by Rosalind Resnick with research by Heidi Anderson
There's no shortage of places for merchants to peddle their wares on the Internet. The trouble is getting paid.
One of the biggest stumbling blocks to commerce on the Internet is the lack of universally accepted legal tender—that is, electronic cash. Unlike the real world, where dollars, francs, lire, deutsche marks, even wampum beads are exchanged for goods and services, there are no equivalent cyberbucks that Internet shoppers can use to make their purchases. The payment systems that do exist on the Internet are fraught with problems. Despite a slew of new security technologies, credit card numbers still can't be safely sent through the network, and setting up an account with an Internet merchant is troublesome and time consuming. What's more, there's no handy way to peddle a 25-cent poem or chocolate-chip-cookie recipe.
The good news is that digital cash—a system in which online shoppers swap real dollars for Internet scrip to pay for goods and services—is on the way. This chapter looks at the pros and cons of the Internet payment systems in use today and examine some companies pioneering digital cash systems: DigiCash, First Virtual, NetCash, and CyberCash. You also get a glimpse of the future of Internet payment systems and find out which system is best for your business.
Closely tied to the problem of Internet payment is the issue of Internet security. Unlike commercial online services such as CompuServe and Prodigy, the Internet is not a secure network—thieves and vandals who hang out on the network routinely hack their way into Internet-connected computers and filch passwords and other confidential data. For online merchants, that means the risk that precious customer credit card data can be pilfered—a chilling prospect for companies and customers alike. That risked turned into chilling reality in February 1995 when notorious hacker Kevin Mitnick was arrested and charged with computer fraud andaccess device fraud—including stealing an estimated 20,000 credit card numbers and thousands of data files from an Internet access provider.
Currently, there are four main ways that business is transacted on the Internet:
Many Internet merchants display their goods and services in cybermalls on the World Wide Web but post their toll-free 800 numbers online so that Internet shoppers can order by phone. One example, shown in Figure 42.1, is PC Gifts and Flowers the Internet version of Prodigy's popular PC Flowers shopping service. Although not as convenient as allowing shoppers to type their credit card information online, phone ordering is more secure and more comfortable for the customer.
FIGURE 42.1. PC Gifts and Flowers takes orders on a toll-free number because of the risk of credit card theft on the Internet.
Another option is shopping clubs, which skirt the credit card security issue in a different way. For example, Internet Shopping Network, a Web-based catalog retailer of computer hardware and software, requires new customers to join the club by submitting their credit card information by fax; any purchases are charged to that card. A cybermall called Downtown Anywhere employs a Personal Payment system that lets any shopper with a credit card and a touch-tone phone acquire a Personal Payment Password that can be used for online purchases in Downtown Anywhere and at other participating sites. In seconds, information about online purchases of goods or services is transmitted by e-mail or fax to the merchants offering those products.
Many Internet merchants offer online order blanks so that shoppers can type their credit card numbers directly onto their Web sites—despite the risks involved. Even though server-based encryption programs like Enterprise Integration Technologies' Secure-HTTP protocol and Netscape Communications' Commerce Server are now available, few storefronts or cybermalls have yet to purchase or install them. In the meantime, many merchants are using on-the-fly security techniques such as PGP (Pretty Good Encryption) or simply crossing their fingers and taking their chances. Another problem with credit cards is that they're not well suited to small transactions or micro-purchases. On a 10-cent item, a bank or credit card company spends more money processing the transaction than the item costs.
Finally, some Internet merchants transact their sales offline by asking customers to send them checks. For example, I publish an electronic newsletter called Interactive Publishing Alert that offers potential subscribers two ways of paying for their subscriptions: check or credit card order. To activate their subscriptions, subscribers either mail a check made out to my company, Interactive Communications International, Inc., or they send me a fax containing their credit card number, expiration date, and signature. Although this system works fine for full-year $295 subscriptions, it's a pain in the neck to handle $20 single-copy issues or $9.95 special supplements this way.
