Electronic payments are an excellent example of a radical reduction in transaction costs as opposed to traditional payment methods. Traditional commerce payments involve cash, check or credit cards, where as electronic cash disbursements can be handled by software wallets, smart cards, electronic cash or debit/credit cards. The above statement assumes a business-to-customer model. Business-to-business transactions frequently employ their own network (extranet) and rely upon electronic data interchange (EDI) to exchange documents with each other.

Electronic cash, also known as e-cash or digital cash must satisfy the buyer’s concerns for privacy and security, independence, convenience, portability, and divisibility. In turn, the seller should be satisfied that the electronic cash is not counterfeit, nor being used in two different transactions simultaneously. Consumer confidence is all-important to the widespread acceptance of electronic cash. If a consumer cannot remain anonymous, or feels that he/she could be victimized by tendering e-cash, or perhaps feels that electronic cash is inconvenient, then the technology will die in the marketplace.

In order to turn the Internet into a giant cybermall (online shopping center), companies have developed software that provides complete and secure order fulfillment over the Internet. These software packages support a variety of payment schemes, which mostly fall into two categories.

The first category is the traditional credit card. Most Web browsers and Internet Service Providers (ISPs) support one of the major security protocols such as Secure Socket Layer (SSL). For example, on Netscape's browser, if the transmission between browser and server is secure, the key icon at the lower left side of the screen is connected. Otherwise, it is split in half to signal an unsecure transmission. More elaborate methods, such as CyberCash's credit card system, prevent the merchant from seeing the credit card number.

The second type of digital money is like travelers checks. This digital money is either downloaded as "digital coins" from a participating bank into the user's personal computer, or a digital money account is set up within the bank. Either the digital coins or the transactions that debit the account are transmitted to the merchant for payment. All transactions are encrypted for security.

Many believe that if the cost for processing digital money can be kept down, it will fuel an entirely new online information industry that allows customers to pay for exactly what they use. For example, 5 cents for each information lookup or 10 cents for each applet download, perhaps even a fraction of a cent for certain transactions. Time will tell if the economics allow for this scenario.

In the meantime, although trillions of dollars are routinely transferred around the world via the private banking network, money traversing the public Internet would seem like easy pickings for the dishonest hacker. As with any new system, time, along with a few panics, will bring about the confidence necessary for everyday use. Thus far, traditional credit card transactions are winning out as users become more comfortable buying on the Internet. The forecast for digital coin usage is expected to be considerably less than initially thought.

The implementation of electronic cash systems

Two approaches to holding electronic cash are online storage where the consumer does not personally have possession of it and off-line where the consumer does have physical control. A smart card is an example of off-line electronic cash storage. Once the storage issue is resolved there are many advantages to using electronic cash including:

The disadvantages of electronic cash are not insignificant. They include the following:

Some of the disadvantages may disappear as security measures improve. Complex cryptographic algorithms are the keys to creating tamperproof electronic cash that can be traced back to its source. These algorithms form a two-part lock, which provides anonymous security that also signals when someone is attempting to double spend cash.

The services of various electronic cash firms are compared to give an overview of the industry. CyberCash offers an electronic cash product called CyberCoin, which is positioned for the micropayment (under $10.) target market. KCOM, a subsidiary of Kokusai Denshin Danwa of Japan offers a NetCoin electronic cash system, which is supported by Millicent software. Checkfree provides an online payment processing service to both large firms and individual Internet users who may pay all their bills with online electronic checks. Clickshare is an electronic cash system aimed at magazine and newspaper publishers. ECoins are electronic tokens issued by eCoin-Net that can be used to pay for online goods or online micropayments of any sort. MilliCent is an electronic script software system that is capable of micropayments. Instead of issuing one standard currency, each merchant creates and sells its own script (vendor specific script) to brokers at a discount. Consumers register with a broker and buy script from the brokerage by traditional payment methods.