Cashing in on the digital wallet

Hands up if this rings true. You have driven into the car park and go to get your ticket only to find that you are completely cleaned out of cash. You haven't got a bean in your wallet, you can't pay by credit card and there is nowhere near enough for you to run and get change before that parking warden (who you know is lurking nearby) comes and slaps a ticket on your car.

But what if there was another way? Supposing you could pay on a card that would be universally acceptable, allowing you to pay for anything from a newspaper to your car parking ticket. Digital cash, either stored on disposable media like phone cards or which can be replenished via an ATM, is just around the corner.

The technology has been around for quite a while, and it is, of course, the smartcard. Much maligned as a technology without a purpose when it first appeared, the smartcard is due at long last to come into its own with the advent of digital cash. However, getting users and, perhaps more importantly, vendors to trust the idea is a little more tricky.

Initial experiments in digital cash were abandoned because not enough customers used them, or spent so little on them, that both customers and vendors quickly gave up on the idea. Chase Manhattan and Citibank combined forces in a trial in Upper West Side Manhattan back in 1998. Around 100,000 cards were issued to residents and vendors equipped with the machines to accept payment this way. After a year it was found that the average spend on the cards was about $20, which was far too low to make the cards financially viable.

Trial and error
But since then other more widespread trials have had much more support. Visa has tested its own Visa Cash cards for some time around the world. In a two-year UK trial in Leeds, six local banks issued a total of 60,000 cards. Customers could use it to pay for parking, as well as in fast food shops, newsagents, phone booths and launderettes.

However, it was in the city's car parks and parking meters where the card really took off. Up to a quarter of parking meter fees were paid using Visa Cash, which translated into 30 per cent of the total amount spent using the cards.

Hans Christian Iversen, a partner at Deloitte Consulting, said that being able to use digital cash on the local transport system is one of the vital keys in enabling digital cash to take off. But other factors need to be in place before digital cash can be widely used. "If local transport and large supermarkets accept it, [and] there are sufficient cash machine upgrades, and the setting up of the scheme is subsidised, then people will support it," he said.

Iversen maintains that where trials have succeeded, such as those carried out in France and Denmark, the whole infrastructure has to be in place if the experiment is to succeed. People must be allowed to use and replenish the cards as often as they would use cash or fill their wallets at the ATM.

He does not believe that it is simply old cash-carrying habits that will hinder the take-up of digital cash. "Lots of people will be willing to support it if the concept is flexible. Coins weigh too much and are not handy to carry around," he explained.

On the contrary, any delays in the system being accepted may be down to small vendors, such as newsagents, which will have to fork out for expensive new terminals and will face huge bills if the system requires them to be online all day long in order to accept the digital payments.

Visa Cash is just one part of the larger picture, however. The company simply sees the concept as part of an emerging trend for what it calls the e-purse, and which others refer to as the e-wallet. The idea is simply that all your payment methods - smart cards, debit cards and credit cards - could be rolled into one and be governed by common standards making them safer to use - something that will be welcome to anyone who is worried about using a credit card over the internet.

Security concerns
An e-wallet standard is currently being developed by a consortium comprising some of the biggest firms worldwide, including Visa, Mastercard, American Express, Microsoft, Compaq, IBM, Sun Microsystems and America Online. The crux of the matter is the digital verification of the user, which makes sure that the card is being used by its rightful owner. This is likely to take the form of a digital ID, issued by a credit card company, which would be required whenever the card is used.

Another part of the e-wallet concept is devising a way of paying for goods or services online when the amounts are too small for a traditional credit card. These could be for content, such as multimedia clips or for playing games online, or for short-term internet access over a mobile phone. Of course, the killer app for micro-payments has to be Napster-style MP3 downloads.

Both IBM and Compaq are busily developing their own micro-payment methods. Compaq has its Millicent system up and running which is being used in Japan for making phone calls, and IBM's Micro Payment technology (www.alphaworks.ibm.com/tech/micropayments) is available to vendors for download and testing. The list of those that have tried out the system reads like a who's who of the worlds biggest companies, according to IBM.

These systems will have to compete with existing internet payment cards which allow those who do not hold a credit card to buy goods online. No end of versions of these cards exist, such as Jalda (www.jalda.com), Y-Creds (www.y-creds.co.uk), iCanBuy (www.icanbuy.com) and Rocket Cash (www.rocketcash.com). These are aimed almost exclusively at teenagers who want to buy things on their own, but are too young to own a credit card and have parents who are not about to let them loose on their own credit cards.

The end of the bank?
One question still remains, however. If all our money is going to be electronic rather than physical, will we still need banks?

After all, if money is simply an electronic commodity which is stored on a network that we can all access from any location, why would we want to store it all in one place, and be restricted to only getting cash from certain holes in the wall?

We are all now aware of internet banking, which, although imperfect, does offer users a great deal of flexibility and a reduction in banking costs. Iversen sees a time when banks will lose their current all-powerful status and will have to take on board the changes happening around them if they are to continue to exist.

"Banks will have to become more agile and flexible and offer services at a lower cost to keep their role," he said. "There will still be a need for banks, but they will have to give access to all distribution channels in order to make it beneficial for people to use them."

In other words, your high street bank will have to shake a leg if it wants to keep up with the digital age.