Dérick Swart
BA LLB (Stell)
Hofmeyr Inc. Attorneys, Stellenbosch
Introduction | Overview of South African online payment infrastructure | The law of payment | Online payment systems based on electronic funds transfer principles | Electronic money | “True” electronic money | Conclusion | Author biography
1. Introduction
The primary function of money is to serve as a medium of exchange in order to avoid the time and effort that would otherwise have to be expended in the process of exchanging goods and services directly.1 To serve as a medium of exchange, a commodity or entity must be one that is generally accepted when offered in payment for goods and services.
 
Commodities with intrinsic value, such as cattle or precious metals, were historically accepted as payment for goods and services as they were in general demand because of their usefulness or scarcity value. The 20th century has seen the movement away from these forms of commodity money with intrinsic value to paper money, which derives its acceptability as money in the market place solely from the fact that it has the backing of the law, which decrees that it must be accepted as legal tender when offered in payment of a debt.2
 
In the modern economy paper money has largely given way to bank money, i.e. deposits held with deposit-taking institutions which can be used to pay for goods or services drawn on or issued against these deposits.3 The ever-increasing volume of paperwork incidental to banking operations involving bank money necessitated the development of electronic payment systems to facilitate the expansion and speeding up of customers’ access to their accounts and the making of electronic payments.4

Freeing the transfer of monetary value from physical constraints led the way for the evolution of a number of payment systems that make use of electronic techniques, and in particular the Internet, as a means of transferring monetary value.5 The rapid expansion of the Internet, and the associated growth electronic commerce has experienced in recent years, led to the development of electronic payment systems to support the growing commercial activities on the Internet.6

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Crede Electronic Commerce and the Banking Industry: The Requirement and Opportunities for New Payment Systems Using the Internet (1995) at http://www.ascusc.org/jcmc/vol1/issue3/crede.html

Understanding these payment systems begins with an understanding of the basics of money, in particular how money can be represented and transferred.7 Money, as a general medium of exchange, can broadly be represented either by way of token or notationally.8 A token is a physical object that has no significant intrinsic value and is used to represent money, such as paper (banknotes) or metal (coins).9 Money can also be represented notationally, namely as a number or entry in a record. The notational transfer of funds means that banks can reconcile the funds exchanged between them by electronic means, instead of physically transferring the large sums of money that pass between them each day.10

Payments in lieu of money can therefore be made by the exchange of tokens or the issuing of an instruction to a third party instructing it to pay.11 Both of these methods of payment are available online and are discussed in context below.12
2. Overview of South African online payment infrastructure
Online payment systems are in most instances applications of existing payment systems that function within the boundaries of the traditional banking environment, but use novel methods to initiate payment instructions and ultimately the transfer of value. While the Internet may therefore serve as a means of issuing these payment instructions, actual payment in most instances is made through existing payment infrastructures. Even the limited number of payment systems that have the ability to function outside the confines of the normal banking system may at some stage enter it, for instance where the holder of such value elects to deposit it at a financial institution.

The term “payment system” refers to a set of arrangements designated for the transfer of value.13 Payment systems may vary from those that facilitate small-value fund transfers used by businesses and consumers, to large-value interbank fund transfers that underpin national and international money and capital markets.14

Group of Ten Electronic Money: Consumer protection, law enforcement, supervisory and cross-border issues (1997) at
http://www.oecd.org/fatf/index.htm

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The National Payment System (NPS) is the collective of all payment systems that operate in South Africa, thereby encompassing the total payment process, including “all the systems, mechanisms, institutions, agreements, procedures, rules, laws, etc. that come into play from the moment an end-user issues an instruction to pay another person or a business, through to the final settlement between banks at the SA Reserve Bank.”15 The main function of the national payment system is thus to enable transacting parties to effect payment through the transfer of monetary value.

Get the National Payment System page on the Reserve Bank web site at http://www.resbank.co.za/NPS/nps.html

The transfer of monetary value in the national payment system generally occurs through the issuing of a payment instruction to a financial institution, instructing it to transfer funds or make a payment.16 Once the financial institution has received and accepted the payment instruction issued to it through a particular system, the exchange of payment instructions between the banks occur, a process known as clearing.17 Unless the paying and beneficiary banks are the same, interbank settlement must take place.18 Interbank settlement occurs when the participating banks post entries to their respective accounts held at the South African Reserve Bank, resulting in a final and irrevocable settlement of the account involved.19

In the South African context the main purpose of the National Payment System Act20 is to provide for the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in South Africa.21 The South African Reserve Bank is assigned a supervisory role in this regard, with particular reference to the regulation of the activities of participants to the payment system and other role-players within the payment systems in general, as well as the clearing and settlement system.22 This is in accordance with the statutory responsibilities laid down by section 10(1)(c)(i) of the South African Reserve Bank Act.23 These responsibilities include the taking of action to limit systemic or other risks which may threaten the stability or confidence in the national payment system, to provide consumers with adequate protection from unfair practices, fraud and financial loss, to ensure the ability to conduct monetary policy and to assist law enforcement authorities in the prevention of criminal activities.

Get the National Payment System Act at
http://www.polity.org.za/govdocs/legislation/1998/index.html

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The Society for World-wide Interbank Financial Telecommunications (SWIFT) connects national payment systems to an international network, enabling interbank payments and ultimately electronic funds transfers between customers’ accounts in different countries. The SWIFT system comprises a computerised telecommunications network that operates a global data processing system for transmitting financial messages over dedicated lines, providing a secure message service through the use of encryption.24 SWIFT therefore provides a secure communication system for the conveyance of payment orders and other messages among member banks.25 When international payment instructions are issued, payment instructions are routed via SWIFT to the beneficiary bank.
3. The law of payment
The discharge of monetary obligations can be effected by means of payment. Innes CJ stated in Harrismith Board of Executors v Odendaal that:26
“Payment is the delivery of what is owed by a person competent to deliver to a person competent to receive. And when made it operates to discharge the obligation of the debtor.”
Payment in the legal sense therefore means any act offered and accepted in performance of a monetary obligation.27 As such, payment concerns a bilateral act requiring in most instances the co-operation of both the debtor and creditor,28 having the effect of releasing the debtor from the obligation.29
 
The ultimate goal of all payment systems is to effect payment in a legally effective manner. The following section investigates the basic principles of payment relevant in the context of online payment systems.
3.1 The proper law of contract
The law of contract in different jurisdictions can impact significantly on the question of the discharge and interpretation of obligations. In the context of international payments, often facilitated by online payment systems, it is therefore of paramount importance to be able to determine the applicable system of law governing a contract, referred to as the proper law of contract.30

Courts have held on numerous occasions that the parties to a contract can decide either expressly or tacitly which system of law is to govern the legal relationship between them, such a term being valid and enforceable.31 In the absence of any express or tacit agreement, the court will take account of the surrounding circumstances to ascertain whether a choice of law can be inferred, in the absence of which the court will assign a proper system of law.32 The rule generally followed by the courts in assigning the proper law is that the law of the place of the contract (the lex loci contractus) governs the nature, obligations and the interpretation of the contract, except where performance is to take place elsewhere, in which instance the law of the latter place is generally considered applicable.33 Where performance must therefore take place in a country other than that in which the contract was entered into, the law of the country where performance is to take place will generally regulate the manner in which performance is to be made.34

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Despite the above-mentioned principle, the intricacies of private international law may have a significant impact on the interpretation of a particular contract as a whole, especially on the determination of the rights and duties of the parties with regard to the substance of the obligations.35
3.2 The manner of payment
Payment must generally be in the form of legal tender. Section 17 of the South African Reserve Bank Act 90 of 1989 defines the concept of legal tender, the significance of which is that an offer for payment made in legal tender in the absence of anything to the contrary must be accepted. Consequently, if something other than legal tender is offered as payment in discharge of a debt, the creditor can strictly speaking refuse to accept the payment and insist on payment in legal tender.
 
