It has been witnessed across the globe, especially in developed economies that there has been a gradual switchover from the use of paper-based payments media to those based on electronics. While the basic characteristics of these new instruments are by and large similar to those of old, paper-based instruments, these, however, present a different set of challenges to policy makers. Electronic money (e-money) is one such new product which has appeared on Indian horizon recently.

Digital cash, electronic money or e-purse, as these are differently called, are a direct off-shoot of the stupendous development of Internat based e-commerce. In the emerging field of electronic commerce, novel buzzwords like smartcards, online banking, digital cash, and electronic checks are being used to discuss money. Electronic money, as it is often referred to, is essentially a payment or transfer of funds that is initiated and processed electronically within current interbank payment systems. In other words Electronic money is the digital representation of money, or more accurately, the digital representation of currency.

E-money may be broadly defined as "an electronic store of monetary value on a technical device�. used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument" (European Central Bank, 1998). These products could be classified into two broad categories viz., (a) pre-paid stored value card (sometimes called "electronic purse") and (b) pre-paid software based product that uses computer networks such as internet (sometimes referred to as "digital cash" or "network money"). The stored value card scheme typically uses a microprocessor chip embedded in a plastic card while software based scheme typically uses specialised software installed in a personal computer.

The stored value card could be of three types - single-purpose card, closed-system or limited-purpose card and general-purpose or multi-purpose card. The single-purpose card generally with a magnetic chip recording the amount of fund therein is designed to facilitate only one type of transaction e.g., telephone calls, public transportation, laundry, parking facilities etc. Here, the distinguishing point is that the issuer and the service provider (acceptor) are identical for the cards. These cards are expected to substitute coins and currency notes. It is important to note here that the European Central Bank (ECB) has exempted these single-purpose pre-paid cards from the purview of their policy initiatives on e-money because of their smaller denominations as well as limited risk exposure for customers and the financial system as a whole.

The closed-system or the limited-purpose cards are generally used in a small number of well-identified points of sale within a well-identified location such as corporate/university campus. ECB has recommended that these cards be subject to lighter regulations and be issued by credit institutions.

The multi-purpose card on the other can perform variety of functions with several vendors viz., credit card, debit card, stored value card, identification card, repository of personal medical information etc. ECB has underscored especially the importance of these cards with respect to regulatory oversight, restrictions on issuers and their implications for monetary policy. These cards may reduce demand for current accounts in the bank for likely reduction in transaction costs, and prudent portfolio management.

It is important to distinguish here the so-called "access" products e.g., credit card and debit card from e-money. The former typically require a telephone or a personal computer with appropriate software to access the customer account before transferring the value while under e-money, the amount of value is already embedded and it may be increased or reduced without necessarily involving a personal bank account. In a sense, e-money can be construed as an electronic form of traveller's cheques (TCs). In both cases, the user pays for the instrument upfront.

The widespread use of electronic currency in the USA dates back to two decades. It begin when the automated clearinghouse (ACH) was set up by the US Federal Reserve in 1972 to provide the US Treasury and commercial banks with an electronic alternative to check processing. Similar systems emerged in Europe around the same time. Payments made today in nearly all of the deposit currencies in the world's banking systems are handled electronically through a series of interbank computer networks. One of the largest of these networks is CHIPS (Clearing House Interbank Payments System), which is owned and operated by the New York Clearing House. It is used for large-value funds transfers. In 1994, CHIPS and Fedwire combined handled 117.5 million transactions for a total value of US$506.6 trillion.

However the use of electronic transfers for settlement of money transactions by individual consumers has emerged only recently due to widespread advancement in information and tele-communication technologies, which brought about global interaction available at vastly reduced costs. As a result, we are now witnessing the early stages of development of the digital economy. Indeed, private citizens have become accustomed to using various forms of digital money, like stored-value cards, debit cards, credit cards, and ATM cards. However, the advent of networked society has opened up a whole new venue--digital cash. Digital or electronic cash is the logical but revolutionary next step in the history of money.

Camp, Sirbu, et al in their work "Token & Notational Money in Electronic Commerce") describe these minimal requirements as atomicity, consistency, isolation, and durability.

1. Atomicity
   Either a transaction occurs completely or it does not occur at all. For example, consider what happens when I transfer funds from a savings account to a checking account. Either my checking account is credited and my savings account is debited or neither account balance changes.

2. Consistency
   All relevant parties must agree on critical facts of the exchange. For example, if I buy a good for three dollars, the merchant and I should both agree on the amount of the purchase. After the purchase is completed, we must agree on that fact as well.

3. Isolation
   Transactions should not interfere with each other, and the result of a set of overlapping transactions must be equivalent to some sequence of those transactions executed in non-concurrent serial order.

4. Durability
   Even if my computer or the merchant's computer crashes, we should be able to recover to the last consistent state. For example, money that was available to a computer before it crashed should not disappear when the machine reboots.

No less important is full-proof security. There should not be the remotest scope for hackers to tamper online transactions in transit, on receipt, or in storage. In other words, hackers should not be able to break in to a storage site and damage or change the data. Nor should they be allowed to forge or falsify transactions. Finally, counterfeiting must be prevented at all costs--in the electronic medium, being able to make an infinite number of copies is easy; hence, even a single case of counterfeiting could bring down the entire digital cash system. Security concerns are probably at the forefront of the public mindset. Before digital cash can gain wide acceptance, it must gain and keep the public trust.

