December, 1997

Exploring Digital Cash

Summary of Available and Developing Products

Products

Products currently available or in development as of November 1997 have been summarized within one of the four categories listed below:

• True Digital Cash: a radically new concept.
• Wallets and Multiple Payment Products: extensions of the current credit-card/ATM type systems.
• Micropayments: small amounts like coins in a pocket.
• "Niche" Systems: early prototypes of digital cash use.

Classification of each product or project is not precise, as some projects contain features of other projects, and some projects are relying on each other's developments for the systems proposed.

Other Observations:

• Micropayments vs. "Regular-size" Transactions
• Few products available today
• Architectural Considerations
• Consumer/Merchant Orientation
• Innovation by Unknowns vs. Adaptation by Well-knowns
• Network Models

Micropayments vs. "Regular-size" Transactions

There are two major and distinct levels at which "digital cash" systems are expected to operate. The first is to replace credit card or debit card transactions with the transfer of actual digital value. This value is derived in some way from a deposit of cash or transfer from a credit card, but the "value" then exists electronically, in the hands of the consumer. This "digitized" cash could then be used for the same range of purchases that have been historically handled by credit cards and ATM debits, where the high transaction costs require transfers of more than $5.00 or $10.00, with the average being much higher.

In contrast, other systems are being developed for a much smaller range of payments, or "micropayments." These products, none of which exists beyond alpha trials now, utilized simplicity and economies of scale to make much smaller transfers of money feasible. Micropayment sizes starting at a tenth of a cent have been discussed for some years, though current systems are focusing on one cent to a few dollars as the designed range of transaction sizes. By enabling small, real-time payments for delivery of information or web content, micropayment systems are markedly different from existing types of monentary transfers, and have important implications for the content and use of the World Wide Web.

Few products available today

At this moment, there are very few digital cash products in existence worldwide. Yet the number of innovative products "in development" has increased greatly in the last two years, and there are several such products in "alpha trial" right now. Many of the new systems for online payment being developed are not entirely (or even partly) digital cash approaches, but are just newer ways to initiate, authenticate and complete payment for goods through an Internet connection that use similar language and concepts to the digital cash field.

Most of these developing systems are coming from companies that are already involved in credit and debit card transactions, or that create network and PC hardware and software. These less-innovative systems are generally promising at this time to incorporate some of the newer innovative technologies (primarily micropayment abilities) into their products, but the extent to which this occurs can only be determined when these products come onto the market. Many of the earliest and most innovative approaches to digital cash focused on placing genuine electronic cash into the hands of consumers, with a great degree of flexibility and anonymity surrounding its use. Such products were generally being developed by universities or small start-up companies and, with few exceptions, they have stopped development or disappeared. A few other existing products can be called "niche" products, designed to solve just one aspect of online security. These are not really digital cash in any sense, though the language of the developers is again similar to that of the digital cash field.

Architectural Considerations

Some of these digital cash products are designed as what could be called Applications. Application software in this context ranges from actual cash value stored as software to the interfaces required on a PC to utilized electronic cash or a virtual wallet of payment options.

But increasingly, the systems being developed are moving in the Services layer of network architecture. In the most basic sense, many of the newest products (from large financial and technical companies) are designed to expand the exisiting financial services layer of Credit/ATM verification to include new products and web functionality. Other services are seeking to combine the use of different products, and these combined products consist of both applications and yet other services.

By keeping the efficiencies of the horizontal architecture in mind, it becomes apparent that products requiring a dedicated network of merchants equipped to accept their payment method (DigiCash, Virtual PIN, Clickshare, CyberCents) have more limited potential than products that can piggyback onto the existing and ubiquitous Credit/ATM system, or take advantage of existing financial institutions and network designs. Yet the applications level is still in a sufficiently innovative phase that a product (E-Cash or Mondex for example) could be incorporated into the financial and network structures by services created by other companies. Also worth noting is the increasing tendency of companies to form alliances and partnerships, to make their products dependent on one another, and to seek integration of digital cash systems from the most innovative applications and concepts (digital cash and micropayments) to the existing payment and authorization structures.

Consumer/Merchant Orientation

It is notable that the language used by each company, and the basis for their designs tend to fall into one of two orientations: many of the companies have backgrounds of supplying software for merchants and thus structure the transactions with the needs of the merchant foremost. Other products, notably the digital cash product (Mondex, E-Cash) are more focused on the consumer, and begin with assumptions of the importance of anonymity and portability, yet initially require dedicated networks of merchants to allow these products to be used.

Innovation by Unknowns vs. Adaptation by Well-knowns

The model of development seen in the digital cash field is interesting, and likely applies to product development and fielding in general. Small, new companies with innovative ideas are founded, and they initially create much of the excitement. Few of these companies (or University Departments) ever create an actual product, though some do, and others are acquired by larger companies.

Large and existing companies enter the field later, with more conservative though perhaps more realizable plans. They incorporate some innovative features, and form alliances with other companies to create large products that have a higher likelihood of successful development and use. These companies have more resources and reputation than the startups, and are in an advantageous position to survive the long period needed to develop, test and market new products. These companies also must engage in e-commerce development to protect their images and product lines, and to have a chance of acquiring market share in an emerging field. It is not accidental that Sun is developing a Java Wallet, nor Microsoft a commerce server for Windows NT.

Network Models

These diagrams are only representative of each kind of transaction model. The details of each system varies, but they generally fall into these basic relationships.

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The Credit-ATM Model is proposed for other uses as well, such as verification of digital cash accounts that remain on a bank server, or servicing of multiple account or payment options for consumers.

The strictly Digital Cash Model, as exemplified by Mondex and Digicash, puts electronic cash into the hands of the consumer. Merchants have the option of verifying the cash's validity online, though they may also store the cash and verify it later (offline). The merchant receives the electronic cash directly, and returns it to the bank to convert it to "real" money. Electronic cash of this kind can also be transferred between consumers.

This is just one model of possible Micropayments. With low values for both transactions and consumer holdings of digital cash, security is lower than with other systems, though verification can take place by the content provider or information "merchant."

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