Electronic Fund Transfer in the Modern World - Essay Example

?Electronic Fund Transfer (EFT) - Literature Review Reflective paper It cannot be denied that globalization without technological advancements especially with the advent of the digital world would have been practically impossible. In a world where with rising demand, the people are looking for better opportunities of income and therefore getting engaged in a super-fast lifestyle, the digital world makes life easier. Electronic Fund Transfer has saved a lot of transportation cost and made transactions faster. It is not just a privilege of the business houses but also assist transactions for individuals in their daily lives. This has also enabled a social revolution all over the world and made interactions easier. An obvious reflection of the use of EFT is in the world of ecommerce. It has helped the companies outsource employment to other nations and transfer the compensation via wire transfer method and thus EFT has brought about a payment revolution as well. While some insecurity issues have been associated with such transfers, it depends on the individual to use this technology to the optimum advantage. It is important to know whom we are making the payment and why. With fraudulent activities on the rise EFT has given exposure to criminal activities especially when it is carried out through Visa or Master Cards online. Fraudulent agents make fake promises on the internet and hence tempt the users to make payments. Making the equal monthly installment payments for loans and insurance have become easier through electronic clearing system (ECS) and this has induced people to opt for insurance policies and credit. Above all wise decision-making is important to make proper use of EFT and hence optimize the digital economy. Introduction The popularity of Electronic Fund Transfer in the present days has become unimaginable and its importance is clearly undeniable with the fact that the process of fund transfer taking place through online internet media with cheap network and improved cryptography making it faster, quicker and accessible to a large mass thus saving a lot of time and making the process very much transparent. The following literature review will help in identifying the usefulness of this application in the modern context and various aspects associated with this particular component of the digital economy. Person-to- person Electronic Funds transfer According to Oz Shy (2010) there is a clear domination of the person-to-person Electronic Fund transfer system in the European countries in schools and in other service sectors, which has made the system vastly popular and noteworthy. For example in schools the parents transfer the money electronically to the bank account number provided by the teacher adding a note stating the basic information checking the requirement for the fund transfer. Moreover the basic day-to-day household payments are also made electronically in virtual mode thus saving a lot of paper checks and time. Thus this electronic process of fund transfer is considered economically most viable and practical process in Germany although in United States this process of electronic fund transfer is not in much use where traditional methods of cash based transfers take place against writing suitable paper checks drawn in the name of the account holder. As per the research by the author in US the adoption of P2P online system is slow due to the fact that P2P transactions require the personal information of the payer to be revealed to the payee which cause concerns and fear for the US households. Using some theoretical framework and using analysis of costs required in delivering online payments and finally leveraging on the concept of critical mass of users the author finds out that the mass adoption of P2P system in Europe is basically of the natural extension of the earlier used ‘old Giro payment’ networks and due to the huge involvement of banks and financial institutions of Europe whereas as per strong prevalence of the Cheque 21 Act of 2003 the strong involvement of the US Fed has not led to significant rise in online payment mechanism. (Oz Shy, Jan-Jun 2010, pp.4-6) Tim McHugh (2002) observes that the consumer adoptions for the different payment innovations at the purchase point and for the bill payment mechanism has shown significant uptrend with significant increase in customer base taking into this mode of payment mechanism confirmed by The National Automated Clearing House Association (NACHA) with almost 20% increase in 2001. Although a recent study by Federal Reserve show that many innovative electronic payment mechanisms failed to significantly move the huge customer base in spite of the fact that the growth of debit and credit cards have gained much significance. The cash transaction is still one of the significant forms of payment. But in recent times the Person to person mode of payment is gaining much popularity concerning all C2C (Customer to Customer) transactions. Moreover with globalization process upfront and increase in all cross border transactions with more and more money remittance not only inside the own nation but also abroad the popularity of Internet money transfer is gaining significance day by day. However in the process of P2P transfer there lies a difference in charging fees depending on the services being offered and the target markets and ownership structures. Sometimes the sender is charged for the service sometimes the receiver and the sender are allowed to negotiate among themselves. Finally considering the ownership structures the participants are mainly E commerce companies and banks. Another important issue, which mainly attracts the media attention towards online P2P networks, involves the online auctions through which majority of online P2P transactions take place. There has been a significant decrease in using checks from about 80% in 1999 to 50% in 2001 at Ebay correspondingly as per the Tower