The law however recognises that valid payment of a debt sounding in money can be effected by means other than payment in legal tender, notably through the transfer of credit. So widespread are credit transfer payment practices that it has become almost a fiction to base payment by credit transfer on the implied agreement or waiver of the right to insist on legal tender.36 In this regard courts have regarded the insistence by a creditor to be paid large amounts in legal tender as vexatious.37 The courts will readily accept that parties agreed by implication to payment by means other than legal tender. This was illustrated in Esterhuyse v Selection Cartage (Pty) Ltd38 in the context of payment by way of a cheque where Trollip J summarised the relevant principles as follows:
“In contract, where the debtor is obliged to pay in money to the creditor, the medium of payment must be that which the contract expressly or impliedly specifies, as determined by reference to its terms and such evidence of custom, usage and the surrounding circumstances as is admissible to aid in its interpretation.”

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In an ordinary commercial contract, in the absence of anything to the contrary, only some slight indication or evidence indicating that payment could be made by means of cheque would suffice, because of the fact that it is such a commonly used medium of payment in such transactions.39 It is submitted that the above can be made applicable equally to other methods of payment.
 
In conclusion it can therefore be stated that payment by means other than legal tender can be effective performance of a monetary obligation where it is expressly or impliedly provided for in a contract, or justified by way of commercial custom.
3.3 The moment of payment
National legal systems can differ fundamentally on the question as to when payment is considered to be final. The moment of payment in the current context becomes relevant in a limited number of circumstances, for example where death, winding-up, liquidation or bankruptcy of the customer terminates the bank’s authority to pay.40 No judgments have been reported on this issue in South African law and many foreign jurisdictions also experience uncertainty in this regard.41
 
The effect of the UNCITRAL Legal Guide is to make the finality of a funds transfer dependent on a number of factors. Different aspects of the electronic funds transfer may become final at different points in time.42 Determining the finality of payment with reference to different aspects of the electronic funds transfer can lead to uncertainty, particularly if payment can be regarded as complete at so many stages.43
 
It is submitted that the conclusion of Lawack in this regard is correct, namely that the common denominator of all theories endeavouring to determine the moment of payment in an electronic funds transfer is the moment when payment becomes irrevocable, making payment effective on the rendering of that final act required in the discharge of a monetary obligation.44
3.4 Conclusion

Legal systems may differ significantly on the principles of payment, in particular relating to the discharge and interpretation of obligations. The parties to a contract must therefore inform themselves of the implications of the law applicable to their contract and where possible stipulate how payment is to take place and which system of law should govern the contract.

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4. Online payment systems based on electronic funds transfer principles
The notational transfer of money and the associated movement of funds from one account to another by means of electronically communicated payment instructions is referred to as electronic funds transfer (EFT).45 The electronic transfer of funds can be effected by electronic payment systems, which encompass both payments by way of systems making use solely of electronic techniques (“pure” electronic funds transfers) and those instances where electronic payment systems have an influence in paper-based payment systems. The legal rules relating to electronic fund transfers determine the particular legal implications of payment, such as when payment is made, the time and proof of payment.46

The precise definition of an “electronic fund transfer” is problematic, as different jurisdictions tend to use different definitions of the term.47 Electronic funds transfers are however generally defined as any transfer of funds in which electronic techniques replace one or more of the steps in the process that were previously done by paper-based systems.48 The following basic steps are usually present when payment by means of an electronic funds transfer is made:49

  • The payment instruction is given by the person who wishes to effect or accept payment to the financial institution holding the funds.
  • The financial institution transfers the funds to the account of the beneficiary.

The relationship between the financial institution and customer in an electronic funds transfer is generally founded on mandate.50 The naturalia of a contract may however be amended through the agreement of the parties to a contract or by way of legislation.51 The naturalia of the contract of mandate provides that the financial institution (the mandatory) must exercise reasonable care and be honest, diligent and bona fide in the fulfilment of its responsibilities in terms of the contract. The requirement to exercise reasonable care however also extends to the customer (the mandator), who must avoid actions detrimental to the operation of the contract, particularly in the current context to avoid unauthorised payments where possible.52

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The absence of legislation specifically pertaining to electronic fund transfers has led to some uncertainty as to the legal relationship between parties to such a contract. Various foreign jurisdictions have enacted legislation in this regard to address some of the thorny issues associated with these contracts, in particular with regard to the allocation of risk in electronic payment systems.
 
In the United States of America the Uniform Commercial Code (UCC) was enacted to provide a uniform code of law for commercial purposes. Article 4A of the UCC regulates the transfer of credit. The article draws a distinction between erroneous order and erroneous execution. In first instance the risk lies with the customer, in the second instance the financial institution bears risk of liability, unless it can prove an objective inability to foresee and unless error is reported by the customer within reasonable time.53
 
The Electronic Fund Transfers Act (EFTA) was enacted to protect parties to an electronic funds transfer. Paragraph 909 of the Act imposes liability on the customer for unauthorised use of an EFT card in certain circumstances. The amount to which the customer can be held liable for the unauthorised transfer is dependent on when notice of the unauthorised transfer was given to the financial institution.54
 
Under English law section 83 of the Consumer Credit Act 1974 imposes no liability against the customer by the bank except in the case of misuse, for example in the case where the customer fails to keep his/her PIN secure. Section 84 also limits the liability of the customer for unauthorised use, again dependent on notice being given to the bank.55
 
The Unfair Contract Terms Act of 1977 further serves to limit the extent to which parties to an electronic funds transfer can unfairly and unreasonably regulate the question of liability by way of contract.
 
The legislative liability structures discussed above serve to regulate the legal position between the parties to an electronic funds transfer and their functions are often complementary to the naturalia of the contract of mandate.56 South Africa has no similar legislative liability structures in place, but these issues will become relevant in international electronic funds transfers involving jurisdictions that have these structures in place.
4.1 Payment cards

The institutional framework already established by payment cards, and the fact that many of the larger card issuers are internationally recognised, make payment cards particularly well suited for international trading on the Internet.57

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4.1.1 Payment cards used for online payment
Three broad categories of payment cards can be distinguished for purposes of online payment, namely credit, debit and charge cards.
 

Payment by credit card entails the buyer instructing its bank via a payment order to transfer funds to the seller’s bank for the credit of the seller.58 The debit on the account of the seller is paid in accordance with the terms of the contract with the issuer of the card. Two types of credit cards can be distinguished, namely bilateral and tripartite credit cards. Bilateral credit cards are issued by retailers and may only be used by the clients of the particular retailer up to an agreed limit.59 Tripartite credit cards by contrast are issued by institutions specialising in the issuing of such credit cards and may be used to make payment to all registered merchants of the particular issuing institution.60 In the context of online payments the most frequently used method of payment is by way of credit card. The legal relationship governing the tripartite credit card is examined in more detail below.

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When payment is made by debit card, the seller instructs its bank via a payment order to collect funds for it by debiting the buyer’s bank account at the buyer’s bank.61 The issuer then proceeds to reimburse itself by debiting the account against which the card was issued. The legal relationships to a debit card are much the same as to a credit card, the major difference being that the debit cardholder must keep an account that is linked to the card in credit.
 
Payment by way of a charge card means that the outstanding balance of purchases must be paid after the statement date, either in full or in accordance with the terms of the contract. The function of this card is to facilitate payment and no revolving credit is generally granted.62
 
Payment for goods or services over the Internet can readily be accomplished by submitting the details of a payment card to the merchant, who in turn forwards the payment information to the issuer of the particular card to receive payment.
 
4.1.2 The legal relationship governing the tripartite credit card
The tripartite contractual framework within which credit card payments take place is established by agreements entered into between the card issuer, the merchant and the cardholder.

First, the issuer and the merchant enter into a franchise agreement. In terms of this agreement the issuer undertakes to make payment to the merchant when the issuer’s card is presented for the payment of goods or services. The merchant thus agrees to accept payment by way of the issuer’s credit card and furthermore to pay a commission to the issuer on each transaction.

Second, the issuer and the cardholder proceed to enter into a bearer agreement. The purpose of this agreement is to regulate the cardholder’s use of the card and in particular the cardholder’s obligation to repay the issuer for purchases made and to address the issue of finance charges. The bearer agreement further provides that the issuer is entitled to debit the cardholder’s account with the amount of those payments it is validly instructed to make.63 The underlying principle is that the issuer may only debit the account of the cardholder with legitimate transactions.

It is generally an express term of the bearer agreement that the cardholder is responsible for the safekeeping and proper use of the card and the associated personal identification number (PIN). Loss or damage resulting from unauthorised payments through the cardholder’s failure to comply with this term of the contract, will have the effect that the cardholder will be liable for any such loss or damage.

