Electronic Payment Systems Observatory : ePSO - Newsletter Issues 1-8 (July 2000 - September 2001).
Date: 2011-07-20
Institutions: Institute for Prospective Technological Studies
Subjects: Joint Research Centre, consumer protection, electronic commerce, payment, research report

ELECTRONIC PAYMENT SYSTEMS OBSERVATORY-

ePSO - NEWSLETTER ISSUES 1-8

JULY 2000 - SEPTEMBER 2001

ABOUT IPTS

The Institute for Prospective Technological Studies (IPTS) is one of the seven Research Institutes of
the European Commission (EC). These Institutes together make up the EC Directorate General known
as the Joint Research Centre (JRC), which is the corporate research laboratory of the European Union
with sites in Ispra (Italy), Geel (Belgium), Karlsruhe (Germany), Petten (the Netherlands) and Seville
(Spain).

IPTS, established in Seville in September 1994, is a unique public advisory body, independent from
special national or commercial interests and closely associated with the EU policy making process. In
fact,  most  of  the  work  undertaken  by  IPTS  is  in  response  to  direct  requests  from    the  European
Commission  Directorate  Generals,  or  the  European  Parliamentary  Committees,  or  takes  the  form  of
long  term  policy  support  on  their  behalf.  IPTS  also  does  work  for  Member  States’  governmental,
academic or industrial organisations, though this represents a minor share of its total activities.

Particular  emphasis  is  placed  on  key  Science  and  Technology  fields,  especially  those  that  have  a
driving  role  and  the  potential  to  reshape  our  society,  and  effort  is  devoted  to  improving  the
understanding  of  the  complex  interactions  between  technology,  economy  and  society.  IPTS  collects
information about technological developments and their application in Europe and the world, analyses
this  information  and  transmits  it  in  an  accessible  form  to  European  decision-makers.  This  is
implemented in three sectors of activity:
(cid:1)  Technologies for Sustainable Development
(cid:1)  Life Sciences / Information and Communication Technologies
(cid:1)  Technology, Employment, Competitiveness and Society

In  order  to  fulfill  its  mission,  the  Institute  develops  appropriate  contacts,  awareness  and  skills  for
anticipating and following the agenda of the policy decision-makers. In addition to its own resources,
IPTS  draws  on  a  large  pool  of  available  expertise,  while  allowing  a  continuous  process  of  external
peer review of the in-house activities (http://www.jrc.es).

ABOUT ITAS

The Institute for Technology Assessment and Systems Analysis (ITAS) is one of 16 institutes within
the Forschungszentrum Karlsruhe (Karlsruhe Research Centre).  The Research Centre is a member of
the Hermann von Helmholtz Association of German Research Centres.  ITAS also runs the Office of
Technology  Assessment  at  the  German  Parliament  (Büro  für  Technikfolgen-Abschätzung  beim
Deutschen Bundestag, TAB).

At the heart of ITAS’ research work is the comprehensive analysis and evaluation of the development
and  application  of  technology  and  its  inter-relationship  with  processes  of  societal  change.    Work  is
done  on  environment  related,  economic  and  political-institutional  issues  and  results  in  the
development  and  assessment  of  alternative  options  for  action  and  design.    This  type  of  scientific
termed  problem-oriented  research  and  usually  demands
treatment  of  complex 
interdisciplinary co-operation.  The ITAS web site provides – in both German and English – extensive
information  on  the  Institute,  its  staff,  on-going  and  completed  projects,  publications  and  events.    In
addition, the TA-Datenbank-Nachrichten archive and selected contents of the TA-Database are made
available in electronic form (http://www.itas.fzk.de).

issues 

is 

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ELECTRONIC PAYMENT SYSTEMS OBSERVATORY-
ePSO - NEWSLETTER ISSUES 1-8

JULY 2000 - SEPTEMBER 2001

http://epso.jrc.es/newsletter

EUR 19922 EN

Michael Rader
ITAS
Co-ordinating Editor
Rader@itas.fzk.de

Ioannis Maghiros
IPTS
EPSO Project Leader
Ioannis.maghiros@jrc.es

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European Commission

Joint Research Centre (DG JRC)

Institute for Prospective Technological
Studies
http://www.jrc.es

Legal notice

Neither the European Commission nor any
person acting on behalf of the Commission is
responsible for the use which might be made
of the following information.

Report EUR 19922 EN

© European Communities, 2001

Reproduction is authorised provided the
source is acknowledged.

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ABOUT ePSO
The Institute for Prospective Technological Studies (IPTS), part of the European Commission’s DG-
JRC, has set up an electronic Payment Systems Observatory (ePSO). The project is co-financed by DG
Enterprise (ISIS Programme). The ePSO project’s primary objective is to enhance  the  information
exchange in the field of e-payment systems and thus contribute to the promotion of e-commerce in
Europe. In order to achieve this, ePSO has set-up an electronic Forum of relevant actors and experts,
which facilitates the systematic exchange of opinions with a view to enhancing the knowledge base,
and working towards consensus.

http://www.epso.jrc.es

How does the observatory operate?
A  high  level  Steering  Group,  chaired  by  Mrs.  Christa  Randzio-Plath,  MEP,  President  of  the
Economic  and  Monetary  Affairs  Committee  of  the  European  Parliament,  provides  guidance  to  the
project.
A large number of experts and market players, participating on a voluntary basis, constitute the ePSO-
Forum.  This  electronic  discussion  Forum,  facilitated  by  the  ePSO-team,  addresses  strategic  and
technological isues in the area of e-payment systems.
Background papers analysing strategic and technical issues are drafted by ePSO-team and reviewed
and approved by the Steering Group before being presented to the Forum participants in order to raise
awareness on controversial matters.
The ePSO-Inventory contains an updated data base of B2C e-payment systems for e-commerce and
the comprehensive and up to date bibliographical database of Leo Van Hove.
A  conference  will  set  the  stage  for  state-of-the-art  e-payment  systems  presentations,  reinforce  and
extend communication channels established by ePSO, and allow actors to exchange views on existing
trends and future developments in electronic payment systems.
ePSO-Newsletter
ePSO-N,  which  is  published  monthly  with  the  exception  of  August  and  January,  is  made  available
electronically free of charge on the web, and is edited by the Institute for Technology Assessment and
Systems  Analysis  (ITAS  )  at  Karlsruhe  Research  Centre,  assisted  by  the  ePSO  team  and  an
international  network  of  experts.  ePSO-N  seeks  to  initiate  informed  discussion  among  stakeholders
and other interested parties in the field of electronic payment systems and related e-commerce matters.
Space for this discussion is provided by the ePSO Forum. Each issue of ePSO-N includes three to five
articles  on  a  special  focus  topic  jointly  selected  by  the  editors  and  the  network  of  correspondents.
Beside papers discussing specific aspects of electronic payments, the newsletters  contain interviews,
country  reports,  news  items,  pointers  to  net  resources,  conference  reports,  facts  and  figures,  plus  a
regular book review feature.
.

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Foreword

The  Electronic  Payment  Systems  Observatory-Newsletter  (ePSO-N)  is  one  of  the  tools  within  the
ePSO project used to structure the ePSO Forum discussions. ITAS of the Karlsruhe Research Centre
has been awarded the task of elaborating and editing the newsletter. This collection of the first 8 issues
of  ePSO-N,  comprising  a  total of  64  articles  on  e-payment  system  related  themes,  is  presented  in  a
single volume, which will allow readers to browse through and may serve as a reference manual.

The  Observatory  Newsletter  (ePSO-N)  is  the  first  ePSO  deliverable  to  be  produced;  the  first  issue
appeared  in  July  2000,  and  since  then  a  total  of  8  issues  has  been  produced.  It  has  been  very  well
received  by  its  public,  despite  the  ever  growing  number  of  e-commerce  related  newsletters  in
circulation. It started with a subscriber base of over 200 people, before the Forum was operational, and
is now regularly distributed to all ePSO-F subscribers (more than 500). It is also available on the ePSO
web  site  for  downloading;  some  200  additional  readers  per  month  prefer  to  use  this  method  of
accessing the newsletter.

Designed to structure and stimulate the ePSO-F electronic discussion, ePSO-N presents high quality,
timely  and  relevant  articles  supported  by  an  international  network  of  highly  skilled  correspondents
[see  section  8&9].  The  ITAS  staff  responsible  for  editing  ePSO-N,  currently  consisting  of  Michael
Rader, Ulrich Riehm and Arnd Weber, manage the 23-strong correspondent team, who discuss, author,
and review articles. Experts from outside this group have also submitted articles that have been edited
and published in ePSO-N. Moreover, ePSO-F participants are invited to comment on issues presented
in  the  articles  and  pose  further  related  questions  in  the  forum  discussion,  to  which  corresponding
authors usually respond.

Short  analytical  articles  addressing  a  rich  variety  of  themes  and  providing  insight  into  various  e-
payment  topics  are  included  in  ePSO-N.  In  addition,  each  ePSO-N  issue  contains  a  special  focus
section consisting of three to five in-depth articles. Each issue’s special topic is selected according to
the need to follow wider developments in the e-payments field, covering persistent knowledge gaps as
well  as  the  broader  requirements  of  the  ePSO  team  in  authoring  background  papers.  The  choice  of
topics  tries  to  balance  the  diverse  needs  of  the  subscribers,  some  of  whom  are  more  interested  in
technological development and innovation in the field, while others are more concerned  with policy
implications. The eight special topics addressed so far focus on:
•  Mobile payment systems (two issues),
•  Electronic purses and e-money schemes,
• 
•  New Internet payment systems (two issues),
•  European regulation of Electronic Money Institutions, and
•  Security aspects of electronic payment systems.

Interchange fees,

In  addition,  country  reports  on  payment  systems  in  use  help  provide  a  better  understanding  of  the
different national payment cultures. Although EPSO-N concentrates on Europe, developments in the
US and Asia are also taken into account. Furthermore, EU funded e-payments projects are reviewed or
their  project  leader  is  invited to  present their findings through  ePSO-N.  Leo  Van  Hove,  of  the  Free
University  of  Brussels,  presents  a  regular  book  review  section  entitled  "Leo's  corner".  Last,  but  not
least, an editorial introduces the issue, giving the personal opinion of the editor on the subject matter
so as to further stimulate the debate.

We hope this collection of newsletters will raise awareness of the important issues in the field of e-
payments and serve as a useful reference document.

The editors

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ELECTRONIC PAYMENT SYSTEMS OBSERVATORY-
NEWSLETTER ISSUES 1-8
Table of Contents 1 – organised by Issue

ISSUE 1 – July 2000

[1&1]   Editorial: ePSO-N: What is it good for? 

Focus: Mobile Phone Payment Systems (I)

[1&2]   The common future of wallets and ATMs? Mobile phones! 

[1&3]   Where EMI Directive and mobile phone payment systems will meet ... 

[1&4]   Country report: Mobile financial services and m-payments in Italy 

[1&5]   Imagine your telco is your bank, but a bank it ain't

[1&6]   Interview: Paybox, a new mobile payment product claims convenience and
             potential for international use. Knud Böhle talks to Peter Seipp, Chief
             Operating Officer of paybox.net AG

European Policy News

[1&7]   eEurope Action "Smart Cards for Secure Electronic Access"

Leo Van Hove's Review Corner

[1&8]   Survey of electronic money developments: impressive, but far from perfect

ISSUE 2 – August 2000

[2&1]   Editorial: Payments by mobile phone more convenient than e-wallets?

Focus: Mobile Phone Payment Systems (II)

[2&2]   M-Payments and the role of telcos

[2&3]   Dual-slot Phones as an Electronic Wallet. Universal or merely local solution?

[2&4]   Use your mobile phone as your payment card – the Danish way

[2&5]   Mobile Internet in Japan - lessons for Europe?

News on the Smart Card Industry

[2&6]   European smartcard industry takes a position on e-purse interoperability

News from the ePSO Project

[2&7]   The e-Payment Systems Observatory FORUM opens it doors

Leo Van Hove’s Review Corner

[2&8]   The price of cash – on a report for a Dutch retail association

9

11

13

15

16

18

21

22

24

25

28

30

31

34

35

36

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ISSUE 3 – November 2000

[3&1]   Editorial: Interoperability or Obsolescence: Which First for e-Purses?

Focus: Electronic Purses

[3&2]   What Future for Stored Value?

[3&3]   An Update on e-Purses

[3&4]   E-purses and Chip Cards in the Netherlands

[3&5]   Three Years of German e-Purse "GeldKarte"

Country Report

[3&6]   Rise and Fall of E-Payment Methods in Japan

Interview

[3&7]   Secure Electronic Marketplace for Europe – Project Semper publishes its results:
             Part 1 of an Interview with Michael Waidner

Leo Van Hove's Review Corner

[3&8]   The future of EBPP

ISSUE 4 – January 2001

[4&1]   Editorial: Interchange fees – Are consumers getting a real service or
             is it just a label?

Focus: Interchange Fees

[4&2]   Interchange fees in the line of fire

[4&3]   Competition in the credit card market

[4&4]   Credit Card interchange fees – A central bank speaks

[4&5]   Justifications of interchange from economic theory

From the ePSO Project

[4&6]   On hype, sacred cows, data holes, and how to cope with them

Interview

[4&7]   Secure Electronic Marketplace for Europe – Project Semper publishes its results:
             Part 2 of an Interview with Michael Waidner

Leo Van Hove's Review Corner

[4&8]   Consumer perceptions matter

- 6 -

39

40

43

44

46

47

49

51

54

55

57

58

60

64

67

68

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ISSUE 5 – February 2001

[5&1]   Editorial: Tell Your Provider What to Pay and What Not

Focus: Internet Payment Systems (I)

[5&2]   Finality of Credit Card Payments and Consumer Confidence –
             Different Approaches in the United States and in Europe

[5&3]   Internet Payment Systems in Finland

[5&4]   Internet Payment Systems in Italy

[5&5]   The Jalda Payment Method

Report

- 7 -

71

72

75

77

79

[5&6]   High Number of Electronic Cash Transactions in Hong Kong Octopus System

81

Interview

[5&7]   The Future of Retail Payment Systems

Leo Van Hove's Review Corner

[5&8]   US Citizens Hesitate to Pay their Bills Electronically:Theory & Empirical
             Evidence

ISSUE 6 – March 2001

[6&1]   Editorial: The Rise of Convenience: Clickable, Convertible, Contactless

Focus: Internet Payment Systems (II)

[6&2]   Access is King: About the Bright Future of Server-based E-payment Systems

[6&3]   Scratch Cards: Here to Stay?

[6&4]   E-money Solution from Austria: Paysafecard.com

[6&5]   Solving the Standardisation Problem of Internet-payments: The Case of Bibit,
             TWYP and SmartAxis

Country Report

[6&6]   Fast Electronic Purses and Transport Tickets in Japan

Presentation of EU-funded Projects in the Area of Electronic Payments

83

87

90

90

92

94

96

98

[6&7]   European Commission's Financial Internet Working Group Outlines its Work

100

Leo Van Hove's Review Corner

[6&8]   Payment Systems Data: Norges Bank Shows the Way

101

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ISSUE 7 – May 2001

[7&1]   Editorial: Europe – A Levelled Field for Electronic Money?

Focus: European Regulation of Electronic Money Institutions

[7&2]   A Harmonised EU Legal Framework for Electronic Money

[7&3]   Interview: The Directive on Electronic Money Institutions –
            A View From the ECB

[7&4]   Genesis of the EU-Directive on Electronic Money Institutions

[7&5]   Why is the Electronic Money-Directive Significant?

[7&6]   Report from the Digital Money Forum: Between Compulsion and
             Use by Children

Survey

[7&7]   Internet Payment Systems in Germany –

             Technologically Advanced Consumers’ View 

Leo Van Hove's Review Corner

[7&8]   The IT Revolution and the Banking Industry: a View from Japan

ISSUE 8 – July 2001

[8&1]   Editorial: Security – Newspeak, Assurance and Trust

Focus: Security

[8&2]   New Payments Authentication Methods for Use on the Internet

[8&3]   Mobile Payment Industry Fora – Consolidation of Initiatives Expected

Presentation of Security-related EU Projects

[8&4]   eEurope Smart Cards, 14 Months after the Smart Card Charter

[8&5]   STAR Project Outlines its Work

Miscellaneous

[8&6]   Electronic Payments 2001 – Food for Thought

[8&7]   Australia "Abolishes" Bank Fees

Leo Van Hove's Review Corner

[8&8]   The Price of Cash Revisited

Of Contacts, Correspondents and Disclaimers

[8&9]   Masthead

TABLE OF CONTENTS 2 – organised by topic

INDEX OF NAMES

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104

105

108

111

114

116

118

120

122

124

126

130

133

134

137

138

141

142

146

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ePSO Newsletter – Issue 1, July 2000

Focus: Mobile Phone Payment Systems (I)

[1&1]
ePSO-N: What is it good for?
Knud Böhle, Michael Rader, Ulrich Riehm
/electronic payment systems/research project/newsletter/Europe/European Commission

In  times  of  globalisation  and  European  integration,  rapid  technological  change,  when  governance
depends on participation, and interactive and nearly instant electronic communication media  are at
hand,  the  European  Observatory  on  Electronic  Payment  Systems  recently  established  is  taking  full
advantage  of  these  communication  media  to  become  an  acknowledged  information  resource  centre
and  a  forum  of  lively  discussion.  Within  the  project  the  ePSO-newsletter  is  an  important  means  of
communication  to  reach  this  objective.  This  first  editorial  will  tell  about  concept,  target  groups,
operation and distribution of ePSO-N, the electronic Payment Systems Observatory-Newsletter.

Welcome to the first issue of ePSO-N. There are many electronic newsletters on e-commerce already
available. So what is a new one like this good for? This is not the place to blow our own trumpet and it
is  safe  to  say  that  time  will  tell  if  ePSO-N  turns  out  to  be  a  useful  means  of  information  and
communication. There are nevertheless three attributes that make ePSO-N a promising undertaking.