Group estimates there has been a massive increase in the growth of online P2P transactions in U.S from about 100 millions in 2001 to 4 billion in 2005. Moreover the author here clearly demonstrates the growth of P2P services rather than the development of e-money clearly due to the fact that P2P was basically developed as a fast, secure and transparent mode of designing online payment mechanism through auctions and it basically leveraged the existing network system rather than creating a completely new set up and mode. Further, with the seller’s scope of expansion on the use of credit cards without relying much on merchant banker this online P2P system caters to the advantage of both consumers and merchants. The revenue generation process of online P2P based system mainly accounts from the transaction fees which is slightly higher than the credit cards and PIN based debit cards and cash based transactions but lower than the debit cards. According to the author the success of electronic payments still is not that great with C2C payments due to the facts like superior technology concerns which are limiting the usage to about 50% of the US households having access to internet. Moreover the emerging form of payment mechanism need to have more superior and customer friendly value added features for faster acceptance by mass crowds. (Tim McHugh, 2002, pp.1-4) Bridging Gap between Physical and electronic money Mas (2011) points out that there is need to shift from the cash based system which is costlier to handle than to a simple electronic system of ‘smart banknote” which can be activated or deactivated at will. By this process the value will get simply transferred from a banknote electronically to and from bank account and deactivation will cause vanish of the cash balance where as activation will process in the conversion of bank account to cash. This new system of bank note usage will help in developing mobile banking faster at much lesser cost and can help in integrating the services provided by ATM and Internet banking terminal. The author considers cash as a chief mode of savings for vast number of customers but there is huge problem in remitting cash to another place, moreover cash causes problems with safety and security as well as handling cash causes handling costs to increase for banks which constrains banks from increasing distribution channels thereby forcing customers to move a lot of distance wasting time and resources. However the presence of ATM s in some developed countries virtually helps to address customer needs but in rural countries there are infrastructural problems. But according to the author cash has got certain advantages as it has been accepted universally with quick transactions and cash can be used in fixed denominations unlike variable costs involved in online payment. Mas (2011) basically addresses the use of banknotes in this article using which would enable cash to be transported in deactivated form at cheaper cost and then activation of the deactivated form would give value to the bills being deactivated for normal usage. Proper recordings of the transactions would enable transparency in the system. The usage of bank notes would enable in reducing security cost of producing and distributing cash as it could be handled in deactivated format. Moreover strong security is maintained in using proper cryptographic keys, as security is a bigger concern in the process of online payment system. Proper address of security issues through authorization of accounts, secured means of cash activating devices and using RFID networking base would help interacting with cash bills with secured bill management application. (Mas, 2011, pp. 6-8) Accountability of centralized payment system Kungpisdan (2010), and Weygandt, Kimmel, & Kieso (2009) observe that the accountability of electronic protocols mainly delineates the fact that each and every party to the transaction needs to be properly verified and each and every party must cater to clear association with the message delivered in the protocol confirming his/her association with the message either as sender or receiver of that message. A centralized payment mechanism mainly involves a single party who mainly takes form in conveying messages either side across the sender or the receiver thus ensuring proper communication system in the process and clearly articulates transparency in the system. A very clear example of centralized payment service involves the Internet banking where the bank acts as the mediator in conveying payment requests and responses among its customers. However there is a need to ensure that the security is maintained clearly in the system. The recipient may be in a false position of not clearly identifying the desired sender and in any case may think that the bank has made the request for payment and it has to ensure that the bank never makes false payment claim to the client which has to be properly verified by the client that the sender has made the payment claim to the client through the bank otherwise the client may be in deep trouble if the amount paid by the client never reaches the intended recipient. Such transaction calls for proper ensuring of accountability. Several logics have been developed in the process of analyzing the e-commerce protocols. The Kailer’s logic has been developed based on the BAN logic which elucidates reasoning on the proper verification of signed plain messages but failed to address the concerns the complex cryptographic messages of the ecommerce protocols. Moreover it has failed to take account of proper verification needed by the verifier to ensure proper verification process. Then comes the KN logic, which although addresses the concerns of proper verification being done fails to do so without revealing secret information to the verifier. Thereafter modifications are being performed and in process come up the KN logic required to prove the accountability of the SET protocol but by proper dealing