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In circumstances where it cannot be said that the actions of the cardholder were intentional or negligent in the disclosure of the PIN, the cardholder cannot be held liable. This is in accordance with the naturalia of the contract of mandate as stated above. Smith states in this regard that the bank would not be in a position to debit such an account even in circumstances where the forgery or fault was undetectable or even where there was no negligence on the part of the issuer.64
 
The third contract is entered into between the cardholder and the merchant every time the card is used in payment for goods or service.
 
4.1.3 Unauthorised payment
Payment by way of payment card over the Internet involves the exchange of sensitive information over a network that is in essence open. The potential risk of fraudsters intercepting messages containing payment information is therefore high where unprotected data is sent.
 
In the context of online payments by way of credit card, the unprotected transmission of credit card details over the Internet may constitute a contravention of the provision of the bearer agreement that the cardholder is responsible for the safekeeping and proper use of the card. It is submitted that the wording of the relevant clause of the contract would determine whether such actions would indeed be in contravention of this term of the contract.65
 
Where a merchant receives fraudulent payment innocently, the validity of the payment will probably depend on the exact terms of the franchise agreement and whether the retailer observed all authentication procedures required under the particular system.66
 
4.1.4 Security
Payment messages transmitted over the Internet can be protected through the use of encryption technology and digital signatures.67 These security mechanisms do however not address all the risks associated with making online payment by way of payment card, in particular relating to the possibility of fraudulent use of the card information by the merchant or its employees. Where payment is effected through a payment instruction, the risk that the message could have been sent fraudulently or amended to replace the intended beneficiary with someone else also remains present.68

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The institution of central registries to facilitate online credit card payment attempts to remove the need for sensitive information to be sent online. Instead the system operator issues an identification number to each registered user which is connected to the user’s card information. When payment is made, no sensitive information is sent over the Internet and the need for protection is greatly reduced.69
 

Example

First Virtual70

Get the First Virtual web site at
http://www.fv.com

First Virtual Holdings operates a prominent registry credit card payment system and transactions through the system are handled via a unique account verifier, obtained on registration and linked to the credit card account of the user. When the user wishes to make a payment, the account identifier is sent to the transacting party and may travel safely through ordinary e-mail channels, as confirmation is later required from the user before the transaction is concluded.

When a user wants to effect a payment by way of the First Virtual system, he/she sends the purchase request and a PIN number to the merchant. Upon receipt the merchant proceeds to send the information to First Virtual, which then requests confirmation of the payment by way of e-mail from the paying party. Upon receiving confirmation, the system sends the payment information through a gateway to the closed financial network for processing.71

Stalder Electronic Money: Preparing the Stage 10 (1997) at http://www.fis.utoronto.ca/ca/~stalder/ htmle-cash1.htm

Although registry credit card payment is effective in minimising security risks, the procedures for verification and confirmation of payment messages by the third party constitute serious disadvantages, in particular relating to the period of time needed to complete the transfer.72

To address this issue and the other difficulties alluded to above, a protocol was developed for conducting secure online transactions, named Secure Electronic Transactions (SET), currently in a pilot phase. SET is a joint initiative by the large card-issuing companies to develop a system whereby the integrity of payment messages can be verified through the use of digital signatures.73

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In essence SET involves special software on the cardholder’s personal computer and the retailer’s network, enabling the transfer of the cardholder’s card details to the relevant card association in encrypted format, through the use of public key cryptography without the retailer being able to decrypt it. The identities of cardholders and retailers are verified by way of digital certificates, issued by the relevant card organisation.74 The effect of a transaction concluded through SET is that the cardholder deals with a merchant that is SET-registered and the merchant knows that it is dealing with a valid cardholder, although it cannot establish the card number.
 
4.1.5 Evaluation
The unrivalled international acceptance of payment cards as a method of online payment and the imminent full-scale implementation of SET will probably see credit cards as the leading online payment method for some time to come.
 
Payment cards are however not considered the ideal online payment system. The main disadvantage of payment cards relates to the requirement for central processing of the payment instruction. In particular this requirement makes payment by way of payment cards unsuitable for low value transactions due to fixed transaction costs and because it prohibits person to person transfers.
 
A further disadvantage relating to the requirement for central processing is the fact that an audit trail is created by each transaction, thereby allowing all payments to be traced. Civil libertarians have commented that the lack of anonymity in this regard could constitute a serious privacy issue if the data collected is used to the detriment of cardholders.
 
The fact that only approximately 10% of people qualify for credit cards, furthermore constitutes a disadvantage, having the effect of barring a substantial number of persons from making online payments in this manner.

When payment is made by payment card on the Internet, it is advisable to read all clauses and small print before submitting credit card details. Many unsuspecting Internet browsers have found themselves to be contractually bound to online contracts they were unaware of. Monthly transaction statements must also be carefully checked to verify the correctness of all payments.

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4.2 Electronic data interchange
Electronic data interchange (EDI) is the computer to computer transmission of business data in a standard format by way of remote data processing, enabling commercial communication and the conclusion of contracts without human intervention.75 The standardised format in which the data is sent is referred to as a transaction set, which contains all the relevant information a traditional paper-based order or invoice contains. Typically an EDI transaction is executed when the computer managing a buyer’s stock automatically generates an order for goods when it detects stock to be low, with the seller’s computer automatically accepting the order and instructing its processing.
 
Although the open network architecture of the Internet was initially not thought to be a suitable method of communication for EDI applications, smaller businesses started to use the Internet as a medium of communication for conducting EDI with success.76 This in turn led to the development of central network providers called Value Added Network Services (VANS) specifically tailored to facilitate EDI communications over the Internet. The transnationality of the Internet proved to be an ideal communication network for conducting EDI both nationally and across international boundaries.
 
4.2.1 Financial EDI
The online application of EDI coupled with an associated electronic transfer of funds is referred to as “financial EDI”.77 Financial EDI consists of electronically communicated payment orders with associated remittance information and typically involves two components, namely the payment of funds and the delivery of remittance information associated with the payment.78 In the instance given above, the seller’s computer would therefore proceed to effect a transfer of funds by way of payment instruction for the goods bought. Recent advances in encryption technology have meant that the authenticity and integrity of information communicated in a financial EDI transaction can be effectively protected, thus making both the technology and the legal enforceability of such transactions possible.79
 
VANS have the added advantage of providing automatic acknowledgements of receipt, that the message was in proper format or messages regarding the formation of the contract (for example an acceptance or counteroffer).80
 

4.2.2 The legal relationship between the parties to financial EDI
Although online EDI can be conducted directly between the parties, it is more often the case with Internet-based EDI that parties choose to make use of the intervention of intermediaries, such as third-party certifiers or VANS. In most instances VANS store message sets in an electronic mailbox, waiting for the intended receiver to retrieve them.81

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Parties intent on making use of EDI first enter into a trading partner agreement (TPA) that provides the structure for the conclusion of contracts by way of EDI.82 The most important issues to be addressed by the TPA are the terms of communication and trade. The contract will usually require the parties to the contract to conform to all the technical procedures the network provider may prescribe.83 The network provider and the users of the EDI network thereafter enter into an agreement that regulates their legal position.
 