First ePSO-N is not an isolated publication effort, but is embedded in the context of a major project
by the European Commission to establish an electronic Payment Systems Observatory. The target of
ePSO-N within this project is to stimulate and structure discussion.

Second ePSO-N is special because it focuses on electronic payment systems with an eye on their
use on the Internet and is thus more specific than many publications on e-commerce, and at the same
time it is broader than most of them. ePSO-N intends to convey unbiased information and to cover the
whole  spectrum  of  opinions,  including  not  only  the  visible  stakeholders  but  also  for  example
consumers, non governmental organisations, civil rights movements, and groups threatened by social
exclusion.  This  broad  focus  helps  to  increase  awareness  of  the  social  dimension  of  technological
innovation – which is a priority concern of the European Commission and the European Parliament.
Consequently ePSO-N targets three groups: the commercial and technological stakeholders, politicians
and the interested public.

Third,  the  main  asset  of  the  ePSO-N  is  its  network  of  outstanding  correspondents.  As  payment
cultures in Europe and world wide vary greatly and as the newsletter is to cover a broad area of issues,
the expertise of a small editorial team would not be sufficient. We have recruited our correspondents
on  the  basis  of  our  contacts  from  former  European  projects  in  the  field,  especially  from  the  recent
study on electronic payment systems requested by the European Parliament and carried out by IPTS
and  the  ESTO  network.  The  network  of  correspondents  will  be  a  living  body  open  for  new
contributors. The "spirit" of the network could resemble the IETF motto attributed to Dave Clark "We
reject  presidents,  kings  and  voting,  we  believe  in  rough  consensus  and  running  code"  ,  but  would
sound  more  like  "We  don't  have  blind  faith  in  banks,  credit  card  organizations,  politics  or  internet
gurus,  but  believe  in  reasoning  and  running  discussion".  The  masthead  at  the  end  of  the  newsletter
provides the names of our correspondents at the time of writing.

The newsletter is not a one way street of communication: it informs the research team at IPTS and
helps  them  to  keep  close  contact  to  reality,  real  demands  and  real  problems.  It  contributes  to
discussion in the ePSO-Forum which is to be established soon. The forum is open for informed debate
among knowledgeable people. And there is a feedback loop within ePSO itself: All readers are invited
to  comment  on  the  issues  covered.  The  development  of  the  newsletter  itself  is  an  ongoing  process
among the network of correspondents and project staff which has only just started. We hope that the
newsletter will improve as we benefit from this discussion. Last but not least comments are also taken

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into  account  in  the  production  of  forthcoming  issues  and  selected  letters  to  the  editors  will  be
published.

Each issue will contain a special focus covered by three to five articles. The special focus might be
on such topics as: mobile phone payment systems, as is the case this time; standard development and
deployment  (e.g.  SET,  SSL  CEPS,  EMV,  FINREAD,  HBCI,  OFX);  cross  country  comparison  of
payment culture (e.g.  e-purses,  credit card  use); impact  of  cross-border  trade  on  e-commerce  and  e-
payment methods; regulation, innovation, and legislation (e.g. on the occasion of a new directive); e-
money and near-money (bonus points & loyalty schemes); competition between banks, near-banks and
non-banks;  approaches  to  micropayments  and  so  forth.  The  topics  actually  chosen  depend  on  what
catches  attention  at  a  given  moment  and  on  the  ongoing  discussion  within  the  network  of
correspondents and the editors.

Inside or outside the focus, interviews and country reports will be provided. Other articles will deal
with news items such as new net resources, facts and figures (e.g. "graph of the month"), conference
reports, news from the IPTS Observatory Project and book reviews. Leo Van Hove, researcher at the
Free  University  of  Brussels,  who  already  maintains  the  most  complete  bibliography  on  electronic
purses and electronic payment systems on the internet, has agreed to provide one critical review for
each issue.

There will be a total of 15 issues of the newsletter appearing each month of the scheduled duration
of the project, with the exception of August and January. The newsletter is sent to those subscribing to
it and at the same time it is available on the ePSO Web-Site for download.

The focus of this first issue is on payments by mobile phone. As is pointed out in the introductory
article by Erik Dahlström, electronic commerce by mobile telephone or "m-commerce" is predicted to
be  the  next  wave  in  electronic  commerce.  Since  mobile  telephones  are  already  more  common  in
Europe than home computers and are more and more enabled to access the Internet, they could well
make  m-commerce  a  universal  phenomenon.  The  introduction  makes  the  necessary  distinctions  to
provide  a  structured  view  of  types  of  mobile  payment  solutions  and  of  the  major  players  involved.
Piero Bucci's country report illustrates this well for Italy, where mobile phones are extremely popular
already.  It  also  illustrates  that  while  banks  have  a  great  interest  in  this  area,  most  of  the  action  is
coming from the telcos. Anna Arbussá speculates on one possible scenario in which telcos take over
the job of the banks. Depending on the solutions selected,  mobile  phone  payment  systems  might  be
subject to regulation under the EMI Directive to be published soon. The challenge for both regulators
and providers of innovative mobile phone payment solutions is discussed by Simon Lelieveldt. Knud
Böhle  interviews  Peter  Seipp  of  Paybox,  one  of  these  innovative  entrepreneurs.  Outside  the  focus
theme  Michael  Rader  describes the  new  SmartCard initiative  of the  European  Commission  and  Leo
Van  Hove  reviews  the  "Survey  of  electronic  money  developments"  published  by  the  Bank  for
International Settlements.

[info]
•  The Institute for Prospective Technological Studies (IPTS), one of the eight institutes of DG Joint Research Centre of the
European  Commission,  is  running  the  "electronic  Payment  Systems  Observatory"  (ePSO).  The  project  is  funded  by
Directorate General Enterprise (ENTR) under  the  ISIS programme  (Information  Society  ITnitiative  in  Standardization).
The  project  team  is  currently  being  put  together.  There  is  still  an  acute  need  for  competence  in  the  field  of  security
technology and safety standards for electronic commerce and electronic payment systems as  well as  for competence on
complex e-commerce protocols and their related legal issues. If anybody has competence in one of these areas and would
like to join the international ePSO team, they are cordially invited to contact ePSO project management.

•  The Electronic Payment Systems Observatory has its homepage  http://epso.jrc.es/.
•  DG Enterprise at http://europa.eu.int/comm/enterprise/index_en.htm.
•  Information Society Initiative in Standardization at http://www.ispo.cec.be/isis/.
•  Institute for Prospective Technological Studies (IPTS) at http://www.jrc.es/welcome.html.
•  ePSO-Newsletter web-site at http://epso.jrc.es/newsletter.
•  Institute  for  Technology  Assessment  and  Systems  Analysis  (ITAS)  of  Karlsruhe  Research  Centre  Forschungszentrum

Karlsruhe (Postfach 3640, D-76021 Karlsruhe) http://www.itas.fzk.de/.

•  ESTO  web-site  http://esto.jrc.es/.  "The  European  Science  and  Technology  Observatory  (ESTO)  is  a  network  of
European organizations that assist, inform and alert the IPTS regarding scientific or technological breakthroughs, trends
and  events  of  potential  environmental  and/or  socio-economic  importance  which  may  call  for  action  at  a  European
decision-making level."

•  The outcome of the IPTS/ESTO study  on  Electronic Payment  Systems  on  behalf  of  the  European Parliament  were  two
reports:  Demosthenes  Papameletiou:  Study  on  Electronic  Payment  Systems  for  the  Committee  on  Economic  and

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 11 -

Monetary Affairs and Industrial Policy of the European Parliament. Brussels and Luxembourg 1999; Böhle, Knud; Rader,
Michael; Riehm, Ulrich (eds.): Electronic Payment Systems in European Countries. Country Synthesis Report. Karlsruhe:
1999.  They  can  be  downloaded  either  from  the  IPTS  web-site  at http://www.jrc.es/pages/f-project.html  or  from  the
ITAS WWW-Server at http://www.itas.fzk.de/deu/projekt/pez/emuis.htm.

•  Leo  Van  Hove,  Free  University  of  Brussels: 

"A 

selected  bibliography  on 

electronic  purses" 

at

http://cfec.vub.ac.be/cfec/purses.htm.

[1&2]
The common future of wallets and ATMs? Mobile phones!
Erik Dahlström
/mobile  commerce/mobile  phones/electronic  commerce/PKI/W-PKI/WIM/WAP/electronic  payment
systems/mobile phone payment systems

Mobile phones have the potential a serious alternative to other types of electronic payment methods
and  devices.  The  mobile  industry  is  now  working  on  equipping  the  phones  with  secure  payment
mechanisms suitable for mobile commerce as well as for conventional trade. This introductory article
deals with different of types of mobile phone payments, maps technology and assesses the market.

In London, all items forgotten on the London tube and trains are counted at the end of each year. Last
year,  for  the  first  time  ever,  the  vast  number  of  umbrellas  forgotten  was  actually  exceeded  by  the
number of forgotten mobile phones. Since the weather that year was as wet as ever, this is one of the
many statistics showing that mobile phones are becoming very popular commodity goods.

Development within the mobile phone industry is moving  very fast. Within  a  few  years,  we  will
have  mobile  networks  with  enough  speed  to  support  many  more  services  than  just  voice.  With  the
Internet  (r)evolution  fresh  in  mind  and  with  new  e-buzzwords  constantly  on  the  tips  of  people’s
tongues,  there  are  many  who  see  mobile  commerce  opening  new  doors  even  wider.  New  mobile
services will create new revenue streams and new value chains. The need for transaction, payment and
billing solutions is obvious. "The big three" – Ericsson, Nokia and Motorola –predict that within three
years  there  will  be  500  million  mobile  phones  equipped  for  trading  and  payment  services.  The  two
major forces driving the development of mobile phones payments forward are:
•  Mobile  phones  can  receive,  contain  and  give  access  to  chargeable  mobile  commerce  goods  and

services.

•  Mobile phones are widely available and would also work for "conventional” purchases.
We  can  see  from  this  that  the  mobile  phone  could  be  used  for  Internet  commerce  as  well  as
conventional trade in the high street. Mobile phones can be equipped with different types of payment
methods - a credit card, an e-purse, a loyalty card, or it can even be a carrier of electronic cash.

The mobile phone is a communications device for both voice and data and it is considered a more
personal device than the PC. Since the cellular phone is mobile, it usually moves with the owner. The
next generation of cellular networks will have positioning services built-in. Knowing where customers
are is great for merchants – they can start pushing offers to them based not only on who they are, but
also  where  they  are  and  when.  It  gets  even  more  interesting  if  a  merchant  can  make  it  easy  for  the
customer to  actually  buy  by  letting  him  use  the  phone  directly,  independently  of  any  fixed  point  of
sale.

There are  two types  of  mobile  phone  payments  to consider. The  first,  and  perhaps  most  obvious
type,  uses  standard  GSM-  or  WAP-phones.  From  the  point  of  view  of  the  user  he  pays  using  his
phone,  although  the  actual  transaction  happens  in  one  of  two  ways  having  nothing  to  do  with  the
phone itself:
•  Registration  of  the  payment  by  the  mobile  operator  who  then  adds  it  as  an  entry  on  the  user’s

phone bill (operator bound billing)

•  Registration  in  a  stand-alone  system  which  allows  for  billing  of  some  kind  (operator  neutral

billing).

An  example  of  an  m-commerce  application  of  the  latter  kind  is  VPS  (Virtual  Parking  System)  by
Cellonet. VPS enables drivers to pay for parking using their mobile phones. For the driver this means
no need for small change or for a physical ticket, since wardens use GSM terminals. It also gives him

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the  possibility  to  extend  the  parking  time  from  a  distance  using  his  phone.  The  parking  fees  are
aggregated  and  the  actual  transaction  is  executed  automatically  at  the  end  of  each  month.  This
transaction is very much like an Internet transaction (cardholder not present, remote POS).

Operator  bound  billing  gives  the  user  the  advantage  of  being  charged  on  his  mobile  phone  bill.
Most people I have spoken to, think this is the most obvious, user-friendly, way of getting charged.
Compared to operator neutral billing the main disadvantage is the difficulty of offering m-commerce
services to subscribers of other networks. Consider for instance the complicated clearing procedures
involved  in  roaming.  With  additional  external  m-commerce  service  providers  transactions  could
become complicated and expensive.

For  any  type  of  commerce,  one  of  the  most  important  prerequisites  is  being  able  to  securely
transfer money to some other known party and then being able to prove you did it. For e-commerce,
the only known feasible method to do this is the use of digital certificates and signatures. The system
handling  digital  certificates  is  called  Public  Key  Infrastructure  (PKI).  PKI  enables  confidentiality,
authentication, and (for commerce most important) non-repudiation. Wireless-PKI security framework
is under development for mobile commerce. This leads the other type of mobile payments, in which
phones are equipped with m-commerce functionality.

Whereas  the  SIM-card  plays  a  central  role  in  the  GSM  standard  to  identify  the  subscriber,  the
WIM-card  (Wireless  Identification  Module;  also  "WAP  Identity  Module"  or  "Wireless  Identity
Module") is now being introduced to convert phones to payment devices. Where the SIM is used to
identify the subscriber to the mobile network, the WIM is used to identify the buyer to the seller.

There are four ways of equipping phones with this m-commerce identification module. These four
methods not only represent four alternative technical solutions, they are also part of a battle for profit,
market share and card ownership (which is not a new phenomenon in the payment card industry).
•  The first option is to combine SIM and WIM in a single chip card. The advantage is that only one
card slot is needed in phones. Swedish mobile operators are today considering replacing existing
SIMs  with  WIMs.  Even  though  this  would  be  expensive,  once  subscribers  become  buyers,  the
operator could become a seller of services.

•  Another  alternative  is  to  install  the  WIM  in  the  memory  of  the  phone.  Mobile  phone

manufacturers are working on a standard to promote this option.

•  The  third  option  is  the  dual-slot  phone,  where  both  the  SIM  and  the  WIM  have  their  own  card
reader. This makes the position of the mobile operators less strong, since other organisations, such
as  banks,  grocery  chains  etc., could  provide  cards  for  the  phone.  Ericsson,  Nokia  and  Motorola
have announced that the development of phones with dual slots.

•  Finally,  a  fourth  alternative  is  using  an  external  WIM  card  reader  that  can  communicate  to  the

handset using, for instance, Bluetooth.
In the near future there are three categories of companies particularly interesting to follow in the

implementation of m-commerce applications.

Telcos  –  for  mobile  operators  the  big  battle  for  subscribers  has  already  been  raging  for  quite  a
while.  Voice  will  in  the  future  only  be  one  service  of  many  offered  in  our  mobile  networks.  The
provision of value added services to mobile subscribers will become a necessity to stay competitive. If
the mobile phone can also be used as a method of paying for goods and services, the mobile operators
see  no  reason  why  anyone  else  but  them  should  handle  the  transaction.  They  actually  have  the
advantage  of  an  established  relationship  with  the  customer,  which  includes  billing.  The  mobile
operator with the cutting-edge position with regard to this is Sonera, the former state telco in Finland.
Their  initiative  SmartTrust  has  the  overall  goal  of  turning  the  mobile  phone  into  a  fully-fledged
popular payment device.

Banks – The banks are now realizing two things. First, new electronic channels are great for them!
Letting their clients use the Internet instead of coming to the local branch reduces loads of costs: up to
90% according to some Swedish banks. Beside mobile banking, two other services offered by banks
play an important role: mobile stock and bond trading and mobile transaction services.

The latter is what banks are good at, leading us to the second thing banks are beginning to realize.
In  theory,  the  mobile  phone  can  replace  all  payment  cards.  Unless  they  get  a  grip  on  mobile

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commerce,  others  (read  telcos)  will  take  over  this  mega  business.  SmartTrust’s  PKI-system,  for
instance, requires the bank to have an agreement with the mobile operator. Hence, many banks have
initiated strategic alliances such as Mobey Forum.

Entrepreneurs – this category is perhaps the most interesting for two reasons. First, the business
concepts  of  these  entrepreneurs  could  be  pretty  much  anything.  Ideas  could  range  from  "Pay-to-
gamble" to "Sunday collection gifts", all with the hope of providing the "killer application". What will
be left in a few years are working business models, evaluated by market forces and proven by trial and
experience.

Second,  companies  without  existing  customers  need  to  establish  new  relationships.  Even  though
this often proves to be difficult, these companies enjoy the advantage of being "position and segment
neutral". This means that they can offer many services to pretty much anyone (many-to-many), adding
value for prospective customers. A bank would only offer financial services (few-to-many). A mobile
operator could find it difficult to offer their services to subscribers of other operators (many-to-few).

More  advanced  mobile  commerce  services,  services  where  the  mobile  phone  acts  as  an  access
device and/or a payment device (Internet, high street) will further a need for secure mobile payments.
A large number of people carry their phones as they carry wallets, which makes the phone interesting
for conventional trade as well. If the cellular phone is considered a fully-fledged connected payment
device, the difference between an Internet and high street purchase diminishes. All in all, the mobile
phone has the potential to be the payment device of the future.

[info]
• METAX – http://www.metax.dk.Offers petrol payment via mobile phones.
•  Cellonet – http://www.cellonet.com.Offers VPS, mobile phone parking.
•  The  BarCode  company  -  http://www.barpoint.com/.  Enables  a  user  browsing  in  a  store  to  type  in  the  bar  code  of  a

product send    it as an SMS, and get the cheaper Internet-store price back.

•  Sonera SmartTrust – http://www.smarttrust.com.SmartTrust has recently bought Across Wireless and iD2 (in fact, they

are both spin-offs of AU-System).

• MET – http://www.mobiletransaction.org. Mobile manufacturers promoting secure mobile commerce.
• Mobey Forum – http://www.mobeyforum.org . Banks promoting secure mobile commerce.

