Electronic Tender

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What is it?

It's tough to tell. This is the primary, and perhaps least answerable question. The "online money" world can be sliced in many ways. I focus on Internet payment and value store schemes, though there is clearly overlap between this definition and the more "traditional" banking services. In fact, because of the huge number of alliances arising in the online money sphere, it is difficult to determine precisely where the various boundary lines might be drawn. Within the payment schemes, additional boundaries may be drawn between payment for physical goods (where speed is not a huge issue) and payment for information (where quick, inexpensive transactions are crucial).

It's not banking, but what is banking? As noted above, online banking is largely beyond the scope of this paper, primarily because it encompasses so many topics: bill payment, funds transfer, brokerage, loan origination, statement downloads, etc. I spoke with a source inside the electronic banking segment of Intuit, and he informed me that there is not currently much action in electronic banking, with Intuit's NPCI division being the leaders in the sector. Checkfree performs electronic bill payment; Visa Interactive is developing the same, as well as ATM-like electronic access, and Commercenet is working to provide banks with online presences, but this is a far cry from "virtual money."

And these alliances aren't making identification much easier. The market is, as they say, "in a state of flux." Alliances and partnerships seem to be the rule, and new announcements are being made daily. Last Thursday (May 11, 1995), the Bank of America (the nation's second largest bank) and NationsBank (the fourth largest) announced they were purchasing H&R Block's Meca Software division for $35 million in order to enter the online banking sphere, presumably to compete with Intuit. [1] A Justice Department source noted that this action should not ease the pressure the Department is putting on Microsoft in regard to the Intuit deal, and pointed out the relative sizes: $35 million vs. $2 billion. [2] On the very same page, the Wall Street Journal Reported that Microsoft has lined up 43 new partners for its new Microsoft Network, with big names like Home Shopping Network, QVC on board.[3] Each of the virtual money producers I discuss below has some connection with at least one banking or credit institution, though this is not technologically required for the production of e-money.

Who are the leaders?

Leaders of what? With all this chair shuffling, it is difficult to tell who is in the lead, or even if there is a market to be leading. A recent survey of 2,000 Internet users conducted by O'Reilly & Associates indicated that although 72% used the Net for gathering information on products before they purchased, they usually bought offline using conventional means.[4] Thus this potentially enormous online marketplace that is the Internet may still be largely potential.

In the sphere I am concentrating on, online digital payment systems, there are currently four major players. These four majors confront a market with many more potential entrants, since many niche markets could exist to support minor presences. These major players are First Virtual Holdings, a glorified ordering mechanism; CyberCash, who is leveraging credit-card clearance experience into online commerce; DigiCash, a leader in digital encryption payment regimes that provide for varying level of identification; and Netscape, a major partner and "engine-builder" for the Web's transactions. I consider each in turn.

What do they do, and how do they do it?

The market is, as they say, in a state of flux. The spectrum of services that any one provider could offer is so large, and the demand so unclear, that several different companies are each testing several different approaches. From reading the press releases, it is unclear if any one firm really knows where it will be in a year. Since this e-paper's strength is the continuing vitality of it's information, I will refrain from neatly summarizing the major players' current offerings in favor a more general discussion of each, with links directly to their own sites. If you feel you'd like a more comprehensive "big picture" view of the e-money world as it existed in the Autumn of 1994, I commend to you an excellent article by Steven Levy published by Wired Magazine.

First Virtual

First Virtual

First Virtual barely belongs within the realm of "e-money," since it represents only a tentative step towards a true acceptance of digital commerce. Essentially, the company relies on the infrastructure of digital money already in place, in the form of EFT and interbank transactions, and grafts this system onto a e-mail based ordering system. The founder, entertainment lawyer Lee Stein, has achieved an electronic requisition system without many of the security issues present in cyberspace by eschewing encryption, and relying on Electronic Data System's proprietary network coupled with a confirmation process from the purchaser. First USA, a Texas bank and credit-card issuer, will provide credit-card authorization and payment clearing. [5] A description of the process, reveals that the system, while simple, does not represent a significant technological achievement over the current offline regime.

First Virtual has begun by selling intangible items, but hopes to migrate towards physical good delivery in the coming months. They currently have a page of merchants accepting the First Virtual Payment Mechanism, and though they've got a long list of those, even the MegaMall left a great deal to be desired in terms of "ease of use." Mr. Stein reports that 500 merchants currently accept First Virtual transactions, and that the number of buyers are growing at a staggering rate of 16% per week [original source], but I am suspicious that this number may be misleading in respect to absolute values. In cyberspace it is difficult to judge the "stature" of any company. First Virtual is truly virtual, having no physical headquarters, with its three executives working out of there homes scattered across the country. When I attempted to contact the company via e-mail, I received a response explaining that since the chief technical operator had been sick the prior week, there was a terrible backload. It is hard to imagine such a state of events in more traditional banking or order processing companies, but such is the condition of the nascent market.

Apple supports the use of First Virtual to order its QuickTime software, but am dubious of its patronage. Apple does, however, provide a very easy to understand guide as to precisely the steps necessary to go ahead and get an account, in case you are interested in sampling the service.