Many legal uncertainties pertaining to EDI can be avoided if the parties to the contract expressly address these issues. When dealing with the terms and conditions for communications, the parties must therefore deal specifically with the interpretation of the concepts of “writing” and “signing”, as these are bound to come to bear in the conclusion of the contract by way of EDI. Due to the possibility of price fluctuations and changes in exchange rates, the parties to a TPA must further determine precisely when a contract will become effective.84 For both evidentiary and tax purposes EDI systems need to be adequately controlled to ensure accurate record keeping and retention.85

To ensure the enforceability of EDI contracts, various organisations have drafted standard form agreements, such as the Uniform Rules of Conduct for the Interchange of Trade Data by Teletransmission by the International Chamber of Commerce, the Model Interchange Agreement adopted by the European Commission and the model EDI Trading Partner Agreement by the American Bar Association.86

Heinrich Harmonised Global Interchange – UNCITRAL’s Draft Model Law for Electronic Data Interchange at http://webjcli.ncl.ac.uk/articles3/hein3.html

While these standard form agreements were not drafted with Internet application in mind, it is submitted that they would be capable of adaptation with relative ease, as in most instances they were drafted with international EDI in mind.87 The terms of EDI contracts should clearly set out the legal position of the parties to such an agreement; consequently the following issues should be addressed:88

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  • technical standards applicable to messages
  • the operation and methods of transmission of messages
  • acknowledgements of receipt of messages
  • message processing
  • message security
  • message recording and storage
  • electronic transactions and the conclusion of contracts
  • the admissibility and probative value of messages
  • the protection of data
  • the applicable law
  • the resolution of disputes
The legal obligations of third parties should also be clearly stipulated in accordance with the above, including to ensure the conveyance of messages in the correct format and protocol, safeguarding against corruption of messages, ensuring that messages are conveyed to the recipient and preserving the confidentiality and security of messages.89
 
It follows that any formalities prescribed by law, in particular relating to the requirement for “writing”, must be complied with and may in certain circumstances prevent the use of EDI. When contracting by way of international EDI, the possibility of such requirements and their implications in foreign jurisdictions must be borne in mind.
 
4.2.3 Evaluation
Paperless exchange of purchase orders and payments holds the distinct advantage of quicker delivery times and response to market demand.90 EDI thus has the potential to be a powerful business tool.

World-wide message standards for EDI are currently under development and are constantly expanded, allowing more flexibility in EDI communications.91 In spite of this, wide use and acceptance of EDI in South Africa is still some way off.

Sim The Legal Problems of Electronic Data Interchange (1994) at http://www.mbnet.mb.ca/~psim/edit.html
 
Heinrich Harmonised Global Interchange – UNCITRAL’s Draft Model Law for Electronic Data Interchange at http://webjcli.ncl.ac.uk/articles3/hein3.html

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4.3 Internet banking
Internet banking offers users the possibility of making electronic payments via the Internet. Almost all major commercial banks nowadays offer their customers the facility to conduct banking transactions via the Internet, including the accessing of account and balance information, the effecting of fund transfers between accounts and the setting up of stop orders.
 
Various legal issues are relevant to Internet banking, including the problem of authentication, electronic formation of contracts and issues related to the creation and protection of content on the financial institution’s web site.92
 
Payment is effected by way of a payment instruction issued by the customer to the financial institution through the system. The authentication of the user in the majority of systems is by way of encrypted passwords.93 In most instances Internet banking is conducted through an encryption protocol named Secure Socket Layer (SSL), offering 128-bit encryption that protects data travelling between the user and the financial institution.94
 
4.3.1 The legal relationship between the customer and the financial institution
Internet banking and the risks involved are extensively regulated by the terms and conditions of the contract that is entered into between the financial institution and the customer in terms of which the facility is offered.95
 
The contract generally provides for the authorisation and security methods to be used to verify the identity of the customer. The use of a personal identification number (PIN) is common practice, but other supplementary methods of authentication may be stipulated in the contract. The customer has a duty to keep his/her PIN secret and the financial institution will not accept liability for any loss or damage if the customer is negligent in this regard. Loss or damage on the part of the customer resultant from culpable mistake or internal fraud on the part of the financial institution is generally excluded from the operation of this clause. As such, the customer must take all reasonable precautions to prevent the unauthorised use of the facility or access to his/her account.

In the final instance the contract usually contains a clause stipulating that the facility is used at the customer’s own risk and that the financial institution is not liable for any damage, loss or consequential damage that the customer may suffer as a result of a malfunction in the system or any circumstances not reasonably within the bank’s control. The bank is indemnified from any claim by the customer as a result of the use of the facility, in particular resulting from any wrong, unauthorised or wrongful instructions. It is apparent from the foregoing that the risk for any loss or damage would in most instances, depending on the specific wording of the contract, fall on the customer making use of the facility.

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4.3.2 Evaluation
It is apparent from the above that in most instances the risk for unauthorised payment will lie with the customer. It is however submitted that the flexibility offered by Internet banking, particularly the ability to conduct banking business at any time and through any Internet connection, coupled with relatively low transaction costs, probably outweighs the risks involved. This is especially true in light of the fact that the risk of unauthorised payments can be greatly reduced if PIN numbers are kept secure.
5. Electronic money

Electronic money96 is a relatively new form of electronic payment that has been developed to improve the speed of electronic commerce and to provide a more secure and anonymous form of transacting.97 Electronic money in its most basic form consists of a string of numbers identifying it as money in much the same way as banknotes each have a unique identifying number, thereby constituting a token that resembles value.

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The term “electronic money” is often used to refer to various electronic payment systems that operate in fundamentally different ways. While some of these systems are based on new and innovative principles both in technology and law, others are merely technological advances in existing payment systems.
5.1 Electronic money technology

Electronic money systems can be broadly divided into software- and hardware-based systems. Software-based systems generally operate by means of computer networks and in particular the Internet, providing a mechanism for remote payments. Hardware-based systems in turn are mostly used for small value transfers from person to person through the use of physical forms of storage.98

Bank for International Settlements Implications for the Central Banks of the Development of Electronic Money (1996) at http://www.bis.org/publ/index.htm
5.2 Software-based systems
Software-based systems require users to be host-connected to complete a transfer and do not involve any physical form of storage on the part of the user, consequently these systems are also referred to as “online systems”.
 
As purely software-based systems do not boast the advantages in security that smart cards offer, they are generally dependent upon cryptography to protect the value within the system. Public key cryptography is generally used in these systems to protect the value within the system from tampering or counterfeiting.99
 
Almost all the software-based systems currently in operation use the Internet as a means of communication with the user. Different systems generally require users to gain access to the Internet through specific means. By relying on e-mail, the lowest common denominator of Internet connectivity, some systems manage to be almost universal in application. Other systems require a real-time connection to the Internet in order to verify identity and maintain security.100

While software-based systems generally tend to allow only trusted third party and notational fund transfers, some do in fact have the capability to transfer stored value, for example systems using smart cards combined with computer hardware as a means to store value along with Internet connectivity.101

295

Bank for International Settlements Implications for the Central Banks of the Development of Electronic Money (1996) at http://www.bis.org/publ/index.htm
5.3 Hardware-based systems
In a hardware-based system neither of the parties involved in the transfer need to be host-connected in order to process the transaction, thus removing the requirement for third party authentication, and functioning as an “offline system”.102 Hardware-based systems generally utilise smart cards and private electronic wallets103 to transfer the electronic money from peer-to-peer (i.e. person-to-person).
 
A smart card is a plastic card containing a microprocessor chip with integrated circuits. The uses of smart cards are almost limitless and it is generally perceived to be the ultimate interface device for the mobile digital economy, having the potential for full multifunctionality. Smart cards have computational power to provide greater security, allowing for the effective verification of the cardholder. The tamper-resistant features of smart cards, coupled with periodic changes in cryptographic algorithms and chip design, hold the advantage that operators of hardware-based systems using smart cards can minimise security risks to a large extent.104
5.4 Conclusion
As developers and operators of electronic money systems continually seek to widen the application of their systems, the clear distinction between software- and hardware-based systems has in recent years faded, with the result that some systems nowadays offer the functionality of both systems. Many hardware-based systems are therefore extending their functionality by crossing over into the virtual world of the Internet.
5.5 Criteria for distinguishing between electronic money systems
As stated above, the term “electronic money” is generic, encompassing a multitude of systems, some of which function in fundamentally different ways. The various systems in operation vary from systems providing access to account balances, at the conventional end of the spectrum, to systems that effect free and final transfers of value without the intervention of third parties, at the other end of the spectrum.

The following criteria can be used in order to distinguish between these different systems in operation.105

296

Crawford Is Electronic Money Really Money? (1997) at http://www.mccarthy.ca/pub_docs/docview.asp?file=mt%2Demidx%2Ehtml&language=0

5.5.1 Stored value and access systems
Electronic money systems using “stored value” allow a record of the funds available to the consumer to be stored on an electronic device in the consumer’s possession, making the value held by the device freely transferable.106 The record of funds (or stored value) thus represents value itself.

Access systems on the contrary refer to products or services that access account balances held at financial institutions. These products or services allow users to use electronic means of communication to access otherwise conventional payment systems.
 