[1&3]
Where EMI Directive and mobile phone payment systems will meet ...
Simon Lelieveldt
/EMI Directive/ electronic money/mobile phone payment systems/ regulation/policy/ innovation/WAP

While  banks,  telco operators  and  ICT-services  companies  are  developing  all  kinds  of  mobile  phone
payment  solutions,  the  EU  will  soon  publish  the  long  awaited  directive  on  electronic  money,  which
will  result  in  the  implementation  of  this  directive  in  the  local  laws  of  member  states.  Consequently
some payment solutions will classify as electronic money while other solutions fall outside the scope of
these rules. In order to avoid high implementation costs, regulators and innovators may benefit from
further considering and discussing the current technical and regulatory developments.

When two market leaders such as Visa and Nokia join hands to develop solutions for advanced mobile
e-Commerce, we don't need a crystal ball to predict that some of the major future innovations in the
electronic payments domain will consist of the combination of mobile phone technology with existing
payment  systems.  This  year,  we  see  the  market  parties  establishing  their  positions.  For  example,
Woolwhich,  the  British  retailer,  set  up  a  WAP  Mobile  Phone  Banking  Service  in  partnership  with
Nokia.  In  the  Netherlands  we  see  the  Dutch  Postbank  offering  WAP-based  brokerage  services  in
partnership  with  Ericsson  and  Libertel.  Another  Dutch  example is the WAP-based  payment  product
developed as a joint effort by KPN (in its role as the WAP-gateway operator) and Bibit, the payments-
facilitator on the Internet.

If we look at the phone market developments in the EU we can see that mobile phone operators are
adapting their phones, routers and networks to become IP-based. The existing infrastructure (including
the billing engines) will be used as the starting point. This means that a number of different payment

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solutions will be developed to allow payment with mobile phones. Payment can be achieved through
the  operator  or  access  provider  channel  by  adding  items  to  existing  mobile  phone  bills  or  access-
provider bills. For these solutions either pre-payment  or  a  proper customer  identification  and client-
operator  relationship  is  a  prerequisite.  Another  series  of  payment  solutions  will  be  based  on  a  card
solution. In those cases either a charge-card, a credit-card or a pre-paid card serves as the identifying
component for making payments. Finally a series of newly built dedicated solutions can be envisaged
in which the customer enters into a specific contract with a payment facilitator/integrator, to be able to
make payments. Essentially this would be the mobile equivalent of the virtual credit-card.

While enterprises seek optimal solutions to maintain or gain a competitive edge in this market, the
European Commission will soon publish the long awaited directive on the taking up, the pursuit and
the prudential supervision of the business of electronic money institutions. As a result the issuing of
pre-paid electronic money to consumers is an activity which will be regulated by the local supervisory
authority,  also  responsible  for  supervision  of  banks.  The  supervision  itself  will  aim  at  ensuring  the
stability,  liquidity  and  reliability  of  the  e-money  issuing  institution,  which  -  as  a  matter  of
competitiveness and open markets - does not have to be a bank.

To  understand  the  possible  consequences  of  the  directive  on  electronic  money  for  mobile  phone
billing solutions, we should note that the EMI Directive specifically covers pre-paid forms of payment
solutions,  in  which  payments  are  made  to  more  organisations  than  the  issuer  of  monetary  value.  A
simple pre-paid phone card, issued by a network operator and used only for phone calls, constitutes a
pre-payment  of  services  and  falls  outside  the  scope  of  future  legislation.  If  however,  that  same
operator would use its pre-paid mechanisms to allow its users to pay for buying drinks from a vending
machine (operated by another company) as well, the prepaid card would not be viewed as pre-payment
of services but as some form of monetary value, issued to the user. The system would then fall under
the regulatory regime specified in the EMI Directive. If on the other hand, the network operator would
not use pre-paid mechanisms but would add the drinks ordered at the vending location to the phone
bill, the applicable laws would be the local laws pertaining to payment instruments. In some member
states  this  would  mean  that  a  bank  license  is  needed.  In  other  member  states  issuing  a  payment
instrument does not in itself constitute banking and does not lead to additional supervision (see also
[1&8]).

The  adapted  infrastructures  and  billing  engines  from  mobile  phone  network  operators  may  fall
under the future local legal implementation of the EMI Directive and (for the billing part of it) under
local  law  with  respect  to  payment  instrument.  It  appears  to  be  useful,  therefore,  for  mobile  phone
operators and regulators to further consider and discuss the potential legal consequences of the current
technical developments. Regulators may benefit from this discussion and be better able to decide on
the best local implementation of the EMI Directive. The mobile phone network operators may benefit
by better understanding the supervisory consequences of some of the technical choices to be made.

[info]

• Visa/Nokia agreement: http://www.visa.com/av/news/press_release.ghtml?pr_form_edit=236.
• Woolwhich/Nokia pilot: http://www.woolwich.co.uk/wap/.
• Postbank/Erisson/Libertel pilot: http://www.postbank.nl/home/1,3000,241,FF.html.
• KPN and Bibit WAP-payments: http://www.wapped.nl/mcommerce/zepn3.html.
•  Status of Codecision procedure on electronic money directive

http://wwwdb.europarl.eu.int/oeil/oeil_ViewDNL.ProcedureView?lang=2&procid=3381.
• Latest version of EMI Directive: http://register.consilium.eu.int/pdf/en/00/st03/03628en0.pdf.

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[1&4]
Mobile financial services and m-payments in Italy
Piero Bucci
/mobile phone payment systems/online-banking/m-commerce/Italy

The present Italian projects and pilots on mobile commerce and mobile payments mark a qualitative
leap. It is an important step towards the mobile telephone as the easiest, most flexible and widespread
smart card based operating platform for everyone. Mobile telephony is becoming such a determining
factor  in  the  acceleration  of  Internet  penetration  that  Italy  is  coming  close  to  the  forerunning
countries.

Italian people are practically learning that mobile phones can be used for more than just making phone
calls. An important aspect in this sense is the expected convergence between mobile phones and the
Internet. Market research indicates that Italy currently has one of the highest mobile-phone penetration
rates in Europe. Today 67% of all Italian families have at least one cellular phone (up by 75% against
June  '99)  (source:  "eFamily"  research  by  Federcomin  and  Niche  Consulting).  Ovum  expects  that  in
2005 there will be 63.6 million mobile phones in Italy, which in fact is more than one mobile phone
per resident. More than half of the Italian population (of 57.5 million people) will participate in mobile
commerce  in  2005.  It  is  estimated  that  by  2004,  61%  of  the  mobile  phones  in  use  in  Italy  will  be
Internet enabled (source: Forrester Research). In terms of the leading applications, financial services
such  as  mobile  brokerage,  mobile  payment  and  mobile  banking,  will  be  the  second-largest  revenue
source (source: Durlacher Corp. 1999).

Since the second half of 1999 the main Italian banking institutions have launched on the market a
variety  of  e-banking  services  (Internet  banking,  online  trading,  etc.)  connecting  more  than  two
hundred  thousand  clients. They  are  now  starting  to  integrate  such  services  with  the  mobile  services
also  including  mobile  phone  payments.  In  terms  of  marketing,  Italian  banks  believe  that  providing
mobile payment services to their customers is one of the first priorities. An important role in this area
will  probably  be  played  by  Banca  Antoniana  Popolare  Veneta  (BAPV)  through  a  commercial
agreement  with  ABN  AMRO  Bank.  The  main  m-payment  initiatives  however  are  currently  coming
from the telcos (technology push). We take a closer look at these activities.

TIM  (Telecom  Italia  Mobile)  together  with  Oberthur  Card  Systems  and  Società  per  i  Servizi
Bancari  (SSB),  has  developed  a  system  that  allows  the  mobile  phone  user  to  carry  out  banking
functions  and  m-payments.  To  make  payments  only  the  number  of  the  authorised  mobile  phone  is
required. To activate the service, the TIM's customer must go to his or her own bank, sign a contract
and authorise the payment instruments at his or her disposal. From that moment, the mobile telephone
is enabled to display a special menu for handling payment transactions. The transmission of the data
from the SIM card (Subscriber Identity Model) to the mobile network will be managed from the SAT
already active on TIM network. In addition to the GSM standard and the bank codes on the SIM card,
security is guaranteed by the fact that the payment instrument identification data is not transmitted on
the network. This new method of payment is now going on the market.

TIM and Banca Popolare di Milano (BPM) have jointly launched We@TIM, a set of services for
on-line trading, mobile banking and generalised access to e-commerce. These services are based upon
a smart card supplied by TIM that can be used on TIM mobile telephones with dual-readers. We@TIM
customers can also buy or sell shares, consult their own bank accounts, transfer funds or make use of
all the electronic services  of  BPM  bank.  There  are  further important  agreements  signed  by  TIM,  eg
with Monte di Paschi di Siena (MPS) or with Yahoo Europe in order to provide TIM's customers with
a comprehensive range of WAP content and services.

Omnitel  has  launched  a  trading  service  along  with  Self  Trade,  a  French  broker  on  the  Net.  On
"Omnitel  2000"  it  is  possible  to  buy  and  sell  online,  either  by  accessing  the  Internet  address
www.2000.it or WAP (http://wap.2000.it). The agreement allows Omnitel clients to operate this service
with a Self Trade account, and to make transactions either through Omnitel 2000 portal web sites or
from the WAP mobile phone.

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Omnitel's  Telematic  Payment  Systems  Division  is  also  developing  value  added  services  for
customers in the field of payments via the Web and GSM/UMTS. To this end, Omnitel plans to create
opportunities  for  collaboration  with  the  Italian  banking  system  sectors  in  order  to  develop  online
transaction services. Omnitel is also starting a mobile auction service targeted for Omnitel's customers.
Blu and Nokia have signed a turn-key contract for the supply and rollout of network solutions for
their GSM network. Blu is probably also going to adopt the Nokia EMPS (Electronic Mobile Payment
Services) technology. The EMPS is a joint project between Nokia, MeritaNordbanken and Visa in the
area  of  mobile  payment  and  it  was  demonstrated  during  the  last  CeBIT  2000.  The  Nokia  solution
showed how the WAP and Personal Area Network (PAN) connectivity technologies, such as Infrared
and Bluetooth, enable customers to purchase either via an on-line transaction over the Internet or at the
merchant  point-of-sale  by  using  a  WAP  enabled  phone  with  a  reliable  credit  card  payment.  This
involves  the  EMV  (Europay,  Mastercard  and  Visa)  compliant  bank  card,  WAP  Identity  Module
(WIM) and, SET (Secure Electronic Transaction) technologies.

Concerning the collaboration with Italian banks, Banca Nazionale del Lavoro (BNL), which is one
of Blu’s shareholders (7%), last June started a mobile trading operation on the normal dual band GSM
SAT with a Blu On SIM card.

WIND and BULL Italia signed an agreement last year that gave Bull the task of  defining  a  new
WIND  company  card,  based  on  Bull  Technology.  Such  an  initiative  should  prepare  new  innovative
mobile  payment  services  even  if,  at  present,  there  is  no  public  information  available.  Since  there  is
strong pressure coming from competitors, it is easy to foresee that Wind will react in the near future
by introducing m-payment services.

[info]
• We@TIM: http://www.webank.it.
• FEDERCOMIN (Federazione delle Imprese delle Comunicazione e dell’Informatica): http://www.federcomin.it/.
• TIM (Telecom Italia Mobile) http://www.tim.it/.
• OMNITEL http://www.omnitel.it/.
•  BLU http://www.blu.it/.
•  WIND http://www.inwind.it/.
• NOKIA Market study (1999): The demand for mobile value-added services.
•  Banca d'Italia Assemblea generale ordinaria dei partecipanti: Considerazioni finali e bozze di stampa (Governor Report),

Roma 30maggio 2000.

•  For general information on the payment culture in Italy see the country report by Piero Bucci contained in: Knud Böhle,
Michael  Rader,  Ulrich  Riehm  (eds.):  Electronic  Payment  Systems  in  European  Countries  -  Country  Synthesis  Report,
Karlsruhe  1999.  Downloadable  from  the  Institute  for  Prospective  Technological  Studies  (IPTS)  web-site  at
http://www.jrc.es/pages/f-project.html. Klick there on "Electronic Business".

[1&5]
Imagine your telco is your bank, but a bank it ain't
Anna Arbussá
/mobile phone payment systems/electronic money/regulation/competition/WAP

Payments  methods  by  mobile  phone  are  a  further  step  in  the  development  of  electronic  payment
systems.  They  can  be  broadly  classified  into  two  categories:  e-money  (pre-paid  cards  and  network-
based electronic money) and ''conventional'' electronic payment systems (eg. bank accounts transfers)
through  wireless  access.  Payments  by  mobile  phone  further  contribute  to  blurring  the  distinctions
between  the  participants  in  payment  systems  (banks,  non-bank  financial  institutions,  telephone
companies, internet access providers).

The  emergence  of  WAP  (wireless  application  protocol)  in  connection  with  mobile  phones  is
considered a significant step forward for mobile interaction with the internet. It is the first in a series
of  envisaged  technology  developments  that  enable  the  link  of  wireless  devices  to  the  net.  With  the
convergence of mobile telecommunications and the internet, it is expected that mobile commerce will
spread.

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With mobile phone penetration in many European countries having reached more than 50 per cent,
and with forecasts indicating that, within three years, 50 per cent of all mobile phones will be internet-
enabled, the prospects for m-commerce look promising. As with electronic commerce (e-commerce) -
trade on the internet with access from a PC - a payment mechanism that is efficient and economical for
consumers  and  merchants  will  be  needed  to  complete  transactions  in  m-commerce.  The  range  of
payment mechanisms that will be available for m-commerce is very similar to that available for the e-
commerce marketplace. These payments mechanisms can be divided into:
• 
•  new electronic access to otherwise conventional payment mechanisms.
The  first  group  of  payment  mechanisms  corresponds  to  multi-purpose  pre-paid  cards  (electronic
purses) and network money. The functioning of these systems will be covered by the EMI Directive
(see [1&3] on this). Changing the type of carrier, from PC to mobile phone, makes no difference from
the perspective of central banks.

electronic money, and

• 

The second category corresponds  to  various  schemes  with  new  electronic payment  solutions  that
ultimately  rely  on  otherwise  conventional  payment  mechanisms  (through  banks  or  credit  card
organisations). Examples of these schemes are the following:
• 

In  Germany,  Mobilcom,  a  wireless  carrier,  is  planning  to  launch  a  wireless  bank  -after  gaining
authorisation to conduct banking activities- and Mannesmann and Deutsche Bank are to launch a
Europe-wide solution for wireless payments.
In  France,  Mastercard,  together  with  Oberthur  Smart  Cards,  France  Telecom,  Europay  and
Motorola, is to run a pilot scheme to conduct wireless payments by inserting smart cards, which
will  be  issued  by  Credit  Mutuel,  into  dual-slot  handsets.  Mastercard  has  entered  a  series  of  m-
commerce  partnerships  and  agreements  with  technology  providers  like  Trintech,  or  Sonera
SmartTrust.

•  Also in France, since June 2000, France Telecom Mobiles has been commercialising the payment
service  ''CB''-  Cartes  Bancaires  -  that  also  allows  for  payment  through  mobile  phones  on  the
internet.
In  Spain,  Telefónica  Móviles  and  BBVA  created  Movilpago,  a  50%  joint  partnership  for  the
development  and  commercialisation  of  payment  alternatives  via  mobile  phones.  Movilpago  is
scheduled to operate in Spain in the last four months of 2000.

• 

What's new about m-commerce payment solutions? What are, if any, the implications for current retail
payments systems? The answer is that the implications are not clear-cut, they are rather imprecise yet
unremitting:  a  trend  for  institutions  other  than  banks  to  gain  significance  as  participants  in  the
provision  of  payments  systems.  The  schemes  mentioned  above  are  instances  of  the  involvement  of
technology vendors, software and telecom companies in payment solutions. The fact that the banking
system continues to intervene in practically all payments, does not contradict the tendency that banks,
and  bank  money,  lose  significance.  Would  it  be  possible,  in  the  long  run,  if  the  trend  for
disintermediation were to continue, that internet and related technologies would bypass banks in the
clearing and settling of transactions?

The question is hypothetical, but let's imagine... . Let's suppose that instead of holding deposits at
banks, economic agents were to store their assets with a mobile operator (in the form of pre-paid cards
or  network  money)  and  that,  when  these  agents  bought  or  sold  something,  the  mobile  operator
transferred the ownership of these assets between the economic agents instead of effecting the transfer
through the agents' bank accounts. The  moment  these  agents  were  willing  to  accept final  settlement
from the mobile operator, it would no longer be bank money.

To conclude, although nowadays banks continue to be at the centre of the retail payments system in
Europe, the role of financial intermediaries in the provision of payments systems is changing. Because
electronic  payment  technologies  require  large  fixed  investments  and  often  networks  that  exhibit
significant economies of scale, we are witnessing a process of alliances among firms that intervene in
payment systems. These alliances are not confined to banks or other financial institutions, but include
technology  vendors  and  telecom  operators  as  major  participants.  It  is  not  clear  if  a  supervisory
approach requiring  that  payment  schemes  involve  a  bank  will  be  sufficient  on  a  long  term  basis,  to
account adequately for the wide range of payment solutions that are likely to appear in the market. As

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 18 -

these  products  become  increasingly  sophisticated,  a  definition  of  what  constitutes  banking  activities
will become more difficult to establish and so will be its supervision. Despite potential difficulties for
regulation,  technology  developments  in  payment  solutions  also  provide  an  opportunity,  through
increasing  competition  and  lowering  transaction  costs,  to  improve  the  efficiency  of  the  currently
fragmented and costly national retail payment systems in the EU.

[info]
• Financial Times: Special Report Understanding WAP; http://www.ft.com/wap.
•  C.Favero,  X.Freixas,  T.Persson,  C.Wyplosz:  One  Money,  Many  Countries.  Monitoring  the  European  Central  Bank  2,

CEPR. Feb. 2000 (to ordered at http://www.cepr.org/.

•  The Economist: Survey On-line finance. May 2000; available via

http://www.economist.com/editorial/freeforall/library/index_surveys.html.

•  The World Bank Group: Future of Monetary Policy and Banking Conference. A Conference Looking Ahead to the Next

Twenty-Five Years. July 2000. Washington D.C.
http://www.worldbank.org/research/interest/confs/upcoming/papersjuly11/papjuly11.htm.

