Infotech In Global Economy

   

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Trends and Technology in E-Payment Alexander N. Chen, University of Central Arkansas Steven M. Zeltmann, University of Central Arkansas Ken Griffin, University of Central Arkansas Michael Rubach, University of Central Arkansas Michael E. Ellis, University of Central Arkansas

EXECUTIVE SUMMARY

This research examines the forms of e-payments used in the global economy today. The Internet is a critical component of the business landscape, lowering the cost of communication, helping meet customer needs, making supply chains more efficient, and improving business practice integration. Smart devices are leading the charge for new methods of payment, especially in regions lacking the legacy infrastructure to facilitate traditional payments. E-payment use is also on the rise in developed countries because of the benefits they afford to all parties. E-payment is also becoming a competitive necessity for entities wishing to remain relevant in online markets. Keywords: E-payments, Online commerce, Smartphone, Social media, Internet security, Global markets

INTRODUCTION

The Internet has been recognized as a user-friendly medium of communication and a good tool to get information and process financial transactions (Hashim, Hameed, Ayyub, Ali, & Raza, 2016). For people who are used to living in this wired world, the use of the Internet has become a necessity not only for work but also for academics, communication, entertainment, and business transactions (Kelleci & Inal, 2010). The Internet is now impacting almost every aspect of our lives from influencing how we interact, the way we do business, and the way we learn. The digital world is becoming immensely crowded. Internet use has grown exponentially with the majority of users being young people and adolescents (Younes, Halawi, Jabbo, El Osta, Karam, Hajj, & Rabbaa Khabbaz, 2016). Since the Internet is now a part of our daily lives, it is not a surprise that the number of active users and Internet penetration as a percentage of population continue to grow globally. Based on data collected from the Global Digital Statshot of 2018 on www.slideshare.net, Table 1 provides a summary of the distribution of Internet users by world region. From Table 1, it is observed that the Internet is used worldwide, and significant disparities exist between developed and developing regions. Specifically, developed regions have higher internet penetration. For instance, in North America, 88% of the population has Internet access, as does 90% of the population of Western Europe. East Europe and South America have relatively high penetration rates of 74% and 68%, respectively. Africa and South Asia have the lowest rates, both coming below 35%. These two regions, with their combined populations of over 3 billion, have the most potential to develop and expand Internet usage.

   

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TABLE 1

Regional Population, Internet Users, and Internet Penetration in 2018 (Kemp, 2018)

Region Population (in

millions) Internet users (in

millions) Internet Penetration

Africa 1,272 435 34%

Central America 180 110 61%

Central Asia 72 36 50%

East Asia 1,661 947 57%

East Europe 291 215 74%

Middle East 252 164 65%

North America 364 320 88%

Northern Europe 104 98 94%

Oceania 41 28 69%

South America 426 290 68%

South Asia 1,869 673 36%

Southeast Asia 655 380 58%

Southern Europe 153 118 77%

West Europe 194 175 90%

The emerging role of the mobile phone in commerce appears unavoidable when one considers the ubiquity of the mobile phone across the globe. As a communication device, the mobile phone is associated with increased satisfaction with people’s lives and relationships when compared to less personal communication methods (Goodman-Deane, Mieczakowski, Johnson, Goldhaber, & Clarkson, 2016). It provides its user with the capability to have a voice or video conversation, exchange email or text messages, or participate in social media or other online activities (Goodman-Deane et al., 2016). This wide variety of tasks for which it can be used has led to the high level of global mobile phone penetration. In Table 2, we summarize mobile phone connections and penetration by region. East Europe, West Europe, Middle East, South America, Southeast Asia, Central Asia, Oceania, and North America all have penetration rates higher than 100%. Africa and South Asia are behind the other regions, but still have relatively high mobile penetrations rates of 82% and 91% respectively. This high rate of mobile penetration globally implies that people are better connected than ever. The increasing computational power of mobile devices has led to the smartphone. A typical smartphone is capable of running several applications concurrently (e.g., navigation, email, browser, communication), in addition to other built-in functionalities such as music player, cameras, and sensors (Rahman, Prima, Razzaque, Hassan, Alelaiwi, Alrubaian, & Choo, 2016). Among all the types of mobile phones, smartphones are the new trend.

