Boom then Bust: How Electronic Cash Faltered

<a href="displayarticle.asp?ID=3109910551PM"><img src="archive/1999/pics/ecash.jpg" align="right" border="0"></a>Once among the highfliers of the Internet world, the original electronic cash companies have run upon hard times. The public never clamored for anonymous transactions or methods for making micropayments of a few cents or dollars over the Internet.

• 03/10/1999

DigiCash Inc. (www.digicash.com) filed for bankruptcy last fall. First Virtual Holdings Inc. (www.messagemedia.com) sold off its electronic cash customers, changed its name and refocused on e-mail messaging. CyberCash Inc.’s (www.cybercash.com) shares hover around $13, well below the $63.50 the shares traded for shortly after the company’s 1996 initial public offering.

Once among the highfliers of the Internet world, the original electronic cash companies have run upon hard times.

Those close to the industry cite a number of factors for the decline of the companies. The primary reason was that consumers proved less paranoid about the security of their credit card numbers than many industry insiders predicted. Marketing moves by Visa and MasterCard to leverage their name recognition and low limits for credit card liability were contributing factors. Also, the public never clamored for anonymous transactions or methods for making micropayments of a few cents or dollars over the Internet.

Edward Vielmetti remembers the heady early days of electronic cash. "It was a zero-, billion-dollar market," says the former assistant director for research at First Virtual who left the company more than a year ago and is now a consulting engineer for Cisco Systems Inc. "The conceit, back when it all was getting started, was that you really needed something new in the way of a payment method with the unique method of doing business on the Internet," Vielmetti says.

Magdalena Yesil, a partner at U.S. Venture Partners (www.usvp.com), and a former CyberCash vice president, says the companies paid a price common for pioneers. "In 1994, the market was almost nonexistent," Yesil says. "Today, people don’t think twice about going to a Web site, clicking on a product and buying it."

The major concern during the early days of electronic commerce was that consumers would balk at typing their credit card numbers into a computer and sending them into faceless cyberspace. CyberCash’s solution was an electronic wallet downloaded onto client machines. The wallet kept the buyer’s credit card number. When the buyer found a merchant that accepted CyberCash, the merchant’s software would obtain an encrypted credit card number from the wallet. Electronic transactions from First Virtual involved a PIN. DigiCash’s technologically impressive eCash allowed for anonymous transactions online through a trial program with Mark Twain Bank of St. Louis.

At the same time, MasterCard, Visa, software companies and banks developed the Secure Electronic Transaction (SET) protocol. The three-way transaction standard required the consumer, merchant and bank to use the protocol, which involved encryption, digital certificates and browser plug-ins.

The solutions of the electronic cash companies and SET ran into the same problem: Consumers weren’t interested. "A lot of energy went into promoting SET, designing SET. We never really had consumer experts come and tell us if this big initiative was really going to work well with consumers," Yesil says.

In fact, consumers seemed comfortable with the Secure Sockets Layer (SSL) security protocol or even less security. Many Internet transactions still involve unencrypted credit card transmissions, or unprotected storage of credit card numbers in a merchant’s database, Vielmetti says.

The customers’ perceived risk didn’t justify the complexity and unwieldiness of additional software, Vielmetti says. "Typing [a credit card number] into a machine onto the Internet didn’t seem that much worse than giving it to a waiter who goes away."

Although Visa and MasterCard had supported SET, they also shored up their Internet presence by supporting e-commerce, signing up merchants and plastering their names all over the virtual marketplace. Says Yesil, "Both credit card companies have done a tremendous job on the marketing side." The name recognition, along with limiting consumer liability to $50 in cases of Internet fraud, helped assuage any lingering fears of Internet commerce.

DigiCash’s crash has been the most spectacular. In September, the company filed for Chapter 11 bankruptcy protection. In public statements, the company has said it may sell its intellectual property.

In July, First Virtual encouraged its 2,000 merchants and 60,000 buyers to migrate to CyberCash’s payment technologies. The company exited the payment service business to focus on its messaging technology services and now uses the name MessageMedia Inc.

CyberCash has survived on the strength of its less sexy payment processing business and infusions of venture capital. The company has carved out the primary position in the Internet payment processing niche, taking credit card transactions from merchants and passing them through to the network of banks it has built relationships with over the years.

CyberCash’s primary competitors are not so much other Internet payment processing companies as they are companies with other methods of processing payments. Some merchants have employees key the credit card numbers used in Internet transactions into the Verifone system, while others use special software that transfers batches of credit card transactions to the bank at the end of the day.

With the acquisition of ICVerify in April, CyberCash gained a large piece of that software-based payment processing market. This past January, a high-profile placement in Microsoft Corp.’s Complete Commerce package for commerce hosting service providers brought the company some positive notice. Nonetheless, the company’s losses for 1998 amounted to $31 million.

CyberCash has not lost faith in its original idea. In August, the company announced an updated version of the electronic wallet called InstaBuy. "We’ve learned a lot," says Ken Perez, senior vice president of marketing for CyberCash. This time, the software runs on a server, storing consumers’ credit card numbers and shipping information. The software overcomes the limitations of its predecessor by giving consumers the portability to make a purchase from any computer with a browser and avoiding the need for a lengthy download of client software. But in the end, InstaBuy can only succeed if CyberCash rounds up enough merchants to make it worthwhile for consumers.

Although the pioneers have had a rough time, Yesil says CyberCash’s most recent attempt is headed in the right direction, and she contends segments of the market remain open. "I think what these companies basically are offering is still useful."

• First Virtual Sold customers, refocused business

• CyberCash Inc. Lost $31 million in 1998