5.5.2 Auditable and non-auditable systems
Auditable products operate within the existing banking infrastructure. As such the full cycle of the transaction is auditable, identifying the transacting purse and the issuer, although not necessarily identifying the transacting individual. The value issued within an auditable system can be redeemed only through the intermediation of a financial institution and processing occurs within the national payment system. An auditable system further involves record keeping of all transactions, which are forwarded to a central point in order to facilitate reconciliation. This in effect means that the issuer of a digital currency keeps a record of the units of value issued to a user and reduces the user’s balance on receipt of a report from a merchant that value has been exchanged for services or goods.
 
As the name suggests, no records of transactions are kept within a non-auditable system. While this provides greater privacy for users of the system, critics of these systems have said that the failure to audit a cardholder’s expenses will undermine public confidence in digital cash and reduce the chances of discovering fraud in the system. In a non-auditable system the issuer of the electronic money does not attempt to keep record of outstanding value, at least not for the purposes of adjusting account balances. The value issued through such a system only enters the national payment system when holder of such value elects to deposit it at a financial institution.
 
5.5.3 Voluntary and required redeposit
The distinction between voluntary and required redeposit products or services relates to the distinction between access and stored value products. If a particular system requires users to redeem value by means of a deposit in an account with the issuer directly after the completion of a transaction, the system would merely effect the transfer of sums held on deposit.107

297

5.5.4 Recourse or non-recourse systems
This requirement relates to whether the discharge of monetary obligations is regarded as final or conditional, i.e. requiring clearance (for example when cheques are concerned) or prior arrangement (for example when payment is made by credit card).
 
5.5.5 Single-purpose and multipurpose systems
In contrast to many existing single-purpose prepaid card schemes (such as those offered by telephone companies), electronic money products are intended to be used as a general, multipurpose means of payment.108 When a prepaid card is usable only for a limited number of transactions (as in the case of a telephone card), it does not qualify as a general means of payment.
5.6 Electronic money operating on EFTPOS principles
At the conventional end of the spectrum are electronic money systems functioning on electronic funds transfer at point-of-sale (EFTPOS) or debit/credit card principles in order to effect online payments.109
 
EFTPOS allows retail payments to be effected by the transfer of funds electronically from the accounts of customers to the accounts of retailers.110 Traditional EFTPOS-based systems have the ability to allow for the transmission and acceptance of payment instruction while the customer is still at the payment point.111

The key components of an EFTPOS payment system are the dedicated hardware, magnetic strip or smart cards coupled with a procedure for authentication and an automated message transmission facility.112 In the case of electronic money digital signatures and encryption technology are used in order to verify and authenticate payment messages issued through the system. The merchant is also not required to have dedicated hardware in order to process the payment.113

298

5.6.1 Payment by way of EFTPOS-based electronic money
EFTPOS-based electronic money systems initiate transfers on conventional bank or credit card accounts, similar to EFTPOS-based systems. The transfer of funds by means of this method in actual fact amounts to an instruction given to an institution within the banking system.
 
EFTPOS-based electronic money systems generally operate at the conventional end of the spectrum of electronic money products. As such they provide technological advances in the issuing of payment instructions and access to account balances. In the following section the CyberCash and Open Market systems are investigated.
 

Examples

CyberCash114

Get the CyberCash web site at
http://www.cybercash.com

The focus of CyberCash is on applying available hardware and software to handle payments. CyberCash functions as an escrow account within the existing banking system. When value is transferred, information regarding the transfer is sent to the bank and the account balances are adjusted accordingly. The CyberCash system therefore provides secure means of providing credit card details and thereby effecting payment electronically.115

Customers making use of the system are sent an online invoice detailing purchase information by the merchant. The customer then proceeds to add to this his/her card details and sends back an original invoice along with the additional information to the merchant. Upon receipt the merchant adds its identification information and then sends this information to the CyberCash system, which causes a standard payment instruction to be issued. The transaction is completed when the merchant receives confirmation from the system.116

OpenMarket117

Get the OpenMarket web site at
http://openmarket.com

The OpenMarket system boasts real-time credit card authorisation and facilities to connect with a variety of established payment systems and networks.118 The system also handles the administrative tasks associated with verifying credit card information and setting up accounts.119

299

OpenMarket uses an emerging protocol named Secure Hypertext Transport Protocol (S-HTTP) through which communicated data is protected. The system creates an audit trail of all transactions, allowing the detection of fraud in the system with relative ease.
 

OpenMarket has also developed the technology to operate an electronic exchange that supports multiple currencies and even non-standard payment schemes (such as frequent-flier miles).

Electronic money systems that operate in the middle of the spectrum display some of the characteristics of “true” electronic money, but not all of them.

The accompanying box examines two of these systems.

DigiCash120

Get the DigiCash web site at
http://www.digicash.com

DigiCash was founded by Dr David Chaum, who developed the blind signature that allows numbers to serve as money.121 This technology is employed in the electronic money system operated by DigiCash, named Ecash, and involves the creation of “electronic coins” in the form of digitally signed numbers in exchange for money from the user’s bank account.122 Ecash is designed for secure payments from any personal computer to any other work station, over e-mail or the Internet or any other computer network.123 Public key cryptography, as well as a password only known to the user, is used to protect the digital money. DigiCash already has the capability to combine its network applications with smart card technology for offline or point-of-sale purchases.

The problem with the system is that the note numbers can be copied with relative ease. When the note is spent, it is immediately sent by the recipient to the issuing bank for online verification to ensure that it is not spent again. Receipt is then confirmed to the payer and the note discarded. Account balances are adjusted accordingly.124 Commentators on the system have suggested that keeping a database of the serial numbers of every note/coin ever spent in the system is not a scaleable solution.125

300

The use of electronic coins places the Ecash system towards the middle of the spectrum of electronic money products. The requirements for redeposit and clearing in order to prevent coins being double spent, however, prohibit it from being labelled “true” electronic money.126

Visa Cash127

Get the Visa Cash web site at
http://www.visa.com/pd/cash/main.html

The Visa Cash project is currently undergoing pilot testing, particularly as a means of payment via the Internet. Consumers may buy value that is stored on the chip of a smart card. As is the case with most hardware-based systems, Visa Cash targets small purchase amounts and transactions occur in much the same way as in the physical world, with card balances displayed before and after the transaction.

The system operates with both disposable cards, obtainable through special card dispensing machines, or reloadable smart cards that permit the reloading of value by way of special terminal or ATM. When the card is inserted in the merchant’s terminal, value is deducted from the card and a payment message sent to Visa for settlement.
 
Prospective users need only obtain a Visa-developed application and a smart card reading device that is attached to a PC in order to perform a purchase over the Internet.
 

The disadvantage of the system relates to multifunctionality, as Visa Cash can only be used to make payments for goods or services to participating merchants and is therefore not freely transferable.128
6. “True” electronic money

“True” electronic money can be defined as a medium of exchange comprising computer-readable code which represents stored value, the transfer of which constitutes final payment and which is neither subject to central reconciliation nor required redeposit. “True” electronic money therefore constitutes an electronic mechanism for the transfer of funds without the intervention of a deposit-taking institution or other third party, the process being characterised by the transfer of “value” itself.129 The consumer purchasing such electronic value does so in much the same way as in the case with other prepaid instruments.130

301

Bank for International Settlements Implications for Central Banks of the Development of Electronic Money (1996) at http://www.bis.org/publ/bisp01.pdf
6.1 Legal implications between issuer and user
Two contracts are generally entered into when “true” electronic money is used to effect payment. In the first instance, the user enters into an agreement with the issuer of the stored value. The terms of this agreement govern the use of the stored value as well as the allocation of risk for unauthorised purchases. As “true” electronic money systems are currently operated on a limited scale and as the infrastructure for widespread use is not yet in place in South Africa, the terms and condition by which stored value is issued may vary.
 
It is however submitted that many of the principles applicable to electronic fund transfers in general will also be applicable in the current context. The contract between the issuer of stored value and the user is also based on mandate, supplemented by the terms and conditions of the contract between the parties. It follows that due to the absence of the requirement for central processing the risk for unauthorised payments can be greatly reduced. When payments are however made via the Internet, an additional element of risk is always introduced.
6.2 Unauthorised payments
The majority of smart cards in operation in electronic money systems require a PIN to be entered before allowing access to the stored value. While this provides some protection against unauthorised transactions, the fact that “true” electronic money constitutes “value” itself, has the implication that when a smart card is stolen or lost the value held by it is also lost.

