When a customer withdraws paper money from the bank and uses it to buy a product at a store, the bank does not know where he shopped, and the store does not know which bank he uses. If a customer uses a credit card to buy an item over the Internet, the bank and the store can identify each other. Electronic cash allows a customer to make an anonymous purchase over the Internet, just as he can with paper cash.
Electronic cash protects its user against theft. If a customer has to enter her credit card number into a merchant's website, and the website stores the credit card information, a thief can break into the website and run up additional charges. With electronic cash, the customer does not need to provide financial information that can be used to incur additional, unauthorized charges.
Many companies that offer electronic cash services are not licensed to operate as banks, according to the Internal Revenue Service. These electronic cash providers are not subject to all of the regulations that govern banks, and federal deposit insurance may not apply to the balance of an electronic cash account.
According to the Internal Revenue Service, electronic cash has the advantage of allowing its user to transport a large sum of money anonymously -- in some cases across international borders. Moving a large number of metal coins is difficult because the coins take up a lot of space and are heavy, and transporting a large number of small denomination bills is also inconvenient.
Electronic cash can increase transaction costs. The electronic cash provider may charge an additional fee when the user transfers money into her account with the provider. If the electronic cash provider is not a bank that offers physical ATM services, the user will have to pay an additional fee to withdraw money directly from the electronic cash account at an ATM.
Internet transactions often involve micro payments, such as the sale of a cell phone ring tone for 50 cents. Credit card companies charge a fee for each transaction, so using a credit card to make these small purchases may cost more than the product itself. An electronic cash transaction does not need to use a credit card network, so the customer can avoid paying the credit card fee.
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