of the complex cryptographic systems and in process also ensure that the secret information are not provided to the verifier mainly by the fact that the prover (checking device) believes that the verifier has every information. But in process KN logic does not take into account symmetric cryptography. But in recent times with the proposition of the KSL logic the analysis of both asymmetric and symmetric cryptography have become utterly possible but it fails to address the concerns regarding proof of the valid party designated as the sender of a message addressing a particular receiver though a centralized bank, where in the sender may not be the same party and may be some other party. The author here mainly discusses the KSL logic by showing a proposed Bill payment Accounting protocol showing each transaction is properly verified using symmetric cryptography where in a cryptographic key is attached to every possible transaction using a system generated code and it reveals the identity of the proper sender. Number of cryptographic keys is proportional to the number of participants in the transaction with one key each is shared between each of the two corresponding parties. This ensures safety in the system when it needs the consent of both the parties to decrypt and generate the information and as such information sent by the sender cannot be fudged by the intermediary or any other body and ensures that proper information is reached to the receiver with true facts and the receiver or the client can make right payments and it reaches the sender making the payment claims to the receiver. The main need of developing the electronic payment protocol is to convince each party in the transaction that they have authorized messages regarding the transaction, taking place in the system. (Kungpisdan, Sep/Oct 2010, pp.351-364, Weygandt, Kimmel, & Kieso, 2009, p.331) Automated Theft Machines: According to Bhattacharjee (2011) there are severe issues concerning the stealing of the ATM PIN information code, unique for every customer by professional skimmers who use different modes to steal the information on the debit cards. To challenge this severe issue the European countries have adopted magnetic chips with embedded microchips making it difficult to skim Canada in the process has adopted the protocol using chip-and-PIN cards. But The US doesn’t have any concrete plans for suitable conversion making it a vulnerable nation and increasing the risks to a great extent. Recent data reveals that the Electronic crimes in the USA has risen by about 10% every year over the last few years with more than 5000 arrests have been made in skimming cases. In 90’s skimmers just moved around here and there and peeped over shoulders to steal the PIN but with modern updated versions of protocols coming out to ensure safety with researches being performed periodically over here and there, these skimmers also had to invent various modern techniques in different innovative fashions to grasp the secret information of the client. Regular tussles are going on between skimmers and online security agents and thus different new technologies are being invented and also getting hacked by these professional skimmers. But still the USA is not taking adequate interest in switching to chip-and PIN cards. Until there is shift into upgraded chip and PIN systems the customers need to be aware to protect his/her number against professional skimmers. Some Protection tips: Check the card reader slot and verify if there is any loose space and when confronted with any glue marks immediately need to move away from the spot as the thieves mainly conceal the skimming devices in disguised looks difficult to getting traced. There should be protection of the Pin during typing and check if there is any video camera installed in the system. The process needs to be safer at shopping areas, airports and gas stations. (Bhattacharjee, Jan 2011). Electronic Fund Transfer Act: Emerson (2009), Beatty, & Samuelson (2006) observe that the introduction of the Electronic Fund Transfer Act play a pivotal role in the process of addressing the issues relating to the Fund Transfer process and takes care of the parties concerned in the process in giving justice to them in case of any unsolicited theft or in any case of unauthorized access to the PIN of any customer and in disclosure of personal information of the parties concerned. During the period from 1990 and 1996 each state started following the newly implemented UGC Article, 4A, which basically controls the process of fund transfer of largely established businesses. More comprehensive act prevalent in the system is the federal Electronic Funds transfer Act of 1978, which follows certain distinct clauses addressing the customer concerns. These clauses include the limit of compensation a customer can claim based on the proper and authentic account delivered by the customer to the bank. Banks are not authorized to distribute unsolicited access to EFT devices and at the same time furnish clear statement showing the detailed account of transactions with every true and clear fact backing the process. And clear rules and regulations guiding the concerned Act should be delivered in right manner to every customer. One basic advantage of the Act is that it empowers the customer in legal terms in the system of Fund Transfer where the customer is given statutory penalties for any misrepresentation of the process. (Emerson, 2009, p. 242; Beatty, &. Samuelson, 2006, p. 579) Electronic Fund Transfer Technologies: According to Tien (1991) with rapid globalization and with indisputable growth and development, there has been hugely up gradation in the technological front with more prevalence of computerized system thus soliciting the growth of the ETF technologies faster. The author basically classifies three group of ETF technologies- one group mainly deals with retail banking which includes Automated Teller Machine (ATM), Point of sale (POS), the