   

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TABLE 2

Regional Population, Mobile Connections, and Mobile Penetration, 2018 (Kemp, 2018)

Region Population (in millions)

Mobile Connections (in millions)

Mobile Penetration

Africa 1,272 1043 82%

Central America 180 173 96%

Central Asia 72 71 98%

East Asia 1,661 1700 103%

East Europe 291 457 157%

Middle East 252 323 128%

North America 364 375 103%

Northern Europe 104 128 123%

Oceania 41 45 110%

South America 426 490 115%

South Asia 1,869 1710 91%

Southeast Asia 655 924 141%

Southern Europe 153 193 126%

West Europe 194 231 119%

TABLE 3

Mobile Connection by Device, 2018 (Kemp, 2018)

Mobile connections by device

User Population Percentage of

total connections Connections originating from smartphone devices

4.8 Billion 57%

Connections originating from feature phones devices

3.4 Billion 40%

Others 0.3 Billion 3% Total global connections (all devices)

8.5 Billion 100%

Globally, smart devices represented 36% of the total mobile devices and connections, and 89 percent of the mobile data traffic in 2015; by 2020, more than three-fifths of all devices connected to the mobile network will be “smart” devices. Sixty- seven percent of mobile devices will be smart devices by 2020, up from 36% in 2015 (Cisco, 2015). Table 3 shows each type of mobile connection by device worldwide.

With the large number of smartphones in use, and technological improvements with each new release, a new type of channel called mobile commerce is emerging (Ondrus & Pigneur, 2006). Therefore, it is not a big surprise that phones are used as a transactional device (van de Heijden, 2002). Smartphones are now playing a key role in the electronic business and are used as devices for electronic payment.

   

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CURRENT TRENDS FOR E-PAYMENTS E-payment is a type of an e-commerce transaction system for buying and selling products that are offered through the Internet. Shon and Swatman (1998) define e-payment as any exchange of funds initiated via an electronic communication channel. According to Wester’s New World Dictionary, electronic payment refers to making any payment that is made electronically rather than in person.

An electronic payment is a financial exchange between buyers and sellers that takes place online. The content of this exchange is usually some form of digital financial instrument (such as encrypted credit card numbers, electronic checks or digital cash) that is backed by a bank or an intermediary, or by legal tender (E-Payment Systems, n.d.). The growth of e-services has created the need for using an electronic payment system. Electronic payment systems are conducted in different e-commerce categories such as Business-to-Business (B2B), Business-to-Consumer (B2C), and Consumer-to-Business (C2B). The electronic payment systems are summoned to facilitate the most important action after the customer’s decision to pay for a product or service, which is to deliver payments from customers to vendors in a more effective and efficient way (Abrazhevich, 2004). Previous studies have shown that younger and more educated consumers, with higher incomes, were more likely to use an electronic payment system (Stavins, 2001). Traditional payment systems typically rely on the physical proximity of the parties to a transaction or the physical exchange of transaction media. The new model of e-commerce eliminates this proximity requirement by addressing some of the following problems with traditional payment systems. Traditional payment systems require the consumer to either send paper checks by mail or a physical presence to sign papers before performing a transaction. This may lead to inconvenient circumstances (E-Payment Systems, n.d.). It is also time- consuming in the way that it can take many days or weeks to process the payment. Since we are living in a world where time is a valuable asset, people are now trying to save as much time as they can. Therefore, they are looking for flexible payment methods that are available to them anytime. This happens as the consumer is required to send all confidential data on paper by mail, which is not encrypted, and it may be read by anyone (E-Payment Systems, n.d.). Security is one of the main concerns of customers. They all want to protect their personal information to prevent fraud. Also, when using the traditional payment system, customers have to carry cash on them in order to process transactions. This creates an enormous security issue because they are more exposed to thefts. When we talk in terms of current businesses, it is global. Financial institutions need faster transactions everywhere. This cannot be possible without the bank having a branch near all of the company’s offices (E-Payment Systems, n.d.). In this globalized world, you should be able to complete an instant payment from any single point on the globe to the opposite side without difficulties. We are now living in a globalized business world where it is possible to buy or sell items to people all around the world. The traditional payment method cannot meet these requirements. Not all potential buyers may have a bank account (E-Payment Systems, n.d.). In some countries, it can be difficult to open a bank account. There are now different customers and buyers profiles that older payment systems do not take into account. We have the example of people who use credits cards and prepaid cards. The parties to an e-commerce transaction are not the only ones interested in electronic payments. Financial institutions are incentivized to adopt e-payment systems by the following commercial environmental factors. The cost of technology used for current activities is decreasing day by day, which is evident from the fact that computing devices are now cheap. People can now purchase powerful smart devices at a relatively low price. As a result, a vast majority of people own a device which can at least connect to the Internet. As the cost of technology decreases, more people get and use the devices such that they become dependent on them. The higher the percentage of the population that is technology- dependent, the bigger the incentive for financial institutions to be part of the electronic payment system market.

