Electronic Checks

Electronic checks (e-checks), which are used primarily in B2B, are similar to regular paper checks. A customer who wishes to use e-checks must first establish a checking account with a bank. Then, when the customer buys a product or a service, he or she e-mails an encrypted electronic check to the seller. The seller deposits the check in a bank account, and the funds are transferred from the buyer’s account into the seller’s account.

Like regular checks, e-checks carry a signature (in digital form) that can be verified. Properly signed and endorsed e-checks are exchanged between financial institutions through electronic clearinghouses.

Electronic Cards

There are a variety of electronic cards, and they are used for different purposes. The most common types are electronic credit cards, virtual credit cards, purchasing cards, stored-value money cards, and smart cards.

Electronic credit cards allow customers to charge online payments to their credit card account. These cards are used primarily in B2C and in shopping by small-to-medium enterprises (SMEs).

Here is how e-credit cards work (see Figure).

Step 1: When you buy a book from Amazon, for example, your credit card information and purchase amount are encrypted in your browser. This way the information is safe while it is “traveling” on the Internet to Amazon.

Step 2: When your information arrives at Amazon, it is not opened. Rather, it is transferred automatically (in encrypted form) to a clearinghouse, where it is decrypted for verification and authorization.

Step 3: The clearinghouse asks the bank that issued you your credit card (the card issuer bank) to verify your credit card information.

Step 4: Your card issuer bank verifies your credit card information and reports this to the clearinghouse.

Step 5: The clearinghouse reports the result of the verification of your credit card to Amazon.

Step 6: Amazon reports a successful purchase and amount to you.

Step 7: Your card issuer bank sends funds in the amount of the purchase to Amazon’s bank.

Step 8: Your card issuer bank notifies you (either electronically or in your monthly statement) of the debit on your credit card.

Step 9: Amazon’s bank notifies Amazon of the funds credited to its account.

Virtual credit cards: Allow customers to shop online. These cards can be used only once. The reason for this limitation is to thwart criminals by using a different, random card number every time you shop online. Going further, a virtual number is good only on the Web site where you make your purchase. An online purchase made with a virtual card number shows up on your bill just like any other purchase. Purchasing cards are the B2B equivalent of electronic credit cards. In some countries, purchasing cards are the primary form of payment between companies. Unlike credit cards, where credit is provided for 30 to 60 days (for free) before payment is made to the merchant, payments made with purchasing cards are settled within a week.

Stored-value money cards: Allow you to store a fixed amount of prepaid money and then spend it as necessary. These cards are used to pay for photocopies in your library, for transportation, and for telephone calls. Each time you use the card, the amount is reduced by the amount you spent.

Smart Cards: Smart cards contain a chip that can store a considerable amount of information- more than 100 times the amount contained on a stored-value money card. Smart cards are frequently multipurpose-that is, you can use them as a credit card, a debit card, a stored-value money card, or a loyalty card. Smart cards are ideal for micropayments, which are small payments of a few dollars or less.

Person-to-Person Payments

Person-to-person payments enable two individuals, or an individual and a business, to transfer funds without using a credit card. One of the first companies to offer this service was PayPal (an eBay company). An attractive security feature of PayPal is that you have to put only enough money in the account to cover any upcoming transactions. Therefore, if anyone should gain access to your account, that person will not have access to all of your money.

Person-to-person payment services work this way. First, you select a service and open up an account. Basically, this process entails creating a user name, selecting a password, and providing the service with a credit card or bank account number. Next, you transfer funds from your credit card or bank account to your new account. Now you are ready to send money to someone over the Internet.

You access the service-for example, PayPal-with your user name and password, and you specify the e-mail address of the person to receive the money, along with the dollar amount that you want to send. The service then sends an e-mail to the payee’s e-mail address. The e-mail contains a link back to the service’s Web site. When the recipient clicks on the link, he or she is taken to the service. There, the recipient is asked to set up an account to which the money that you sent will be credited. The recipient can then credit the money from this account to either a credit card or a bank account.