The Electronic Payment System - Essay Example

The Electronic Payment System al Affiliation) Executive Summary The electronic payment system has had a significant influence in US banking sector. Financial institution capitalizes on the electronic payment attributes such as convenience, cost and time reduction, security, and accessibility. Elements of this study are highlighted below. Convenience The most significant factor that attracts clients to the electronic payment system is its convenience. Most depository institution believe that efficiency in transaction increases their turnover. According to a renowned scholar, convenient transaction results in the accessibility to competitive prices and returns (Weiner, 2008). There is no arguing against this proposition provided all the elements are present in the payment system. However, the electronic payment platform has not been utilized fully due the absence of computing facilities and other factors discussed in the following section. Cost and Time Reduction The profitability of depository institutions primarily depends on the aspect of cost reduction. The evolution of the Point on Sale system from checks to debit cards has significantly lowered the transaction cost. The electronic payment system has enhanced the span and quality of financial services. As a result, the financial sector has grown rapidly. According to a recent research, technological change in American banks has resulted in productivity gains and cost reduction (Babus & Allen, 2009). However, the research indicates that the clients have a perpetual problem with certain aspects of the electronic payment system. In addition, the primary benefit of electronic payment system is its enhancement of transaction speed. As a result, the speedy operation leads to a fall in transaction cost, increased payment efficiency, and improving the convenience of making payments. Therefore, it results in the decline in the prices of goods and services produced in the economy. However, the transaction speed is often affected by other factors that must be tackled first to maintain proper function of the electronic payment system. Security The security and safety of the online financial transaction is a primary concern of most enterprises. It pertains to the protection of vital financial information and components that once they are compromised would result in losses. Information security is strongly related to the importance of the information. The security of information is vital to the functioning ability of depository institutions. In addition, it safeguards the technology components used by the systems (Lumpkin & Thurlow, 2001). The US legal framework requires all the systems to protect the information of the clients. Failure to do so may result to legal redress by the customers on grounds of privacy violation. Scholars argue that the most significant factor slowing the progress on the electronic payment is the client concern on the information security (Lumpkin & Thurlow, 2001). Accessibility A number of mechanisms for measuring the quality of online transactions have been proposed. Some the mechanism include reliability, access, security, and credibility. The access to internet and is a significant requirement for the adoption and implementation of an efficient electronic payment system. As a result, the benefits provided by internet banking are easily accessible. Governments across the world are encouraging their nationalities to embrace information technology through subsidizing the prices of computers. Scholars stress on the issue of accessibility citing that it is a primary element of assessing the quality of online services. The Theoretical framework Figure1: The Attributes of an Effective Electronic Payment System (Allen, 2003) The concept of electronic payment has been in practice for a number of years. However, it varies among different countries and enterprises. It is argued that any transaction that is not paper based qualifies has an electronic transaction. The advancement in technology has led to the adoption of the electronic payment system in most depository institutions. In addition, growing competitions in the financial sector has also led to the growth of the use of the electronic payment system. There are several forms of electronic payment ranging from the internet banking, mobile banking, debit and credit cards, and electronic payment networks. In the US, a number of factors have influenced the development of the system (Babus &Allen, 2009). First, several financial institutions offer payment, settlement, and clearing services. Privately operated electronic payment systems include; localized interbank that runs Automated Teller Machines (ATM) and the point on sale (POS) that facilitate online transaction using debit and credit cards. Secondly, the complexity of the legal framework in the US governing the payment system has influenced the development of the system. In the US, financial institutions are controlled by agencies at the state level, the federal level or both. Thirdly, a number of payment mechanisms are available to facilitate the transaction between the financial institutions and their clients. The mechanisms may vary significantly in their attributes such as technology, convenience, and cost. Information technology has played a significant role in the advancement of the electronic payment system. It has facilitated the provision of financial services using the telecommunication devices and wireless networks. Electronic payment system entails clearing of the network attributes that provide automated clearing services. Debit and credit cards help in identifying client’s information and initiate an electronic or paper payment. Banks issue the cards to provide credit or debit services to the customers (Weiner, 2008). Debits card are designed for making payments while credits cards provide a convenient means of borrowing. The government requires the financial institution to adopt the latest technologies that facilitate a secure platform for online transaction. Such technologies have made the financial sector to automate most of their operations, and hence it minimizes the level of paperwork. In addition, due to the increasing competition, banks