THE JINGLE OF eMONEY - It could mean the end to searching your pockets for your train ticket or fumbling in your wallet for loose change. In many countries virtual money is fast replacing the coins and notes we are so used to. Stephen Fay takes us on a tour of the new world of contactless cards and electronic purses and wonders how long it will be before Britain finds an alternative to old-fashioned cash.
The small change in my pocket weighs 100g, and it irritates me.
What I want is an electronic purse that I can take to the post office to buy stamps, then to a newsagent to buy a paper, and to the Tube station for a ticket. If I lived in Finland, I could go to a Coke machine and dial a number on my mobile telephone to make a can tumble out. In Belgium, I would use my Proton card at most vending machines. Buying petrol at a petrol station in the Netherlands, I would flash my smart card, punch in my PIN and fill up. The cost would be deducted from my bank account. On the trams in Hong Kong, I would be one of 10 million people a day paying with a smart card.
Before long, I will be able to use a contactless card in Hong Kong and leave it in my wallet or pocket. The card will be detected by a chip in the ticketing machine and the fare deducted automatically. This futuristic system is coming to London, too, although I will have to wait until August 2002 before London Transport catches up with the latest e-cash technology.
Living in Britain today, the only place I can get an e-purse to hold my e-cash is at one of a few universities, such as Exeter or Edinburgh, where students get a Mondex card that can store money drawn from their bank accounts. They then use Mondex to pay for books and beer, cafeteria meals and photocopying. A multi-purpose card, it also gives them security access to the library and student residences. Soon the e-purse will take care of car park and launderette charges too.
The Edinburgh Mondex scheme has been pioneered by the Bank of Scotland, whose director of smart cards, Christine Peace, says: 'Within the next 10 years or so, we believe that electronic cash will be as familiar to us as notes and coins are today.'
Tim Jones, managing director of NatWest's retail banking services and one of the inventors of the e-cash business, showed me his mobile telephone and told me I was looking at the future of cash. A card slipped into the phone will connect him to his bank account, and, by dialling a number, he will be able to charge his e-cash card with money from the account. Alcatel and Motorola have produced a dual-slot mobile phone that can perform this task but banks have yet to accommodate the system.
It was Jones who, with some colleagues, applied lessons learned from military cryptology to produce the card called Mondex. Although pilot schemes in Swindon and Leeds have introduced Mondex and Visacash cards to the UK, Jones admits that e-cash is stuck on the beginning of the learning curve. For the time being, old-fashioned cash is remarkably resilient, with notes and coins in circulation rising at 4% to 5% a year, although cash business, as a percentage of all money transactions, is declining. John Trundle at the Bank of England says: 'Electronic money has been slower to take off than most pundits expected.
Cash is very convenient for low-value transactions.' It is also indispensable to the black economy and other illegal transactions, such as the sale and purchase of drugs.
Apart from a few pioneer enthusiasts like Jones and Paul Saward, who runs HSBC's interactive television project, bankers remain incorrigibly sniffy about e-cash. Graham Pell of Lloyds TSB says that while Swindon and Leeds may have shown that electronic money works, the big banks will be reluctant to commit the £5 billion required to finance a national network of e-cash terminals.
'It will take a long time,' says Pell. Jones' forecast is 10 to 20 years. (Had he said it in 1980, he would be talking about today.)
E-cash evangelists like David Birch, a consultant with Hyperion Systems, finds the lack of institutional enthusiasm frustrating; banks tend to behave as if e-cash is for e-nerds. Yet the historic breakthrough took place at 26 Throgmorton Street, in the City of London, less than 10 years ago under the auspices of NatWest. In the 1980s, the bank had pioneered new payment systems. Its EFTPOS (point of sale) experiment failed, but the experience produced Switch, which soon took off. (Switch has overtaken credit cards in volume and value of sales in Britain.) Looking at the range of banking services in 1988, Jones decided the single missing product was a stored-value card system, or the e-purse.
Derek Wanless, then NatWest's chief executive, told Jones to go ahead with a feasibility study. He was enthusiastic, but after two years of research, Jones' team reported total failure. They could not think of a way of making money out of the sale of a 30p Mars Bar when the cost of the transaction to the bank was 5p. 'That was too big an intrusion,' says Jones. A valedictory meeting of the project was called for 2 March 1990.
'Only then did we ask the question we should have asked the previous year: why are the costs too high?' says Jones. The basis for the costs that were as high as for credit-card business was in the number of transactions which had to be reported by clients, retailers and banks. Without being fully conscious of what he was suggesting, he proposed a secure system based on advanced mathematical cryptology. This would transmit cash from a chip in an individual's account to a chip in the e-purse. With the cash stored in a chip stuck in a card, there would be no need to authenticate each purchase, and transaction costs would be reduced. Rather than collecting the sum of a variety of individual transactions, as they do with credit cards, retailers would have a lump sum credited to their accounts. 'That was it. A Friday afternoon. Eureka!' says Jones.
The idea was based on a mathematical formula known as asymmetrical crypto entities, an invention of the '70s exploited by the US National Security Agency. It enables a bank to transmit money to a client's purse, on demand, without worrying about it being filched on the way out or the way in. The presence of cash in the card guarantees payment to the supplier. Jones patented the idea on 14 April 1990, and it forms the basis of the sophisticated Mondex electronic payments system.
NatWest was convinced the idea was sound. Hitachi was commissioned to make a chip for the card and such was the bank's commitment that by the end of 1996 over £103 million had been pumped into research and development.