•  On  the  German  development  see  http://www.epaynews.com/archives  and  search  for  Mobilcom  05  Jul  2000

(Mobilcom Details Plans For Wireless Bank).

•  On the French developments see http://www.epaynews.com/archives and search Mastercard 06 July 2000 (Mastercard
Tests Mobile Payment in France); see also: France Telecom Mobiles lance le commerce mobile en France avec l'ouverture
du 
2000;
sur 
http://www.francetelecom.fr/vfrance/actualite/f_actu.html.

Paiement 

mobile. 

service 

Paris, 

juin 

CB 

20 

le 

" 

" 

•  On the Spanish development see the Economist survey mentioned above and

http://www.bbv.es/BBV/ingles/relinv/noticias/reli0069.htm.

[1&6]
Paybox,  a  new  mobile  payment  product  claims  convenience  and  potential  for
international use
Knud Böhle (ITAS) talks to Peter Seipp, Chief Operating Officer of paybox.net AG
/mobile phone payment system/m-commerce/PKI/Internet/Germany/

In May 2000 paybox.net AG, provider of a mobile phone based payment system, started operation in
Germany.  Deutsche  Bank  owns  50%  of  the  company  and  is  responsible  for  payment  clearing  and
settlement.  The  system  is  independent  of  particular  mobile  phone  service  providers  and  it  does  not
depend  on  PKI-structures.  Peter  Seipp,  member  of  the  board  of  paybox.net  AG  ,  is  a  wellknown
payment  expert,  who  formerly  worked for  GZS  (Gesellschaft für  Zahlungssysteme  mbH  )  and  debis.
The talk covers the particular approach of Paybox, co-operation, international deployment, the role of
PKI-structures and standardization.

Q: The Paybox system has had an enormous echo in the German press and some journalists have even
talked  of  a  payment  revolution.  But  before  talking  about  real  life  success  could  you  please  explain
what the Paybox concept essentially is and how this idea was born?
A:  While  walking,  the  founder  of  Paybox.net  AG,  Mathias  Entenmann,  observed  that  he  often  left
home without his wallet, but never without his mobile phone. So the question came up why can't we
pay with our mobile phones in a simple way? As the mobile phone is already personalized, the SIM-
card allows for identification and the GSM-network is highly secure, why should it be so difficult to
use it for payments? This happened 18 months ago, when the CEO of Paybox.net, as he now is, started
developing his own approach. The Paybox approach is straight forward and consists of four steps: 1.
the payer communicates his or her mobile phone number to the payee (an alias will also do by the end
of  August).  2.  The  payee  forwards  this  number  and  price  information  to  Paybox.net.  3.  Paybox.net
checks the identities of payer and payee and checks for any restrictions before a voice computer calls
the payer asking if he or she is willing to pay the amount x to merchant y, and the payer is requested to
confirm this by typing in his or her PIN. 4. The payer types in the four digit PIN for Paybox (not his or
her  SIM-card  PIN)  and  the  voice  computer  thanks  for  paying.  The  rest  is  conventional  payment
clearing  and  settlement.  At  the  moment  the  favoured  payment  instrument  in  Germany  is  a  kind  of
direct  debit  (Lastschriftverfahren),  but  the  system  is  open  in  this  respect.  To  sum  up:  Paybox  is
basically a system of authorization and identification.
Q: Is the Paybox approach protected by a patent?

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 19 -

A: Yes, Paybox claims a world patent on its authentification and identification system for payments.
The claim comprises 16 functional items. Although the procedure has not yet been finished it is going
well. And even now the claim will help to prevent start ups from imitating the Paybox system.
Q: Well, not every good idea makes its way into real life. How can you convince us that the Paybox
innovation  will  be  successful,  or  in  other  words  do  you  already  have  any  hard  evidence  about  the
viability of Paybox?
A: To be accepted a payment instrument needs to be widespread and convenient. Although we do not
publish concrete figures, it is safe to say that the real trend is surpassing our expectations by far. We
aimed for a total of 300  points  of  sale  up  to  the  end  of  2000.  Now  we  have  already  more  than that
number  of  online-shops  and  more  than  300  taxi  drivers  using  Paybox.  In  other  words:  within  two
months we have overtaken all other new internet payment systems in Germany like SET, CyberCash
and eCash. Paybox is especially attractive for Internet merchants, because it can potentially be used by
a  very  large  group  of  customers,  it  is  secure,  and  installation  costs  are  low.  Paybox.net  entered  the
market  some  eight  weeks  ago  and  each  month  the  turnover  has  doubled.  To  make  Paybox  cost
effective in one country you need let's say a four-digit number of merchants if you're only talking of
the  online  segment.  If  you  talk  of  mobile  service  providers  too  it  will  take  a  five-digit  number  of
acceptance points.
Q:  Many  providers  of  digital  goods  and  services  are  still  looking  for  a  micropayment  system.  Is
Paybox what they are looking for?
A: Paybox is definitely not a Micropayment system. If micropayment means less than one Euro, then
it  is  clear  that  Paybox  is  not  a  cost  effective  solution  for  this  segment.  We  are  using  a  hybrid
calculation,  comparable  to  credit  card  organizations  and  at  the  moment  we  do  not  exclude  any
merchant, independent of the amount of each transaction. But that may change. At the moment we ask
for a commission of 3% but in the future a model with a commission dependent on the average amount
of  transactions  will  be  established  and  maybe  a  flat  minimum  rate.  What  is  most  important  at  the
moment is to make Paybox widely available
Q: I can image that Paybox is attractive for online-payments, but isn't it too unwieldy to pay the taxi
driver and at conventional points of sale?
A: Together with a taxi drivers' organisation we have tested how long it takes, and we came up with an
average 50 to 60 seconds per transaction. More and more customers expect that they can use cashless
payment instruments. While card payments are relatively expensive and unwieldy for taxi drivers, the
Paybox meets their need, given that most of them have a mobile phone. Regarding the conventional
points of sale, we are not being so ambitious for the time being, but it is amazing how some trading
enterprises are. And we expect a chain of stores to carry out a pilot around Christmas time.
Q: Are all payment instruments equally suitable for the Paybox system?
A: In Germany we process direct debits (Lastschriften), because that is cheap and convenient. It would
be more difficult to process credit card payments, because the Paybox merchant would have to pay a
commission to Paybox and Paybox one to the credit card organization. This would only work well, if
the credit card organisation and Paybox worked close together and reached an agreement with a very
small commission for Paybox to pay. Technically there would be no problem to feed the payment data
into the  creditcard  network.  I  do  not  see  any  remarkable competition  with  prepaid  card  approaches.
But  nevertheless  we  could  add  a  prepaid  mode  to  Paybox,  simply  by  establishing  pool  accounts  at
Deutsche Bank, so that young people under 18 years old and customers with limited credit could also
use Paybox.
Q: For the moment you have decided to act as a neutral payment intermediary. Wouldn't it make also
sense (and money) to co-operate closely with credit card organisations or mobile phone providers?
A:  We  don't  think  so.  At  the  initial  stage  we  also  considered  such  alternatives.  Paybox.net  was
founded  in  July  1999,  in  October  we  presented  a  demo  system  and  in  December  a  pilot  had  been
installed.  Everyone  could  see  how  it  worked  and  we  talked  to  all  well-known  players  in  the  field.
Today  we  are  investing  a  lot  of  money  to  build  up  our  own  brand,  and  some  people  already  take
Paybox  as  a  generic  term.  Without  doubt  we  can  not  compare  with  the  strength  of  the  credit  card
brands,  which  by  the  way  is  their  major  asset.  Although  it  is  not  an  easy  task  to  establish  an  new
payment channel if you are not a big telco or credit card orgnisation we are trying it. And that means
that we are not willing to accept partners who insist on a proprietary solution. That may also explain
why it would be difficult to start a joint project with credit card organisations.

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 20 -

Co-operation with telcos is a different thing. First of all have in mind that Paybox does not depend
on  them.  They  are  not  able  to  exclude  us  from  their  networks.  In  some  countries  mobile  phone
operators will be our partners. But again, these partnerships will aim at an open payment channel. At
first sight it may look like as if a  proprietary  solution  could be  a competitive  advantage,  but in  fact
every exclusion of networks, merchants or customers would be stupid. Fragmentation is of no use for
anyone.  Wherever  Paybox  wants  to  operate  it  looks  for  strategic  partners.  They  may  be  from  the
banking  sector  or  the  telecommunications  sector.  But  big  retailers  could  also  be  interesting.  In
Germany the Deutsche Bank,  now  50%  owner  of  Paybox,  is  our  strategic  partner.  And  we  are  very
happy with Deutsche Bank, because it is exactly the German bank with the most developed payment
network world wide, and that makes it easy to clear and settle payments.
Q: There are lots of activities to build up a mobile PKI infrastructure for m-commerce. Maybe at the
moment  Paybox  can  be  deployed  quicker  than  the  competitors  relying  on  PKI-infrastructure.  But
aren't you worried that some day these solutions will conquer the market and leave Paybox behind?
A: I agree that PKI-structures are an intelligent technological solution and important for m-commerce,
and  they  have  the  potential  for  the  future.  But  I  wonder  how  long  it  will  take  to  establish  this
infrastructure. And please consider, although we transmit the  PIN  now  via  DTMF-procedures  (Dual
Tone Modulation Frequency) , it would be easy to migrate to a PKI-structure if widely available. But
more important in this  context is  a common  misunderstanding.  PKI  is  not  about  payments,  or  to  be
precise  PKI  is  perhaps  10%  of  a  payment  solution.  Take  for  example  the  credit  card.  If  it  migrates
from magnetic strip to chip technology that does not change the meaning of a credit card. The solution
has to be secure and convenient. That's what counts. In the same spirit, I deny that PKI-structures will
rule out the middleman and lead to more direct electronic payments. If you take a look at direct debits
in Germany there is practically no merchant who handles them without an intermediary, because of the
need for fraud prevention, to check creditworthiness, and for organisational rationality. This will not
change  in  cyberspace.  The  distinction  between  solution  and  product  is  crucial.  If  you  look  at  other
activities you will find that most of the time it's about solutions and not about products.
Q:  At  your  web-site  an  international  roll  out  is  announced.  What  has  happend  so  far  in  the
international arena?
A: We will found the first subsidiaries within the next weeks and by the end of this year we expect to
see five countries with a Paybox solution. These  companies  will  co-operate  with local  partners,  and
there  may  even  be  differences  with  regard  to  details  of  marketing  and  the  choice  of  payment
instrument. I won't mention their names, but we are talking of wellknown brands.
Q: Do you know of similar approaches in Europe?
A:  To  my  knowledge  there  is  no  comparable  system.  What  might  come  closest  comes  from  Spain.
There  Telefónica  and  BBVA  joined  forces  and  committed  to  invest  235  million  Euro  for  a  mobile
payment solution within the next three years. They have announced the unveiling of their product this
year.  There  are  other  market  players  trying  to  build  their  payment  solution  on  SMS,  but  they  focus
only on internet payments, and SMS messaging is slower than using the voice channel and it is less
secure. The danger of eavesdropping is far greater. If you try to make it more secure by a combination
of PIN and TAN (Transaction Number), it gets more complicated.
Q: Let's talk more about the internationalisation of Paybox. Will there be "islands" of Payboxes or do
you envisage an integrated cross border system?
A:  Yes,  we  want  a  Paybox  system  that  works  well  in  the  countries  in  which  we  are  active  at  the
moment and that works well for cross border payments. Each system starts at the local level, but in
some months from now - because of legal questions - crossborder payments will be possible too. We
will use EDIFACT formats for cross border payments. .
Q: Market penetration is not equally easy...
A:  The  USA  market  is  without  doubt  the  most  difficult  market.  We  are  talking  to  partners  there
interested in co-operation but it is too early to say when we will enter this important market. At the
moment  there  are  only  43  people  working  at  Paybox  and  we  can  not  expand  at  an  arbitrary  pace.
France again is a very difficult market. Within Europe it is a very special market place. It is amazing
how  different  France  is  in  many  respects.  France  is  an  island  within  Europe  not  the  UK.  In  France
maybe  smartcard  based  payment  solutions  will  come  first,  because  of  the  unique  position  of  Card
Bancaire and widespread use of smartcards. In the long run other solutions may compete successfully.

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 21 -

Q: From a European perspective standardization is a big issue. Where particularly do you feel a need
for further standardisation regarding communication channels as well as payment instruments?
A: GSM is a good and successful standard, but nevertheless it is not defined exactly the same in all
countries. Take for example the caller ID. In Austria it depends on the node if it is transmitted or not.
That makes it difficult to take advantage of this feature for special services. On the payment side we
deserve  a  common  payment  infrastructure.  It  is  somewhat  ridiculous  how  incompatibly  banking
systems  operate.  A  uniform  type  of  direct  debit  within  Europe  could  be  a  major  step  in  the  right
direction.
Q:  Do  you  expect  agreement  on  a  common  standard  for  electronic  payment  systems  by  banks  and
telcos?
A: If this type of standardization happens it will emerge as an industry standard. For the time being I
don't see the mutal interest that is needed. Take a look at Mobilcom becoming a bank and the efforts of
banks to keep the telcos out of the payment business - for example by the dual slot approach.
Q: Thanks a lot for this interesting talk.

[info]
• The english homepage of Paybox: http://www.paybox.de/international/english.html.
•  About Peter Seipp (in German): start at http://www.paybox.net/index.php3 and follow the buttons: first "paybox.net

ag", then "Management Team" and "Peter Seipp".

[1&7]
eEurope Action "Smart Cards for Secure Electronic Access"
Michael Rader
/eEurope initiative/European Commission/smart cards/standards/interoperability/security/policy/global
competition

A  major  objective  of  an  action  on  Smart  Cards  recently  launched  as  part  of  the  European
Commission's  eEurope  initiative  is  to  open  the  existing  and  projected  smart  card  infrastructure  for
non-financial applications and to ensure fair commercial access to all kinds of merchants throughout
Europe. Its centrepiece is the "Smart Card Charter", which is the basis of activities coordinated by an
industry-led task force. Input for the implementation of this Charter is welcome.

At first glance, conditions seem very favourable for Europe to repeat the GSM success story for smart
card  technology  as  a  whole.  However,  a  major  difference  to  the  situation  at  the  time  of  the  GSM
initiative is that the development and adoption of the GSM standard was focused largely on a single
application,  namely  voice  telephony,  while  smart  cards  in  general  involve  a  broad  variety  of
applications  with  a  correspondingly  great  number  of  actors  and  stakeholders.  Few,  if  any,  of  these
stakeholders have interests in the whole range of issues raised by smart cards.

Some of the seventeen areas mentioned in the Smart Card Charter will prove easier to manage than
others, since progress has already been made by the major actors. The Commission's goals are to push
convergence, enhance acceptance, and to convince possible players currently holding back to join in.
The Commission's own perception of its role is that of a catalyst bringing people together to work in
the spirit of eEurope, which is rather a "state of mind" than a programme.

The  Charter,  which  has  been  produced  largely  by  the  "smart  card  community"  encourages  the
"standard  owners"  to  consider  the  special  requirements  of  such  sectors  as  health  care  or  public
transport.

The Smart Card Action  was  launched  with  a "Smart  Card  Summit" in  Lisbon on  11  April  2000.
The major outcome of this summit was the  adoption of  the "Smart  Card  Charter",  which  contains a
detailed work plan for the period until the end of 2002. This work plan foresees:
•  The completion of a core of common specifications for smart-cards interoperability and security,
with the involvement of the private sector, the standards organisations and the Member States, by
the end of 2000

•  The  same  group  of  actors  is  assigned  the  task  of  improving  the  user  interface  of  secure  card

terminals, which is slated for completion by the end of 2001.

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 22 -

•  The  availability  of  cost-effective  smart  card  solutions  to  enable  secure  electronic  transactions,

which is regarded as the matter of the public and private sectors, is scheduled for 2002.

Work directed at ensuring reliable and efficient smart-card based payment systems and concerning the
further  development  of  the  existing  infrastructure  builds  largely  on  ongoing  activities  under  the
banners of EMV (Europay, Mastercard, Visa) , CEPS (Common Electronic Purse Specifications) and
FINREAD (Financial Transactional IC Card Reader Project).

While  American  experts  usually  acknowledge  European  leadership  in  the  use  of  smart  cards,  at
least  one  columnist,  Chet  Dembeck  of  "E-Commerce  Times",  is  doubtful  as  to  the  success  of  the
eEurope  initiative:  "centuries  of  rivalry  and  tradition  will  probably  reduce  these  initiatives  to  just
another wish list that disappears into oblivion."

There is obviously reason to doubt that the interests of all actors in some areas can be reconciled
sufficiently  to come  up  with a  consensus  solution.  Take  the  example  of  payments  by  mobile  phone
discussed in this issue of ePSO-N. Is it likely that mobile telephone service operators seeking to enter
the market for payment services will be able to compromise with the banks wishing to push their own
range of payment instruments for much the same purposes?

[info]
• The seventeen points contained in the Smart Card Charter are not yet evenly developed and coherent. Organisations and
individuals wishing to contribute to further development of the charter are cordially invited to send their comments and
suggestions  to:  eeurope-smartcards@cec.eu.int,  preferably  using  the  template  of  the  Smart  Card  Charter  Follow-up
document on http://www.ispo.cec.be/istka2/smartcards.html.

• Personal communication from a Commission officer involved in the action.
• The homepage of the eEurope Smart cards action: http://www.ispo.cec.be/istka2/smartcards.html.
• Dembeck, Chet: Are EU initiatives just another wish list? http://www.ispo.cec.be/istka2/smartcards.html.

[1&8]
Survey of electronic money developments: impressive, but far from perfect
Leo Van Hove
/review/survey/electronic money/international developments/regulation/policy/

On May 22, the Bank for International Settlements (BIS) published an important report compiled by
the  Committee  on  Payment  and  Settlement  Systems  (CPSS),  entitled  "Survey  of  Electronic  Money
Developments".  The  report  provides  information  on  electronic  money  schemes  in  no  less  than  68
countries or territories. Strengths and weaknesses of the survey are pointed out and requirements for
future surveys of this type appear.