are left with no other options rather than devising innovative financial products. The automation in the financial sector has eliminated long queues in the banking hall. The lines results in the long client waiting time and hence inhibiting customer satisfaction. In addition, lengthy waiting time increases the cost incurred by the banks and results in a negative economic impact. The bank employees also experience the negative effects of long queues and waiting time. Their frustrations are due to their failure to provide timely and suitable financial services to the clients. Such situation calls for elaborate strategies of minimizing the waiting time. The adoption and implementation of information technology in the banking have affected numerous business transactions positively (Lumpkin & Thurlow, 2001). It has achieved this through decongesting the banking halls by offering other convenient platforms for carrying out transactions. As a result, it has reduced the overall waiting time for financial services and increased the liquidity of the clients. Consequently, it has also led to the adoption of the cashless system. Purpose of the study Depository institutions of the 21th century operate in a convoluted and competitive market. Today’s financial market is characterized by an unpredictable economic situation and changing conditions (Allen, 2003). Information technology is the focal point of the global change of electronic payment system in the US. Objectives The paper will present varied opinions on electronic payment concerning the financial sector. In addition, it will analyze the impact of the electronic payment system on the profitability of US depository institutions. The study also focusses on the benefits of electronic payment transaction that bear fruits in many depository institutions worldwide. For the study to achieve the stated objectives, answers will be provided for the following research questions 1. What is the scope of US depository institutions? 2. What are the impacts of electronic payment on the scope of the said institutions? 3. What are the implications of the electronic payment system on the profitability of depository Institutions? 4. What is the economic importance of electronic payment in the US? 5. What are the limitations in the of the electronic payment system in the US banking sector? Methodology A quantitative method is applicable as the primary focus of the study is on the clients and employees of American banks. The quantitative approach is appropriate as a deductive approach. It pertains to the building up of a theory and hypothesis and designing a research plan for testing the hypothesis. The study will involve a survey to collect information on the impact of the electronic payment system to depository institutions. In addition, evaluation of the information on the constraints of the payment system will provide the solution to the problem identified. The respondents will comprise employees and clients of commercial banks, saving and loans associations/credit unions, and, saving banks. The collection of data will be in a period that has witnessed a significant growth in electronic banking services in the US. The total number of the respondents are 100. Thirty respondents will come from commercial banks; the remaining 70 respondents will come from saving banks and credit unions. The use of primary source will facilitate the attainment of the objectives of the study. The primary source of data comprises the use of a questionnaire to collect data from the clients of the three forms of depository institutions. The survey will provide alternatives the respondents can choose from and express their opinion. The questionnaire will use of the Likert scale that requires the respondent to point out a level of agreement or disagreement. Data Analysis Models for Obtaining the Results The specialized statistical packages better known as the SPSS will help retrieve and analyze the results. The Chi-square will test the hypothesis while the regression and the ANOVA will test the existence of a linear relationship between the variables. In addition, it will measure the degree of linearity between the use of the electronic payment system and the improvement in service delivery in the U.S. The queuing theory The queuing theory provides an analysis of the waiting time. The theory is the most appropriate model for determining the impact of the electronic payment system to the depository institutions. The model applies probability theory in establishing the cost implication of long queues. To characterize a queuing system, first identify the probabilistic attributes of the arrivals and the service time. The process of arrival can be analyzed by the distribution of the client’s inter-arrival times. The model assumes an independent inter-arrival time that is randomly distributed. Service time is also a random variable, it also known as the service request. Both variables are presumed to be independent. The service structure represents the number of clients in the queuing system. The service discipline is essential as it establishes the policy rules. Some of the frequently used rules include the first in fist out, the last in first out, and the random service. The first in first out is the most popular queuing system rule in the banking hall. The main objective of this model is to establish the primary performance measures of systems that have the probabilistic attributes. For instance the mean, variance, and the distribution function of the random variable. The variable include the number of customers in the queue, the number of customers in the system, the customer waiting time, the idle time, and busy time of the cashiers. The model will be applied on the data collected before the adoption of the electronic payment system and after. Comparisons are made to determine the impact of the automation on the waiting time. For an appropriate conclusion, it is important to start with a simple system. If the results do not fit the problem, the use of a more complex system is inevitable. There are varieties of software packages that are applicable while dealing with a complicated process. The Decision Theory Technique Under this section, an analysis is