DigiCash turns out empty pockets

DigiCash has just run out of cash. The provider of software solutions for online micropayments confirmed on Tuesday that it had filed for Chapter 11 bankruptcy following the official closing of its Amsterdam facility a month ago and the layoff of 12 employees in its Palo Alto, California, office during the last two weeks. DigiCash has been financed by venture capital firms, along with several individual investors including Nicholas Negroponte, founder of MIT's Media Lab.

DigiCash has just run out of cash. The provider of software solutions for online micropayments confirmed on Tuesday that it had filed for Chapter 11 bankruptcy following the official closing of its Amsterdam facility a month ago and the layoff of 12 employees in its Palo Alto, California, office during the last two weeks. Privately held, DigiCash was founded in the Netherlands in 1990 and moved its corporate headquarters to Palo Alto last year. During its peak, the firm employed more than 40 people. Six remain.

The DigiCash product offering, called eCash, is a software application that allows merchants and consumers to anonymously conduct small transactions on the Web. The company signs up banks to act as "gateways" for its merchant and consumer customers to conduct these micro transactions. All seven participating banks are outside of the U.S., including Germany's Deutsche Bank and Australia's St. George. Its only U.S. customer, St. Louis-based Mark Twain Bank, pulled out of its two-year eCash pilot in September.

DigiCash has been financed by venture capital firms including August Capital, Applied Technology Investors and Netherlands-based Gilde Investments, along with several individual investors including Nicholas Negroponte, founder of MIT's Media Lab.

"ECash is not really a venture capital play," explained DigiCash CEO Scott Loftesness. "It takes significant amounts of money to finance the deployment of a new payment system."

Loftesness, who replaced Michael Nash as CEO of the struggling company in August, says he is "exploring a range of potential alternatives" for DigiCash, and plans to reach a conclusion by year-end. He hopes to either find a suitor to buy the company's intellectual assets or "restart" the company by helping to organize a consortium of U.S. banks to collectively take the eCash bait.

"It's going to take a small group of major banks to make it happen," he explains. "U.S. banks feel that it's strategically not urgent, but it's inevitable."

Consumers in the U.S. have been much more reluctant to adopt the concept of digital cash than their European counterparts. Earlier this year, First Virtual Holdings ended its tenure in the online micropayment business and referred its entire customer base to competitor CyberCash.

And just yesterday, major banks including Citibank and Chase Manhattan, in conjunction with Visa USA and Mastercard International, ended their year-long test pilot of smart cards, citing disappointing results. Smart cards were issued to 100,000 New Yorkers to make small purchases from 600 merchants. Only $2 million were spent using the cards during the year, two-thirds of the merchants dropped out, and banks were forced to offer consumers cash rebates for using the cards instead of charging them monthly fees as they had hoped.

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