The  CPSS  has  been  compiling  such  surveys  for  a  number  of  years,  but  previous  reports  were  only
shared with the contributing institutions – that is, central banks - and were not made available to the
general public. For each of the countries included, the report contains a short description of the current
state of 'card-based products' (Section 1) and 'network/software-based products' (Section 2). The bulk
of  the  information  and  statistics  relates  to  late  1999.  The  final  Section  includes  information  on  the
policy stance adopted by the various authorities concerned - including central banks - on issues such as
monetary  policy,  seigniorage,  supervision,  law  enforcement,  cross-border  use,  etc.  A  separate
contribution by the European Central Bank (ECB) summarizes its concerns. The contributions vary in
length  and  detail,  but  several  are  quite  interesting.  Amongst  the  ones  worth  reading  are  France,  the
Netherlands, the  US and  the  UK,  to  name  a  few.  Other  country  reports  (China,  for  example)  suffer
from tedious detail – or discuss debit and credit cards rather than electronic money (Morocco).

On  the  whole,  the  CPSS  survey  is  a  most  welcome  addition  to  the  publications  relating  to
electronic  money  that  have  already  been  published  under the  auspices  of  international  organisations
such  as  the  BIS  or  the  ECB.  One  can  only  regret  that  the  previous  surveys  have  not  been  made
publicly available as the  report  provides a  wealth of  data and information.  Where else  can  you  find
information  on  electronic  money  developments  in  countries  as diverse  as  Hungary  and  Mauritius?  -
even if it is to discover that in some cases there are no major  developments  at  all.  Another  positive
point  is  that  the  statistics  included  in  the  survey  are  considerably  more  up-to-date  than  the  ECB

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 23 -

'Blue Book'  and  the  BIS  'Red  Book',  the  latest  versions  of  which  were  released  last  February,
containing only (annual) data up to and including 1998 ..

This said, the CPSS survey is something of a disappointment in other respects. One is the absence
of (comparative) analysis. Given that they were drafted in central banks, it would be foolish to expect
bold judgements in the individual country reports. And purely descriptive reports collecting facts and
figures can obviously be valuable in their own right. However, some sort of synthesis report - drafted
by the CPSS itself - painting the overall picture would have given real value added to the document.
What the report has to offer in terms of synthesis is limited to two comparative tables at the back – one
that  compares  specific  features  of  e-money  products  in  selected  countries  and  a  second  containing
statistics.

As  a  researcher,  it  was  also  particularly  disappointing  to  discover  that  these  statistics  are  not  as
reliable as one might expect. For example, where Proton in Belgium is concerned, the report confuses
the total number of cards issued with the number of activated cards. The float figure reported for the
‘Electronic  Cash  Bradesco’  pilot  in  Brazil  is  higher  than  the  value  limit  of  the  card  would  seem  to
permit. And the float figure for the Netherlands relates to December 1998 even though the reporting
period mentioned in Table B is April-November 1999. It is also troublesome that the definitions used
appear  to  differ  across  countries.  For  example,  in  the  case  of  Spain  the  "number  of  merchant
terminals" does not seem to include pay phones, whereas in the case of Belgium and the Netherlands it
does.

Finally, given that the report itself does not have a go at it, what are the main conclusions that can
be drawn from the (super)abundance of information? For one, the survey is yet another confirmation
of  the  fact  that  up  to  this  date  usage  of  electronic  purses  has  fallen  well  short  of  expectations.
Secondly,  where  regulation  is  concerned  almost  all  EU  member  states  assert  that  their  policy
responses are based on the ECB’s policy stance. Even some prospective EU member states (Estonia,
Hungary,  Lithuania,  ...)  state  that  their  policy  approach  will  be  in  accordance  with  the  ECB  ‘banks
only’ guidelines. There is only one dissenting voice: the UK. Finally, it is not very encouraging to see
that there are almost no software-based schemes other than a number of eCash trials (some of which
have been closed down). One exception, which I was not aware of, is the Russian PayCash scheme.
Summing up, when confronted with all the enthusiastic eCash news coverage in the early years, the
CPSS survey serves as a sharp reminder of the fact that payment systems – and habits - are notoriously
slow to change.

[info]
• Committee  on  Payment  and  Settlement  Systems  (CPSS):  Survey  of  Electronic  Money  Developments,  Bank  for

International Settlements, Basel, Switzerland, May 2000: http://www.bis.org/publ/cpss38.htm.

—————————————— ePSO-Newsletter Issue 1 – July 2000 ——————————————

- 24 -

ePSO Newsletter – Issue 2, August 2000

Focus: mobile phone payment systems (II)

[2&1]
Editorial: Payments by mobile phone more convenient than e-wallets?
Michael Rader (rader@itas.fzk.de), Ulrich Riehm (riehm@itas.fzk.de), ITAS, Karlsruhe, Germany
/mobile phone payment systems/electronic payment systems/e-wallet/usability

Looking back in the short history of electronic payment systems we see the failure of  most of the early
innovative systems coming from young Internet start-ups. One reason among others might be the lack
of  convenience  and  usability  of  these  systems.  New  mobile  phone  payment  systems  avoid  windows
based  PC  interfaces  and  confine  themselves  to  the  quite  humble  interface  of  a  mobile  phone.  This
possibly makes them more user-friendly and therefore successful.

Looking back to the mid-nineties, we saw the emergence of new electronic payment systems, like First
Virtual,  eCash  or  CyberCash.  Although  these  pursued  several  different  approaches  and  provided
different  sets  of  functions,  they  had  common  roots  in  the  so-called  internet  culture.  The  financial
sector was faced with payment innovations taking place outside its traditional staked claims. Central
banks and private banks warned about risks coming with the new systems once these had left the safe
harbour of the established financial world. In this situation, the new internet payment start-ups usually
looked for co-operation with financial institutions or licensed their systems to banks. Even so, these
systems only had a short lifetime.  In  July  1998  First Virtual  stopped  its  payment  system,  in  August
1998 Mark Twain Bank in the USA ceased its eCash service and CyberCash completely changed its
approach.  In  Germany,  CyberCash  and  eCash  are  still  working  but  finding  no  real  favour  with
merchants or consumers.

We do not wish to perpetuate any myths on a conspiracy of the financial sector against challenges
from outsiders but it was obvious that most players in the financial industry showed little interest in
such things as cash-like anonymous and peer-to-peer electronic payment systems. The young payment
start-ups also were unable to find a way to convince the financial industry of their ideas. But this is
only one side of the story of failures of internet payment systems.

The new internet payment systems of the nineteen nineties were usually presented to the consumer
as  a  software  wallet.  Paying  from  such  wallets  translated  into  finding  one’s  way  around  a  complex
type of software. In an evaluation of some of the systems  available in  Germany  we  found that  only
three out of ten electronic payments in the internet could be completed successfully without problems.
(The evaluation was conducted by ITAS in late 1999.) So user friendliness and convenience became a
major  factor  in  competition  with  traditional  means  of  payment  like  credit  cards  or  other  national
payment  instruments.  In  many  respects  of  usability,  the  new  payment  software  interfaces  were  not
ready for market. The developers had simply not done their homework.

Now we are witnessing a new kind of payment system, the so-called mobile payment systems. We
have dedicated the focus of the first issue and also of this second issue of ePSO-N to this topic. The
success or failure of these systems depend on many factors, for example their usability in the real life
world  as  well  as  on  the  Internet  and  in  the  newly  emerging  mobile  commerce.  But  maybe  the
promoters of m-payment systems have solved, or more accurately skirted, two problems we identified
for the older wallet-based systems. First, they are not trying to invent a new kind of money and  thus
avoid any problems with the guardians of the financial sector. They have based their systems on the
existing payment infrastructures and combined them in an innovative way. Therefore  it  is  easier  for
them to find partners in the financial industry. If they build upon the traditional payment systems and
only provide new ways of access to these systems, they also have greater independence in their choice
and do not have to take much account of the interests of the established financial sector. Second, we
already mentioned the problem of usability and convenience. The user interface of the new m-payment
systems  is  not  based  on  WIMS  (windows,  icons,  mouse  system),  which  in  the  case  of  wallet-based

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 25 -

electronic payment systems turned out to be far from  user-friendly.  M-payment  systems  usually  use
the  quite  humble  interface  of  a  mobile  phone  with  its  voice  communication  capabilities  and  its
numeric key pad to fill in the security number to initiate an payment. We will see if such an approach
proves more attractive than those used in the past.

The focus section in this issue kicks off with a discussion by Malte Krüger and Gérard Carat  of the
specific interests of telecom operators in the provision of mobile payment solutions, investigating the
various  roles  that  telcos  can  play  here.  Recent  months  have  seen  the  commercial  launch  of  mobile
solutions forging a link between the increasingly popular mobile telephone and payment instruments
in common use for payments of all types of transactions in various countries. It will be interesting to
follow  which  of  these  is  successful  in  migrating  to  other  countries  and  which  remain  ”national”
solutions. The example of ”Paybox” from Germany was the subject of an interview in the focus of the
last issue [ePSO-N 1&6]. In this issue, articles by Michael Rader and Morten Falch describe two of
the solutions for France and Denmark respectively. This is followed by ePSO-N’s first look beyond
Europe, in this case to Japan, where Internet access via mobile telephones seem to enjoy even greater
popularity than in Europe. The article by Thorsten Wichmann and Andreas Stiehler asks which lessons
Europe can learn from Japanese experience.

Outside of the focus feature section, Knud Böhle comments on an industry report dealing with the
question of e-purse interoperability and Yannis Maghiros of IPTS tells us about the forum, which will
be a major arena for discussion during the Electronic Payment Systems Observatory project. Finally,
Leo van Hove uses his review column to ask provocatively about the true price of using cash and who
is paying it.

Knud  Boehle,  who  has  done  invaluable  work  during  the  launching  period  of  ePSO-N  has  now
joined  the  ePSO  project  team  in  Seville.  We  sincerely  hope  we  can  follow  in  his  footsteps  and
continue ePSO-N as a project worthy of the attention of all serious actors in this exciting field.

We are still seeking to expand  our  network  of  correspondents for ePSO-N  with  experts  who can
write  at  fairly  short  notice  precise  and  thought-provoking  articles,  in  particular  in  France,  Greece,
Ireland,  Portugal,  Central  and  Eastern  Europe,  the  Americas,  Asia  and  Africa.  Do  not  hesitate  to
contact us if you are yourself interested in joining the network or are aware of such people.

[info]
• The mentioned evaluation of internet payment systems in Germany are only available in German.
•  Riehm, U.; Böhle, K.; Wingert, B.: Bezahlsoftware aus Nutzersicht - Hürden und Mängel. CardForum 7(2000)1, S. 36-39;
•  Böhle,  K.;  Riehm,  U.;  Wingert,  B.:  Der  Umgang  mit  ”Bezahlsoftware”  aus  Nutzersicht.  In:  Fluhr,  M.  (Hrsg.):  Die

Chipkarte: Multifunktionaler Schlüssel im neuen Jahrtausend. Berlin: inTime 2000, S. 228-259

[2&2]
M-Payments and the role of telcos
Malte  Krueger  (malte.krueger@jrc.es),  Gérard  Carat  (gerard.carat@jrc.es).    Institute  for  Prospective
Technological Studies, Seville, Spain
/financial 
management/micro-payment /counter party risk/

institutions/telcos/ 

payment/mobile 

electronic 

systems/ 

payment 

phone 

risk

Payments by mobile phone have the potential to become a universal payment instrument of the future.
But  it  is  not  yet  clear  which  role  telecommunication  service  providers  (telcos)  will  play  in  this
development.  Telcos  are  already  offering  payments  services  like  third-party  billing.  However,  an
increased  role  as  payment  service  provider  would  make  it  necessary  to  develop  appropriate  risk
management procedures and to apply for banking licenses.

The mobile phone as the payment device of the future
It is not surprising that Erik Dahlström concluded in the first issue of this newsletter that ”the mobile
phone  has  the  potential  to  be  the  payment  device  of  the  future”  [ePSO-N  1&2]  since  there  are  two
strong arguments in favour of m-payments (payments using mobile phones)

1.  The number of users of mobile phones is already huge and still rising.

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 26 -

2.  In principle, m-payments can be used for all types of payments:

- at unmanned POS (vending machines, parking meters, etc.)

- at manned POS (any merchant e.g. supermarkets, travel agents, etc.)

- for e-commerce via a mobile phone

However, different scenarios are possible – both with respect to the institutions that provide payment
services and the range of payments that is conducted via mobile phone.

M-payments and the role of telcos
It is far from clear which role will be played by telcos. To simplify, we can identify three categories:
a)  Telcos can simply sell communication services.

b)  Telcos can implement third-party billing on behalf of merchants.

c)  Telcos  can  extend  their  prepaid  or  account-based  business  to  include  m-payments.  That  would

presuppose an electronic money institute or bank status.

a) Telcos as communication providers
This would imply that telcos stick to their bread and butter business. But simply providing bandwidth
may not be a very profitable business. Selling value added services seems more promising and one of
these services is payments. Payment services do not just generate additional fees they also reduce the
churn rate that eats into telco’s profits. Thus, it seems unlikely that telcos will stay out of this market.
However, banks are aware of this competitive threat and are trying to position themselves. They are
setting  up  new  payment  schemes  like  Paybox  and  they  are  promoting  the  development  of  dual-slot
phones that would allow to use bank’s payment cards over mobile phones.
b) Third-party billing systems
Telcos are already providing payments services. For one thing, incumbents such as Deutsche Telekom
have to provide billing services for competitors. Second, they have been providing billing services on
behalf of merchant or service providers via the telephone or the internet. Early examples are services
offered via Minitel in France and BTX in Germany. Such billing models which charge customers on a
per-minute or a per-call basis have already been transferred to the internet (e.g. Telekom’s ”Click &
Pay Net900”). Similar payment models could be offered to mobile phone customers. The attraction for
telcos is that offering these services would not only help generate additional traffic but they would also
receive commissions on payments. However, the additional income comes at a cost. Providing billing
services includes an element of credit since customers do not have to pay immediately but only at the
end of the billing period. Thus, in billing schemes telcos run the risk that customers will not be able to
pay  up.  This  risk  also  exists  for  pure  telephone  customers.  However,  with  the  possibility  to  charge
purchases  for  other  goods  and  services  to  one’s  phonebill  this  problem  is  bound  to  become  bigger.
Eventually, telcos will have to put limits on the maximum amount people can charge to their phone
bill.  More  than  before,  telcos  will  have  to  engage  in  risk-management.  They  will  have  to  find
techniques  that  allow  them  to  determine  ‘credit  limits’  for  their  customers  and  they  will  have  to
develop procedures to deal with non-payment. Customers who are at the limit will also want to have
the ability to settle their accounts before the end of a billing period so that they can continue to use the
payment service. At the same time customers will demand more information such as access to up-to-
date account information.

Fraud will also become more important. Once telcos basically provide a free overdraft there will be
more attempts to acquire a connection under false identity. Therefore, telcos will have to monitor more
closely with whom they are dealing.

Risk will not only be a factor in the relationship between different telcos. A payment service that
restricts payments to the customers and merchants of one mobile phone provider is not very attractive
for  customers  or  merchants.  Thus,  there  clearly  would  be  an  incentive  to  allow  for  ‘payments
roaming’. There are two kinds of payment roaming to envisage: between mobile operators within one
country and on an international basis. However, if m-payments become possible, roaming will become
a more complex issue. Once the volume of payments becomes large, telcos have to be more careful

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 27 -

when  considering  roaming  agreements.  Roaming  agreements  imply  short-term  credit  relationships
between telcos. As payments grow, so do net credit positions. This exposes each telco to increasing
counterparty  risk.  Thus,  telcos  will  have  to  monitor  more  carefully,  how  their  roaming  partners
manage their payments business and whether security is sufficiently high. Furthermore, risk reduction
might  make  it  necessary  to  increase  the  frequency  of  settlements.  Banks,  the  established  payment
providers, clear and settle every day.
c) Pre-paid solutions
Most mobile phone providers offer two different solutions for the payment of phone services: monthly
billing and prepaid accounts/cards. Instead of adding a payment to a monthly bill, telcos could simply
debit it to a prepaid card/account. The advantage of such prepaid solutions is that the risk of customer
default  is  reduced  to  zero.  Thus,  telcos  would  have  to  be  less  concerned  about  risk.  However,
counterparty  risk  would  still  exist.  Due  to  roaming  there  would  still  be  net-credit  and  net-debit
positions between telcos. Therefore, they would still have to monitor each other, taking into account
what type of payment service is offered (prepaid or billing), how credit and fraud risks are handled etc.
Thus, risk would not be eliminated.

Again,  fraud  risk  would  be  rising  making  it  necessary  to  screen  customers  more  carefully.

Furthermore, card management has to include even tighter measures against fraud.

Prepaid  solutions  would  also  make  it  necessary  to  become  either  an  Electronic  Money  Institute
(EMI)  or  a  bank.  The  use  of  prepaid  cards  for  payments  of  goods  and  services  provided  by  third
parties  makes  it  necessary  to  get  an  EMI  licence.  Managing  prepaid  accounts  is  equal  to  managing
deposits. Therefore,  in all  likelihood,  such  a  payment  solution  would  force  telcos  to  become  banks.
Indeed, one mobile phone operator, Mobilcom, has already applied for a banking licence.

What is the business case for m-payments?

Once telcos start to offer payment services on a larger scale they are entering a business that depends
crucially on proper risk management procedures. Such procedures have been developed and employed
by  banks  and  it  is  not  clear  why  telcos  should  have  a  comparative  advantage  in  this  field.  Thus  it
would  seem  unwise  for  a  telco  to  pursue  a  go-it-alone  strategy  in  this  market,  especially  when  the
payment involves more than one operator per country (payment roaming, counterparty risk) and more
than one country (international payment roaming, international counterparty risk). If a telco wants to
offer payment services on a larger scale, a safe approach would be to team up with a bank.

