Essay Example on Digital Money - Benefits and Types

Introduction

Electronic money refers to a type of currency that is available in a digital form. Electronic money is also known as digital money or e-money. (Goldfarb Greenstein, & Tucker, 2015). Electronic money is usually stored in a hardware or software chip that is usually and in a server and can be accessed using credit and debit cards. Some of the types of electronic money include prepaid cards, smart cards, and virtual currencies. Electronic money stimulates a wider use and provides many benefits such as the reduced risk of theft and vandalism in retail outlets, lower costs as well as increased convenience for consumers (Solomon, 2013). However, the use of electronic money is associated with many challenges such as card data security, cross-border transactions, technical integration, as well as fraud and chargebacks. The paper focuses on discussing electronic money challenges as well as providing solutions.

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Electronic money is and works through electronic banking systems as well as being monitored through electronic processing. The use of electronic money requires special considerations such as electronic payment processing and currency in circulation (Solomon, 2013). However, digital wallets such as pay-pal, Pioneer, and prepaid cards allow individuals to deposit fiat currency for electronic money. Some of the challenges of electronic currency include volatility of prices, lack of trust, fraud, and the risk of identity theft. Besides, other challenges of electronic money include limitations on amount and time, risk of being hacked, anonymity and privacy concerns, loss of smart cards, and password threats.

The Lack of trust

Electronic currencies are not tangible and therefore cause trust issues among some people. Over the last couple of years, electronic money has become widely popular. However, there are individuals who do not feel safe dealing with electronic money and always insist on transacting using cash. For many people, there is still a lack of trust in using digital payments to make electronic payments (Goldfarb Greenstein, & Tucker, 2015). There are those that do not feel safe using electronic money since they don't trust the internet due to the perceived security risks associated with online transactions. The perception that another individual can access another person's bank account causes fear and mistrust among individuals, thus limiting the use of electronic money. For instance, people living in upcountry and old individuals have limited experience with the online world due to lack of understanding and exposure to how it works. Also, there is a habit centered on paying and being paid in cash since it is the traditional way that businesses were being done in many areas and domains around the world. Therefore, there are certain individuals who carry cash and believe they are safe and in control at all times.

In countries such as the United States, India, and the UK, there is a perception that having every transaction be tracked electronically could invite problems such as excessive scrutiny for higher taxes. Certain individuals prefer the use of cash since it does not leave any digital footprint (Solomon, 2013). Moreover, electronic money is not accepted everywhere. However, cash is accepted everywhere and therefore leading to trust issues while using electronic money.

Solutions

Financial institutions such as banks and digital wallets should help in sensitizing people on the advantages of using electronic money such as convenience. Also, the financial institutions should provide mechanisms on ensuring the security on online platforms used to transfer money and thus restoring the confidence and trust of users.

Volatility of Prices

The prices of money stored electronically vary from time to time, depending on various factors such as the supply and demand for money. For instance, money stored in electronic wallets such as Pay pal and prepaid cards can change depending on the market forces. Also, electronic currencies such as bitcoin change value depending on the performance of the markets. Price fluctuations in electronic money such as bitcoin are driven by any factors, and volatility is measured in traditional markets through volatility indexes (Goldfarb Greenstein, & Tucker, 2015).

Solution

The volatility of prices of funds held on online stores such as pay pal is based on market forces. Therefore, financial institutions may lack the ability to control price volatility. However, banks should help in ensuring the stability of prices in the market. Some of the ways the government can participate in stabilizing market prices include maintaining peace, as well as encouraging investments through measures such as reduced cost of energy and low taxation.

Security Issues

Electronic money is faced with the problem of fraud and chargebacks, especially in transactions that do not require a card. Due to the expansion in electronic commerce, opportunities for fraudulent misuse payment networks and data theft has continued to rise. Fraud in digital currencies happens through card-present and card-not-present transactions. Fraudsters use various ways to trick merchants and consumers such as triangulation, identity theft, clean fraud, as well as the use of friendly fraud (Stewart, Gunashekar, & Manville, 2017). Friendly fraud occurs during chargebacks. For instance, friendly fraud occurs when a customer makes a digital purchase with their own credit card and then contacts their bank to dispute the charge. In such a situation, the customer contacts the bank claiming that the item was not delivered and they did not receive a refund. Also, customers can contact their card issuer to complain that their card has been compromised. If the bank or card issuer does not take keen attention to verify, they may end up losing money in instances where the information provided to them is not true.