second group deals in corporate banking which includes wire transfer, automated clearing house (ACH) and also includes cash management, the third group deals in internal banking functions which includes on-line teller terminals and online check processing system. The author in this book focuses basically on the use of ATM and wire transfer technologies in both retail and corporate segments although the scope of EF technologies is huge. Moreover the author considers the ATM and ACH being the mature technologies among all other technologies considering the fact that fraud related issues are few in ATM and ACH system. But it’s not easy also every time to get proper information about any fraudulent matters considering the complex multiple data repositories with difference in procedures by different banks and also lack of transparency in the process of information sharing by banks which makes it critical to address the fraud related issues. But the author here thanks the banking association-the ARCB for participation in the process, which helps in the success of the study taken up by the author. Elucidation of the different underlying ETF technologies makes it easier to gauge the fraud occurring in the system and tracks it correctly thus helping to minimize it or completely remove it from the system. Under the Retail category the technologies which are used include the Automated Teller Machine (ATM) which has made the system of money withdraw, deposits, balance inquiries, transfer of accounts, payments of loans and mortgages and other bill payments a very simple and lucid process where the kiosks are located at different places and are linked to the banks’ financial records. This helps in saving time and energy and also these are flexible in operations considering the time. The operational efficiency of the ATM makes it highly popular to a vast majority of people around. Another technology to be discussed under retail segment include the point of sale (POS) which is basically a financial intermediary connecting the merchant with the customer where the financial intermediary takes active part in fund transfer from customer to the client account, helps in authorization of the credit purchase, verification of check payments. The other important technology includes the Home banking which facilitates the transactional process from home which includes checking of balance, tracking the history of transactions, making payments of different sorts from home using online computer based service thus helping in reducing the wastage of time, energy and money in going to the bank. In the corporate category comes the Wire transfer system, which facilitates movement of large dollars among the different participants in the system, the ACH system basically uses magnetic tape in sorting the transaction before delivering to the recipient. It’s basically used in payroll deposit and government checks. The third technology under corporate segment includes the cash management facilitating customers to transfer funds between accounts, electronically accessing their accounts and checking balance history. In the internal system the technology discussed is On-line Teller terminal with computerized processing. This system is completely internal to the financial institution, which facilitates them in processing the transactions for the customers. (Tien, 1991, pp.1-2) From the Literature Review performed it has been observed that the introduction of the Electronic Fund transfer system has helped a lot in bringing operational, transactional efficiency for the financial institutions and has facilitated every transaction the customer deals at the click of mouse thereby saving a lot of time, money and energy and increased the rapidity of the transactions. But the major concern in this system is tracking online fraudulent activities, which should be dealt strongly and effectively. References Shy, O. (Jan-Jun 2010),” Person-to-Person Electronic Funds Transfer: Recent Developments and Policy issues”, Research Review, Issue 13, pp. 4-6. Available at http://web.ebscohost.com/ehost/detail?vid=3&hid=119&sid=670e2d49-6bde-4c23-b362-7f2c71951113%40sessionmgr115&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph&AN=55413458 (Accessed on May 5,2011) McHugh, T. (Aug 2002),”The growth of person-to-person electronic payments”, Chicago Fed Letter, 180, pp.1-4, Available at: http://web.ebscohost.com/ehost/detail?vid=4&hid=119&sid=670e2d49-6bde-4c23-b362-7f2c71951113%40sessionmgr115&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph&AN=7057499. (Accessed on May 5, 2011) Ignacio, M (Jan/Feb 2011), “Smart Banknotes”, Futurist, Vol. 45, Issue 1, pp.6-8. Available at http://web.ebscohost.com/ehost/detail?vid=6&hid=119&sid=670e2d49-6bde-4c23-b362-7f2c71951113%40sessionmgr115&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph&AN=55664943. (Accessed on May 5, 2011) Kungpisdan, S (Sep/Oct 2010), “Accountability of Centralized Payment Systems: Formal Reasoning, Protocol Design and Analysis”, IETE Technical Review, Vol. 27, Issue 5, pp. 351-364. Available at http://web.ebscohost.com/ehost/detail?vid=6&hid=119&sid=670e2d49-6bde-4c23-b362-7f2c71951113%40sessionmgr115&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=aph&AN=53291243. (Accessed on May 5, 2011) Bhattacharjee, Y. (Jan 2011), “Automated Theft Machines”, Time, Vol. 177, Issue 2, pp.53-54. Available at: http://www.time.com/time/magazine/article/0,9171,2041113,00.html (Accessed on May 5, 2011) Emerson, R W. (2009), Business Law. Barron’s Educational Series Tien, J M. (1991), Electronic Funds Fraud. Dane Publishing. Weygandt, J J, Kimmel, P. D& D. E. Kieso (2009), Financial Accounting. John Wiley and Sons Beatty, J. F. & S. S. Samuelson. (2006), Business Law and the Legal Environment. Cengage Learning “What is EFT or Electronic Funds Transfer and How does it Work?” Transact-Money, Available at: http://www.transactmoney.com/transaction-articles/electronic-funds-transfer.htm (Accessed on May 5, 2011) Read More