May 2003

ePSO Discussion Starter

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No. 1
E-payments:
what are they and what makes them different?
by
Kimmo Soramki and Benjamin Hanssens
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In order to have a fruitful discussion on e-payments, it is necessary to define the concepts used. The
aim of this paper is therefore to work towards a common understanding of the concepts involved. We
begin by discussing what constitutes a payment in general and then go on to consider e-payments. We
do not seek to provide definite answers, but rather to raise awareness of some definitional issues and
related concepts, and to arrive at some proposals and topics for discussion.
What constitutes a payment?
Interestingly, there does not seem to be a consensus on this. The following existing definitions may
give some ideas:
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(i) An amount of money paid where money is the coins or notes which are used to buy things,
or the amount of these that one person has.
(ii) The partial or complete discharge of an obligation by its settlement in the form of the transfer
of funds, assets, or services equal to the monetary value of part or all of the debtors
obligation.
(iii) The payers transfer of a monetary claim on a party acceptable to the payee. Typically claims
take the form of banknotes or deposit balances held at a financial institution or at a central
bank.
All of the above definitions pose some problems. The first definition only covers payments using
banknotes or coins, meaning that payments in commodity money (e.g. gold coins of intrinsic value) or

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The e-Payment Systems Observatory (ePSO) is in the process of preparing and posting on its website (www.e-pso.info)
discussion starters on topical issues in the field of e-payments. The discussion starters are aimed at stimulating debate
on these issues on the ePSO forum.
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The authors work for the European Central Bank. Views expressed in this paper are those of the authors and should not
be construed as a statement of the European Central Bank.
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Sources: (i) Cambridge Dictionary, http://dictionary.cambridge.org; (ii) investorwords.com,
http://www.investorwords.com; and (iii) Payment and securities settlement systems in the European Union (Blue
Book), ECB 2001, www.ecb.int.
other assets, book-entry payments, or payments in bearer instruments other than cash are not included
in its scope.
The second definition focuses on the discharge of an obligation. Like in the first definition, a payment
is linked to money here via the term monetary value. The definition presumes that payments are
made only to fulfil an obligation. A transfer to make a donation or a transfer by the same person
between two accounts would be likely excluded. Unlike the first definition, this one includes the
delivery of assets or services in payment.
The third definition underlying the statistics published by the European System of Central Banks (in
the so-called Blue Book) and the statistics published by the G10 countries (in the so-called Red Book)
relates payments to monetary claims. It is well-suited to the current situation in which most payments
are made with claims either against the central bank (i.e. cash) or against credit institutions (i.e. book
money). The definition excludes payment practices of the past (e.g. commodity money) and may
exclude payment practices of the future.
When comparing the three definitions above, another difference is noteworthy. Definition (i) refers to
the payment amount, whereas definitions (ii) and (iii) cover the process. We wish to concentrate
on the process here and propose that a payment is the transfer of the means of payment from the
payer to the payee through the use of a payment instrument. This definition requires further
clarification of the terms means of payment, transfer of the means of payment and payment
instrument.
We understand the means of payment to be those assets or claims on assets that are accepted by
the beneficiary to discharge a payment obligation. These assets or claims are determined today by
law (legal tender) and, based on this, by contract (whereby the contract is often based on tacit or
explicit consent between the parties). Although the means of payment can consist of either assets or
claims on assets, we will concentrate on the latter as they constitute by far the most important means
of payment in todays economy.
Today, claims issued by the central bank (central bank money) are the pivotal means of payment.
These consist of banknotes issued by the central bank and credit entries in the books of the central
bank. It is often stipulated by law to what extent claims on the central bank can be used and/or must be
accepted as a means of payment.
Next to central bank money as means of payment are those claims that carry a certain legal guarantee
or promise to be converted (back) into central bank money. These claims are credit entries on current
accounts held by deposit-taking institutions (e.g. banks/credit institutions) for their customers. The
financial order of most countries stipulates an obligation to redeem (i.e. pay out) these transferable
credit entries (commercial bank money) in central bank money at par. This obligation is referred to
as the redeemability requirement. It ties commercial bank money to central bank money and is a
pillar of the current monetary order.
The obligation to redeem the claims recorded on specific accounts in central bank money makes these
claims a trustworthy and widely accepted means of payment. Claims on credit institutions (which in
the EU definition also include electronic money institutions or ELMIs) derive their capability to be
used as a generally accepted means of payment also from institutional safeguards and backing
(e.g. prudential supervision and deposit insurance). In a well-functioning banking system, customers
easily forget that these claims are means of payment by virtue of contract or tacit acceptance only.
Owing to their dependence on central bank money, these claims are a secondary means of payment. In
case of distrust of the banking system, individuals will quickly switch to the primary means of
payment (central bank money).
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In case of distrust of the latter means of payment, they will choose
other claims as means of payment (private money), other assets or revert to barter. That is why,
besides central bank money and commercial bank money, various kinds of assets or claims may, at
times and under specific circumstances, function as means of payment. Both central bank money and
commercial bank money depend on the trust in the institutions issuing them. This trust has to be
earned through lasting financial and operational stability.
The other term to be clarified is the transfer of the means of payment. We suggest defining it as
the process by which the change of ownership of a means of payment is effected. This process can
be effected in various forms. We define a payment instrument as the forms and processes used
to effect the change of ownership of a means of payment. Examples of payment instruments are
banknotes, debit and credit cards, credit transfer orders, cheques, etc. All these instruments are
underpinned by standardised and legally documented procedures aiming to enable the transfer of
means of payment (i.e. governing the finality of the payment).
What are electronic payments (e-payments)?
E-payments are often mentioned, but the term is rarely defined, and the characteristics that distinguish
e from traditional payments are seldom described. Following the logic above, we arrive at a proposal