Section 2(1) of the Bills of Exchange Act 34 of 1964 defines a bill of exchange as “an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to a specified person or his order, or to bearer.” From the above it is clear the Act confines bills of exchange to instruments in writing.131 The resultant lack in negotiability of true electronic money may have the effect of leaving the current holder of the value out of pocket if it is discovered that there is a defect in the title somewhere along the chain of ownership.132

302

By similar token, the holder of electronic money may find that he/she is out of pocket for the value of the electronic money if the electronic money is in fact found to be counterfeit. Although operators of electronic money systems claim their systems to be secure, the possible reward for creating counterfeit electronic money provides a large incentive for dishonesty.
6.3 The impact of “true” electronic money on macroeconomic policy
The purchase of “true” electronic money has the effect of removing currency from circulation and replacing it with an electronic equivalent. Currency in circulation represents non-interest-bearing liabilities to the central bank. As such a decline in central bank asset holdings could occur once electronic money replaces cash to a large enough extent, thereby reducing the interest earned on these assets.133 This is the result of the issuance of currencies being taken over to an extent by private minters, and central banks being denied seignorage,134 costing the state a substantial amount of revenue. The large scale purchase of electronic money and the resulting decrease in the availability of currencies may potentially have a negative effect on the national economy. This effect poses a number of questions to central banks world-wide, particularly in relation to the regulatory and operational requirements necessitated by the implications electronic money systems hold for macroeconomic policy.135
 
Many operators of electronic money systems refer to the position in the United States during the 19th century, when banks issued private currencies, to motivate the feasibility of electronic money systems and to justify the feasibility of private currencies.136 Contrary to this view, other commentators have stated the economy of the United States was at that time primitive and often ineffectual and that it would therefore not be a valid argument in favour of the large scale implementation of private currencies.137
 
The issuance of electronic money implies the creation of liabilities on the balance sheet of the issuer. These liabilities are generally payable (or redeemable) at face value to those entities accepting electronic money as payment.138 The problem with any measure not requiring a 1:1 ratio of funds issued in relation to the “float” that underwrites the electronic money in circulation, is that this could amount to credit creation.

In light of the possible impact of the large scale implementation of “true” electronic money in South Africa, the question can be asked who must be allowed to issue electronic money and how will it be regulated?

303

“Deposit” as defined by section 1 of the Banks Act 94 of 1990 makes clear
reference to the repayment of an amount held on balance. This could possibly have implications for the stored value held in the user’s possession, or the stored value in the possession of the merchant after the completion of a transaction. The reference to an amount held on balance however implies that the deposit-taking institution must keep accurate and up-to-date records of the balances held with the particular institution in order to facilitate such repayment. It is therefore only in circumstances where an obligation to repay (or redeem) is entered into, that the provisions of the Banking Act would apply. Although issuers of “true” electronic money are continually under an obligation to redeem any value tendered for currency, the system generally makes no use of records for the purpose of determining the balance of stored value held by the users of the system. The operation of different systems may however have a different result.
 
In 1994 the European Monetary Institute (EMI) recommended that only credit institutions be allowed to issue multipurpose prepaid cards, in an effort to bring operators of electronic money schemes under uniform regulation with these institutions.139

The 1997 Annual report by the EMI proceeded to state minimum requirements that must be fulfilled by issuers of electronic money, as guidelines for the development of effective regulation by member states:

  • The meaning of “electronic money” must be clearly defined and
    distinguished from “single-purpose” and “limited-purpose” prepaid cards.
  • Issuers of electronic money must be subject to prudential supervision.
  • The issuance must be subject to solid and transparent legal arrangements, technical security, protection against criminal abuse, and statistical reporting.
  • A legal requirement must be imposed that electronic money be redeemable at par, implying that issuers must be in a position to convert electronic money into central bank money on request of the holder of the electronic money.
  • The possibility must exist for central banks to impose reserve requirements on all issuers of electronic money, in particular in order for a substantial development of electronic money with a material impact on monetary policy.
  • An insurance scheme for electronic money schemes could be envisaged as a way to protect the public.

304

These requirements are intended to be effective guidelines for regulation of all electronic money systems within the national payment systems of member countries, regardless of the nature of the issuer. The EMI has reiterated that it favours the limitation of the issuance of electronic money to operators of “credit institutions” as defined in Article 1 of the First Banking Co-ordination Directive. The article requires “credit institutions” to “receive deposits or other repayable funds from the public and grant credit from its own account”. In this regard the Bank for International Settlements has stated that:

“... in any country, [regulation] involves a trade-off. If issuance of e-money is limited to banks, the regulatory framework already in place can be extended to cover the new products but the competition and innovation might be more limited. In contrast, if a greater variety of institutions can be issuers, a greater degree of competition could yield commensurate benefits but a number of regulatory issues may be left unresolved.”140

305

It is apparent from the paragraph quoted that the obvious advantage of this approach would be to introduce electronic money systems to existing payment systems and the regulatory framework already in place. The challenge that electronic money presents to governments world-wide is to effectively regulate it within the national economy. The foremost responsibility of the central banks in this endeavour will be to maintain monetary stability of existing currencies within each monetary unit. The South African Reserve Bank foresees the following instances where regulatory adjustment or intervention may be required:141

  • in order to limit systemic risk or other risks which may threaten stability or confidence in the National Payment System
  • to provide consumers with adequate protection from unfair practices, fraud and financial loss
  • to ensure the Central Bank’s ability to conduct monetary policy
  • to assist law enforcement authorities in the prevention of criminal activities
The current view of the South African Reserve Bank on electronic money is indeed consequent to that of other banks, namely that unnecessary legislation must not be imposed on these emerging technologies as it may prohibit it from yielding the tremendous opportunities it is capable of.
 

Example

Mondex142

Get the Mondex web site at
http://www.mondex.com

Mondex is a hardware-based system that primarily uses smart cards as means to load and store value. The system allows value to be loaded onto the smart card by means of automatic teller machines or by special screenphones.143 A personal identification number protects the value held by consumers.144

Each Mondex card has an identifying narrative stored on its chip in the form of a 16-digit personal identification number that is transmitted with every transaction and stored in the log of both parties, along with the date and the amount of the transactions. The narratives are transmitted between the parties when their Mondex phones connect, enabling the transfer of value via ordinary telephone lines and thereby minimising the potential for crimes associated with the physical handling of money.145 Mondex payments over the Internet utilise the resident software on the smart card to make the insecurity of the communication channel irrelevant. This is of particular importance in the context of online payments, as the Mondex system allows users the ability to download value onto smart cards by way of a special smart card reading device linked to computer and software that recognises the card reader.

306

The transfer of value occurs entirely on the local chip and makes the verification of transactions very secure.146 Value transferred between smart cards can only reside in the Mondex cards and cannot remain anywhere else where it can be compromised.
 
It was originally stated that the Mondex system did not record any transactional data. It later became evident that transactional data was in fact gathered from the merchant’s terminal logs.147 Although the system therefore is not anonymous, it is said to be private, the data being recorded for security purposes and not for the purpose of reconciliation.
 
The Originator, an independent legal entity, issues the value within the system, i.e. the float. The system was designed to operate through a hierarchical purse class structure in accordance with which classes of cards are issued for security reasons.148
 
Users of the system are generally not required to redeposit value (merchants are however required to redeposit from time to time for security reasons). Payment by means of Mondex value is final, the transfer of value taking place immediately.
 
Online Mondex payments have the distinct advantage of being suitable and cost effective for low-value transactions. Because the transfer of value never has to enter the NPS, no record of payment over the Internet is generated.149
6.4 Evaluation

Electronic money holds a number of advantages over conventional forms of money and other online payment systems. The ease of issuance and circulation of electronic money, coupled with new advances in encryption technology, are among these. This is largely due to the fact that electronic money requires no physical handling in the sense existing currencies do, and having the distinct advantage of being digital in nature, capable of automatic conversion from other international units of value.150 Because of reduced operating costs, this in turn leads to savings for the banking and business sectors.151

307

“True” electronic money holds the distinct advantage of being able to operate in isolation from the national payment system, requiring no clearing or prior arrangement to effect a transfer. When stored value is therefore lost or stolen, the consumer’s only loss is that of the value stored on the card. In the case of payment cards, compromising card details may lead to other unauthorised payments being made.
 