Trouble is, all four of these payment systems (phone ordering, shopping clubs, credit card billing, and checks) have serious drawbacks when it comes to doing business on the Internet. Clearly, a better solution is electronic cash. With e-cash, or digital cash, as it's known, you simply transfer money from your checking account to your digital cash account, converting real-world dollars or other currency into digital coins stored on your hard drive. When you spend those coins on Internet goods or services, the transaction is credited to the merchant's account by the clearing bank and the proceeds are deposited into the merchant's bank account. Digital coins can't easily be stolen or faked, reducing the risk for both the buyer and seller.
NOTE Having digital coins on your hard drive is analogous to having cash in your wallet. A thief may be able to steal the contents of your wallet, but he can't clean out your entire bank account the way he could if he got hold of your ATM card and password.
What's more, digital coins are perfect for handling micro-payments, making it possible for all kinds of booklets, pamphlets, and other low-cost bits of information to be marketed world wide.
"Famous writers and columnists might find it profitable to use this medium to write 10-cent and 20-cent articles," speculates Arnold Kling, formerly of The Federal Reserve, in an article about Internet banking now posted on the Global Network Navigator Internet site. "Nonfiction authors with only 20 pages of things to say could issue pithy $2 online pamphlets, rather than repetitive $20 books."
And these small sums do add up.
The following sections describe the four leading electronic cash systems vying to be top dollar.
In May 1994, an Amsterdam-based company called DigiCash rolled out an electronic cash system that lets Internet users pay for products and services without typing credit card numbers or mailing checks. Founded by David Chaum, a bearded, ponytailed Los Angeles native who holds a doctorate in cryptography, DigiCash previously pioneered a similar system for automatic highway toll collection using what are known as "smart cards."
Although the DigiCash system (http://www.digicash.com) shown in Figure 42.2 is still in the testing phase, 500 customers and approximately 25 online merchants around the world (including Encyclopedia Brittanica and the Massachusetts Institute of Technology) are already swapping play money for goods and services ranging from books to groceries. If the talks now underway between DigiCash and bankers are successful, soon real money can be exchanged through the system.
FIGURE 42.2. DigiCash, an Amsterdam-based electronic cash company, lets Internet shoppers pay for products and services without typing credit card numbers or mailing checks.
"You can pay for access to a database, buy software or a newsletter by e-mail, play a computer game over the Net, receive $5 owed you by a friend, or just order a pizza," says Chaum, the company's managing director. "The possibilities are truly unlimited."
Some of the online merchants accepting DigiCash money include:
Of the four e-cash systems profiled in this chapter, DigiCash most closely resembles real money. Here's how it works:
First, you convert a certain sum of money from your bank account into electronic cash; if your bank doesn't participate in the DigiCash system, you must open an account at a bank that does. The DigiCash software then stores the digital "coins" on your computer's hard drive until you spend them (you don't earn interest on that money because you've already withdrawn it from the bank—just as with an ATM machine).
You can spend your digital money at any shop accepting electronic cash without first having to open a charge account there or typing in a credit card number—still risky business on the free-wheeling Internet. Buying goods and services is as easy as using your mouse to "drag and drop" your coins into an online store. The merchant then takes your money and deposits it at a participating bank. Unlike credit card transactions, merchants don't have to ante up a percentage of their sales, although bankers may decide to charge a fee for converting digital cash to real money.
The nice thing about electronic currency is that it enjoys the privacy of paper cash at the same time it ensures security by using encryption (coded messages that can't be cracked by online pickpockets) and by using digital signatures. The company's previous digital cash products ("chip cards" and "electronic wallets") have relied on a tamper-resistant chip for storing monetary value. Now, "all you have to do is download the software and you're up and running," Chaum says.
Like real-world cash, DigiCash coins also possess another important feature—anonymity. Because the merchant sees only the bank's signature and not Joe's, Joe remains anonymous throughout the entire process, enabling Joe to purchase anything he wants without fear of embarrassment.
Interestingly, the DigiCash system isn't restricted to the Internet alone. In February, DigiCash announced it was nearing completion on a technology that allows e-cash to be used on smart cards, which are popular in Europe where many currencies coexist. The technology, code-named Blue, uses a low-cost chip that takes advantage of DigiCash's encryption technology.
