Electronic cash payments still mostly a pipe dream

Electronic cash has been heralded as the wave of the future but no one has yet delivered a product that has a fighting chance of leading the market.

Electronic cash, currency in the form of data that users can download to their hard drives in order to buy products and services on the Internet, has been heralded by merchants and banks as the wave of the future for online commerce.

But are there really any viable electronic cash solutions available to Internet consumers today? Several technology companies have entered the ring to fight for territory in the vast world of electronic payment systems, but have yet to deliver a product that has a fighting chance, according to analysts.

"I am not hugely optimistic about consumers adopting e-cash any time soon, since no precedent has been set for this sort of buying system," says Ted Julian, research manager for Internet commerce for International Data in Framingham, Massachusetts.

In some very specific instances where credit card payments would be cumbersome, such as buying a $1 graphic image or a 25 cent article, e-cash is a reasonable metaphor, but it probably won't be widely adopted for about two years, according to Julian.

Electronic cash, or e-cash, works when customers dial into a participating bank over the Internet, identify themselves using a password and a personal identification number (PIN), and download packets of low- value electronic "coins" directly from their account. This e-cash is then stored on the user's hard drive until the user makes a purchase from a participating merchant.

To secure the transaction, the computer creates a randomly chosen serial number for each coin and hides the number in an encrypted envelope so that no one can tell who withdrew or used the e-cash.

While shopping in this way leaves the buyer's trail virtually untraceable, something privacy advocates applaud, there are several problems with the system. First, only a handful of merchants accept e-cash -- current estimates hover around 300 merchants worldwide -- and just a few banks are offering e-cash as an account option.

Second, if a user's hard drive crashes, the e-coins are lost and the money is irretrievable, a risk to which many consumers are not willing to be exposed. Third, the e-coins are still based on traditional monetary systems, so that a German bank would have to issue e-cash in Deutsche marks, a French bank in francs and so on, which necessitates the use of special exchange software for overseas transactions.

Netherlands-based DigiCash is currently the only company commercially offering a true e-cash system, with CyberCash and Digital set to follow soon. DigiCash began testing an e-cash system called CyberBucks with St. Louis-based Mark Twain Bank in October 1995 and later penned deals with two international banks: Finland's Merita Bank, which launched services in March, and Germany's Deutsche Bank, whose services are slated for launch in the third quarter.

"In launching this pilot project, Deutsche Bank aims to test the possibilities of innovative payment forms and procedures and to expand their range of Internet services," says Wolfgang Johannsen, head of Deutsche Bank's department for technological development last month.

Mark Twain Bank has been pleased with the response it has received from merchants and users of the e-cash system, according to Frank Trotter, the bank's senior vice-president and director of international markets division.

"Phase one is a retail shopping system, but the real potential is in phase two, which I believe will be a global business-oriented payment network," Trotter says. Customers have said that e-cash is very easy to use, he says.

The bank currently has 60 merchants, including the online music store CDNow, operating its e-cash system -- which requires users and merchants to open an account at the bank -- plus 190 more in the wings. Drawbacks the bank has noted include the international currency exchange issue and reluctance of customers to send a cheque to an out-of-state bank to open an account. As a result, Mark Twain Bank expects to have international currency exchange and credit card account payment systems in place by the third quarter, according to Trotter.

Digital within six months plans to begin a trial of an e-cash system called Millicent that will be focused on transactions of less than US$1, but company officials have not released details of the proposed system.

CyberCash has plans to offer e-cash coins in the third quarter and is currently offering a "wallet" that uses encryption and authentication to enable users to send credit card information securely across the Internet.

Users need to go to the company's Web site at http://www.cybercash.com to download the wallet, in which they can then store Visa, Mastercard and American Express information, as well as a stock of e-coins once they're available, to purchase items at merchant sites running the CyberCash server. Some of these merchants include Virtual Vineyards and Price OnLine, the online version of discount store PriceClub.

Analysts and industry leaders have their eyes on CyberCash, whose technology has been licensed by companies such as America Online, CheckFree, CompuServe and Oracle. "CyberCash has a clear leg up right now because it is the first to market a system that everyone understands," says Jim McBride, an analyst at Jupiter Communications.

IDC's Julian agrees. "If you don't count CyberCash, no one is really doing anything worthwhile yet," he says.

Why has CyberCash been so successful early on? "The key has been getting banks involved in the Internet market. Merchants are used to working with them, and consumers trust them," says Magdelena Yesil, vice-president of marketing for CyberCash. The company currently has alliances with banks including Mellon Bank, First National Bank of Omaha, Wells Fargo Bank and European payment services giant SLIGOS and plans to announce more in the near future.

VeriFone is taking the same approach with its vPOS and vGATE payment systems announced this month by aiming its credit card processing servers at financial institutions. So far, Wells Fargo Bank, the Royal Bank of Canada and Universal Savings Bank have signed on to the VeriFone plan, which will be based on Visa and Mastercard's jointly developed secure electronic transaction (SET) protocol as soon is it is widely available, an event that analysts foresee happening in early 1997.

While CyberCash was first to market, VeriFone has the advantage of already having cornered a huge percentage of the market for countertop credit card processing terminals, of which it has shipped over 5 million in 100 countries.

"VeriFone is very well positioned because it already has its hands in merchants' pockets," says Allen Weiner, director and principal analyst of online strategies for Dataquest.

Banks usually are not willing to limit themselves to one online credit card payment processing system, and the success of companies such as VeriFone and CyberCash on the Internet will depend on how many merchants adopt their products, analysts says.

"In the long term, the 'Net is potentially the most attractive merchandising space available," says Dudley Nigg, executive vice-president of Wells Fargo Bank at a VeriFone press event in San Francisco this month. Wells Fargo wants to offer its merchants as many options as possible in this new realm, he says.

This sentiment is echoed by Bank of America vice president Mack Hicks: "We want merchants to have many ways to pay online and will probably adopt several credit card processing systems," he says.

DigiCash, based in Amsterdam, can be reached on the Web at http://www.digicash.com.

CyberCash, based in Reston, Virginia, can be reached at http://www.cybercash.com.

VeriFone, based in Redwood City, California, can be reached at http://www.verifone.com.

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