Secure transactions using strong encryption Computer networks are essentially public in their scope of operation because the information transmitted over them can be accessed anywhere between the points of origination and destination. Even private computer networks are not immune to wiretapping and surveillance by determined infiltrators. Therefore, if the transmitted information is of a sensitive nature (e.g., financial data), then it needs to be protected so that only those authorized to read it may do so. The science of cryptography, which is the science of keeping digital data secure, makes this possible. Encryption is the process of scrambling data into ciphers or code so that it can only be unscrambled (decrypted) by individuals who have the key essential to accomplish this task

We will now consider specific instances of digital cash/e-money as they emerged in the commercial world

Digital cash has been pioneered by DigiCash. Its founder, David Chaum, is an expert in financial cryptography and is the inventor of more than half a dozen cryptographic processes covered by US Patents. DigiCash has created and markets a software program called "ecash", which basically creates DBCs that represent units of various currencies.

Currently, US Dollars, Finnish Markkas and Australian Dollars circulate on the Internet using the ecash system, with several other currencies to be introduced in the near future. Although DigiCash is the only company with a working product that is now available for use, there are other companies and independent developers who are working on digital cash systems as well.

Digital cash is ideal for what is known as micropayments, or transactions of less than US$10 in value. Micropayments are generally not economical with credit cards or electronic fund transfers, primarily because of the high overhead costs in processing those transactions. Digital cash makes small payments of just a few cents possible and profitable for both the merchant receiving the payment and the issuer of the digital cash.

One of the interesting features of digital cash is that it allows for relative degrees of privacy in monetary transactions. DigiCash's ecash only provides privacy (anonymity) for the payer in the transaction. The payee reveals himself when he verifies the authenticity of the ecash with the issuer. Other types of digital cash involve anonymity for both parties or neither party. Ideally, individuals will be able to choose between these different systems to decide the level of privacy they wish to maintain in any transaction

A smartcard resembles a credit card except that it has a microchip embedded within it, which allows the smartcard to store information and sometimes to even perform simple calculations. Common smartcard chips typically holds about 8,000 bytes (characters) of information, which enables the smartcard to perform a variety of functions such as identification, storing bank account information and holding digital cash.

A number of smartcards are on the market today, and these are used in a wide range of applications. Mondex has received a lot of recognition in the financial press, and several banks have already conducted trials with its smartcard. Wells Fargo & Co., a major California bank based in San Francisco, will issue Mondex smartcards to all of its online banking customers in 1998, a number which could reach into the hundreds of thousands. Because MasterCard International holds a 51% stake in Mondex, it could become the de facto international standard for bank-issued smartcards.

An economy like India where cash transactions are very high, could benefit from using e-money through cost savings from printing and minting of smaller denomination notes and coins and eliminating the cost of handling, storing, transporting and insuring currency. These should also improve operational efficiency of the financial sector as also extension of banking to the urban poor and rural communities besides facilitating e-governance initiatives of governments. However, such benefits should be weighed against the need to build up the costly infrastructure to operate nationwide cashless retail payment system.

In India RBI has defined E-money as an electronic store of monetary value on a technical device. RBI set-up a working group to examine the use of e-money in India.Chaired by Mr Zarir Cama, CEO, HSBC, India, the group has said that issuance of e-money on a credit basis should be strictly regulated and closely monitored. With regard to the status of issuers of e-money, the group has said only banks should be allowed to issue multi-purpose e-money. However, single purpose and limited purpose e-money should be allowed to be issued by an entity including banks.

With a population of one billion, India generates personal consumption expenditure of $225 billion. Due to the cash intensive and credit-averse nature of Indian society, 90 per cent of this is in cash, nine per cent in cheques and one per cent electronically on credit/debit cards! However, recently with globalisation and introduction to better technology, Indian consumers have revealed a desire for alternatives to cash and cheques. Having become more sophisticated and convenience oriented, they have shown a preference for electronic transactions without having printed bank books.

The government has also strengthened regulatory and policy support to provide impetus for creating infrastructure and spurring usage. Owing to this development, use of electronic money took an upswing in the economy, which has shown a growth rate of 33 per cent.
[Source - Mr.Girish Rangan - MD, Venture Infotek)]

"Our Bank has revolutionized consumer payments by launching a Smart Card under the name "e-Purse". Pilot launch was made at Pune on 07.11.2001 by the hands of our General Manager Mrs.T.A. D'Mello. The card has been launched in association with M/s. Venture Infotek Limited who are providing an integrated end-end solution for this activity.

The e-Purse is a chip embedded card and is essentially a deposit access product. It is a stored value card that will enable holders to conduct cash-free transactions at merchant locations. The account holders of our Bank will be able to "load" value into these cards either by deposit of cash or through debit to their accounts with our branches. On purchase of goods, the value gets reduced by virtue of an authorization from the card holder through a PIN. The card can be used repeatedly and can be re-loaded any number of times with amounts ranging from Rs.100/- to Rs.15000/-. At present there is no fee for issuing the card but at a later stage we may introduce a small charge to recover our costs.

Numerous small value transactions can be undertaken through the e-Purse and all these transactions can be tracked. The user will no longer have to carry cash. The card will be issued to any account holder of the Bank since no credit risk is involved.
[Source: Website of Bank of India.

With the rapid evolution and revolution of technology, electronic transactions have now gone beyond the payment domain. The same infrastructure that processed payment transactions electronically, is now being used for several other consumer-centric initiatives. A case in mind is that of BPCL Petro Card, which is a phenomenal success story today, with over 6,00,000 customers already under the belt and growing at the rate of 40,000 per month.

The Petro Card is fundamentally an e-purse-cum-loyalty card, that allows customers to pay for fuel on this e-purse, a stored value card, and earn loyalty points simultaneously. This programme is also being run on the same infrastructure that is used for payment transactions!