Since the formation of financial institutions, people used metal coins, paper currencies and cheques for conducting transactions and transferring value. The era of information and communication technology (ICT) changed all that in terms of introducing electronic payment networks.
Moreover, introduction of the Internet gave birth to the electronic commerce, which required faster payment processing. To meet this demand, electronic payment was introduced by the financial services industry. It is basically non-cash based payment system that does not require physical actions like writing a cheque and swiping a debit or credit card. Nowadays, electronic payment systems do not even require users to visit the financial institutions, like banks or any agent, for initiating the transactions.
These payments have proven to be the most convenient method of transferring funds. Because it is lightning fast, literally takes less than a second to complete a transaction. There are several types of electronic payment systems and these have different features that cater to the different consumer needs.
Country Level Electronic Payment Networks
Most advanced economies have established national internet payment networks. For example, the United States has an Automated Clearing House (ACH). Similarly, Australia, New Zealand and Singapore have developed Electronic Funds Transfer at Point of Sale (EFTPOS) and Network for Electronic Transfers (NETS) networks, respectively. Even developing countries like Bangladesh have implemented an Electronic Funds Transfer Network (BEFTN) in recent years.
National payment networks smooth out the progress of transmission of payments between the banks via a central payment processing service that log and process transactions, which makes it a faster and efficient means for inter-bank clearing. In contrast to the existing paper-based system that requires cheques to be physically mailed or processed, electronic payments are executed by transmitting data over wired lines, cutting transaction time to few hours compared to a few days.
These national level payment networks mainly deal with business to business (B2B) payments by processing large scale credit and debit transactions in batches. Transfers of funds by national electronic payment networks may include direct deposits, cheque processing, mortgage loan payments, point of purchase transactions and so on.
Person-to-Person (P2P) Payment Network
Compared to national payment networks that deal with institutions, person-to-person (P2P) payment networks handle transaction service for individuals. P2P payments are usually conducted by individual users over mobile phones, tablets, and personal computers by logging into the commercial networks website over the internet. P2P type electronic payments include popular payments processing services like PayPal, EgoPay, Skrill and so forth. Besides, in recent years, open source P2P payment networks, such as Bitcoin and Litecoin, have gradually developed to offer P2P electronic transaction services at virtually zero cost.
Most P2P payment networks only require the payer to provide recipients contact or identification information. If both payer and payee are members of the same electronic payment network, then the payer can initiate a fund transfer just by providing the contact information of the payee. The contact information is usually the registered ID, email address or wallet ID of the payee. Once the payer submits the transaction by inputting an amount, a central server or a network of servers processes the transaction by deducting the amount from the payers account or electronic wallet, then depositing into the payers account. Commercial P2P payment processors like EgoPay usually charge a transaction fee for providing its services around the world.
Conclusion
The emergence of electronic payment networks marks a new dawn of commerce. The simplicity and accessibility offered by electronic payments have democratized the financial service industry. In fact, in many parts of the world the only banking service available to people is through their mobile phones. Nevertheless, electronic payments also bring many new concerns like privacy and security with the convenience it offers. Regardless, as more people pick the convenience of electronic payments over traditional paper currency and cheque based payment system, it will continue to change the financial landscape and how we conduct business in coming years.