   

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Due to reduced technology costs to process various commercial activities, electronic transactions allow us to save both paper and time. Now with the increase in online commerce, financial institutions have to adopt an e-payment system or get left behind. For the customer, e-payments are more convenient than traditional payment methods; users can use their smartphones to make payments, or they can be at home and shop online (Hayashi, 2012). Also, customers have more flexibility since the electronic payment system offers multiple payment methods. Another important convenience is the ability to keep track of their purchases. Since all the transactions are made over electronic devices, it will be easier for customers to have a history of their past purchases and/or schedule upcoming ones. The e-payment also reduces the inconvenience of carrying multiple plastic cards or cash in a physical wallet. For the merchants, e-payments will be more convenient in the way that it can provide them good customer data control in order to have a more efficient marketing strategy. The e-payment system provides a positive customer experience, so an effective payment system can drive sales up. Merchants respond to an excellent platform that meets their customers’ expectations. For the customer, the cost of using e-payment includes two components: the cost of equipment and materials needed to use the method and the fees paid to payments providers, for using the method (Hayashi, 2012). Reducing the payment processing cost is one of the major incentives for merchants to accept e-payment (Mobile Payments Today, 2011). All merchants want their processing payments fees to be as low as possible. The use of the electronic payment can be cost-saving for merchants in the way that it may reduce their labor cost. Since many customers will not need to go to a physical store to purchase their items, companies can reduce the number of employees. The security issues that consumers are concerned about before using an e-payment system include the likelihood of fraudulent transactions and the extent to which laws and regulations protect them from financial loss when unauthorized transactions occur (Hayashi, 2012). They are also concerned about the security of customer data and payment security (Hayashi & Bradford, 2014). Merchants are obliged to protect their customers’ information, so they need to rely on high-security technologies to obtain customers’ trust. Payment security is a major concern because merchants want to reduce fraudulent transactions as much as possible.

E-PAYMENT TYPES E-commerce sites use e-payment because it is a paperless transaction that gives them the advantages of saving time, controlling expenses, reducing the risk of theft and loss, and convenience. In Table 4, a classification of e-payment systems is provided with the different systems types along with the technologies they use. Card-based system: used to transfer data through cards by a secured protocol SSL (Secure Socket Layer), where customer can even have the advantage of making a transaction by communicating its card number and expiration date directly to the merchant or using a reader machine (Sahut & Galuszewska, 2004). The different types of cards are:  Credit Card: A plastic card that has an attached account with a unique set of numbers and a magnetic chip embedded in it,

which is used to read a credit card via credit card reader (E-Commerce Payment Systems, n.d.),

   

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TABLE 4

E-payment Systems Classification Systems Types Technologies

Card-based Systems Credit Card Debit Card Magnetic Stripe Card Smart Card Contactless Card

RFID Card Reader (Chip, Magnetic, Stripe…) Contactless Card Reader

Mobile Payments Smartphones Tablets Laptops

RFID NFC Code-Based Cloud-Based

Electronic Fund Transfer and E-Checks

E-mail Internet interface

ATM Point of Sale (POS) Facsimile Draft

Electronic Money Virtual Wallet Electronic Wallet

RFID Software Card Reader (Chip, Magnetic, Stripe…) Contactless Card Reader

 Debit Card: It is similar to a credit card, but it requires users to have a bank account, before getting it from their bank, and

the amount is automatically deducted from the card’s bank account when making a transaction,  Magnetic Stripe Card: It is a type of card that is capable of changing the magnetism of the iron-based magnetic particles

on a band of magnetic material on the card, in order to store data (Magnetic Stripe Card Definition, 2014),  Smart Card: It is a plastic card that has an attached account with a unique set of numbers and a magnetic chip embedded

