virtual envelope in such a way that it does not know the drawer's identity.

Stage 7 At the time of a purchase the issuer subtracts the total amount payable from the customer's electronic account. This is a possible source of profit for the issuer since it can invest the customer's money during the interval. Thus, issuers might not charge customers a purchase commission. Similarly, in some cases the electronic money might be lost (e.g. if the electronic wallet in which it is stored is destroyed or the computer's hard disk crashes) and the bits may never be redeemed. One of the problems is that if the electronic wallet is damaged or destroyed then all your credits will destroyed also. Although this is quite clearly an area for development it is surely a better solution that having a wallet full of notes susceptible to damage from water and tearing etc.

A major business development into digital or electronic commerce has come about through the use of Electronic Data Interchange (EDI) between companies. These technologies are currently being used and developed for major industry using Extranet or other secure technologies between interested parties. Technology is now available for every business to use EDI easily and inexpensively. Low-cost personal computers, the Internet and secure browsers have helped to reduce the barriers that once stood in the way of EDI implementation. Financial Electronic Data Intrchange (FEDI) was developed to support businesses, which wanted to send, receive, pay for and orrder goods and services.

EDS sights the following advantages of making financial transactions electronically.

1. Increased efficiency in users accounting processes.

2. The ability to respond to customers faster.

3. Easier reconciliation of payments, deposits and accounts receivable.

4. Electronic confirmation that customers have received invoices.

5. A reduction in error rates and transaction times.

6. Same-day delivery of invoices.

7. Faster receipt of payments.

8. Lower overhead costs.

Financial Information Systems-John Lindsay-1999