CyberCash is a step further towards a more fully realized "virtual money" system. Headquartered in Reston, Virginia, the company was founded in August, 1994, by Bill Melton, the same man who founded Verifone, the dominant force in merchant credit-card clearance systems. Jim Bizdos, president of RSA Data Security, is also a principal. CyberCash appears to be an outfit that has its act together, although precisely what this act is remains a bit hazy. They tout their services as the "convenience of checks with the reliability of cash."[original source]

Press releases indicate that they provide (or will provide) both merchant and peer-to-peer transaction services in debit, credit, and electronic cash environments. They believe that their low cost will finally make peer-to-peer service feasible and cost effective. They have announced partnerships with Wells Fargo and First National Bank of Omaha (a major mail-order merchant processor, with over 44,000 merchants) and predict that although they will begin with credit cards, they will migrate to debit and cash cards by June or July.[6]. As part of their Omaha Bank deal, they now have a relationship with First of Omaha Merchant Processing, the second largest in-house bank processor in the country.[7]. CyberCash recently announced their status as the first to win export approval from the Department of Commerce for their encryption technology, but Allan Schiffman of Terisa Systems explained to me that the DES technology that Cybercash received "permission" to export had been cleared since 1992.[8]

In keeping with the unsettled nature of the services available, the company provides an appropriately amorphous "vision" of how CyberCash transactions will work. In descriptions of the system, they merely indicate that users will communicate with CyberCash servers, who will communicate with banking networks. They provide a very pretty graphic of how credit card transactions will work, which I felt compelled to include, but neither text nor graphic served to completely clarify precisely how transactions will be accomplished. One prediction that I take away from all my readings, however, is that while secure anonymous transactions are entirely technically feasible in this system, they will not be, since the constituency of the CyberCash system are merchants who will prefer to know the customers they are dealing with.

One of the online merchants accepting Cybercash transactions is a Los Altos winery, appropriately named Virtual Vineyards, which uses SSL, the current Netscape encryption scheme, to process the transaction. Not to limit its options, Virtual Vineyards also accepts encrypted credit card transactions, and was the first of Wells Fargo's partners to make use of this secure transaction scheme. This merchant is a good example of how commerce on the Web may develop, and how unsettled standards compel participants to support a variety of schemes.[9]

The CyberCash client software was due to ship on May 12, 1995. I provide this link to allow you to download a copy.


DigiCash is a privately held company (nominally headquartered in the U.S., but with the main office in a subsidiary in Amsterdam), formed by one of the leaders in both cryptography and privacy, Dr. David Chaum. Dr. Chaum received a Ph.D from Berkeley and taught at NYU and UC before going to the Netherlands to work with some of the leaders in European encryption technology and payment schemes. Several of his electronic "smart-cards" are currently in use in the Netherlands and the EC. He is deeply committed to the need for privacy in the electronic world, and has implemented several encryption schemes to allow secure, nontraceable transactions over a network. Dr. Chaum describes the general principles of such a system in a very readable article in Scientific American, and Steven Levy did a comprehensive profile of Dr. Chaum, DigiCash, and e-money in the December, 1994, edition of Wired Magazine.

Dr. Chaum holds many of the basic patents necessary to implement a secure, anonymous electronic monetary regime, but has been reticent in wide licensing of the technology. With all the current partnering evolving, DigiCash remains largely out of the loop (though there are some European trials with MasterCard for a "smart-card"), resolute in refusing to compromise its ideals in the privacy arena. Some people think this political stance will doom the company, but the power of the technology may yet step in to rescue the enterprise. Should DigiCash wish to provide varying levels of privacy, the technology supports such application.

DigiCash offers a brochure on the company describing their mission and operations. They've had a trial of e-cash running on the Net since October 1994, with over 11,000 people participating. The company does a superb job of explaining precisely what e-cash is, and how it differs from other payment schemes. It also disabuses the uniformed of the common perception of criminal uses: that e-cash is useful only for tax evaders and drug pushers. If you are interested in the technology, you can participate in the trial.


Netscape Communications is the provider of the dominant browser you are presumably using to read this document, and has been one of the primary motivating forces in the commercialization of the Web. In its short history, it has made major advances in capitalizing on its technology and connections, partnering with First Data, MCI, DEC, BofA, MasterCard, SGI, Novell, Delphi, and others. When security standards developed by Netscape (SSL) conflicted with those developed by others (SHTTP), Netscape was instrumental in helping to form Terisa, a joint venture of RSA and EIT, in order to harmonize the standards. It is a safe bet that Netscape will continue to be a major player in the online commerce field.


The nature of the business is such that it is (relatively) simple to create encrypting software to mint digital money, but difficult to deploy on a widespread basis. So look for many different companies to come up with varying forms of digital transaction, but only a few major players to really be a national or global presence.

Netbill is a new service just starting up, created out by Carnegie Mellon and Visa. The service will be a low cost credit-card clearing mechanism, with the merchant seeing neither the credit card number nor the name of the customer. Netbill should support pseudonymous accounts, and will strive to reduce transaction costs from the current 15 to 50 cents per purchase to a mere penny per transaction, in order to make the provision of information rather than goods economically feasible. The system will start at the university level, but is expected to extend into the commercial information provision field. This testbed may be important in developing an "information economy" on the Web.

CommerceNet, a Silicon Valley electronic industry consortium, has been very active in "wiring" businesses to the Web. They have "published" a number of papers, dealing with commerce on the Net, and are currently working to bring a number of banks web presences, but it is difficult to call this "electronic money." Commercenet provides some good "live demos" of online commerce, including one using Secure HTTP, but the offerings seem spotty at this time. This is just one example of the dynamic nature of the Web.

Of course, Intuit and Microsoft were the 900 pound bears to watch, but the pending Justice Department suit to prevent the acquisition has left developments in that arena quite unsettled. In late April, Microsoft announced it had partnered with NaBANCO, a merchant-card processing subsidiary of First Financial Management Corp. (FFMC) which handles more than $74 billion in annual bankcard transactions for more than 165,000 merchants.[10] This announcement is interesting, coming on the heels of Microsoft's deal with Visa in November 1994, because it now provides Microsoft to access of both the card issuing and credit clearance segments of the industry. It goes without saying that Microsoft will be a force to watch in the online arena, and has already lined up many big players for the worldwide Microsoft Network slated to ship as part of Windows '95. [3]

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© 1995 Alex H. Benn