Dominic has a post with a few links to payment systems sites.

One of them from IBM’s DeveloperWorks is Show me the Money which is a great introduction to the to how current payment systems work. It covers some of the newer methods but is still very credit card centric.

Credit Cards have shown to be an easy way for people to make payments over the internet. It is particularly popular in the US and Europe. However it has many fundemental flaws which many people have covered before. First of all there is NO security with credit card payments.

When people say that they have secure payments, it really is a lie. They have a secure connection (even that is up for argument). What happens after you’ve entered the number is really pure magic to the end user but pure horror to anyone with a slight knowledge of security.

Many people have tried to introduce alternatives to Credit Cards. Search google for digicash for an excellent example.

The excuse has been that consumers dont want to use other systems than Credit Cards has become nothing more than an oft repeated self fullfilling profecy. The real issue is that the banks know that they will loose out if they loose control of the payments industry. The banking world can adapt if they have to, they just dont want to.

It is common knowledge that DigiCash went down because they kept trying to pursuade integration with banks. They were waiting and waiting and waiting until they finally died (I think they died twice by now???). What would have happened for example if they would have followed PayPal’s example and focused on the needs of the end users and merchants as opposed to the needs of the financial institutions.

Payment processing systems (or clearing systems) currently consist of large industry controlled networks (VISA, M/C, SWIFT) who look out for their member institutions interests. They have insecure systems that use decades old technology.

The security of payments are built up on legalistic “risk management” practices where member banks have to “vet” their clients risk worthyness. A good example of this is that to become a credit card merchant or even obtain a visa debit card you need a credit check. This credit check ensures that if there is a problem within their system technically you are good for the money. In other words they need to verify your ability to pay if something goes wrong with their network.

Example 1. Merchant Account holder receives payments from stolen credit cards. How is this possible? Because the credit card system is fundamentally insecure. So the owner of the card complains (and rightly so). What happens is that the merchants bank will immediately debit the funds from the merchants account and charge a chargeback fee to the merchant. Which is interesting as the whole problem was due to lack of proper authentication in the network in the first place.

Example 2. Debit card holder Bob goes travelling to another country. He thinks he has $250 in his account but isnt sure. So he pays for something in a shop but isnt quite good at calculating, so he goes to an ATM to verify his account balance. As he is abroad he (most likely) cant check his account balance, so he thinks, lets take out $200 cash to be sure. The atm networks arent synchronized with the credit card networks. Some of them might use store and forward processing of transactions. The end result anyway was that when he comes home he has a letter from the bank saying that he is overdrawn $25, because the thing he bought in the shop actually cost $40 more than he thought. Thus he gets charged overdraft fees for trusting the currency of the information provided by his bank.

The key to all of these things is to forget about the banks for the time being. There are individual banks who are future thinking, but most major US or European once arent.

The moral of all of this is that new secure payment systems have been possible for years. Financial Institutions and their networks have intentionally been stalling them. So the key to create an new working payment system. Create one with your own rules such as PayPal did.