Retail Payment Instruments

The following discussion includes a description of some of the retail payment instruments, their applications and related issues.

Cash

Currency continues to be the most convenient and popular form of payment for everyday, low-value transactions. Cash payments are usually associated with face-to-face transactions of low value between individuals or between an individual and a retail firm. In most countries legislation or regulation enables the acceptance of currency for all types of transactions, subject possibly to minimum denomination limits. Cash payment transactions do not usually require further identification. It is an immediate and final transfer of value, and the currency received as payment can be reused by the recipient for further payments. Cash is still a popular payment instrument due to familiarity and simplicity and the fact that it can be easily withdrawn from automatic teller machines and is untraceable, satisfying the user's demand for privacy.

Cheques

The use of cheques has traditionally dominated Australian non-cash payments and they were, until the mid 1970s, virtually the only non-cash payment instrument. As reported by the Reserve Bank of Australia, despite the development of other payment instruments, cheques remain an important form of non-cash payment. In Australia cheques can be drawn on authorised deposit-taking institutions such as credit unions and building societies besides banks.

Direct Funds Transfers

Retail funds transfers include credit and debit transfers, both of which apply to remote payments. Instructions from either the payer or the payee prompt its payment service provider for transfer of funds from the payer's account at its financial institution to the payee's account at its financial institution. These transfers usually are scheduled payments to individuals, different individuals that have been grouped together in a file of electronic payment messages to the payer's service provider.
Direct-entry payments entail direct computer-to-computer linkages, usually after payments have been bulked. In Australia since March 1994, banks and other financial institutions such as building societies and credit unions have been linked in an integrated but decentralised national system to support directentry transactions. Direct credits enable a paying institution to transfer funds to the accounts of a large number of recipients. These are useful to government departments and companies for regular payments such as social security benefits, salary and dividend payments. Direct debits are used mostly by insurance and utilities companies and like bodies for collecting regular policy premiums and payments, and by financial institutions to collect loan repayments. Direct debit transfersare initiated by the payee, usually through a preauthorised agreement with the payer, and are generally processed in electronic form. Credit, debit and charge cards are the main payment instruments for goods and services bought on the Internet.

Credit Cards

Credit cards include charge cards, which involve a short-term fixed-period credit arrangement, and cards with revolving credit arrangements. With charge cards, the accumulated credits are settled at the end of the charge or billing period, generally around one month. Cards with revolving credit arrangements allow a minimum partial payment at the end of the billing period, with the balance of the accumulated credits charged to the cardholder's revolving credit line. In some systems the credit charges accumulated through the initial billing period are interest-free if the charges are fully paid at the end of the billing period or interest is charged only on the unpaid credit balances and on subsequent charges. Cash advances are also possible through credit card transactions, either from vendors directly or from ATMs. Interest is charged from the date of the advance and in some countries there is even a surcharge for cash advances. Although using a credit card entails a fee, it is popular because of its acceptability in many foreign countries and also because it is a relatively safe method of payment. Credit cards are used in both on-line and off-line systems to initiate and authorise payment. On-line payments, which are either via the Internet or EFTPOS, involve a direct communications link through a network switch for real-time authorisation of the payment. At the point of sale the payer signs the merchant's credit card voucher to authorise the payment. Initiating the payment through to its clearing and settlement is fully electronic. Turban, Lee, King, and Chung (2002) suggest that the credit card is the most popular payment method for on-line shopping today, despite its vulnerability to security breaches when used on-line.

Debit Cards

Debit cards are usually used for non-recurring electronic funds transfers at the point of sale (EFTPOS) to initiate payment to the vendor with an immediate debit to the cardholder's account. Payment cards with a deferred debit arrangement are classified as credit cards in most countries and as debit cards in France. In Australia, banks, credit unions and building societies are the main issuers of debit cards, which can be used in ATMs, cash dispensers, automated petrol dispensers, telephones and EFTPOS terminals.

Travel, Entertainment and Retailer cards

These are also called charge, store and private label cards, and allow payment to be deferred from the date of purchase until the account due date. Accumulated balances are payable in full on receipt of the monthly statement. No interest is charged if payments are made on time, but there may be joining and annual membership fees. In some instances, the card may be linked to a separate line of credit through an account with a financial institution.

EFTPOS

All electronic funds transfers at point of sale (EFTPOS) in Australia apply with PIN-based identification and authorisation. Most EFTPOS transactions debit customers' accounts in real time. Payment to the merchant is guaranteed by the bank which acquires its transactions, with a cash-back facility to cardholders making purchases. EFTPOS terminals operate whenever the merchant is open; for some merchants, such as petrol stations, this is 24 hours a day, seven days a week. Many EFTPOS terminals are integrated with retailer cash registers.

Automated Teller Machines

Although automated teller machines (ATMs) are not money in many forms, they enable cash withdrawals, deposits, balance enquiries, transfers between accounts and ordering of cheque books and statements. There are no legal restrictions on the siting or number of machines financial institutions may install; however, operators have to meet standards established by Standards Australia covering design and placement. Most operate 24 hours a day. Some financial institutions also provide limited-purpose Cash Dispensers which can be used only for withdrawals and account balance enquiries. ATM and cash dispenser transactions are authorised by debit cards and certain credit cards with a Personal Identification Number (PIN).

