A new way of generating virtual cash flow

Raising credit can be a big problem when you first get started in business. It's difficult to get credit with no trading history, the high street banks are notoriously reluctant to get involved with small companies and dotcom companies in particular, because of the high risks involved.

Then consider the widespread concern that still exists over internet security and credit card fraud. Time after time surveys in the past year have shown that consumers fear their credit card numbers will be stolen if they use a card online.

Most recently credit rating company Experian found that fraud on the web was going largely undetected and unpunished, and a survey of surfing habits by The Consumers' Association in July found that 58 per cent of respondents were worried about fraud on the internet.

Banks are also reportedly scared off the internet by online fraud, with some observers commenting that the problem has become so bad that banks are not giving online accounts to new web retailers.

You also can't always easily strike up a merchant relationship with the major credit card operators to enable you to take payments off the internet, but even the smallest ecommerce merchant needs access to a full range of payment options for customers from all over the world.

There are, of course, payment solutions providers (PSPs), such as NetBanx, to meet this need. They make their money by processing the online transactions of those retailers that the banks consider too high risk. But PSPs demand higher transaction fees. Whereas normal high street stores can expect to pay fees of up to two per cent per transaction, online retailers pay around four per cent or more.

Online pre-paid credit cards
The recent rash of online pre-paid credit cards has been mooted as a possible answer to these problems: the pre-paid card phenomenon could have a big impact in the long term.

Online pre-paid cards work in a similar way to pre-paid mobile phone cards. Consumers and businesses can buy a card in set denominations which can then be spent online by using the card's PIN to shop from a website. Recent launches include cards from Splash Plastic, WorldOnline and Global Internet Billing.

Splash Plastic is aimed at the teenage market, to give young consumers more control, flexibility and freedom over their spending. SplashPlastic will enable holders to download funds at electronic top-up terminals, located in high street stores across the country. The money will be immediately available, via an online account, and ready to spend with affiliated Splash Plastic online retailers.

Splash Plastic is developing a network of web merchants that supply products and services suitable to the teenage market. A pilot programme starts in November and nationwide launch should take place early next year. Splash Plastic says it's meeting a proven need: UK teenagers spend £20bn annually, but can't easily buy on the internet because credit cards are unavailable to under 18s.

Global Internet Billing is a spin-off from telecoms carrier Interoute. It says its recently launched card, called interactivcash, is ideally suited to the SME market and is available from the same country-wide network of newsagents that sell Interoute phone cards. Cards will be available in denominations of £10, £20, £50 and £100, and shoppers will use the card's PIN to shop from a website.

The newsagent will take a cut of the card sale and pass on the rest to GIB, which then forwards it to the web retailer. GIB makes its money by managing the PIN accounts. Britishinformation.com, a portal for SMEs, has already signed up to the card.

But the response to these cards has not been overwhelmingly positive. Traditional credit card players have been perhaps predictably sceptical about the long-term impact of such cards.

Steve Williams, risk management director at Barclaycard, said on the launch of interactivcash: "Some unknown company brings out a pre-paid card and expects people to trust them ahead of established high street names. I find that rather improbable."

Will SMEs use pre-paid cards themselves?
While smaller companies may find that this is a way of receiving payments from customers, it is thought unlikely that they will want to use them for buying goods and services from suppliers.

Lindsay Robertson, smartcard programme manager at ICL, believes that SMEs will use some form of pre-paid mechanism online, but not necessarily a credit card.

"Pre-paid credit cards tend to be based on having a credit limit directly related to the amount of cash deposited. Cash flow is often a substantial problem for SMEs, so how does this actually help," he says.

Robertson also points out that the cash on a pre-paid credit card cannot be used for other purposes and so remains effectively out of reach until such time as the business achieves a decent credit rating.

"The other way is to have a limit related to a monthly payment such as a £250 limit against a £50 per month payment. However, the rates tend to be high and the temptation exists to overspend," he says. "What good is £250 anyway?"

Robertson instead suggests some kind of debit card, whether pre-paid or not, is preferable. It means that money not being spent via the card could also be available as cash or via a cheque. Neither does he believe that pre-paid credit cards would answer the internet security problem.

"There are far easier ways to get a credit card number than from the web. Would you rather lose your own [pre-paid] money or the bank's in a real credit situation," he says.

He thinks that single-use credit card numbers are a good option for security but are still unlikely to be offered to poor risk customers. He says maybe they could be offered on a per transaction basis - pay in £50 for a £45 purchase with a £5 fee.

Pre-paid cards are just one way in which money is likely to develop in the online future, and with the European online shopping market predicted to be worth nine billion euros (£5.3bn) by the end of this year (an estimate made by the Boston Consulting Group), we are likely to see increasing amounts of pseudo currency around.

Other forms of e-currency already abound: there are loyalty points which can be traded for goods at a given exchange rate (e-cash specialist Mondex teamed up with Beenz earlier this year to produce a smart currency card), and GIB has a scheme whereby telephone accounts can be used to pay for goods as an alternative to credit card accounts. There is sure to be much more where they came from.