The prepaid nature of “true” electronic money products and services results in a lower risk of refusal than other payment systems that require central processing of transactions when payment is made.152 The fact that no enquiries as to the creditworthiness of prospective consumers are conducted, widens the application of electronic money beyond that of existing payment systems that function by way of credit card.
 
The question of anonymity of payment has been the subject of considerable debate between those advocating privacy and those stressing law-enforcement issues.
 
The systemic risk introduced into the national payment system necessitates constant monitoring of the effects of electronic money on national monetary areas. It is however submitted that the current impact of electronic money on the national payment system is negligible and does not constitute any immediate threat to monetary stability.
 
Electronic money is currently in its infancy, enjoying very little acceptance from a South African perspective. “True” electronic money, as the counterpart of its physical ancestor, is however commonly perceived to have the potential to become the ideal payment system for commerce on the Internet.
7. Conclusion
The future of electronic commerce is inextricably linked to the development of an online payment mechanism that is reliable, easy to use and secure. An analysis of existing online payment systems indicates that there is still some way to go before the ideal online payment system becomes operational and widely accepted.153

It is likely that payment cards will retain their current dominance as a method of online payment for some time to come. The imminent full-scale implementation of SET may further promote the use of this payment system that up to now has experienced unrivalled international acceptance. The requirement for central processing, the limitation of users and the fixed costs of payment are however serious disadvantages to the system.

308

The advent of “true” electronic money has shown its potential to become the ideal payment system. “True” electronic money is especially suited for low value payment and person to person transfer, which constitute big advantages over systems that require central processing. The success of any electronic money scheme is likely to depend on the way that it is implemented.154 In this regard it has been suggested that electronic money could gain wider acceptance if it is underwritten by a suitably widely recognised and trusted body.155
 
It is apparent that many of the issues addressed in this chapter relate to novel applications for both technology and law. It is submitted that in the light of the almost non-existent regulatory framework of South African law, in which electronic commerce is currently conducted, the development of electronic commerce is hampered. It is further submitted that the true potential of electronic commerce will only be realised once the parties to it can be sure of their legal position.
Author biography  

Dérick Swart matriculated from Outeniqua High School in George in 1992. He studied at the University of Stellenbosch from 1993, completing the degrees BA (Law) and LLB. In 1998 he took up the position of Junior Lecturer in the Department of Private Law at the University of Stellenbosch, while continuing his studies. He is completing his LLM degree under the title “Electronic Money in South African Law” and is the co-author of an article with the same title. Dérick is currently an articled clerk at the Stellenbosch office of Hofmeyr Herbstein Gihwala Cluver & Walker Inc.