There are some advantages to integrate parts of the financial transaction on a mobile platform for
obvious economies of scale and scope, but there is a need to precisely identify when and where the
wireless device will have – if at all - an advantage against traditional means of payment. For instance,
it is important to realise that mobility and wide distribution are not per se special advantages of mobile
phones. After all, payment cards are also widely distributed and easy to carry.

One  advantage  of  the  mobile  phone  is  that  it  can  be  used  as  a  mobile  merchant  terminal  (for

debit/credit payments and for e-purse). Two examples will illustrate this point:
•  Paybox  [ePSO-N  1&6]:  Here  the  ”merchant”    (for  instance,  a  taxi  driver)  calls  Paybox  and
transmits the payment data and the phone number of the customer. Subsequently, the customer is
called by Paybox and authorises the payment using his PIN number. Thus, the two mobile phones
(of the merchant and the customer) take over the task usually performed by the merchant terminal:
transmission of payment data and PIN authorisation.

•  Dual  slot  schemes  [ePSO-N  2&3]:  In  this  case  the  similarity  of  mobile  phone  and  merchant
terminal  is  straight-forward.  Instead  of  inserting  a  payment  card  into  a  merchant  terminal  the
customer  simply  inserts  it  into  his  phone  to  transmit  the  data  and  authorise  the  payment.
Subsequently, the merchant will receive a confirmation.

Basically, the merchant terminal becomes mobile – thanks to wireless transmission – and it is split
in  two,  so  that  now  both  the  merchant  and  the  customer  are  connected  to  the  authorisation  and
identification service provider. In the case of double slot phones, the payments system would not be
much affected and the existing structure would persist. However, new service providers like Paybox
might  emerge  which  take  over  identification  and  authorisation  for  mobile  payments.  Such  service

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 28 -

providers  would  not  necessarily  compete  with  banks  because  this  part  of  the  transaction  chain  is
sometimes outsourced by banks to specialised firms (a German example is Telecash – a firm founded
by Deutsche Telekom and IBM).

In  the  case  of  micropayments,  the  mobile  device  presents  more  added  value  on  the  internet  (the
micropayment  is  allocated  to  the  prepaid  value  or  aggregated  to  the  monthly  phonebill),  but  the
advantage becomes less evident for real world micropayments:  For  attended  and/or unattended  POS
transactions, the cost of the call may be relatively high when compared to the price of the product (it is
true that services like Sonera Mobilepay offer to buy from vending machines with a call to a service
number,  but  it  remains  to  be  seen  if  other  operators  will  follow).  On  the  other  hand,  specifically
targeted unattended POS applications will clearly benefit from the mobile platform as in the case of a
parking  meter  remotely  charged:  The  customer  may  be  prepared  to  pay  more  because  of  the
convenience of being able to remotely reload the parking machine.

There are also niche applications like in the case of GiSMo: when buying with a credit card on the
net with a PC and a fixed telephone line, the GiSMo buyer will receive a transaction-specific code on
his/her GSM phone to enter on the computer screen to complete the transaction within a limited period
of  time.  The  mobile  phone  is  here  used  as  a  hybrid  solution  offering  a  complementary,  wireless
channel to an Internet purchase.

[info]
•  Erik  Dahlstroem’s 

article: 

The 

common 

future 

of  wallets 

and  ATMs?  Mobile 

phones!

http://epso.jrc.es/newsletter/vol01/1-2.html

• The home pages of the systems and enterprises mentioned in this article:

Sonera Mobile Pay: http://www.sonera.fi/english/solutions/mobilepay
Paybox: http://www.paybox.de/international/english.html, [ePSO-N 1&6]
GiSMo: http://www.gismo.net
Telecash: http://www.telecash.de, http://www.xcert.com/resources/case-study-telecash.html
Click & Pay Net900:  http://www.telekom.de/dtag/presse/artikel/0,1018,x637,00.html

•  Latest version of EMI Directive: http://register.consilium.eu.int/pdf/en/00/st03/03628en0.pdf

[2&3]
Dual-slot Phones as an Electronic Wallet. Universal or merely local solution?
Michael  Rader  (rader@itas.fzk.de),  Research  Centre  Karlsruhe,  Institute  for  Technology  Assessment  and
Systems Analysis
/France/electronic  commerce/electronic  payment  systems/mobile  phone  payment  systems/payment
cards

While  the  combination  of  popular  payment  cards  and  mobile  telephones  employing  the  dual-slot
technology looks compelling at first glance, its chances of becoming a universal payment system are
uncertain. Important factors are the availability of low-price mobile handsets or other mobile devices
for Internet access, the existence of standards for chip card readers and a sufficient number of actors
from the different industries throughout Europe with an interest in promoting this payment system.

At  the  end  of  June  2000,  France  Telecom  launched  a  new  payment  service  based  on  the  dual-slot
technology for subscribers to its ”Itineris” mobile telephone service and owners of ”Mobicarte” pre-
paid services . Called ”Paiement CB Sur Mobile” and combining the use of dual-slot handsets and the
ubiquitous  ”Carte  Bancaire”  issued  by  all  French  banks,  Itineris  and  ”Mobicarte”  customers  will
virtually be able to use their mobile handsets as a personal points of sale terminal. It looks  as if this
method  of  payment  will  eventually  be  available  from  all  three  mobile  telephone  service  operators,
since these signed an agreement with the Groupement des Cartes Bancaires on 15 September.

Once the user has indicated the intention to use this method of payment for purchases from a web
site  by  communicating  his  or  her  mobile  phone  number  via  the  Internet  or  a  phone  call,  he  or  she
receives an SMS message containing the details of the foreseen transaction. When the users accepts
these, he or she inserts the Carte Bancaire into the slot and types in the PIN belonging to the card. This
action sends an authorisation request to the user’s bank, and the customer receives confirmation of the
transaction  in  a  way  similar  to  that  in  the  conventional  point-of  sales  environment.  The  companies

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 29 -

involved  in  the  service  stress  that  at  no  time  is  the  account  number  transmitted  across  the  GSM
network, so that the method is claimed to be completely secure.

The  pilot  trial,  which  went  under the name    of  ”Iti  Achat”,  indicated  good  acceptance  and  rapid
adaptation  of  users  to  this  service,  probably  since  it  closely  resembles  the  familiar  POS  payment
procedure and makes use of an established payment instrument, the Carte Bancaire.

France  Telecom  Mobiles  (FTM),  which  operates  Itineris,  expects  one  million  subscribers  by  the
end  of  2000  and  27  web-sites  already  accept  the  card,  including  those  of  several  quite  well  known
companies. It is also possible to purchase air time for mobile phones and to pay certain bills by this
method.

Probably the crucial factor for the success of ventures of this kind is the widespread availability of
mobile  handsets  and  other  equipment  with  the  dual-slot  technology.  The  current  generation  of
handsets and also most new sets on offer in Europe, including France, are certainly not equipped in
this  way.  In  fact  the  trend  for  mobile  phones  is  for  smaller,  lighter  handsets.  A  recent  report  by
Durlacher Research has this to say about the market potential of the dual-slot technology: ”the phone
would be thicker and heavier, and smartcards for micropayments have not worked so far. Moreover, a
smart  card  reader  on a  mobile  phone  might  not  be  robust  enough  to  survive  external  impact  on  the
handset”,  and,  later,  ”dual  slot  phones  are  unlikely  to  become  mainstream  products”  (p.  43).  In
general,  however,  Durlacher  believes  that  the  ”mobile  phone  will  become  the  de  facto  electronic
wallet  in  Europe”  (p.  5),  although  most  obviously  not  dual-slot  phones.  The  report  also  states  that
mobile  phone  service  operators  will  seek  to  position  themselves  in  the  payment  services  sector  by
acquiring existing banks or applying for a bank license themselves.

It  seems  likely,  however,  that  mobile  devices  intended  for  more  than  casual  use  to  access  the
Internet will have to be larger and more sophisticated than the humble single-purpose mobile phone
with its small display and simple keypad. More likely is something like the personal organiser with a
built-in phone and other devices, like an mp3 player, so that the slot for payment cards will not be as
obtrusive as in a mobile phone.

In the case of the ”Paiement CB Sur Mobile”, which may be viewed as a test-case for the dual-slot
technology, success depends on the availability of reasonably-priced terminal equipment, encouraging
the current subscriber to upgrade their handsets or to attract new customers.

Success  also  requires  the  cooperation  and  commitment  of  the  manufacturers  of    terminal
equipment: out of about 15 mobile telephony kits currently being offered by Itineris, only 3 have the
dual-slot,  and  the  two  for  which  prices  were  available  were  in  the  upper  price  range  (150  and  227
Euros). There seems to be no package deal specifically trying to push the service.

Since the  manufacture  of  terminal  equipment  for  wireless  telephony  is  an  international  business,
another important condition is a quasi-standard for card-readers to enable use of the preferred payment
instruments in the various countries where services of this kind will be made available. Only this will
enable the economies of scale needed to ensure the availability of low-cost equipment.

A crucial point will be the pricing structure for the service. While there does not appear to be any
charge from FTM for the service since it generates extra revenue through the necessary phone-calls,
the commissions charged by banks will obviously have an impact. And there are indications that all
might  not  be  well  for  the  adoption  of  debit-card  based  solutions:  German  banks  are  considering
levying hefty commissions for the use of the EC/Maestro service  (ec-cash, ec-POZ) at points of sale
or to authorise payments in the electronic, but not the conventional,  ”Lastschrift” direct debit process.
While some experts feel that such a move could boost the cause of electronic purses, others fear that it
will be back to cash for consumers and merchants.

While  ”Paiement  CB  Sur  Mobile”  shows  every  sign  of  being  a  success  as  a  national  solution  in
France, its chances of migrating to other countries are uncertain in the light of developments such as
those just mentioned. Finally the plot thickens with the announcement that Mobilix, a Danish mobile
telephony services provider part-owned by France Telecom has just launched an alternative payment
service  based  on  a  popular  payment  card,  this  time  in  Denmark  [ePSO-N  2&4],  which  is  also
announced as being a potential universal solution. Watch closely for further developments...

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

[info]
•  Press releases on ”Paiement CB Sur Mobile”:

- 30 -

Sylvia: 

Le club des industriels et des utilisateurs de la carte à puce: Mobile Commerce Becomes A Reality With the SIMphonIC
Smard Card. 6 September 2000. http://cardshow.com/EN/Public/Fil/253.html
Dennis, 
France  Telecom 
http://www.emarketer.com/enews/200000626_france.html
FTM/Itineris: Le Paiement CB Sur Mobile: le paiement mobile
sécurisé.http://www.itineris.com/fr/decouverte/itiachat/find_index.html
Groupement des Cartes Bancaires ”CD”: Les trois opérateurs français de télephonie mobile ont signé avec le Groupement
des  Cartes  Bancaire  ”CB”  la  Convention  de  paiement  ”CB”  sur  mobile.  Press  statement,  Paris  15  September  2000.
http://www.cartes-bancaires.com/html/grpmnt/commun/cp1_15092000.html

Intros  Mobile  Phone  Commerce.  Emarketer, 

2000.

June 

21 

•  The Durlacher report:

Durlacher Research Ltd.: Mobile Commerce. Report. Available on the web at http://www.durlacher.com

•  Speculation on the impact of commissions on card use:

Kros, Matthias: Wird aus den Deutschen wieder ein Volk der Barzahler? Mannheimer Morgen, 15 September 2000, p. 7 –
A  newspaper  article  arguing  that  cash  is  in  for  a  revival  if  commissions  are  introduced  for  the  use  of  debit  cards  at
electronic points of sale.
Meichsner, Julia: Bereit zum Beladen. Die Zeit, 28 August 2000, p. 24 – An article from the prestigious German weekly
arguing the advantage of electronic purses if commissions on debit card use at POS are introduced.

[2&4]
Use your mobile phone as your payment card – the Danish way
Morten Falch (falch@cti.dtu.dk), Technical University of Denmark, Lyngby

/Denmark  /mobile  telephony/electronic  payment  systems/mobile  phone  payment  system/payment
cards

In a joint effort with the Danish clearing house PBS, the mobile telephony services provider Mobilix is
offering  its  customers  a  card-based  payment  system  for  GSM  phones.  The  solution  has  features  in
common with SET and has the potential to develop into a universal mobile payment system. Since it is
based on international standards, it  is a contender for universal diffusion.

Following the successful completion of a trial involving about 100 of its customers, the Danish mobile
telephony  services  provider,  Mobilix  in  co-operation  with  the  Danish  clearing  house  PBS  and  the
international  card  producer  GEMPLUS  introduced  the  first  solution  world-wide    for  card  based
payments  via  the  GSM-phone  on  May  16  of  this  year.  Mobilix,  which  is  owned  54%  by  France
Telecom, thus just beat the ”Paiement CB Sur Mobile” solution offered by France Telecom’s Itineris
mobile telephony services  to the market[ePSO-N 2&3].  Other systems for mobile banking services
are  available. These  systems  offer  various  types  of  banking  services  such  as  information  on  current
accounts, certain types of payment services and even trading at the stock market. This is however, the
first service enabling the user to make payments directly to a third party in the same way as by using a
credit card.

The  system  is  independent  of  the  WAP  technology  and  can  be  installed  on  any  mobile  phone
provided with SIM toolkit 2+, and this holds for most of the phones sold within the past two years. A
SIM card for this service, which requires filling in an agreement form, is priced at DKK 100 (about 13
Euro).

The first application for this system is prepayment of airtime for the company’s own mobile phone
subscribers. About 700,000 Danish citizens have a prepaid mobile phone, and about 500,000 of them
buy airtime by use of scratch cards. It is at these customers that the Mobilix/pbs payment system  is
mainly directed. After their PIN code has been accepted, these customers  are able to buy airtime in
portions  of  100  or  250  DDK,  and  the  amount  will  automatically  be  drawn  from  their  credit  card
account, once they have registered with the system.

The  system  resembles  the  SET  (Secure  Electronic  Transactions)  concept  in  the  sense  that  users
have to be registered and approved by PBS before any transactions can take place. It is also necessary
to have a special piece of software installed at the phone, and the users must obtain a new SIM card
from their phone dealer. The payment is carried out by exchange of an electronic payment certificate
and no card or account numbers are transferred via the phone. The identity of the user is confirmed
through  the  SIM  card  and  the  PBS  has  already  all  the  information  on  the  account  to  use  for  the

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 31 -

transaction.  The  system  is  therefore  considered  to  be  at  least  as  safe  as  payment  with  the  widely
accepted  Dancard,  which  is  the  dominant  debit  card  in  Denmark.  In  a  sense  it  may  be  even  more
secure as it is using phone’s simcard as a means for identification instead of the magnet strip on the
Dancard, which is easier to copy.

In  comparison  with  Internet  payments  it  is  certainly  more  secure  than  payment  using  the  SSL
technology. In comparison with SET payments it has the advantage that it might be more difficult to
get access to a mobile phone people have in their pocket than to a computer left at the office desk.

Compared to ordinary card payments, mobile phone payments have the advantage that the mobile
phone replaces both the physical card and the card terminal as well. Therefore payments can take place
anywhere far away from both the recipient and the bank. It is also independent of access to a computer
or to the Internet. The only condition being to have a mobile phone and be within the reach of a GSM
network.

The question is if the system can be developed to be as cost effective as card based payments. The
types  of  payments  where  mobility  is  an  advantage  involve  mostly  relatively  small  amounts  per
transaction,  and  at  this  market  the  costs  per  transaction  is  an  important  parameter  for  success.  The
mobile operators have an obvious interest in developing such systems, which can contribute to further
growth on the fast expanding market for mobile services

Mobilix plans to extend this service to cover other types of payments such as tickets for the theater
and for concerts, ordering of pizzas, ordering of flowers etc. The perspective is to develop the mobile
phone  to  a  means  of  payment  almost  as  efficient  as  the  physical  payment  card  is  today.  It  is  also
envisaged that the system can be used in combination with e-commerce at the Internet. Many users are
still reluctant to use the Internet for credit card payments. A solution  to this problem could be to use
the Internet for browsing and selection and ordering of goods and thereafter do the payments via the
mobile phone.

Preben  Rahtgen  of  the  PBS  clearing  house  states  that  their  vision  is  an  open  system  where
everybody can make payments to anybody with any type of credit card. The solution is now provided
by Mobilix  for the Danish market only, but the system is based on international standards (EMV) and
can  be  used  with  the  Danish  Dancard  as  well  as  with  VISA  or  Eurocard.  Moreover  it  is  not  an
exclusive system. In order to ensure rapid growth in this type of services, technical specifications will
be made public so they are available to other telecom operators, software companies and others with
interest in the service. PBS and Mobilix have developed not only a technical solution, which easily can
be used in other systems as well. They have also developed a  concept  for  a business  model  sharing
responsibilities costs and revenues between the mobile operator and the financial institutions involved.

[info]
•  The  site  of 

the  mobile 

telephony  services  provider  containing 

the  press  announcement  for 

the  service:

http://www.mobilix.dk

•  The site of the Danish clearing house: http://www.PBS.dk
•  A  site  (in  Danish)  describing  payment  solutions  for  the  Internet  using  payment  cards  in  common  use  in  Denmark:

http://www.betaling.dk

•  For information on existing payment systems in  Denmark,  including  Dancard,  see  the  chapter  written  by  the  author  in:
Böhle,  Knud;  Rader,  Michael;  Riehm,  Ulrich:  Electronic  Payment  Systems  in  European  Countries.  Country  Synthesis
Report. Karlsruhe: 1999, available in pdf.-format http://www.itas.fzk.de/deu/projekt/Pez/estocsrfinal991216.pdf

[2&5]
Mobile Internet in Japan - lessons for Europe?
Andreas Stiehler und Thorsten Wichmann (tw@berlecon.de), Berlecon Research, Berlin, Germany
/Japan/mobile internet/ mobile commerce /WAP/ i-mode/

While Europe is still at the beginning of mobile Internet services,  Japan is often regarded as one of
the forerunners. However, apart  from the success of NTT DoCoMo’s popular service i-mode little is
known in Europe about Japan. The main results and hypotheses from an investigation by the authors
are that the success of Japanese mobile Internet services is in part explained by relatively high costs

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 32 -

of  fixed-line  Internet;  that  a  major  success  factor  is  the  packet-switching  technology,  not    high
bandwidth,  another  success  factor  being  the  way  i-mode  makes  use  of  its  portal.  Finally,  Japanese
mobile Internet users are not as different from Europeans as often thought.