Fraud also occurs through triangulation that implies the presence of three participants in the purchase of a particular product. The three participants include a fake online store, the unsuspecting customer, and stolen data. In such a situation, once the client has made a purchase, the fake merchant immediately steals his card details. The fraudster gathers data and cancels the payment once he has got of the client's credit card details. Clean fraud involves stealing of all the necessary data of and using it to make a purchase look legitimate. Important to note is the fact that fraudsters can penetrate firewalls through old and weak security systems (Stewart Gunashekar, & Manville, 2017). A common instance is where cybercriminals hack bank systems and move ahead to steal billions of money. Other instances include theft using mobile banking platforms. For instance, criminals can kidnap and individual and force them to provide mobile banking passwords and thus sending money to their digital wallets.

Payment fraud is also another security issue that affects electronic money. Payment fraud involves false or illegal transaction which can happen on the internet. The cybercriminals steal an individual's money or sensitive information (Goldfarb Greenstein, & Tucker, 2015). The most common type of payment fraud is credit card fraud, where fraudsters use stolen credit cards to buy goods online. Some of the online transactions do not require a pin or password, which makes it easy for fraudsters to transact. For instance, a fraudster can collect a lost card and purchase a product online without being requested to enter a password and thus causing a major security threat to digital money.

Other types of fraud that occurs in electronic money transactions include wire fraud, auto lending fraud, and account takeover fraud. Wire fraud occurs as a result of CEO impersonation attacks as well as ongoing romance as well as eBay.

Solutions

Some of the ways to help in protecting against fraud in the usage of electronic money include protecting passwords and not giving information to unsolicited callers. Users of electronic money should use different passwords for each online account. Also, clients should focus on using an online password manager to help in keeping them protected. Smart cards should be kept protected using an antivirus app. Besides, individuals should use a password lock and a data deleting the app that can be accessed from a computer in case the phone is stolen. Also, users of electronic money using their phones should prevent sharing apps from other users and instead download apps from the trusted app store.

Individuals that use online banking should always ensure that their Wi-Fi at home is always protected by using secure encryption on a home network that cannot be easily hacked. Besides, banks and other financial institutions should advise their clients on the need to use a firewall and antivirus software. Also, individuals should set up an automatic scan to help in cleaning electronic devices free from viruses. In instances of suspicious emails, clients should not click on the links to avoid malware.

People should be encouraged and sensitized on the need to purchase from online retailers that are trustworthy. There are many online sites that provide incredibly low prices on desirable items. Also, clients should not use a public network when accessing sensitive information, such as bank details. People should only use a secure network to access a bank account or private information.

Other solutions to help in the prevention of fraud and security concerns include using identity protection services such as life lock and identity Guard (Stewart Gunashekar, & Manville, 2017). Moreover, users of electronic money through online platforms should always delete suspicious emails, shredding important documents as well as keeping smartcards and other cards such as social security card safe. Checking of bank accounts on a regular basis would also help in identifying any suspicious transactions in the account.

Limitations on Amount and Time

Most banks and digital wallets such as pay pal put a limit on the amount that can be transacted on at a particular time. For instance, there are banks that limit international transfers to ten thousand dollars per day. Also, digital wallets like pay pal and Pioneer establish limits on the amount that can be transacted over their platforms at a particular time and thus inconveniencing many business people who transact huge amounts of money (Stewart Gunashekar, & Manville, 2017). Therefore, due to the limitation on the amount and time, people avoid using electronic money and thus causing a major challenge.

Solution

Digital wallets should develop a criterion of identifying customers who have a high net worth and allow them to transact huge amounts depending on their worth. Banks should develop intelligent systems that can evaluate an individual's transactions over a certain period of time (Solomon, 2013). Based on a client's transactions, the financial institution should set the amount a client can transfer at a particular time instead of using a blanket figure. For instance, high net worth individuals should be allowed to transfer huge amounts of money. Also, financial institutions should not limit customers to make transactions at a particular time. Users of electronic money should be allowed to transact at all times both night and day.

The Challenge of Transactional Costs

There are individuals who are opposed to the use of electronic money due to the fact that it involves transactional costs while moving it from one wallet to another. For instance, there are bank charges associated with sending money from one account into another. Also, digital wallets such as pay pal charge users for withdrawals and transfers to other platforms such as banks and mobile banking. Stores of di...