Of course, the DigiCash system isn't foolproof by any means. As with credit cards, it's possible for someone to steal your digital encryption key and use it to make purchases you may not find out about until it's too late.
DIGICASH'S FIRST CUSTOMER
While DigiCash is experimenting with Internet money, First Virtual Holdings is pioneering Internet credit.
At First Virtual (http://www.fv.com), shown in Figure 42.3, Internet shoppers access the First Virtual Web server and set up an account by giving First Virtual their credit card number. But instead of getting cyberbucks as they do with DigiCash, shoppers get online accounts. Once shoppers see something they want to buy, they simply give their account number to the merchant by typing it into the First Virtual server. Unlike DigiCash, there's no software to download and install.
FIGURE 42.3. First Virtual, a Web-based cybermall that sells electronic information products, is pioneering Internet credit.
The merchant, who pays First Virtual a $10 registration fee plus a 2-percent commission on each sale, ships the product to the customer. Every week, the merchant supplies a list of sales to First Virtual, which, in turn, sends e-mail to the customer confirming the order.
If the buyer wants to keep the product, he or she notifies First Virtual, which charges it to the appropriate credit card. If the buyer decides to return it, no money changes hands.
To be sure, there are some serious drawbacks to this system for participating merchants: namely, the system requires the seller to ship a product and trust the buyer to pay for it. Although First Virtual says it will close accounts of shoppers who do nothing but return products, the burden is clearly on the merchant.
Another drawback is that, at this point, the system is available only to vendors of information, not tangible goods. Although this fits well with the Internet's current demographic profile, the less computer-savvy buyers who are now making their presence felt in cyberspace may want products they can see and feel.
"One of the big barriers is...being able to make actual deliveries of goods," says Robichaux of Fairgate Technologies, whose company is currently negotiating with First Virtual for space in its mall. "First Virtual says that if you use [their] system to sell physical items and someone rips you off, that's your problem, not ours."
Another drawback to the system is the large volume of e-mail that exchanges hands. A buyer and seller can't meet in real time and exchange cash for goods; instead, a bank must act as a go-between.
Still, for all these faults, First Virtual has something that DigiCash doesn't: a real bank as a partner. By teaming up with FirstUSA, First Virtual has been able to start handling real transactions, rather than run it with funny money as an experiment.
PEDDLING INFORMATION ON FIRST VIRTUAL
Yet another digital cash experiment is NetCash, the Internet's answer to travelers' checks. The oldest of the payment systems profiled in this chapter, NetCash has been up and running with e-mail since May 1994; its Web site was almost complete as of this writing.
Developed by Bob Houston, president of Software Technologies in Germantown, MD, NetCash http://www.netbank.com/~netcash/, shown in Figure 42.4, is both easy to use and fairly secure.
FIGURE 42.4. NetCash lets shoppers purchase goods and services using electronic coupons and is the Internet's answer to travelers' checks.
It works like this: Internet shoppers enter their checking account or credit card number into an on-screen form and e-mail it to the NetCash system. This entitles the buyers to buy electronic coupons from NetCash for their face value plus a 2-percent commission. Each coupon is marked with a serial number.
The shopper then browses NetCash's merchant list—currently, it's through e-mail, although soon it will be through the Web site as well. Once the shopper selects a product to buy, he or she makes the purchase by sending NetCash coupons to the merchant. The merchant redeems the coupons at the NetCash NetBank (a computer program and not a physical location); NetCash takes 2 percent off the top as its fee. Currently, NetCash's most active merchant is Boardwatch magazine, which sells subscriptions. Other NetCash merchants include software companies and music and video stores.
NOTE The NetCash coupons themselves are transferred with e-mail. The consumer sends a check or money order by snail mail to NetCash, which exchanges it for the coupons and sends them by e-mail to the consumer. A coupon looks like this:
Because there is no minimum transaction fee, the NetCash system is ideal for micro-sales. However, because the system is not totally secure, NetCash isn't as good a way to sell bigger-ticket items. (And, in fact, NetCash has placed a $100 ceiling on vendors' offerings.)
"We prefer people to use existing systems for larger transaction items," Houston says. "We don't want them buying houses or cars online. One hundred dollars is the limit on any one item."