First some basic facts about the i-mode service: It was launched in February 1999 by NTT DoCoMo
(NTT Mobile Communications Network Inc.), a mobile subsidiary of the Japanese telecom giant NTT
(Nippon Telegraph and Telephone Corp.). i-mode offers access to more than 600 official portal sites
and  to  more  than  15,000  sites  not  listed  on  the  i-mode  portal.  The  service  runs  on  a  packed  based
version  of  the  PDC  (Personal  Digital  Cellular  standard),  which  provides  a  bandwidth  of  9.6  kBit/s.
Sites have to be developed using cHTML, a compact version of the internet markup language HTML.
To get access, customers must use i-mode enabled phones. By now, the i-mode service has attracted
more than 12 million customers.

Although the most popular service, i-mode is not unique in Japan. The second in popularity is EZ-
Web.  The  carriers  DDI  Corp.  and  IDO  Corp.  run  it.  The  two  companies  merged  in  October  with  a
third carrier, the KDD Corp. The new company is called KDDI Corp. Their common brand name now
is  ”au”  (pronounced  like  the  English  letters  A-U).  This  service  had  more  than  3  million  users  in
September  this  year.  EZ-Web  is  at  least  partially  WAP-compatible,  showing  that  WAP  is  indeed  a
feasible technology for mobile Internet services. The third service in operation is the J-Sky service by
J-Phone (the mobile arm of Japan Telecom Ltd.), which had about 3 million users in September. Thus,
altogether more than 18 million people are already using mobile Internet services in Japan.
The main results and hypotheses from an investigation we did in Japan are as follows:
1.  The success of Japanese mobile Internet services is in part explained by  relatively  high  costs  of

fixed-line Internet.

2.  A major success factor is the packet-switching technology, not high bandwidth.

3.  A further success factor is the way i-mode makes use of its portal.

4.  The Japanese mobile Internet users are not as different from Europeans as often thought.

In contrast to a country like Germany, use of fixed-line Internet access is rather expensive in Japan
-  at  least  for  low  usage  of  services.  Fixed-line  Internet  can  cost  around  Euro  20  per  month  plus  a
charge  of  20  cents  per  minute.  In  comparison,  NTT  DoCoMo  charges  a  monthly  fee  of  Euro  3  for
using the i-mode service and Euro 0,003 per data package (128 Bytes) transferred. The average i-mode
bill is between Euro 15-21 per month.

Compare  this  with  Germany:  One  can  get  fixed-line  Internet  access  for  less  than  2  cents  per
minute. For the use of WAP services, however, the operators add between ca. 8-20 cents per minute to
the monthly bill. Using mobile Internet is thus about 4-10 times as expensive as fixed-line Internet, not
to  mention  the  still  rather  unsatisfactory  user  benefits.  Therefore  it  seems  that  the  relative  prices  of
fixed and mobile Internet service are (yet) rather unfavourable for widespread acceptance.

Although relative prices compared to the fixed line Internet access are favourable for  the  i-mode
service,  it  is  not  advertised  as    a  substitute  for  the  Internet.  In  Germany  WAP  services  are  mostly
promoted  as  ”mobile  Internet”  leading  to  totally  wrong  expectations  and  to  the  current  ”WAP
backlash”.

People  discussing  the  WAP  services  currently  available  in  Europe  often  point  out  the  low
bandwidth,  which  in  most  networks  allows  only  a  transmission  of  9.6  kBit/s,  less  than  20%  of  the
performance  of  modern  fixed-line  modems.  This  low  bandwidth  is  often  cited  as  one  of  the  major
reasons for WAP not finding wide-spread acceptance so far. However, the Japanese experience casts
some doubt on this argument: Two of the three mobile Internet services only offer a bandwidth of 9.6
kBit/s, only EZ-Access offers up to 64 kBit/s in selected regions, and 14.4 kBit/s in most others. Thus,
high bandwidth does not seem to be a major success factor.

However, all three networks are using a packet-switching technology, where users are always on-
line and are charged only for the amount of data they transfer, not for the air time. A typical e-mail
transaction costs an i-mode  user  between  2-4  cents and  a typical  interactive  transaction like  a flight
check  or  a  bank  transaction  between  20-40  cents.  This  feature  of  being  always  online  is  ideal  for

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 33 -

messaging, as also the success of SMS messages in Europe shows. It  also favours first-time users as
they can try out services without having the clock ticking.

According  to  this  experience  one  might  conclude  that the introduction of  GPRS  (General  Packet
Radio  Service)  in  Europe  will  boost  the  number  of  mobile  Internet  users  if  it  is  priced  reasonably.
GPRS  is  a  packed-switched  extension  of  the  currently  used  GSM  standard  and  will  probably  be
available  in  most  major  markets  at  some  time  in  2001.  However,  while  important  for  a  better  user
experience and the introduction of new services, it should also not be overvalued. After all, one of the
main applications used on mobile Internet phones in Japan, e-mail, is already available in Europe in
the form of SMS, although only in a primitive form.

A major part of i-mode is the i-mode portal, which serves as the primary starting point for i-mode
users and through which almost 600 official i-mode sites provide information services. Becoming an
official i-mode site and being listed on this portal is very attractive for content providers since NTT
DoCoMo  provides  a  billing  facility,  where  the  users  are  charged  for  value-added  services  via  their
phone  bill.  However,  the  users  are  not  charged  for  each  click  or  view,  but  rather  for  a  monthly
subscription  to  services.  Generally,  the  fees  are  between  Euro  1-3  per  month  and  service.  NTT
DoCoMo  keeps  around  9%  of  the  fees  charged  and  in  addition  makes  money  from  charging  the  i-
mode users for the data transferred.

This  can  provide  an  interesting  business  opportunity,  as  shown  by  a  service  offered  by  the  toy
company Bandai  Ltd.: The company offers a daily download of various cartoons for a monthly charge
of Euro 1 and already has more than a million subscribers. Most of the entertainment providers as well
as many other content suppliers use this business opportunity. Apart from these ”official” sites almost
15,000 unofficial sites exist which cannot use the billing facilities of i-mode’s portal. A lesson to be
learned  for  Europe  from  this  Japanese  experience  is  that  the  portal  strategy  seems  to  be  rather
important for the development of a mobile data service.

It is often argued that the success of i-mode can only be explained by some cultural peculiarities of
the Japanese. However, a closer look at the services enjoying popularity shows quite a few similarities
to patterns of mobile phone usage in Europe. For example, communication is a major motivation for
using  i-mode:  According  to    market  research,  e-mail  was  the  major  reason  for  more  than  80%
customers  to  subscribe  to  i-mode.  But  e-mail  is  also  an  important  factor  in  Europe.  Deutsche
Telekom’s  mobile  service  T-D1  alone  handles  around  11  million  SMS  each  day,  almost  one  per
subscriber.  ”Having  fun  with  SMS”  is  a  major  reason  for  sending  them.  Entertainment  is  also  very
important for i-mode users: According to NTT DoCoMo the majority of hits on the i-mode portal is
targeted on entertainment offers. Last but not least, i-mode usage as well as SMS usage in Europe is
often done during idle time.

Putting these similarities together, the most important services for mobile Internet in Europe might
not be the interactive flight schedule present in so many future scenarios but rather services offering
the download of the cartoon ”monster of the day”.

The question still remains whether the early success of i-mode as a proprietary approach of NTT
DoCoMo can continue - bearing in mind the fate of Minitel in France or BTX in Germany. Currently
there is much speculation about the features of the future WAP version 2.0, which might migrate to
XHTML, a mark-up language closely related to cHTML  used  by  i-mode  at  present.  Also  upcoming
cooperation  between  i-mode  and  AOL  or  the  Dutch  KPM  might  work  in  the  direction  of  a  single
world-wide standard for a mobile mark-up language. This, however, does not change the advantages
the billing possibilities via the i-mode portal provider. After all, the problem of billing for small sums
on the Internet is still unsolved.

[info]
•  The web sites of the Japanese service providers mentioned in the article:
http://www.ido.co.jp
http://www.japaninc.net

http://www.nttdocomo.com 
http://www.j-phone.com 

•  A portal to information on the Japanese wireless communications industry: http://anima.editthispage.com

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 34 -

[2&6]
European smartcard industry takes a position on e-purse interoperability
Knud Böhle (bohle@jrc.es), ITAS, Karlsruhe Germany and IPTS, Sevilla, Spain
/Smartcard industry/smartcards/e-purse/electronic money/interoperability/standards/payment
infrastructure/CEPS/EMU/Esprit project

The  European  smartcard  industry  has  published  its  opinion  about  e-purse  interoperability  and
introduction  of  the  Euro.  Technical  constraints  of  the  migration  process  are  indicated  and  special
emphasis  is  laid  on  the  problem  of  clearing  and  settlement  of  e-money  in  Euroland,  a  problem
previously not taken into account sufficiently.

The European smartcard industry, to be precise its industrial association EUROSMART, that is said to
represent 90% of the smartcard industry (including also terminal and chip manufacturers) has made up
its mind about the development of e-purse interoperability, on the one hand, and the introduction of
the  Euro  on  the  other.  Its  position  has  been  developed  within  a  ”SmartEuro  project”  and  is  now
available as a ”white paper”, of which the last section containing conclusions and recommendations is
most interesting.
This project was not the very first ”SmartEuro project”. Back in 1997 the FIWG (the Financial Issues
Working  Group  established  by  the  European  Commission)  held  a  first  ‘Smart  Euro’  meeting  in
Brussels that raised awareness on the relationship between the introduction of the  Euro and e-purse
developments. One of the participants, Olivier Trebecq (Gemplus), the convener of the Euro working
group within EUROSMART initiated the new SmartEuro project in November 1998. It was supported
by  the  European  Commission  within  the  fourth  framework  program  (Esprit  Project  ”SmartEuro”
EP29196).  This  effort  lasted  eighteen  months,  in  which  expert  workshops  and  bilateral  interviews
were organized. The white paper was published in May 2000 and the project finished officially after
being reviewed ”to the highest satisfaction” of the European Commission in July this year.

The outcome of the project is remarkable in at least three respects. First, the ”white paper” presents
the publicly available (majority) opinion of the European smartcard industry and is as such a  useful
point  of  reference  for  further  debate  among  the  different  groups  of  actors.  Second,  the  analysis  of
EUROSMART  is  not  narrow-minded  as  one  might  expect  from  an  industrial  association,  but  takes
into account different views including the card acceptors’ and the consumers’ expectations. Third, the
conclusions derived from the analysis are thought provoking, because they point out real technical as
well as strategic problems related to the migration to CEPS.

All in all there are 16 recommendations that are further compressed here in a very selective way to

two major concerns - technical the first, and organizational the second - that deserve further debate.

CEPS is understood as the common basis for the definition of interoperability migration strategies.
But although the aim is agreed upon unanimously, the migration process is complex and CEPS is not
yet the right formula for all e-purse applications envisaged. To mention but three points:
•  To  be  CEPS  compliant,  over  one  million  terminals  will  have  to  be  upgraded  and  given  the
complexity of this task only a very small fraction of the technical infrastructure will be converted
to CEPS compatibility by 2002.

•  Current card technology is not ready for multi-application cards with a CEPS compliant e-purse

function. More sophisticated technology is required here.

•  Current  technology  has  not  reconciled  the  requirements  of  CEPS  compliant  e-purses  with  the
requirements  of  transport  applications:  ”Alternative  solutions  must  be  found  to  enable  the
integration of both transport and e-purse applications on a single card” (p 57).

At  the  organizational  and  regulatory  level  the  smartcard  industry  has  detected  a  need  for  further
improvements. How clearing and settlement of e-money in Euroland should work best seems neither
clear  nor  settled.  The  SmartEuro  partners  hold  that  the  Euro  should  be  considered  ”a  domestic
currency in Euroland”, while the international payment networks prefer to offer CEPS interoperability
as an additional cross-border payment brand mark to domestic e-purses. Consequently these payments
would be settled over the existing infrastructure of the international credit card organizations. Further
questions arise, e.g. how the different e-purse families like ZKA-e-purse, Proton and Visa will realize
cross-border  clearing  and  settlement  and  how  they  will  interoperate.  The  industry  association  also

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 35 -

urges the European Central Bank to determine its role in the overall handling of e-money: ”IF ECB
chooses  not  to  play  a  role  in  this  domain,  then  the  establishment  of  a  European  Electronic  Central
Bank should be considered” (p. 56).

The  last  sentence  of  the  ”white  paper”  (and  of  this  contribution)  comes  up  with  an  idea  on  e-
payment infrastructure and links us smoothly back to the focal theme of this ePSO-N issue. When the
EUROSMART  authors  turn  to  the  potential  of  mobile  phone  networks  as  alternative  to  established
payment networks claiming ”that the use of mobile phones would avoid the necessity to go through all
the current acquirer networks associated to the terminal” (p58) we feel their drive, don’t we?

[info]
•  Background information was obtained thanks to Bruno Cucinelli of ARTTIC (http://www.arttic.fr), one of the partners

of the SmartEuro project responsible for its organization and co-ordination.
•  The homepage of the SmartEuro project is at http://www.smarteuro.net
•  SmartEuro  project  partners  (on  behalf  of  EUROSMART):  The  Euro  in  the  Electronic  Purse.  Interoperability  issues  of
2000

A  White 

ARTTIC 

Paper. 

Paris: 

based 

in 

e-payments 
smartcard 
(http://www.eurosmart.com/download/WhitePaper.pdf).

Europe. 

•  Information on EUROSMART is to be found at http://www.eurosmart.com/ Members of EUROSMART are:  Ascom
Monetel,  Atmel,Bull,  Dassault  AT,  Datacard,  Elva,  Emosyn,  FNMT,  Gemplus,  Giesecke  &  Devrient,  Gilles  Leroux,
Hitachi, Incard, Infineon Technology, Ingenico, Microelectronica Esp., NBS, NEC, Oberthur Card Systems, Orga, Philips
Semiconductors, PPC Card Systems, Sagem, Schlumberger, STMicroelectronics, Xiring

•  Read about the first FIWG ”Smart Euro meeting” of June 25, 1997 at http://www.ispo.cec.be/fiwg/smartgen.htm

[2&7]
The e-Payment Systems Observatory FORUM opens it doors
Ioannis Maghiros (ioannis.maghiros@jrc.es), IPTS, Sevilla, Spain
/electronic payment systems/European Commission/ePSO/

An open participation Forum of experts, convened on a voluntary basis, animated by IPTS, with the
objective to address strategic and  technological  issues  in  the  field  of  electronic  payment  systems,  is
being  established  within  the  activities  of  ePSO.  The  main  aim  is  to  allow  Forum  members  share
information  among  them  about  problems  and  proposed  solutions  on  electronic  payment  systems
technology and their views on future impacts of the use of this technology.

The  payment  function  is  central  to  any  business  transaction.  Combining  this  with  the  advent  of  the
Internet as a new communications medium and its subsequent use for e-commerce, will result in the
rethinking of existing payment systems (cash, cards, bank transfer, etc.) as well as new requirements
in  order  to  achieve  improved  convenience,  security,  and  cost-efficiency.  Besides  technology,
European  Monetary  Union  and  the  single  currency  drive  developments  on  this  issue.  Thus  many
complex technical, economic and political questions arise, e.g. the dilemma how to maintain a balance
between  protecting  consumers  (financial  integrity  of  new  institutions,  market  harmonisation)  and
fostering innovation (avoiding excessive regulation). It is believed that a systematic exchange of views
at  a  European  level  on  available  solutions  and  probable  future  trends  aiming  at  reconciling  the
interests  of  many  disparate  players  by  assisting  in  the  development  of  a  consolidated  common
knowledge  base,  would  help  solving  this  type  of  questions.  Therefore  the  Institute  for  Prospective
Technological  Studies  (IPTS),  an  institute  of  the  Joint  Research  Centre  Directorate  General  of  the
European Commission, has set out to establish an e-payment systems Observatory (ePSO).

Rapid  technological  development,  a  multitude  of  actors  from  numerous  economy  sectors  and
market  fragmentation,  owed  partly  to  the  existing  legal/regulatory  system,  are  barriers  to  efficient
information exchange. Therefore an open participation Forum is being established within the activities
of  ePSO,  designed  to  allow  its  subscribed  members  share  information  among  them  about  problems
and proposed solutions on electronic payment systems technology and exchange their views on future
impacts  of  the  use  of  this  technology.  The  open  but  structured  communication  between  actors  will
create a knowledge-base that all participants may benefit from. The expected substantial information
exchange  will  also  help  ePSO  to  come  up  with  sound  analysis  and  review  reports  that  will  then  be
forwarded to the relevant EU policy level bodies.

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 36 -

The  Forum  is  expected  to  draw  participants  from  market  actors  (banking,  credit  card,  retail,
telecommunication  sectors,  technology  providers,  etc.),  consumer,  standardisation  and  academic
institutions as well as decision-makers. Forum members will be summoned to actively participate by
the  chair  of  the  Steering  Group  of  the  Observatory,  namely  Mrs.  Christa  Randzio-Plath,  MEP,
President of the Economic and Monetary Affairs Committee of the European Parliament.
Forum members will
1.  receive  structured  information  generated  by  ePSO  staff  and  react  to  it  by  communicating  with

other experts and market actors within the Forum,

2.  receive the monthly-published electronic newsletter ePSO-N http://epso.jrc.es/newsletter/ edited and

published by the Institute for Technology Assessment and Systems Analysis (ITAS),

3.  be able to interact, mainly through e-mail, with other Forum members, expressing their concerns
and  views  on  technology  and  market  developments.  This  discussion  will  also  provide  an
opportunity to take advantage of cross-sectoral communication paths.

