It was supposed to be the currency of the web, but little is circulating

THE DIGITAL BAZAAR Click for June 22, 1998 issue

Three years ago, the idea that just about anyone could set up a virtual store on the Web was fairly radical, but it certainly appealed to plenty of daring cyber-entrepreneurs. Just ask Momo.

The "over 50"-year-old artist and native of the Caribbean was so taken with the whole electronic-commerce concept that she and some artist friends in California decided to open an gallery solely on the Web. But to sell its art, needed some way to accept payments -- sometimes as low as $5.00 for a single photograph. At the time, the only form of electronic payment system that would allow the virtual gallery to accept such low-priced transactions was a new system of digital money called E-cash, offered in such products as eCash by DigiCash USA Inc.

Payments for items, such as an objet d'art from Momo, would work like this: If a customer had enough E-cash -- a series of encrypted serial numbers representing bills and coins in a PC-based "electronic wallet" -- the correct amount would be deposited into the participating merchant's computer. Customers could fill their E-wallets by visiting a bank's online ATM and moving more money from their accounts into their E-wallets.

AN E-MARE. But what sounded so simple turned out to be an electronic nightmare for Momo. In addition to mastering the intricacies of installing DigiCash's eCash software on her server, Momo had to learn something else: how to change long-standing consumer shopping habits. Despite their tech-savviness, Net surfers willing to shop on the Web weren't willing to try something new -- especially when it came to parting with money -- if there were no perceived benefit. "People didn't want to go the extra step" of getting an eCash wallet, says Momo. "Whenever you require that," she adds, "we found that customers wouldn't buy." And for its first year, floundered.

So how did the Web wind up raking in more than $2.4 billion from consumers in 1997, according to Forrester Research? Not because of electronic payments such as DigiCash's eCash or CyberCash's CyberCoins. According to Forrester analyst David Weisman, E-cash contributed hardly anything to online revenues, and he doesn't expect that it will until 2003.

What's holding E-cash back? At least in America, it's the near-universal use of credit cards, which have made much progress as an online currency. "Credit cards work," says Weisman. "We know them, how they work, and that there's consumer protection for them." On the other hand, he adds, hardly anyone is familiar with digital-cash schemes.

FREE OR FLEE. The other factor hurting E-cash is lack of demand from sites engaging in E-commerce. So-called micropayment systems such as eCash were supposed to let merchants charge for low-priced items -- say a single online news story, rather than an entire monthly subscription -- without incurring high fees for credit-card authentication and processing. But, hardly any online publishers are selling such content, and it appears that they'll be unlikely to do so anytime soon. "People don't like to be nickled and dimed," says Weisman, "And if you don't give it away, people will go to someone who will."

What's more, transaction fees charged by banks for credit-card payment authorization and processing have also become less of an issue. Merchants "can make money on a $2 online transaction," says Alan Glass, senior vice-president of electronic commerce at MasterCard. Automating the authorization and back-office processing between credit-card organizations such as MasterCard and affiliated banks has trimmed the costs passed on to merchants. Now, Momo can easily use local bank branches to process card transactions for her least expensive products, currently $3.50. Her business "really started to happen when people could use their credit cards," Momo says. She adds that the complexity of the E-cash system, not the transaction costs, were the biggest deterrents on her site.

DigiCash and other virtual-money proponents concede this point and are trying to address it. "We need to simplify and make it easier to implement the technology," concedes Michael Nash, CEO of DigiCash. And although DigiCash is already working with several major overseas banks such as Deutsche Bank in Germany and Bank Austria, Nash says DigiCash must establish such relationships with American banks before eCash is widely accepted among U.S. Web surfers, who account for a clear majority of Net traffic and shopping. (Nash says that several American banks are "very close" to signing agreements with DigiCash, but he could not offer any details.)

A WHOLE NEW GAME Other E-cash proponents such as CyberCash argue that while low-priced, online-only content has been slow to develop and catch on, it will --eventually. According to Maureen Loftus, senior vice-president for corporate strategy and marketing for CyberCash, one possible hot-growth area would be computer games. After spending millions of dollars to create a computer game capable of online play, software companies are looking for new ways to recoup their costs and keep gamers playing. One possibility, says Loftus, is to create extra characters or features that can be purchased only online -- using CyberCoins, of course. "Online gaming has eaten [the concept] up," she says.

But for now, E-cash is still pretty much an idea that's trying to figure out how to crack the wallets of consumers and merchants. Even initial adopters such as Momo are still taking a wait-and-see attitude. Although is "completely electronic," generating online sales that range from $5 to $10,000, Momo says she had only one Net customer who wanted to use eCash. Momo has since removed the DigiCash software from her server. "It was a beautiful concept," she says, "and I would like to see it work." So would a lot of other people.

By Paul M. Eng, Senior Correspondent, BusinessWeek Online


Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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