performed on the collected data to test the propositions of this study. The decision theory technique is crucial in analyzing the data collected. It is based on the utility and the probability theory. The study focuses on probability to explain the impact of the electronic payment system on the banking sector. Maxmax rule The Maxmax rule represents the optimist approach in which the most favorable situation is expected. The alternative that results in the maximum payoff is chosen and highlighted. The maximum of the maximum payoff is the Maxmax. Below is an illustration of the procedure used in the analyzing the data. Table 1: The procedure of the Maxmax rule (Babus & Allen, 2009) Impacts of electronic system/state of nature High Moderate low Maximum payoff Commercial banks 40% 25% 30% 40% Credit unions 30% 25% 45% 45% Saving bank 30% 50% 25% 50% maximum Summary and Conclusion Summary Electronic banking is capable of widening the customer relationships, and maintaining customer loyalty. As a result, the banks can command a significant market share if their inadequacies are adjusted. Fraud and virus pose an enormous threat to online transactions. The software used to maintain sound electronic payment systems are expensive to acquire and maintain. They require proficient information technology personnel to keep out intruders from the system. Electronic payment system is flexible, and has a range of delivery channels that crucial in retaining the customer (Allen, 2003). Banks should make certain information available to the customers to help them decide on the most suitable channel. Many major depository institutions offer diverse forms of payment mechanisms to different customers. Their primary objective is to optimize revenue from each of the platforms. Mobile services are appropriate for high-value customers while the Automated Teller Machines are suitable for low-value clients. An inherent ability allows the systems to switch from one platform to the other. A customer would only require a personal computer with an internet connection to access the electronic payment system. Conclusion The electronic payment system is a complex entity that allows transaction anywhere, and at any time. It provides the clients with several advantages as compared to the conventional banking system. Appropriate controls should be established to mitigate or alleviate the risk posed in an online transaction. Most bank clients are of the opinion that the electronic payment system has cheapened the cost of bank transaction. In addition, the system is easy to set up hence a number of new depository institutions are likely to enter the banking industry. Electronic payment provides the customer with a variety of choices. As a result, they are less inclined to remain loyal to a certain bank. Portal developers are likely to attract a large share of the banking revenue. The bank only plays the role of bringing the two parties together for instance the payer and the payee. Depository institutions that fail to embrace the payment system find it difficult to evolve. They are unable to make cash acquisition as well as obtaining additional capital from the securities market (Weilner, 2008). Institutions practicing the technologies attract investors easily. The electronic payment system does not only provide services through a new delivery channel but it also offers new services to the customers. Most customers prefer banking services provided through different channels. Technology has continued to change the payment system in the US. However, many efforts are required to utilize it numerous benefits entirely. Depository institutes should explore the internet vividly to gain the huge opportunities available both locally and globally. The institutions can achieve by capitalizing on the services of internet service providers. In addition, they should guarantee the client safety of financial transactions on the internet and Automated Teller Machines. It can achieve this through authentication, authorization, and data integrity. In addition, a well-secured network should be employed where the source of the request for payment is captured and proven. In this regard, devices such as the Secure Electronic Transaction, digital signature, smart cards, and digital wallet. Electronic banking mainly depends on the supply of electricity. Financial institutions should make proper use modern backup generators that operate automatically to avoid transaction delays. An erratic power supply can have several damaging effects on the financial sectors. For instance, it may result in loss of certain financial data. Limitations of Electronic Payment System There are several limitations of electronic payment in the banking sector. First, the clients are worried about the safety situation of the Automated Teller Machines. A number of customers have reported to lose their money from unsecured Automated Teller Machines. Cyber criminals have come up with new ways of defrauding the public. For instance, there are cases in which the ATMs are configured to capture sensitive financial information of the clients. After that, the information is used to fleece the customers of their savings. Other clients have questioned the safety and the risk of providing personal account details while making an online transaction. Internet banking exposes the client’s financial information to the threat of cybercrime (Lumpkin & Thurlow, 2001). A number of cases have been reported in which the online banking platform has been hacked, and sensitive information of the clients retrieved. The United State legal framework requires all the depository institution to develop a tight information security against the threat of hackers. References Allen, H. (2003). Innovations in retail payments: e-payments. Bank of England Quarterly Bulletin, Winter. Babus, A., Carletti, E., & Allen, F. (2009). Financial crises: theory and evidence. Available at SSRN 1422715. Lumpkin, S., Ogrodnik, R., & Thurlow, P. (2001). The Future Prospects for National Financial Markets and Trading Centres. Bank of Canada. Weiner, S. E. (2008). The Federal Reserve’s role in retail payments: Adapting to a new environment. Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter. Read More