Logging on to electronic means of payment.

• Author: Kezar, Michelle L.

Debit cards, smart cards, electronic cash, electronic checks - all of these electronic means of payment (EMOP) - are now coming into use. Slowly, they are beginning to replace paper checks and paper cash.

Electronic means of payment are a big step beyond credit cards, the first and now widespread alternative to payment by cash or check. A credit card issuer acts as an intermediary between the merchant and the consumer. For the merchant, the issuer takes on, for a fee, the burden of verification and debt collection. For the consumer, it consolidates transactions, puts off the due date, and acts as a buffer in disputes. EMOP often eliminate the intermediary. When customers make a purchase, their bank account is debited. For the merchant, payment is guaranteed and almost immediate. For the consumer, EMOP offer convenience, instant proof that the "money" is good, and automated bookkeeping.

Twenty years ago, EMOP were widely touted as the wave of the future, a revolution. Revolutions take time, however. People were unlikely to give up writing checks overnight. They were going to require other reasons to invest in the home personal computers (PCs) needed for some EMOP transactions. Merchants also were hesitant to embrace EMOP because they faced start-up costs. Another problem was that the communication networks and supporting tools were not established. Software programmers had hardly begun the work needed to address the prickly issue of privacy or the major threats of theft and fraud. The standardization of equipment and networks that would be needed to minimize cost and complexity for both consumers and merchants was far from complete.

In the last few years, there has been enormous progress in making electronic means of payment a reality. Many consumers, for example, can use their automated teller machine (ATM) cards as debit cards to pay retailers. Today, some 44 percent of American households surveyed now contain at least one PC, according to an American Banker/Gallup report. A consumer now can navigate the Internet, likely to be the major communications link for electronic payments, with user-friendly software. Entrepreneurs, banks, and other financial institutions are working vigorously on the details of various EMOP transactions. A growing number of these transactions are being tested in marketplace trials.

Still, the obstacles to EMOP remain immense. So the transition to a cashless society is certain to be a bumpy one - unlikely to be concluded within the next decade or two. Changes in the payment system tend to be evolutionary, not revolutionary.

EMOP Transactions

Whatever the timetable for the arrival of a cashless society, experts agree that someday everyone will be EMOP users. Use of debit cards and smart cards will grow most rapidly. The use of electronic cash and checks, which require computer access, will increase more slowly.

Debit Cards. Like a credit card, a debit card has a magnetic strip from which a card reader can extract data. When consumers use a debit card issued by a bank to make purchases, they authorize deductions from their checking accounts at that bank. If the merchant processes the card on-line, which is usually the case, the deduction is immediate. For the consumer's protection, the user must furnish a separate personal identification number (PIN) when the card is used. Most banks and many nonbank companies issue debit cards or ATM cards that also can function as debit cards. A consumer can use debit cards in many of the places that accept credit cards, such as gas stations, supermarkets, and other retail stores.

Smart Cards. Unlike a debit card, which deducts money from a bank account after a purchase, a smart card requires an outlay from the user's account prior to a purchase. A smart card has an imbedded microprocessor chip that makes it possible to store, retrieve, and in some cases to manipulate data.

There are two basic types of...