Chris Mirabile of Manhasset, N.Y., is like many 15-year-olds who use the Web. He's on it as many as 15 hours a week, e-mailing friends and
researching school projects. But there's one thing he can't do: buy stuff. He doesn't have a credit card, and his parents, fearing hacker violations,
usually demur when he asks for theirs.
It's a situation that prevents many teenagers from participating in the world of e-commerce. Smelling an opportunity, InternetCash, a New York
City startup, has created InternetCash, a stored-value card that consumers can use like cash at selected Web sites -- without needing a credit card.
Only 10 retail entities offer the cards, and 50 online stores accept it. But InternetCash aims to eventually make its cards available to consumers
at 30,000 brick-and-mortar locations nationwide, and sign up hundreds of stores -- online and off -- to accept the card. For Mirabile, who has used
the card in beta tests, InternetCash opens up a whole new world. "It makes it very simple to spend online," he says. Youngsters like Mirabile are
InternetCash's target market, but Charles Doherty, InternetCash's president and CEO, says the product is designed to appeal to people "who don't
necessarily use credit, even in the brick-and-mortar world."
InternetCash works like this: The cards, which retailers display near cash registers, are sold in amounts of $10, $20, $50, and $100. Like phone
cards, they must be activated to work, first by merchants who swipe the cards through a specially programmed point-of-sale machine. When users log on
to InternetCash's Web site (www.InternetCash.com), they enter a 20-digit code from the back of the card and create a personal identification number.
That gives them shopping privileges at designated stores, which carry an InternetCash icon. Purchases are automatically deducted from the value of
the card. When the value is used up, consumers throw it away, or link an amount not used to another card. As with cash, InternetCash's transactions
are anonymous.
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Despite several false
starts, the concept of
alternative payments on
the Web continues to
intrigue entrepreneurs
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Developing a killer application for Internet purchasing is an enormous undertaking that other entrepreneurs have struggled with for years with
limited success. Digicash, an early leader in Net cash-replacement services, filed for bankruptcy last year. Its technology used electronic tokens
that represented cash. Smart-card company Mondex has piloted tests of its cards with computer chips that store digital cash. It has had some success
in Europe, but an effort to launch the cards in New York City failed.
Nevertheless, the concept continues to intrigue entrepreneurs. In August, James Bidzos, the vice-chairman of Internet security and encryption
company RSA Security Inc., invested $2 million in InternetCash. "The anonymity and privacy of spending cash is something that is really valuable to
people, and I think this is a simple approach that doesn't suffer from the complicated problems that Digicash and others have suffered from," Bidzos
says. InternetCash also recently closed its first round of venture-capital financing, for about $8 million, led by El Dorado Ventures in Menlo Park,
Calif.
HUGE MARKET. Even with prominent backers, InternetCash has significant hurdles to overcome. The company must lay down an entirely new
distribution and settlement network. At the same time, it faces heavy competition from credit-card companies that dominate the Internet-payments
world, as well as a host of other cash-replacement companies that focus on teen consumers.
Doherty, a former steelworker who ran his own construction company in New York, has certainly identified a potentially huge market. Nearly 20
million teens between the ages of 13 and 17 reside in the U.S., with a combined buying power of about $109 billion, according to New York-based
Internet research company eMarketer. What's more, nearly 9 million teens regularly spend an average of 8.5 hours a week online. Most of them lack
credit cards, as do 30% of all U.S. households, according to Auriemma Consulting Group Inc., a credit-card consulting group in Westbury, N.Y.
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Other sites aimed
at teens use cash
replacements, but
many of them still
require a credit card
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InternetCash faces about a half-dozen competitors in the teen market. Sites like Icanbuy.com, Rocketcash.com, and Doughnet.com have already forged
partnerships with such brand-name stores as CDnow, Amazon.com, and BarnesandNoble.com. "We have the highest number of top-tier merchants, and we go
where kids tell us they want to shop," says Carol Kruse, co-founder and vice-president for marketing at Rocketcash, which has some 82,000 teen
accounts. On the other hand, these sites all require teens to set up accounts, frequently backed with a parent's credit-card number. What teens buy
is also carefully restricted by the site.
Points out InternetCash's Doherty: "The difference between us and them is that you do not need to ask your parents for their credit card." And
that raises some important social issues. Obvious uses for a card that allows anonymous Web purchases would be adult-oriented material, like
pornography, or dangerous goods, like guns. These are two areas Doherty says he plans to stay away from. But what about stores that sell pornography
and guns. "It will ultimately be the retailer's responsibility, if they are selling [products] requiring age verification."
IN A GRAY ZONE. InternetCash also could face some serious legal issues. An official at the Federal Reserve who insisted on anonymity says
electronic-cash products like InternetCash exist, for the moment, in a gray zone regulated by the different laws of every state where it will be
used. Should the Fed decide that new cash instruments place companies like InternetCash closer to the banking business, they would then confront
complex national regulatory hurdles governing banks and other depository institutions.
Meanwhile, InternetCash is trying to persuade as many merchants as possible to accept the card for online purchases -- and willing to pay a
commission of between 2.25% to 10% of sales. Those amounts are often comparable to and in some cases lower than the fees paid to credit- and
charge-card companies. It must also find merchants with broad brand appeal for teens. The company was turned down by Amazon.com. "That's a tough
organization to pierce from the outside," says Doherty. So far, it has assembled a lackluster collection of 30 little-known brands like EZCD.com and
Riffage.com, a music-download site.
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InternetCash claims it
will have a network of
30,000 retail locations.
It has 29,990 to go
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InternetCash must also find retailers to distribute the card. This may prove easier, since merchants who sell the card pay nothing for it.
Instead, they collect a commission of approximately 6% of the value of each card sold. Although InternetCash claims it will distribute the cards to a
network of 30,000 retail locations, only 10 are doing so. Among them are Boston-based Store24, Hudson (Ohio)-based Dairy Mart, and one Texaco station
in Connecticut.
Doherty expects InternetCash to break even by the middle of 2001 with revenues near $19 million. That means selling $100 million worth of cards in
the next year. He'll also tap revenues from advertising, as the card can be branded with merchants' names, and from merchant-affiliate programs. He
says the card platform can be fitted later to use smart cards, should they ever catch on with consumers. And he has plans to launch the card in Latin
America and Europe, where privacy concerns are greater and consumer liability for credit-card fraud is more severe.
In the end, though, InternetCash's future success will depend largely on the merchants who accept it as payment. At least one Web store is
delighted by the potential to reach new customers. Chris Carfagno, president of Sound Professionals in Sicklerville, N.J., a company that sells
miniature microphones and other products for sound enthusiasts, says teens make up the majority of his customers. "A lot of our customers are
high-school-age students, and most of them don't have their own credit cards," he says. "I think it is going to be a very popular way of making
purchases."
Whether consumers will agree is another matter. For now, InternetCash just has to hope that online cash alternatives, like teenagers, will
eventually outgrow their awkward phase.
By
Jeremy Quittner
in New York
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