BURN THOSE BANK NOTES - DIGITAL CASH IS COMING


July 22nd 1994

As far a business is concerned, there is a big problem with selling goods and services over the Internet - how do you get hold of your customers' money? Traditionally, the answer has been the credit card - by filling in a Web form, or sending off some email with your card number, expiry date and billing address. However, many people are wary about sending their plaintext financial details across the world's least secure network. And do you *really* want to go through that kind of complex process just to access a digital newspaper that costs 50 cents.

The Internet, the Infobahn, whatever you want to call it, has the potential to became a place where all kinds of cottage industries could offer their wares - what David Birch at UK consultancy Hyperion describes as a return to the medieval economy. But that potential is threatened by both the technical problems of security and authentication, and by the realisation that any system - such as credit cards - which relies on a central clearing system is too expensive and unwieldy to cope with thousands of tiny, sub-dollar transactions that could form the basis of a thriving electronic economic community.

What is needed is an electronic equivalent of cash, something without central accounting. After all, when you take a $10 note out of your wallet and give it to a friend, you don't need authorisation from the Federal Reserve or the Bank of England first.

Enter Mondex - a British-driven initiative to replace bank notes and loose change with smart-cards. It is not aimed at the Internet in particular, but those involved think the two are ideally suited. There are plenty of smart cash-card initiatives - what makes Mondex different is its lack of a centralised clearing facility.

Each card contains a special chip which can hold totals in up to five currencies. The card is topped up with cash through specially equipped phones which can be used to transfer cash between the card and your bank account. Once in the card, the money is yours to do with as you will. Lose the card, and the money in it has gone for ever, just like a real purse. Locking cards with a personal identification number is possible so that a thief may not benefit). If you want to give your child some pocket money, you slip your two cards into a special 'electronic wallet', and tap the amount in on the calculator-style keyboard and the money is transferred immediately. The Mondex facility can be built into any device - so your cellular phone could become your own automatic teller machine - you could transfer cash to a friend by dialling up the card sitting in her personal digital assistant. Similarly your local retailer will have a Mondex-enabled till, or perhaps a digital wallet. The communication is direct, chip-to-chip; no bank or clearing agency intervenes.

In theory, adding a Mondex card to computer terminals and placing them under software control should be easy. One practical approach would be a system akin to the Worldwide Web but with some pay-per-view pages. The remote Mondex card would ask for 10 cents to supply the page, the user would click on the OK button, his or her card would cough-up the requested cash and the page would be displayed. The same approach could hold true for any other type of "software" in the broadest sense of that word. And if it is good for the retail trade, the banks love the idea. Recent estimates show that each of the UK's major clearing banks spend between UKP200m to UKP300m a year, just on handling, counting, storing and moving cash.

At this point everyone will be asking: "What about security?" To which the Mondex response tends to be "don't worry - it's very secure, trust us". There are two aspects to security here. First, consumers want to be sure no one is faking transactions from them, for example removing funds from their bank accounts. Meanwhile, the world's central banks will need to be assured that a crook cannot completely screw up a country's M0 money supply by forging a few bytes that represent a few zillion pounds - so much easier than all that tedious mucking about with printing presses.

The Bank of England is apparently satisfied on the latter count but what about the safety of your cash, and mine? Mondex uses a system of digital signatures to ensure transactions are bona fide, however the transactions are sent in plaintext. This means that anyone tapping into the Net will be able to spot your $1,000 order for lingerie as it travels over the wires. However Mondex says that it is perfectly possible to add separate encryption to Mondex.

Mondex has several reasons for not including encryption, not least of which is that it would probably result in Mondex being banned in countries that do not take kindly to their citizens carrying out large, uncrackable cash transactions. The US, for example, with its current penchant for the public Clipper encryption standard, certainly would not be happy.

Generally, Mondex takes a pragmatic approach to security. David Taylor, a senior manager with the group, says: "What is secure today will not be secure tomorrow". Therefore the signature system has the built-in ability to evolve. To start with, cards may use what we will call authentication system A, but with the ability to switch to system B. After some period of time (yet to be decided, but perhaps a year or two) cards will be issued that use System B but can switch to System C. In general, each chip has a unique number burned into it and if a transaction is interrupted, both parties will check they are still talking to the right card before continuing the transfer. Moreover, it is not possible to simply intercept a transaction and play it back later.

Mondex was initially the brainchild of the National Westminster Bank - the UK's largest retail bank - and the Midland Bank - now part of the HongKong & Shanghai Banking Corp. Currently the scheme is restricted to the UK, but a Mondex spokesman says negotiations are going on that should result in the scheme spreading to other countries by the end of the year. Potential overseas partners, he says, are going through the formalities required to inform banks and national authorities of their intentions.

The general public's first encounter with the technology will come next year in Swindon, a town to the West of London. Between them, NatWest and Midland Bank have about 30,000 to 40,000 customers, who will each be invited to take a card. Their children and other non-bank-account owners will also be able to have a go.

Meanwhile British Telecommunications Plc is working to replace virtually all the several thousand pay-phones in the area with Mondex-compatible telephones, so that every phone-box becomes a bank. Mondex-compatible phones will be available for home use. The trialists are also keen to get children to use the cards to receive their pocket money. Then little Jimmy or Janet can decide whether to spend their weekly allowance in the sweet shop or in the set-top-box to order a movie.

There is an obvious market here for electronic gizmos - Mondex PDAs, Mondex portable phones, perhaps even Mondex charity collecting "tins". The banks had little trouble attracting aspirant manufacturers who wanted get in early on the technology. Hitachi Ltd, AT&T GIS (nee NCR), Panasonic, OKI Electric Industry Co, Texas Instruments, SPOM Japan Co and Dai Nippon Printing Co are all developing equipment and components for the system.

As well as the phones and the electronic wallets, there are small 'balance readers' which fit onto a key-ring. The consortium expects this sort of thing to be given away as gifts bearing advertising. After a few months Mondex expects the system to spread quite rapidly across the country.

Will it replace physical cash? Mondex doesn't make such a claim. It points out that in the developed nations about 60% of all transactions are made in cash - so capturing even a small portion of that market will make the system a success. There is little doubt that it will spread through Britain, but the speed of its progress will depend on the amount of cash the banks and retailers will invest in it. If every BT phone box and cash till in Britain had a Mondex slot, there would be no doubt of its success. But BT has no plans yet to convert boxes outside the Swindon test area, and points out the expense of the procedure. The retailers are staying similarly quiet.

Mondex's international appeal is unknown, but we should have a clearer idea of that by the end of the year. However, the factor that bodes well for the technology is that even technophobes say "what a good idea". That, if nothing else, should ensure that systems like Mondex will make a mint.


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