in it, which is used to read the credit card via a card reader,  Contactless Card: Payment usually made via debit, credit, charge or pre-paid card where there is no need for PIN or

signature, and payment is made by touching the contactless card reader. Mobile payment systems can be defined as payments where a mobile device such as PDA (Personal Digital Assistant) and wireless phones are used to initiate, authorize, and confirm the exchange of currency in return for goods and services through the Internet, face to face shopping, vending machines, event, and public transport ticketing (Sahut & Galuszewska, 2004). The technologies associated with mobile payments, such as Near Field Communication (NFC), Code-Based and Cloud-Based, will be further discussed in this paper. Electronic check: A transposition of traditional checks into a dematerialized environment where the merchant presents it to an e-check issuing institution for authentication and payment. They are similar to card-based systems but with a low transaction cost (Sahut & Galuszewska, 2004). Electronic money: According to the European Central Bank (n.d.), it can be defined as an electronic store of monetary value on a technical device for payments. It can be hardware-based or software-based. It is composed of the electronic wallet, which is based on the technology of cards that store customer’s fund data and the virtual wallet. It is rather similar to the electronic wallet, but instead of using a smart card, the money is stocked on software managed by a bank or bank card issuer (Sahut & Galuszewska, 2004). Electronic fund transfer: An electronic method to transfer money from one bank account to another and it can be a similar or different banking institution. It can be done by using an ATM (Automated Teller Machine), computer, or smartphone. Cryptocurrencies: A cryptocurrency is a digital asset which is “designed to work as a medium of exchange that is created and managed through the use of advanced encryption techniques known as cryptography” (Osterrieder, Lorenz, & Strika, 2017).

   

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Due to the use of the blockchain transaction database and distributed ledgers, decentralized controls, as opposed to centralized banking systems, are used by cryptocurrencies (Osterrieder, Lorenz, & Strika, 2017).

E-PAYMENT TECHNOLOGIES Various technologies can be used to make an electronic payment such as RFID (Radio Frequency IDentification) tag, NFC (Near-Field Communication), Code-based and Cloud-Based, Bluetooth, and Infrared. Three major technologies currently used are the NFC, Code-Based, and Cloud-Based. Table 5 below describes the major technologies mentioned above with their features.

TABLE 5

Major E-payment Technologies and Features Technology Types Examples Features

Code-based CurrentC, Starbucks, LevelUp, MCX

Application scans a code to process the transaction

Cloud-Based PayPal Square Wallet

Need to install the correct software and interface to use Cloud-Based systems

Near-Field Communication

Apple Pay Google Wallet

Require compatible device and reader

First, the code-based system requires barcodes and quick response (QR) codes that are machine-readable from which information is pulled. Linear barcodes consist of a series of vertical black lines and white spaces of variable width that represent numbers read by a barcode reader extracting the information that they represent. QR codes are formed by a matrix of black and white squares containing data that can be read and displayed by a mobile device (Hayashi & Bradford, 2014). For an electronic payment, those codes can be displayed, for instance, by a smartphone screen and scanned at a point of sale. Such technology is quick and inexpensive for the merchants to implement a mobile wallet solution based on it. This type of solution is relatively easy to use, although it is important to properly align the QR code or barcode with the scanner or the camera. The market for this technology interface is quite large. On the other hand, users need to have a smartphone compatible with an application reading those codes and not everyone has a smartphone. Some malicious codes contain malware or Trojans. Using a QR code at a point of sale is not easy because consumers and merchants are both required to perform more work in order to complete a transaction (Arjunwadka, 2015). Second, the cloud-based system enables the industry to deploy innovative payment solutions efficiently. It is a convenient and secure way for a customer to pay with mobile devices. The technology uses remote servers where data can be stored, and it leverages encryption, tokenization, and the mobile device’s connection to the Internet to obtain credentials to enable payment. Consumers only need an account, and merchants only need to install the correct software and interface to use cloud-based systems (Hayashi & Bradford, 2014). With the service of a payment service provider (PSP), such as PayPal, merchants become less dependent on financial institutions to manage transactions (Payment Service Provider, n.d.). When you have created your PayPal account and want to make a payment, you choose from funding sources such as debit and credit card, Bank account or PayPal balance. First, you give PayPal the authorization to withdraw the amount you want to pay from your funding sources. Then PayPal sends the money without sharing your financial information to the merchant. Finally, the merchant receives the money via the third party, which in this case is PayPal. But a PSP such as PayPal make profits by charging fees either to the payer or the payee depending on their agreement (Kumar, 2014). With such technology, cardholders, as well as financial institutions, can find it easy to put their cards’ information into a wallet, which is considered to be a Secured Element (SE)