Stored-Value Cards

The use of prepaid stored-value cards (SVCs), although available in Australia, does not have a widespread application. The major issuer is Telstra with its Phonecard, which is used for making calls from public telephones. Prepaid tickets have been used in urban transport systems for some time, and some tertiary institutions sell prepaid rechargeable cards for use by students in their library photocopying machines.
There have been extensive trials of SVCs in Australia. The major operators and technology involved are MONDEX, VisaCash, ERG (using Proton technology) and Chip Application Technologies Ltd, a domestic operator. The cards have an electronic purse function which was recently "turned-on", but to date the take-up of this facility has been modest.
Since smart cards have advantages of anonymity, payment between parties, and low transaction fee, it is possible that in the future this will be a preferred method over e-cash. Similar to credit cards and stored-value cards, smart cards function like magnetic strip cards, with different payment times. In on-line commerce, customers use smart cards by keying-in certain identification numbers that match the information stored on the magnetic strip. The amount of the product or service is then deducted by the card reader and the reader rewrites information back to the card. Many stores desiring micropayment mechanisms adopt the stored-value card payment system. In Taiwan, Software International issued Web Gold Services (WGS) for its on-line game players to make payments. The storedvalue card can be either anonymous or identifiable. Anonymous cards have the advantage of being able to be transferred from one person to another, whereas identifiable cards are non-transferable.
Smart card exemplifies the real-time payment method and is also capable of converting stored value back to real currency, have superior encryption technology, and are less vulnerable to security breaches than the credit card. It can also support peer-to-peer payment. However, Plouffe, Vandenbosch, and Hulland (2001) suggest that for smart cards to succeed, many consumers must use them for many products and services across many purchase occasions. At the same time, many merchants must adopt the required point-of-sale technology needed to process smart card payments from consumers. "If too few consumers adopt the technology, merchants will have little incentive to invest in the required equipment, to alter their business practices, or to train their employees in the system's operation. If too few merchants adopt the system, consumers will have little use for the cards. Thus, adoption must take place simultaneously within both groups" (p. 69).

Electronic Data Interchange

Electronic Data Interchange (EDI) is the computer-to-computer exchange of information in a standard format. EDI is most commonly used in the retail, transport, automotive and heavy engineering industries as well as some areas of the public sector, particularly Customs, the Reserve Bank and the Department of Finance and Administration settling business- to- business payments via inter- bank settlements.

Other Retail Payment Instruments

Other instruments for retail payments include money orders, wire transfers and travellers' cheques. A money order is essentially a direct credit transfer instrument involving a payment to a specified recipient. It can be used for both domestic and foreign currency remote payments. A money order is a paper-based instrument transmitted and processed as an electronic credit transfer, similar to a wire transfer. Retail wire transfers are electronic credit transfers sent through a proprietary communications system. Wire transfers entail a fee and enable quick transfer of funds between two parties. Travellers' cheques are essentially paper-based instruments issued in specific denominations for general-purpose use in business and personal travel. Travellers' cheques are available in domestic currency and selected major foreign currencies. They can be converted into cash only by their specified owner, and are generally accepted only by other issuers, large retailers, hotels and restaurants.

Third-Party Bill Payments

In Australia, the largest operator of third-party bill payments is Australia Post. There are around 3,900 post offices or agencies throughout Australia. Australia Post offers access to banking facilities as an agent for the Commonwealth Bank and for a range of other financial institutions through its giroPost network. While the agreement with the Commonwealth Bank is long-standing, giroPost was introduced in July 1995. It is an electronic banking and financial services network which provides post office access to card-based accounts of participating financial institutions. Customers of these institutions can open accounts, make deposits and withdrawals, pay bills and make balance inquiries. Post offices accept over-the-counter cheque and cash payments for over 300 principals.
A bank-owned service company, BPAY, recently established a new third-party bill payment service. BPAY is an electronic bill payment service owned by a consortium of banks. It allows customers of participating financial institutions to arrange for the transfer of funds from their bank account to issue payment instructions via telephone or the Internet. Fees are charged for payments made using the BPAY service.

Building Societies

Building societies are organised to lend money mainly for housing. However, they also offer comprehensive retail payment services. Cheque-issuing arrangements with banks enable them to offer depositors access to cheque account facilities.

Credit Unions

Credit unions are mutual organizations that provide for deposits and borrowing by their members. Loans are mainly for the purchase of consumer durables, motor vehicles and housing. Most credit unions have an arrangement with a major national bank whereby depositors with the credit union are able to draw cheques on the credit union's account with the bank.

Credit and Debit Card Companies

There are three major credit cards issued in Australia. Banks and many building societies and credit unions issue cards which are affiliated with either the Visa or MasterCard schemes. Some banks also issue Bankcard, a local credit card used in Australia and New Zealand. American Express recently signed agreements with two banks to issue Amex credit cards. Many institutions issue proprietary debit cards for ATM and EFTPOS transactions.

Charge Card Issuers

American Express and Diners Club also issue charge cards in Australia. American Express cardholders have access to some bank ATM networks. Some other overseas card issuers have arrangements with Australian merchants to accept their cards.

Retailers

Retailers are not generally providers of third-party payment services. However, many stores and retail chains issue their own cards for use in their premises only, such as Myer and David Jones. Some oil companies issue their own cards, both credit and debit for commercial fleets.