309
  1. Cloete The Theory of Money and Banking (1988) 9 (Back)
  2. Ibid
  3. Cloete 10; Frazer Plastic and Electronic Money (1985) 1
  4. Lawack Electronic Payment Systems in South African Law (1997) 1
  5. See in general Meiring The South African Payment System 1996 SA Merc LJ 164; Visser The Evolution of Electronic Payment Systems 1989 SA Merc LJ 189; Fraser 3; Visser Banking in the Computer Age: the allocation of some of the risks arising from the introduction of automated teller machines (1985) 102 SALJ 646 at 648 where the author states that “[p]ayment now becomes essentially the transfer of information” (Back)
  6. Crede Electronic Commerce and the Banking Industry: The Requirement and Opportunities for New Payment Systems Using the Internet (1995) (www.ascusc.org/jcmc/vol1/issue3/ crede.html 05/06/99)
  7. Smedinghoff Online Law (1996) 105
  8. Ibid
  9. Ibid
  10. Reed Electronic Finance Law (1991) 14 (Back)
  11. Smedinghoff 105
  12. It must be noted that the term “online payment system” can refer to any number of systems designed for the transfer of value by electronic means by way of a host-connection. In the context of this chapter, the meaning of the term “online” is however restricted to payment systems that function via the Internet
  13. Lawack 2; see also section 1 sv “payment
    system” of the National Payment System Act 78 of 1998
  14. Group of Ten Electronic Money: Consumer
    protection, law enforcement, supervisory and cross border issues     (1997) (www.oecd.org/fatf/index.htm 08/04/98)
  15. The South African Reserve Bank The South African National Payment System: Framework and Strategy (1995) (www.resbank.co.za/NPS/ frame/chap1.html 03/06/1999) (Back)
  16. See section 1(x) of the National Payment System Act, 78 of 1998
  17. The South African Reserve Bank The South African National Payment System: Framework and Strategy (1995) (www.resbank.co.za/NPS/frame/chap1.html 03/06/1999)
  18. Ibid
  19. Ibid
  20. Act 78 of 1998 (Back)
  21. See Introduction to Act 78 of 1998
  22. See Clause 1 of the Memorandum on the Objects of the National Payment System Bill, 1998
  23. Act 90 of 1989
  24. Lawack 116
  25. Smedinghoff 107 (Back)
  26. 1923 AD 530 539
  27. Lawack 7; Goode Payment Obligations in Commercial and Financial Transactions (1983) 11
  28. De Wet & Van Wyk Kontraktereg en Handelsreg Vol 1 5de uitgawe (1992) 263
  29. Harrismith Board of Executors v Odendaal 1923 AD 530 539
  30. Lawack 18 (Back)
  31. Laconian Maritime Enterprises Ltd v Agromar Lineas Ltd 1986 3 SA 509 (D) 525 F-G; Premier Wire & Steel Co. Ltd v Maersk Line 1969 3 SA 488 (C) 490D; Pretorius v Natal South Sea Investment Trust 1965 3 SA 410 (W) 417 C-E; Standard Bank of South Africa Ltd v Efroiken Newman 1924 AD 171 185
  32. Lawack 19
  33. Lawack 20
  34. Shacklock v Shacklock 1948 2 SA 40 (W) 51
  35. Lawack 21; Hoffman 144­154. (Back)
  36. Mann The Legal Aspect of Money (1992) 77
  37. Mann 78
  38. 1965 (1) SA 360 (W) 361
  39. Ibid
  40. Lawack 108 (Back)
  41. See Lawack 109 for an exposition of foreign law
  42. UNCITRAL Legal Guide 75 para 21; Lawack 108
  43. Lawack 109
  44. At 111. The precise moment when payment becomes irrevocable will depend on the functioning of the particular payment system, discussed in context below
  45. See UNCITRAL Legal Guide 12 paragraph 6 (Back)
  46. Aurora Electronic Banking and the Law (1993) 155
  47. Meiring Electronic Funds Transfers JBL 1998 Vol 6 Part 1 36
  48. Visser The Evolution of Electronic Payment Systems (1989) 1 SA Merc LJ 200. See also UNCITRAL Legal Guide 12 paragraph 6
  49. Meiring 36
  50. Lawack 107 (Back)
  51. Christie The Law of Contract in South Africa 3rd Ed. (1996) 177
  52. De Wet and Van Wyk 387
  53. Article 4A 205(3)(b). See further Lawack 123
  54. See further Lawack 122
  55. Lawack 124 (Back)
  56. Ibid
  57. Smith Internet Law and Regulation (1997) 229
  58. Smedinghoff 106
  59. Lawack 79
  60. Lawack 80 (Back)
  61. Smedinghoff 106
  62. Lawack 79
  63. Smith (1997) 228
  64. At 238­239
  65. Smith (1997) 240 (Back)
  66. Cf. First Sport Ltd v Barclays Bank plc [1993] 1 WLR 1229 where this question was dealt with under English Law
  67. See further chapter 5
  68. Smith (1997) 238
  69. Godin Presenting Digital Cash (1995) 127
  70. www.fv.com (Back)
  71. Stalder Electronic Money: Preparing the Stage 10 (1997) (www.fis.utoronto.ca/ca/~stalder/ htmle-cash1.htm 04/11/1998)
  72. Ibid
  73. See chapter 5
  74. See chapter 5
  75. The United Nations Trade Interchange Directory (UNTDID), TRADE/WP. 4/R.721; Rowland et al. Information Technology Law (1997) 225; Hance Business and Law on the Internet (1996) 164 (Back)
  76. Hance 164
  77. Smedinghoff 109
  78. Ibid
  79. Ibid
  80. Wright op cit (Back)
  81. In circumstances where the receiver makes use of a different VAN than that of the sender, message sets can also be forwarded to the receiver’s VAN through an “interconnect”. Wright op cit
  82. Also referred to as a master or interchange agreement. See Wright; Rowland 229; Sim
  83. Rowland Information Technology Law (1997) 230
  84. Wright op cit
  85. Wright op cit (Back)
  86. See Heinrich Harmonised Global Interchange – UNCITRAL’s Draft Model Law for Electronic Data Interchange (http://webjcli.ncl.ac.uk/articles3/hein3.html 05/06/99); Wright
  87. Hance 164
  88. Ibid
  89. Rowland 228
  90. Sim The Legal Problems of Electronic Data Interchange (1994) (www.mbnet.mb.ca/~psim/ edit.html 05/06/99) (Back)
  91. For example UN/EDIFACT (United Nations/Electronic Data Interchange for Administration, Commerce and Transport)
  92. Heinrich Harmonised Global Interchange – UNCITRAL’s Draft Model Law for Electronic Data Interchange (http://webjcli.ncl.ac.uk/articles3/hein3.html 05/06/99).
  93. Lawack 128
  94. See Chapter 5
  95. In many instances this contract is entered into when the customer of the financial institution completes and submits an online application (Back)
  96. Also known as e-money or digital cash
  97. Birch (1994) Downloading software, Uploading money (www.hyperion.com 04/11/98)
  98. Bank for International Settlements (1996) Implications for the Central Banks of the Development of Electronic Money 1 (www.bis.org/publ/index.htm 03/05/99)
  99. See Chapter 5
  100. Godin 27 (Back)
  101. Bank for International Settlements (1996) Implications for the Central Banks of the Development of Electronic Money 2 (www.bis.org/publ/index.htm 03/05/99)
  102. Matonis Digital Cash and Monetary Freedom (1995) (info.isoc.org/HMP/PAPER/ 136/abst.html 08/04/98)
  103. A palm-sized reader and loader for smart cards; the Mondex and DigiCash electronic money systems have developed readers equipped with infrared protocol technology, allowing the transfer of value through infrared connection.
  104. Committee on Payment and Settlement Systems Security of Electronic Money (1997) (www.fxfxnet.com 08/04/1998)
  105. Crawford Is Electronic Money Really Money? (1997) (www.mccarthy.ca/pub_docs/ docview.asp?file=mt%2Demidx%2Ehtml&language=0 08/04/1998) (Back)
  106. Also referred to as “prepaid” products or services
  107. Crawford Is Electronic Money Really Money? (1997) (www.mccarthy.ca/pub_docs/ docview.asp?file=mt%2Demidx%2Ehtml&language=0 08/04/1998)
  108. Bank for International Settlements (1996) Implications for the Central Banks of the Development of Electronic Money 2 (www.bis.org/publ/index.htm 03/05/99).
  109. Smith (1997) 233
  110. Visser 201 (Back)
  111. Smith (1996) 111
  112. Lawack 113
  113. Smith (1997) 233
  114. www.cybercash.com
  115. Crede (Back)
  116. Crede
  117. www.openmarket.com
  118. Godin 151
  119. Perritt Cyber Payment Infrastructure (1996) 5 (warthog.cc.wm.edu/law/publications/jol/perritt. html 17/06/99)
  120. www.digicash.com (Back)
  121. On blind signatures, see Tanaka Possible Economic Consequences of Digital Cash (1996) (www.Virtualschool/edu/mon/ElectronicProperty/EconomicConseqDigiCash.htm 04/11/1998)
  122. Buck From Electronic Money to Electronic Cash: Payment on the Net (1993) 4
    (www.hyperion.com 01/11/98)
  123. Godin 104
  124. Buck 4
  125. Stalder Electronic Money: Preparing the Stage (1997) 13 (www.fis.utoronto.ca/ca/ ~stalder/htmle-cash1.htm 04/11/1998) (Back)
  126. Smith (1997) 237
  127. www.visa.com/pd/cash/main.html
  128. Smith (1997) 238
  129. With “true” electronic money, intercepting a message is an outright theft of property, not just information; Center for Research in Electronic Commerce, University of Texas Electronic Commerce FAQ (1998) (www.cism.bus.utexas.edu/resources/ecfaq/ecfaq3.html 08/04/98); United States Dept of Treasury (1997) Money in Cyberspace (www.treas.gov/fincen/cybpage.html 08/04/98)
  130. Bank for International Settlements Implications for Central Banks of the Development of Electronic Money (1996) 2 (www.bis.org/publ/bisp01.pdf 04/11/98) (Back)
  131. Cf. Smith (1997) 240 under English Law
  132. Ibid
  133. See Bank for International Settlements Implications for Central Banks of the Development of Electronic Money (1996) 6 (www.bis.org/publ/bisp01.pdf 04/11/98). See 7­9 for a discussion of the possible impact of electronic money on central banks. See also Greenspan (1996) Regulating electronic money (www.cato.org/ pubs/policy_report/cpr-19n2-1.htm 04/11/1998)
  134. Seignorage can be defined as the difference between the selling price of currency, its face value and the printing costs. See Stalder 18
  135. “[v]irtually all e-money systems under development will need inter-institutional clearing and settlement arrangements.” Bank for International Settlements 7 (Back)
  136. David Chaum remarked in this regard that “[t]he process, for now, resembles the free-for-all that surrounded the US banking industry in the nineteenth century, until the creation of the Federal Reserve... Before the Fed, banks circulated their own private currency...” Quoted in Godin 17
  137. Cato Online Regulating electronic money (1997) (www.cato.org/pubs/policy_report/cpr-19n2-1.htm 04/11/1998)
  138. Bank for International Settlements (1996) Implications for the Central Banks of the Development of Electronic Money 18 (www.bis.org/publ/index.htm 03/05/99)
  139. EMI (1994) Report to the Council of the EMI Council Members 8
  140. Bank for International Settlements (1996) Implications for the Central Banks of the Development of Electronic Money 9 (www.bis.org/publ/index.htm 03/05/99) (Back)
  141. Taken from correspondence with Dave Mitchell: Assistant General Manager: Business Systems and Technology Department of the South African Reserve Bank
  142. www.mondex.com
  143. Once the system is fully in operation, ATMs and other electronic devices can be equipped with readers compliant with the system, enabling other financial institutions to accept Mondex value
  144. Ibid
  145. At 91 (Back)
  146. Plotkin & Albert Smart Cards – Why Regulation is Premature (1997) 12 JIBL 459
  147. Stalder 17
  148. In the first instance, only the originator can mint and destroy Mondex value. Merchants can secondly only deposit the value in their purses to designated bank accounts, making it impossible for them to be robbed of their Mondex value. By making regular deposits to financial institutions a record is generated of all value entering the national payment system. The value held by consumers is freely transferable and protected by a personal identification number. See Stalder Exploring Policy Issues of electronic Cash: The Mondex Case (1998) 5 (www.fis.utoronto.ca/research/iprp/dipcii/
    workpap8.htm 04/11/98)
  149. Mondex Mondex on the Internet (1999) (www.mondex.com/mondex/ 05/06/99)
  150. Most electronic money systems currently in operation are denominated only in national currencies; the technology is however currently available to hold value and make payments in different national currencies (Back)
  151. Stalder Exploring Policy Issues of electronic Cash: The Mondex Case (1998) (www.fis.utoronto.ca/research/iprp/dipcii/
    workpap8.htm 04/11/98); Tanaka Possible
    economic consequences of digital cash     (1996) (www.virtualschool/edu/mon/ElectronicProperty
    /EconomicConseqDigiCash.htm 04/11/1998)
  152. Group of Ten op cit 7
  153. Smith (1997) 226
  154. Tanaka Possible Economic Consequences of Digital Cash (1996) (www.virtualschool.edu/mon/ElectronicProperty/EconomicConseq DigiCash.htm 04/11/1998)
  155. Smith (1997) 24 (Back)