   

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deployed in the cloud (Johnson, 2014). This leads to lower costs as well, and its computing power is higher than on a mobile device. The storage capacity is unlimited and credentials in the cloud can be available to any device if the user is authenticated. The risk of a security breach is also present since sensitive information is provided, and a wireless connection is required to deliver credentials from the cloud to the phone (Arjunwadka, 2015). Third, the adoption of mobile payment methods such as near-field communication (NFC), has been perceived by merchants as an opportunity to improve a payment environment which has been long dominated by cards. The NFC can be easily defined as a short distance identification system using proximity or touch that enables the user to make contactless payment (Profis, 2014), which requires a compatible device and reader. It works by enabling two devices to communicate wirelessly when they are close together. It is a substitute for RFID (radio-frequency identification), a technology that allows us to identify things through radio waves. Apple Pay is an example of a near-field communication system (Square, n.d.) that requires a compatible device and reader. The system utilizes the wireless data interchange that NFC provides to transmit payment data and complete transactions without the involvement of a third-party. It started with the iPhone 6 and iWatch. The payment process is pretty simple. The customer at a sales terminal, equipped with NFC technology, has the option to pay via magnetic-strip credit card, a smart card, or by using Apple Pay. When the device is held over the terminal, it receives the information, and the customer can simply scan their thumbprint using the Touch-ID without opening the Passbook app or unlocking the phone (NearFieldCommunication.org, 2014). NFC is easy to use, and customers have all their information on their phone necessary to make a payment. Also, it is safer than using credit cards. However, there are some issues associated with NFC. For instance, for merchants, it is expensive to afford this technology, and especially if they have multiple locations. For the customers, the risk of their mobile device being hacked is present because all of their data is stored there and not all the phones are NFC enabled. Debit cards clear money immediately, however, NFC requires an overnight update to actually clear the funds, which can occur with a risk of fraud (Arjunwadka, 2015). Today it is clearly difficult to say that one of these technologies is above the others. Instead of proposing improved security options to protect payment data, they are more focused on their technological features. However, a study revealed that NFC usage should increase by 38%, and it should be worth $10 billion by the end of 2016. This shows how the technology is improving. From 2011 to 2014, QR code users increased, and the number of mobile barcode users went up from 21.2 million to 38.5 million. To the contrary, despite the fact that the number of people using barcodes has increased, the number of smartphone owners using this technology to make financial transactions is declining (Cayan, 2013). The cloud-based technology used by a payment service provider such as PayPal remains the favorite payment method for customers.

THE FUTURE OF E-PAYMENTS Facebook is one of the most used social networks worldwide. Actually, Facebook is a true revolution. Facebook Messenger is an instant messaging service that lets users chat with friends on their mobile device and/or the website. While using messenger to chat with friends about settling debts or splitting bills, Facebook does not want its users to use others’ applications, so they introduced the payment feature on messenger. Basically, it is a person to person payment for free. Users just need to link their debit cards on the platform to be able to use it. Customers can also receive money on messenger but it takes up to 3 days to be posted on their bank account. Created in 2009, Venmo started as a payment system through text message. It now includes social network features on its platform. Venmo facilitates money transactions among individuals. Users need to link their credit card, debit card or checking account to be able to use the service. Other than making payments, customers have an option of receiving money that can be stored as a Venmo balance for later use, or it can be cashed out immediately to a bank account. Sending money using your balance, bank account or debit card, is free with Venmo, but if you use a credit card, a standard 3% fee applies. Snapcash is a feature of Snapchat that allows its users to send or receive money to one another through the chat portion of the application. All the payments made through Snapcash are processed by Square. In order to use Snapcash, users should link only their debit card information. Unlike regular messages that disappear after the recipient has seen it while using Snapchat, money transactions will not disappear from the chat history. When someone sends money, the recipient has 24 hours to link

   