The US rights were sold for £30 million in 1996, and Midland Bank took an interest. Then, in 1997, MasterCard bought 51% of the company. Bankers everywhere thought the electronic purse was a great idea, but were worried about the cost of putting it into the marketplace.
The first e-cash transaction took place in July 1995 with a Mondex card in Swindon, when a girl bought a newspaper from a street vendor. Mondex had financed and installed the terminals that validated the transactions and the e-purse cards that drew down cash from bank accounts. Retailers reported that they liked the cleanliness of e-cash, but older people did not like it. Since Mondex didn't do anything that physical money couldn't, they asked, 'Why bother?' Some years later, Mondex was still putting a brave face on the Swindon experiment. The system had operated successfully, but the report on its commercial feasibility is still secret. 'It is very competitor sensitive,' says Dan Brockbank, Mondex's spokesman. He mentions consumer resistance to yet another piece of plastic in our wallets.
Moreover, Mondex operated only inside Swindon.
If you wanted a paper in Reading, you had to pay cash. 'It needs ubiquity in order to succeed,' says Brockbank.
Jones reacts fiercely to a competitor's suggestion that Mondex is never going anywhere: 'It isn't a flop, but we do accept that Mondex on its own doesn't justify the whole smart-card reading infrastructure.' A similar research project in Leeds by Visacash (more like a credit card than Mondex) found customers still preferred cash and Switch or credit cards. The best case for the card was made on the buses and at parking lots. But Brockbank continues to look on the bright side: 'Mondex is so far ahead of its time that it is taking time to hit the ground running in the right direction,' he says. Jones is now encouraged by factors that have nothing to do with banks. 'The structure's arriving anyway in pay-as-you-go mobile phones,' he says. 'All the world's mobiles have a chip and their memories are getting bigger - 32K next year.'
However, Jones does raise the question about where punters will spend e-cash that has been paid into the smart card. HSBC is attempting to get round that problem by tying its Mondex cards into television commerce.
The bank belongs to OPEN, an interactive services platform jointly owned by HSBC, BT, BSkyB and Matsushita. This is intended to create a virtual shopping mall in your living room or study, and HSBC has invested £60 million to provide the banking services in the mall.
HSBC's Saward hopes it will be feasible to download money on to a Mondex card that is fitted into the television, although he is reluctant to be pinned down on the timing. (Maybe 18 months to two years, he says.) After that, customers will be able to use charged Mondex cards for pay-TV programmes, or for purchases from stores in the virtual mall.
On the other hand, Pell at Lloyds TSB believes that only a huge government initiative will trigger widespread use of e-cash - by announcing its use for benefit payments and transport services. Only then, he says, may the smaller retailers follow. But the scepticism of bankers like Pell is the reason why the e-cash evangelists have begun to wonder whether banks will ever be the right organisations to popularise electronic money.
David Birch, the consultant and futurologist, has a vision inspired by London Transport's adoption of the latest, smartest cards, which it intends to introduce in 2002. Transport has so far proved to be the most fruitful sector for e-cash, and LT has signed a £1 billion agreement under the private finance initiative with a consortium called TranSys - which includes Electronic Data Systems and ICL - for a new ticketing system based on contactless smart cards. Electronic ticketing systems will be installed on buses and at Underground stations and the cards will take the place of bus and Tube passes. These are geared to time. The new card will contain a sum of money from which fares will be deducted as passengers walk through ticketing machines.
Here is where Birch's imagination takes over.
LT puts an e-purse on the card alongside the ticketing application. First of all, automatic dispensers compatible with the card are installed in stations for telephones, newspapers and chocolate bars. Banks then soon convert their ATMs (automatic teller machines) so that clients can load their LT purses directly from their bank accounts. They need never queue at a ticket office again. The next step is for fast-food franchises, pubs, sandwich bars and newsagents near the Tube and bus stations to install compatible, point-of-sale terminals. Customers at McDonald's, whose smart cards have already been detected in their wallets or handbags and checked for available funds, confirm their purchases by punching in their PIN numbers. Shops like the system because the transfer of the money is automatic and immediate. Birch calls this Omnipurse.
Birch then conceives a bonus known as TravelPoints. These are loaded automatically on to a customer's card - perhaps by an employer wishing to pass on a bonus in kind, or by a local authority rewarding prompt payment of council tax. The TravelPoints will be accepted by taxis as well as on buses and Tubes. 'Over time, all remote and unattended points of sale are upgraded to Omnipurse - parking metres, cable TV boxes, launderettes and so on.
'Omnipurse then spins out into a separate company that offers a wide range of financial services. And when you sign up for Omnidirect, its direct banking operation, you are sent a unit the size of a box of matches - a contactless smart card interface that plugs into your PC. Now you can buy a ticket, load your Omnipurse or spend some TravelPoints on the web,' explains Birch.
OK, back to reality. Trundle at the Bank of England judges e-cash so far to be: 'A technical success, but not a business success.' Jones, one of the architects of e-cash, looks forward to a generational change. The children of the next century will have no trouble adapting to e-cash, he says. As for myself, I feel the weight of the change in my pocket again, and look forward to a future in which it is lodged in a card or even a key ring.
One of the great soundbites of the 20th century was made by the crusading journalist, Lincoln Steffens, on his return from Stalin's Russia in the 1930s. 'I have seen the future, and it works,' he declared. Such pious optimism makes me nervous of prediction. Suffice for me to say therefore that I hope I have seen the future of money. And I hope it works.