Advantages and Disadvantages of Electronic Cash
Advantages and Disadvantages of Electronic Cash - Billing for goods and services that customers purchase is part of any business. Traditional billing methods in the brick-and-mortar paradigm are costly and involve generating invoices, stuffing envelopes, buying and affixing postage to the envelopes, and sending the invoices to the customers.
Meanwhile, the Accounts Payable Department must keep track of incoming payments, post accounts in the database, and ensure that customer data is current.
How Electronic Cash Works
To begin using electronic cash, a consumer opens an account with an electronic cash issuer (such as a bank that issues electronic cash or a private vendor of electronic cash, such as PayPal) and presents proof of identity. The consumer can then withdraw electronic cash by accessing the issuer’s Web site and presenting proof of identity, such as a digital certificate issued by a certification authority, or a combination of a credit card number and a verifiable bank account number.
After the issuer verifies the consumer’s identity, it gives the consumer a specific amount of electronic cash and deducts the same amount from the consumer’s account. In addition, the issuer might charge a small processing fee. The consumer can store the electronic cash in an electronic wallet on his or her computer, or on a stored-value card. In addition, the consumer can authorize the issuer to make payments to third parties from the electronic cash account.
Online stores have many of the same payment collection inefficiencies as their brickand mortar cousins. Most online customers use credit cards to pay for their purchases.
Online auction customers also use conventional payment methods, including checks and money orders. Electronic cash systems, though less popular than other payment methods, provide advantages and disadvantages that are unique to electronic cash.
For the most part, electronic cash transactions are more efficient (and therefore less costly) than other methods, and that efficiency should foster more business, which eventually means lower prices for consumers. Transferring electronic cash on the Internet costs less than processing credit card transactions. Conventional money exchange systems require banks, bank branches, clerks, automated teller machines, and an electronic transaction system to manage, transfer, and dispense cash. Operating this conventional money exchange system is expensive.
Electronic cash transfers occur on an existing infrastructure the Internet and through existing computer systems. Thus, the additional costs that users of electronic cash must incur are nearly zero. Because the Internet spans the globe, the distance that an electronic transaction must travel does not affect cost.
When considering moving physical cash and checks, distance and cost are proportional the greater the distance that the currency has to go, the more it costs to move it.
Electronic cash does not require that one party obtain an authorization, as is required with credit card transactions.
Electronic cash does have disadvantages, and they are significant. Using electronic cash provides no audit trail. That is, electronic cash is just like real cash in that it cannot be easily traced. Because true electronic cash is not traceable, another problem arises: money laundering.
Money laundering is a technique used by criminals to convert money that they have obtained illegally into cash that they can spend without having it identified as the proceeds of an illegal activity. Money laundering can be accomplished by purchasing goods or services with ill-gotten electronic cash. The goods are then sold for physical cash on the open market.
Just as physical currency can be counterfeited, electronic cash is susceptible to forgery.
However, it is much more difficult to forge electronic cash than it is to use a fraudulently obtained credit card number. There are several other potentially damaging digital economic factors that might result from the use of electronic cash. These factors have to do with the expansion of the money supply when banks loan electronic cash on consumer and merchant accounts in traditional bank accounts.
You can learn more about these economic factors by following the links to Understanding the Digital Economy and The Economic and Social Impacts of Electronic Commerce in the Online Companion.
Electronic cash has been successful in some parts of the world, but it has not yet become a global commercial success. Making electronic cash a popular alternative payment system requires wide acceptance and a solution to the problems of multiple electronic cash standards.
Customers do not want to have to carry a dozen different brands of electronic cash to be able to purchase goods from a majority of the merchants that accept electronic cash. Establishing electronic cash as a popular payment method requires that a standard be developed for electronic cash disbursement and acceptance a standard that individual vendors then implement for their individual electronic cash systems. Electronic cash from different vendors must be easily interchangeable so that customers can exchange one cash type for another when needed.
Electronic Cash Systems
Electronic cash has not been nearly as successful in the United States as it has been in Europe and Japan. In the United States, most consumers have credit cards, debit cards, charge cards, and checking accounts. These payment alternatives work well for U.S. consumers in both online and offline transactions. In most other countries of the world, consumers overwhelmingly prefer to use cash. Because cash does not work well for online transactions, electronic cash fills an important need for consumers in those countries as they conduct B2C electronic commerce.
CheckFree, the largest online bill processor in the world, provides online payment processing services to both large corporations and individual Internet users. CheckFree provides infrastructure and software that permits users to pay all their bills with online electronic checks.
Clickshare is an electronic cash system aimed at magazine and newspaper publishers. Clickshare’s technology has occasionally been called a micropayment-only system; however, the ability to make micropayments is only one of Clickshare’s features. Users with an ISP that supports Clickshare are registered automatically with Clickshare.
When users click links leading to other sites that are registered with Clickshare, they can make purchases on those sites without having to register again. Clickshare keeps track of transactions and bills the user’s ISP. The ISP, which already has an account relationship with the user, then bills the user for his or her purchases.
PayPal is the electronic cash payment system that you read about in the opening case of this chapter. PayPal was founded in 1999, and in 2000 it merged with another payment processing service, X.com. PayPal provides payment processing services to businesses and to individuals. PayPal earns a profit on the float, which is money that is deposited in PayPal accounts and not used immediately.
After two years in business, PayPal began charging a transaction fee to businesses that use the service to collect payments. Individuals who use PayPal to send money to other individuals do not pay a transaction fee. The free payment clearing service that PayPal provides to individuals is called a peer-to-peer (P2P) payment system because the payments are from one type of entity to another of the same type.
The source: Electronic Commerce