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The use of other means of payment can, however, be justified also from an economic perspective. The transfer of bank
money may sometimes be more costly than the transfer of alternative assets or claims in which parties have enough trust
to accept as a means of payment. However, all these alternative means of payment receive their acceptance only by
contract and consensus between the parties.
that an electronic payment or e-payment is the transfer of an electronic means of payment
from the payer to the payee through the use of an electronic payment instrument.
An electronic means of payment would be understood to be a means of payment that is
represented and transferable in electronic form.
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Book money provided by the central bank and
credit institutions has been represented digitally and transferable through electronic networks for a
long time already. Claims against the central bank have not yet undergone this transformation.
In a similar vein, an electronic payment instrument can be understood to be a payment
instrument where the forms are represented electronically and the processes to change the
ownership of the means of payment are electronic. The payment instruments may be electronified
fully or only partially. Many of the traditional payment instruments have been electronified, e.g. online
(rather than paper-based) credit transfers, and many new channels to access these instruments have
been developed (via mobile phones, Internet, TVs, etc.).
What makes e-payments different?
Many of the issues discussed in conjunction with e-payments do not relate to their specific features,
but rather are topics of general importance for all payments or payment services. These topics are:
- the institutions issuing the claims used as means of payment and their regulation (financial
stability issues);
- the redeemability of the claims in to central bank money;
- the security of payment systems and instruments (operational robustness, the problems of
fraud, money laundering and counterfeiting, shorter track record of e-payments, privacy
issues); and
- efficiency (speed, cost and convenience).
Some of the above aspects, especially the latter two, take on important dimensions when related to e-
payments. Where the payment instruments are bearer instruments, the problem is counterfeiting, a
challenge also faced by banknotes. However, e-payments have a shorter track record, meaning less
security experience and knowledge, and face the problem of perfect copy. They also face a different
qualitative threat to operational robustness in that they may be subject to low-cost, mass attacks
which would affect their availability. Security flaws in a system may also be automatically exploited
and the damage thereby increased. The prevention of fraudulent transactions may also be harder in
the relatively anonymous environment of the internet and other networks. A further distinctive feature
of e-payments is the fact that their use generates information, which can be used for other
purposes. Each e-payment leaves behind electronic traces that may be processed and analysed for
purposes that go beyond the needs of payment processing (e.g. for analysing customer behaviour, for
investigations, etc.) This falls within the scope of personal data protection and the right to privacy, and
this may have far-reaching societal aspects that go beyond the security threats to which traditional
money is exposed.
However, e-payments have a great potential to increase payment efficiency, thereby contributing to
increased welfare by reducing transaction costs and by enabling trade in goods and services of a
very low value. They may also increase the convenience of making payments by enabling them to be
made swiftly and remotely from various devices connected to global networks.
Having attempted to define some core concepts and outlined some specific features, we would like to
invite the e-PSO forum to discuss the two issues mentioned in the title of this paper:
1. What are e-payments, i.e. are the proposed definitions meaningful and adequate?
2. What makes e-payments different, i.e. what distinguishes them from normal payments?
Proposed definitions:
Means of payment: assets or claims on assets that are accepted by the beneficiary to
discharge a payment obligation.
Payment instrument: the forms and processes used to effect the change of ownership
of a means of payment.
Payment: the transfer of the means of payment from the payer to the
payee through the use of a payment instrument.
Electronic means of payment: a means of payment that is represented and transferable in
electronic form.
Electronic payment instrument: a payment instrument where the forms are represented
electronically and the processes to change the ownership of the
means of payment are electronic.
Electronic payment: the transfer of an electronic means of payment from the payer to
the payee through the use of an electronic payment instrument.

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In this context, it is noteworthy that the so-called m-payments (payments via a mobile phone) are also e-payments since
mobile telephony relies on electronic data processing and transmission.