Along with the low ceiling and lack of total security, NetCash has some other drawbacks. Shoppers are not as anonymous as those using DigiCash; and until the Web site opens, NetCash shoppers must retrieve a list of vendors by e-mail, which isn't as easy to use as a Web browser.
On the other hand, NetCash is up and running now, handling real transactions and helping Internet merchants make money. Although Houston won't release sales figures, he says that several thousand people have registered to shop on the system.
Also, unlike First Virtual, vendors can sell tangible products, not just electronic information. NetCash users can have products shipped by postal mail, and they can also order by telephone so long as they give their NetCash serial number to the merchant. There is no minimum transaction.
While many companies are creating cash substitutes that can be passed across the Internet, CyberCash is working on a way to let Internet consumers use something they're already thinking of as money—their credit cards.
CyberCash (http://www.cybercash.com), launched in August 1994 by Bill Melton and Dan Lynch, comes close to providing a secure solution for sending credit card information across the Internet. The Reston, Virginia, company has teamed up with encryption experts Enterprise Integration Technologies, Trusted Information Systems, and RSA Data Security, Inc. to create a way to encode credit card data so that it can be sent through cyberspace safe from hackers. Rather than acting as a bank that exchanges offline money for cash that can be spent online, CyberCash acts as an Internet postal service (see Figure 42.5).
FIGURE 42.5. CyberCash provides a relatively secure way for Internet shoppers to use credit cards on the network.
Heres how the system works: A consumer downloads the free, graphical CyberCash interface, views the merchandise online, and presses the CyberCash "pay" button. This action notifies the merchant to send an online invoice to the consumer, who fills in his or her name and credit card information in an order blank. The credit card information is then encrypted and sent to the merchant, who sends the invoice and identification information to the CyberCash server.
Once this information reaches the server, the CyberCash computer sends a standard credit card authorization to the merchant's bank and forwards the response to the merchant, who ships out the product or service. The entire process is conducted quickly and with little cost to the buyer (CyberCash likens it to the cost of a postage stamp; CyberCash's processing fees are in line with those of systems now in place).
CyberCash's advantage to Internet shoppers is that it's cheap and easy to use. Buyers do not have to set up special accounts with a bank or with CyberCash as they do with NetCash; they just type in credit card data. The main advantage to the merchant is that payment is guaranteed before any product is shipped, unlike the First Virtual system. And, in theory, merchants can use the CyberCash system to sell any product online that they can sell offline—they're not restricted to non-physical goods or services under $100.
The main drawback to the system is that it's still in the trial stage and has yet to prove its worth. CyberCash signed a deal with Wells Fargo Bank of San Francisco last December, enabling merchants with accounts at Wells Fargo to sell their products through the system. Merchants with other banks, however, cannot market items. To date, only a handful of merchants are participating in the test, and a release date not been announced, although the system is expected to be ready within the next few months. Another minor disadvantage of the CyberCash system is that buyers must have credit cards, although most Internet consumers presumably have them or they probably wouldn't have been able to open an online account.
The CyberCash system is expanding into other areas as well: CyberCash accounts for organizations (in which an individual uses the organization's "key" to conduct a transaction) and electronic cash payments (which allow merchants to sell products that are too inexpensive to process cost effectively, such as searchable databases).
Because of the problems involved in getting paid, Internet commerce is still more hype than reality—that is, there are still more shops than shoppers. And each of the four payment systems profiled in this chapter have limitations; in the end, none of them may emerge as the Internet's answer to universally accepted legal tender. Of the four, however, we believe that DigiCash's system holds the greatest potential for widespread acceptability. It's easy to use, it's anonymous, and it's not restricted to the Internet. In Europe, where smart cards are more common than in the United States, DigiCash's offline capabilities could make it the system of choice.
At the same time, it's also possible that all four systems will coexist in the future—along with credit card entry, shopping clubs, and offline payment methods like toll-free phone ordering and checks sent by postal mail. The key for Internet merchants is to show online shoppers that they have a choice in how they pay: a choice that's convenient, secure, and suited to their individual needs.