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its debit card; otherwise, the money is refunded to the sender. Snapcash is available to people who are older than 18 years old and only in the United States at the time of this writing. Bitcoin is an online communication process that enables the use of virtual currency. It is built upon a transaction log (blockchain) distributed across a network of participating computers (Bohme, Christin, Edelman, & Moore, 2015). Bitcoin (https://bitcoin.org) is the largest cryptocurrency representing over 80% of the total market for such currencies (Osterrieder, Lorenz, & Strika, 2017). It has been the most successful of the cryptocurrencies (Bonneau, Miller, Clark, Narayanan, Kroll, & Felten, 2015). Bitcoin attempts to address the issues of current transaction systems which we already addressed. Unlike currencies issued by central banks, it is a decentralized currency that no one controls (Gupta, 2017). It utilizes person-to- person/peer-to-peer network technology to allow all functions, including currency issuance, transaction processing, and verification to be carried out by the network (Osterrieder, Lorenz, & Strika, 2017). Table 6 is a summary of social network applications using an e-payment system.

TABLE 6

Social Network Applications Using an E-payment System Social Tool Payment type Availability Facebook Person-to-person transfer Users with a debit card Venmo Person-to-person transfer US users Snapcash

Person-to-person transfer US users over 18 years old with a debit card

Bitcoin Peer-to-peer transfer Global

CONCLUSION The continuing growth in Internet use has made it a crucial part of the worlds’ economic infrastructure. Mobile smart devices are leading the charge for new methods of payment, especially in regions lacking the legacy infrastructure to facilitate traditional payments. E-payment use is also on the rise in developed countries because of the benefits they afford to parties on both sides of transactions. For consumers, they can be more convenient, more secure, and more accessible than traditional payment systems. Financial institutions see a way to reduce their payment processing costs in the growing e-commerce market. E-payment is also becoming a competitive necessity for entities wishing to remain relevant in the online commerce market. In short, e-payments appear to be here to stay. The forms taken by this evolving technology vary a great deal, from the adaptation of existing systems (e.g., card-based payment systems) and existing financial infrastructure (e.g., e-checks and electronic funds transfers) to new methods of payment (e.g., mobile payments using smartphones and cryptocurrencies). The technology that enables these systems also varies greatly. Options range from the use of a code to initiate a transaction to using smart devices and near-field communications protocols as a card replacement. New payment methods continue to develop as the online space evolves and matures. Social networking applications are providing new ways for consumers to leverage existing payment technology on their platforms. Companies like Facebook, Venmo, and Snapcash lead this emerging category of payment systems. We expect them and others to continue to innovate as e-payments become more commonplace. The growth of these technologies means there is much potential for future study. The effectiveness of different payment methods in realizing the expected benefits can be investigated from both sides of the transaction. Are consumers happier with one system but financial institutions prefer another? Is there one system that could be used universally or are multiple options necessary? Quantifying the benefits for both sets of stakeholders would be highly useful in sorting through the current (and future) options available for e-payment processing.

   

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The societal utility of these systems will differ based upon adoption rates. As we have seen with other technologies, adoption can vary widely across different groups. Geographic or cultural regions can experience different rates due to inherent differences. Geographic or cultural isolation may influence adoption independent of other factors. Economic development may also influence the rate of e-payment adoption. The high rate of mobile device penetration in developing countries may make e- payment systems a necessity, whereas developed countries have traditional payment systems available. The generational differences in adoption rates seen with other technology may be diminishing (McMurtrey, Zeltmann, Downey, & McGaughey, 2011), yet it might influence the prevalence of e-payments. Whatever the reason, insight into how adoption might vary across groups will be invaluable to the future development of e-payment systems as methods emerge or disappear in the market. As with any connected technology, security issues should be examined. One of the strengths of newer payment methods is the increased security offered over traditional payment methods. However, this advantage may be short-lived since mobile technology is far from immune from the threats seen with traditional payment systems (Agarwal, Khapra, Menezes, & Uchat, 2007). As e-payment technology matures, and it becomes a more inviting target for criminals, we would expect efforts to compromise its security would also mature. The effectiveness of current security measures and the development of new ones would be a very fruitful area for research. E-payment systems appear to be poised to become the norm rather than the exception. A better understanding of them would help everyone in business and government prepare more thoroughly for the ramifications of this coming fundamental shift in financial infrastructure.

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