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Alternative Payment Methods

Autor:   •  May 8, 2017  •  Research Paper  •  3,555 Words (15 Pages)  •  811 Views

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ALTERNATIVE PAYMENT METHODS

Introduction

It is widely accepted amongst the financial community that the need for physical money (i.e. banknotes and coins) is on the decline (Woodford, 2000), as today’s technology offers multiple convenient alternatives of transferring wealth.

The modern payment cards have ancestors dating back to the early 1920s, when innovative large-scale merchants awarded charge cards to their most loyal customers. However, their use was only limited to that particular merchant and it is not before the late 1950s that general-purpose payment cards were issued (i.e. Diners Club, American Express), allowing the card holder to do transactions with a large number of independent stores (Layton, 2013).

The convenience of payment cards and the introduction of credit cards, allowing for deferred payment by the holder, were contributing factors to their success. According to MasterCard, 45% of customer spending in the US was cashless in 2013 (MasterCard Advisors, 2013).

Nowadays, a new method of payment is gaining popularity. Since the emergence of the internet in the 1990s, digital money has become a subject of great interest amongst communities.

Traditional bank transfers, whereby two parties exchange funds from their respective bank accounts, can be viewed as a form of digital money exchange, as no physical exchange of currency is taking place. However, digital money also encompasses a wide variety of innovative online payment solutions, all with radically different characteristics potentially appealing to different segments of society.

The most recurrent criticism towards traditional banking is the high transaction costs involved when transferring money. Hefty commissions are generally charged to merchants (in the form of credit/payment card charges), as well as to the card holder himself. Common practice sees a transaction charge of between 1% and 4% split between the parties. Purchases made overseas in a foreign currency drastically increase the costs (i.e. exchange rate commissions, additional banking charges) (Harrow, 2016).

It is argued that modern digital payment alternatives emerged as a result of the dissatisfaction of society with the banking system and the way it is regulated (Fernandez, 2016). Digital payment facilities may exhibit the following properties:

  • Digital transactions can generally be conducted at only a fraction of the costs charged by traditional banking institutions. Some digital payment platforms do not actually charge any transaction costs at all.
  • Some payment platforms restrict transactions to fiat currencies, while others are borderless, performing transactions using virtual global currencies created as an alternative to conventional money.
  • Some platforms offer instantaneous transactions, with money changing ownership in a click of a button, while others require several days for transactions to be processed.
  • Some payment platforms allow for anonymous transactions, as parties hide their true identity behind pseudonyms.

The following chapter provides a more detailed description of the different categories described above. Advantages, risks and shortcomings of these new payment alternatives will be discussed.

Centralized vs Decentralized Digital Payment

Centralized payment facilities entail that all transactions are processed and archived at a specific location by a third-party regulating body, just like traditional banks process and keep records of currency transactions.

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