What are electronic payments and what are their advantages?
How can consumers use electronic money?
Why is online banking growing?
Is online banking safe?

Thirty years ago, some predicted we were on the verge of a cashless society. Paper currency and checks would join the Edsel and the black-and-white television as antiquated symbols of the past. Consumers would embrace a new alternative for making payments: electronic money. As it turned out, consumers have been reluctant to give up on currency and checks.

In recent years, however, consumers seem to be changing their minds. Cash and checks are still widely used. Currency is used for the vast majority of payments, mainly for smaller purchases. And checks are the payment choice for about 10 percent of transactions each year. But the percentage of transactions done electronically is growing dramatically. The important role of electronic payments can be seen by looking at the value of payment transactions. Electronic payments account for more than 90 percent of the dollar value of transactions.

This growth is made possible by electronic payment networks, which move funds in and out of accounts using electronic messages. Electronic payment systems range from the now-familiar automated teller machines (ATM) to Internet bill payments. This essay discusses the different types of electronic payment systems and looks at the future of electronic money.

The most common form of electronic money transfer is the ATM, or automated teller machine, which enables consumers to access existing accounts and make deposits, obtain cash, and transfer funds between accounts. To access an account from an ATM, a consumer must first get an ATM card from his or her bank or financial institution. Some other types of cards, such as credit cards and some stored value cards, can also be used at ATMs to get cash. The consumer inserts or swipes the card into the machine, enters a PIN (personal identification number) on the keypad, and then can perform the transaction. When the transaction is completed, the consumer receives a receipt showing the date, the dollar amount and the type of transaction.

Make Guessing Your Pin Like Finding a Needle in a Haystack
Some basic rules for effectively using your four-digit Personal Identification Number (PIN):

The PIN should be kept secret to prevent fraud. It should be known only to the owner (or joint owners) of the card. Never tell your PIN to anyone else.
The PIN should be easy to remember but avoid numbers such as birth dates, Social Security numbers, addresses, or phone numbers. Those numbers are easily guessed or gathered from other sources of information such as checkbooks, driver's licenses, or social security cards.
The PIN should be memorized and never written on the ATM card or anything kept with or near the card.
The PIN should never be given over the phone. Likewise, don't include it in mail orders.

A new type of ATM is being introduced offering services that may be useful for people who do not have checking accounts. It is available in a few locations such as convenience stores. These machines allow consumers to do things like cash checks and pay utility bills electronically.

A variation of the ATM system is online, or PIN, debit. With PIN debit, consumers use an access card (often their ATM card) to transfer funds immediately from their account to a merchant's account. In this way, a PIN debit transaction is different from a credit card transaction in which payment is postponed.

To make a PIN debit payment, a consumer simply passes a debit card through the merchant's card reader and enters a PIN on the keypad, much like at an ATM. The consumer receives a printed receipt after the transaction is completed.

Some debit transactions are "offline." These transactions are carried over the credit card networks rather than the ATM networks. For this reason, consumers endorse the payment with their signature, as they would with a credit card, rather than with their PIN. The merchants submit their debit card sales slips to their financial institution along with their charge slips. The amount of the transaction is deducted by the consumer's financial institution when the sales slip is received, rather than when the transaction takes place, and appears on the consumer's account statement.

During the 1990s, the number of merchants who accept PIN debit increased dramatically to include such retail outlets as grocery stores, convenience stores, and even movie theaters. In fact, most places that take a major credit card will take a debit card.

The level of electronic payments and electronic banking has grown considerably in recent years. One area of significant growth is debit card payments, which increased dramatically in the mid-1990s as retailers began installing and using debit technology.

When ATMs and PIN debit were first introduced, consumers could use only machines that carried the logos of the networks used by their financial institutions. This is no longer true. All of the ATM networks are now linked together, and consumers can use their ATM or debit card at any machine. However, there are frequently fees associated with doing so.

Until recently, the credit card networks required merchants to accept signature debit cards if they accepted credit cards. While merchants no longer have to accept signature debit cards, most still do. Merchants have to pay fees to their financial institutions to process payment card transactions, and the fees for PIN debit are typically lower than those for signature debit or credit card payments. For this reason, many merchants are trying to push their customers toward PIN debit, while financial institutions are encouraging their customers to use signature debit.

Debit cards are a useful payment alternative because they allow a swift transfer of funds between the buyer and seller. The seller does not have to worry about a bounced check. For the buyer, debit can be more convenient than writing a check, and is safer than carrying cash. Some consumers also like debit because they find that being limited by the amount of money in their account helps them to control their spending.

The federal government has been a big proponent of this technology. Many state and federal benefits, such as Social Security and food stamps, are distributed electronically. For example, many states issue food stamps as value stored on a card that works like a debit card, and Social Security and welfare benefits are typically paid by direct deposit. Electronic distribution of benefits has advantages for both the government and the recipients. It is less expensive than using paper checks and reduces opportunities for fraud. It is more secure for recipients because they don't have to worry that their check will get stolen, and they avoid the hassle of cashing the check.

More and more, paper checks are being processed electronically. One way this happens is when a merchant puts a consumer's check through a special reader that reads the check's account information and matches it against a list of accounts that have recently had bad checks written against them. The reader helps the merchant decide whether the check is likely to be paid and whether to accept it. More recently, some billers have started scanning paper checks and turning them into electronic transactions. Billers do this because it makes the check less expensive and faster to process. Checks can be turned into electronic transactions both when they are mailed to the biller and at the point of sale. Once a check is turned into an electronic transaction at the point of sale, it can be handed back to the consumer. Checks processed electronically can show up in a different section on a consumer's monthly checking account statement, but are otherwise the same as other checks.

Legislation, called "Check 21," was recently enacted that is expected to increase financial institutions' ability to process paper checks electronically. Electronic processing would greatly increase the efficiency of the system, but would mean that consumers would not be able to get their checks returned to them once they are cleared. Instead, consumers would get a special copy of the cleared check that would legally be the same as the original.

The shift to electronic payments offers clear benefits to society. Processing checks is a labor-intensive, relatively inefficient process. American consumers and businesses currently write about 40 billion checks every year, down from an estimated 50 billion in 1995. A shift to electronics would allow the money needed to process these checks to be used in more productive ways.

As economic incentives to change intensify, and as consumers become more familiar with new electronic systems, electronic payments may eventually equal or even surpass cash or checks as the convenient and accepted means of paying for goods and services. Electronic payments are rapidly gathering momentum. But a cashless or checkless financial system is still not in the foreseeable future.

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