4.  be invited to attend the consensus raising conference foreseen for November 2001.

Topics  of  discussion  are  likely  to  include  business  models,  legal/legislative  implementation
benchmarking,  barriers  to  success  and  technical  difficulties.  Also  developments  on  building
infrastructure as well as benchmarking the use of available infrastructure will be considered. In order
to provide requirements for eventual market-led standardisation activities, long-term socio-economic
impacts  will  also  be  studied.  ePSO-N  will  provide  material  for  discussion  by  presenting  novel
controversial issues to which Forum participants may present their views through the newsletter. Brief
background  papers  and  synthesis  reports  presented  by  ePSO  experts  in  draft  form  will  also  provide
food  for  thought  and  interaction.  Suitable  web-based  tools  (electronic  archived  e-mail  lists)  will  be
used to facilitate a more structured and transparent exchange of information. In case a specific issue
raises  heated  discussion  a  thematically  focused  workshop  will  be  organised.  This  Forum  aims  to
provide all interested parties the chance to promote their views and react to different views presented
by other Forum members. The discussion will also provide an opportunity for specific market players
to establish cross-sectoral communication paths. A number of discussion themes will be proposed but
new ones may be added as required.

[info]
•  The Forum page on the ePSO website http://epso.jrc.es/forum/ will provide all necessary information (such as this brief

presentation, links to the various discussion topics, contact details and the conference announcements).
Anyone  wishing 
http://epso.jrc.es/forum/subscription.htm.

participate  may 

subscribing 

the 

do 

by 

so 

to 

to 

Forum 

electronically

[2&8]
The price of cash – on a report for a Dutch retail association
Leo van Hove (Leo.Van.Hove@vub.ac.be), Vrije Universiteit Brussel /Free University of Brussels, Belgium
/review/costs of payment systems/retailers/pricing

A recent report by a Dutch retail federation on the costs associated with various means of payment
finds that cash is still by far the cheapest.  This finding is important in two respects: not only is it a
reminder of the fact that the merchant side of the equation should not be forgotten when talking about
the economics of electronic purses, but it also raises questions about the pricing of cash (and other
means of payment).

Last May the Hoofdbedrijfschap Detailhandel (HBD), a Dutch retail trade association, published a 59
page report (De kassa rinkelt niet voor niets - Afrekenen kost ook geld! – The cash register doesn’t ring
for  nothing.  Accounting  also  costs  money)    on  the  costs  of  various  means  of  payment  for  Dutch
retailers.  At the basis of the report lies a written survey conducted among 3,710 retail locations - of all
sizes and all lines of business, including supermarkets (but excluding department stores).  The survey
was complemented with desk research and expert interviews and the results were extrapolated, sector

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 37 -

by sector, in order to make them representative of the entire Dutch retail sector (department stores not
included), which in 1998 comprised some 97,400 shops.

The HBD report contains several interesting findings.  For example, it finds that despite a surge in
debit  card  usage,  in  1998  no  less  than  82.8%  of  retail  payments  in  the  Netherlands  were  still  made
with  cash.    In  terms  of  value,  cash  accounted  for  57.9%.    The  corresponding  figures  for  electronic
purses–  which  were  launched  in  1996  -  were  only  0.3%  and  0.2%  respectively.    The  total  cost  of
incoming payments for the entire sector is estimated at NLG 1,175 million.  This corresponds to 0.9%
of turnover.  Among the major cost components are back office costs (29%) and costs associated with
debit card payments (23%).  The costs associated with cash transports and with cash deposits in banks
branches are less important in relative terms (15% and 17% respectively), but are on the rise.

The most interesting result is that cash is still by far the least costly means of payment.  On average
a  cash  transaction  costs  Dutch  retailers  21  cents  (0.095  euro),  compared  to  41 cents  (0.19  euro)  for
giro  payments,  48  cents  (0.22  euro)  for  debit  card  payments,  59 cents  (0.27)  for  electronic  purse
payments,  and  553  cents  (2.50  euro)  for  credit  card  payments.    The  HBD  report  thus  confirms  two
earlier German studies – mentioned in Krüger (2000, p. 3) – which had also found that cash was still
the cheapest for retailers.  Interestingly, for cash the Dutch and German estimates are quite close: the
oldest of the two German studies puts the cost of cash, in the mid 1990s, at 0.17-0.29 DEM (0.087-
0.148 euro) per transaction; the more recent study - which relates to 1998 and was conducted by the
German  retailers  association  –  estimates  it  at  0.226  DEM  (0.116  euro).    The  latter  also  presents  an
estimate of the cost of a GeldKarte payment, namely 0.378 DEM (0.19 euro).  In the UK too, a recent
survey  of  merchants  nationwide  found  that  the  cost  of  handling  cash  is  ”not  astronomic”  (Davis,
2000).  ”We’re  relatively  relaxed  about  it”,  said  John  Simpson,  director  of  financial  services  for  the
British Retail Consortium.
The finding of the Dutch report is important in two respects.  Firstly, together with the German studies
it is a strong reminder of the fact that the merchant side of the equation should not be forgotten when
talking about the economics of electronic purses.  In the current setting, merchants appear to have little
or  no incentive  to  embrace  the  new  means  of  payment.    Secondly,  the  finding  also  raises  questions
about the correct pricing of cash (and other means of payment).

Concerning the first point, it has to be stressed that the results should be interpreted with caution.
For one, the cost estimates rely on a number of critical assumptions.  For example, the time the cashier
spends on receiving the payment is - to my surprise - not taken into account in the personnel costs that
can be attributed to incoming payments, ‘because in the meantime the cashier usually also performs
other  functions’  (p.  28).    This  implies  that  the  reduction  in  check-out  time  promised  by  electronic
purse issuers, if any, will never show up in the Dutch figures.  To be clear: the time needed to count
the receipts at the end of the day, to replenish the inventory of small change, etc. is  included  in the
back  office costs.    According  to  the  survey  an  average  of  7.5  hours  per  month  and  per  company  is
spent on such activities – which boils down to some 20 minutes per business day.  It should also be
underlined that given the current uptake of electronic purses, the new means of payment can not yet
fully benefit from the economies of scale that are clearly present.  As an illustration, in 1995 the cost
of a debit card payment for Dutch retailers was still 80 cents compared to only 48 cents in 1998.  This
drop is due in large part to the fact that debit card usage more than doubled over the period.  Hence,
there is little doubt that the average cost of an electronic purse payment will fall in the years to come -
although it is difficult to predict just to what level.  It also has to be underlined that especially in the
early  years  a  large  part  of  the  electronic  purse  acceptance  points  in  the  Netherlands  were  in  fact
converted  POS  terminals.    Since  merchants  who  already  accept  debit  cards  are  not  part  of  the  real
target population of electronic purses, this may have negatively affected the HBD cost estimates.

To turn to my second point: probably the most important reason behind the fact that cash continues
to be seen as an efficient and inexpensive alternative is that the public has been spared the real cost of
cash use.  That is, the explicit prices charged to consumers and merchants for using currency, if any,
do not cover the full cost.  And this makes it very difficult for electronic purses (and other electronic
payment systems) to gain ground.  All available estimates indicate that the social cost of cash is very
substantial.    A  1993  study  by  the  Boston  Consulting  Group,  for  example,  put  it  at  UKP  4.5  billion

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 38 -

annually for the UK - which is equivalent to 0.75% of GDP.  Of this, UKP 1.5 billion would relate to
opportunity  costs  (interest  foregone)  and  UKP  3  billion  to  handling  costs  (Kredietbank,  1995).
Concerning  Belgium,  in  1995  the  Kredietbank  (now  KBC)  estimated  the  social  cost  of  cash  -
excluding  opportunity  costs  -  at  25  to  40  billion  BEF  (0.35%-0.56%  of  GDP);  20  to  30  billion  of
which  would  be  paid  by  the  banks,  not  by  the  users  (not  directly,  that  is).    Given  this,  many
economists seem to agree that considerable social savings could be reaped by encouraging the use of
more efficient electronic payment systems and by discouraging the use of cash.

‘Correct’ prices – that is, prices which reflect the real costs and which reflect the difference in costs
between various payment services – could be an important instrument in changing payment behaviour.
Under full-costing, the ‘user pays’ principle applies and undesirable distributional effects (i.e., passing
on  costs  to  consumers  not  using  the  payment  instrument)  would  be  avoided.    Explicit  transaction-
based (as opposed to account-based) pricing would make visible the real costs of payment services and
would  motivate  consumers  to  switch  to  the  least  expensive  payment  instruments.    Norway  is  an
interesting  case  since  it  has  a  substantial  head-start  on  most  other  countries  in  this  field:  in  1998
transaction  prices  already  covered  60%  of  banks’  variable  costs  compared  to  only  20%  in  1988
(Humphrey  et  al,  1998).    The  result  has  been  a  dramatic  increase  in  the  use  of  electronic  payment
instruments (ibid.).  As to the best pricing method, Humphrey et al. (1997) advocate two-part average
cost  pricing,  in  which  one  price  (e.g.  a  fixed  charge  per  account)  reflects  the  average  fixed  cost  of
providing the payment service while a second price (a volume-related fee) reflects the average variable
cost.   A  delicate  question  is  how the  charges should  be  split  up  between  merchants  and  consumers.
Humphrey et al. argue in favour of so-called benefit-flow pricing where the two-part prices are split
between payer and payee ”according to a judgement of how much each party gains from a transaction”
(o.c.,  p.  12).    Obviously  it  is  not  easy  to  determine  objectively  whether  the  Dutch  merchants,  for
example,  are  paying  their  part  where  cash  is  concerned.    But  in  my  view  the  introduction  (or
enhancement)  of  explicit  pricing  for  the  use  of  cash  is  an  issue  that  should  be  brought  under
discussion.  Electronic money deserves a fair chance.

[info]
•  Davis,  D.,  A 

the 
http://www.cardtech.faulknergray.com/jan00.htm

dawns 

new 

day 

for 

electronic 

purse,  Card  Technology, 

January 

2000

•  Humphrey,  D.  B.,  Keppler,  R.  H.  and  F.  Montes-Negret,  Cost  recovery  and  pricing  of  payment  services:  theory,

methods, and experience, Policy Research Working Paper nr. 1833, World Bank, August 1997

•  Humphrey,  D.  B.,  Kim,  M.  and  B.  Vale,  Realizing  the  gains  from  electronic  payments:  costs,  pricing,  and  payment
choice,  paper  presented  at  the  34th  Annual  Conference  on  Bank  Structure  and  Competition  ‘Payment  Systems  in  the
Global Economy: risks and opportunities’, Federal Reserve Bank of Chicago, May 6-8, 1998

•  Jaarsma, K. and W. V. M. van Rijt-Veltman, De kassa rinkelt niet voor niets - Afrekenen kost ook geld! Editie 1999,
at

(HBD),  The  Hague,  May  2000. 

can  be  ordered 

  The 

report 

Hoofdbedrijfschap  Detailhandel 
http://www.hbd.nl/infopunt/info_d0005.htm

•  Kredietbank, De kostprijs van chartaal geld, Weekberichten, Vol. 50, Nr. 1, January 13, 1995
•  Krüger,  M.,  Private  banknote  issue  without  free  banking,  paper  presented  at  the  Money,  Macro  &  Finance  Research

Group Conference 2000, South Bank University, London, September 6-8, 2000

—————————————— ePSO-Newsletter Issue 2 – August 2000 ——————————————

- 39 -

ePSO Newsletter – Issue 3, November 2000

Focus: Electronic Purses

[3&1]
Editorial: Interoperability or Obsolescence: Which First for e-Purses?
Michael Rader (rader@itas.fzk.de), Ulrich Riehm (riehm@itas.fzk.de), ITAS, Karlsruhe, Germany
/e-purses/mobile telephones/interoperability/smart cards

This third issue of ePSO-N has its focus on the smart-card based electronic purses which created such
a stir only two to three years back. At that time, there were massive roll-outs at the national level in an
attempt to stake out claims in what was then seen as a promising arena for global level competition.

On the face of it, e-purses had many features making them attractive, such as their  potential for  the
replacement of cash, which is still  the  major  payment  instrument  in face-to-face  transactions  world-
wide. E-purses were expected to be attractive to merchants and the operators of vending machines and
automats since they were pre-paid, and reduced risks of fraud, theft and vandalism in addition to the
costs of handling cash. Since they only needed a special card-reader, they were also expected to find
easy  acceptance  for  e-commerce.  With  the  advent  of  the  Euro,  cross-border  use  was  regarded  as
simple and essential. Finally, there is little problem in providing so-called white cards, which can be
purchased and used anonymously both in real life and in the cyberworld.

Actual  use  of  purse  has  proved  almost  without  exception  disappointing  for  their  operators,
prompting one of our correspondents to remark that "e-purses were dead or dying". While none of our
correspondents was able to report a staggering increase in the use of purses, it is not true to say that
nothing is happening:
•  Since June 1999, there has been an agreement among German banking associations to develop the
"GeldKarte " e-purse into a payment system for the Internet, most notably for digital goods and
services. The implementation of this recommendation has depended on the approval of sufficiently
secure card readers, which has recently taken place.

•  There are at least two projects pioneering cross-border use of electronic purses. The PACE project
(Purse  Application  for  Cross-border  use  in  Euro)  involves  partners  in  France,  Luxembourg  and
Germany,  while  issuers  of  e-purses  in  Belgium  (Proton),  the  Netherlands  (Chipknip)  Spain
(Monedero-4B) and France (Moneo) are co-operating in project  offering  e-purse  interoperability
based  on  the  Common  Electronic  Purse  Specifications  (CEPS).  The  payment  platform  "Smart
Access"  enables  cross-border  payments  on  the  Internet  using  "Proton"  and  in  future  CEPS
compatible e-purses.
Since the average value of cash payments is low, e-purses have to replace a considerable fraction of
cash payments to be a genuine business case. While slow acceptance of e-purses is partly due to the
well-known chicken-egg phenomenon, doubts have also been cast on the amount of true demand for e-
purses, in particular for cross-border use.

The  overall  impression  is  that  only  slow  progress  is  being  made  in  this  field  despite  Europe's
strengths in  chip-card  technology.  E-purses  are  not the  only  horse  the  chip-card  industry  is  backing
since they are a central element in the current boom for mobile telephones.

It  is  perhaps  instructive  to  cast  back  one's  mind  a  few  years.  In  recent  times,  coin-operated
telephone booths were replaced very quickly by card-operated booths. It was soon virtually impossible
to find a phone booth which still accepted coins. Travellers arriving in a foreign country wishing to
make a phone call home had to first equip themselves with a local telephone card, since these  were
usually unique to the service that had issued them.

Within  less  than  a  decade,  everything  has  changed  due  to  the  resounding  success  of  mobile
telephones  in  Europe:  not  only  have  the  numbers  of  public  telephones  decreased  due  to  falling
demand, but even foreigners are able to make calls to their own countries on their own mobile phones
thanks to the GSM standard, which enables roaming.

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 40 -

The  first  two  issues  of  ePSO-N  focused  on  payments  using  mobile  phones  and  one  quite  likely
scenario is that mobile telephones could develop into a universal payment system offering all of the
functions of debit and credit cards and those of the e-purse. In such a scenario, it is not yet clear who
stands to gain the major share of profits since at least one major mobile phone operator, the German
"Mobilcom",  has  expressed  interest  in  recovering  the  costs  for  UMTS  licenses  by  entering  the
payment business. The cover story of the November issue of "European Card Review" asked whether
that  banks  should  forget  about  implementing  the  EMV  standard  since  this  would  soon  be  made
obsolete by the mobile phone solutions. Conversely, the Forrester consultant company is arguing that
with the release of the "smart Visa" credit card in September, chip cards are to be "the story" of the
2000 Christmas e-shopping season. The  question then  arises  whether  history  will,  in  a  sense,  repeat
itself and that even if smart card solutions achieve a breakthrough, these will be gradually edged out
by mobile phones.

The first article from one of our two Australian correspondents, Michael Walters, investigates the
prospects  of  pre-paid  products  such  as  e-purses  for  establishing  themselves  in  the  market  place.  He
argues that this will indeed be the case, if multiple product cards are rolled out in sufficient numbers.
This is followed by a brief update on e-purses by Michael Rader, incorporating information provided
by  ePSO-N's  network  of  correspondents.  Emphasis  is  given  to  purse  schemes  not  included  in  the
ESTO  "Country  Synthesis  Report"  for  the  European  parliament.  Simon  Lelieveldt  then  deals  with
recent  developments  concerning  the  two  rivalling  Dutch  e-purse  schemes  and  their  trend  towards
interoperability. Simon comes to a conclusion that the current generation of smart card e-purses will
no  longer  be  in  use  for  their  original  purpose  within  a  decade,  but  that  there  will  be  new  uses  as  a
means  of  authentication  and  identification.  Ulrich  Riehm  describes  recent  developments  concerning
the German "GeldKarte", which exists in huge numbers but is still looking for killer applications. A
few potential applications are discussed in this article. This is followed by a country report on Japan
by  Masanobu  Higashida  which  reveals  remarkable  similarity  to  events  and  discussions  in  Europe.
Next in line is the first half of a two-part interview with Michael Waidner of IBM by our Switzerland-
based correspondent Hans-Dieter Zimmermann. In it, Waidner discusses the goals of Semper and the
results  the  project  reached.  Semper  developed  a  comprehensive  security  architecture  for  electronic
marketplaces.  This  issue  of  ePSO-N  closes  with  Leo  van  Hove's  column,  in  which  he  discusses
presentations on Electronic Bill Presentment at the 2nd Electronic Payments Workshop hosted by the
Chicago Fed last October. This provides an introduction to the topic, which will be subject of a focus
in one of next year's issues of ePSO-N.

Incidentally, Leo van Hove's discussion of the price-related problems of cash and e-purses in the
last issue inspired a number of articles on interchange fees which will be included in the next issue of
ePSO-N.

[info]
•  The  ESTO  "Country  Synthesis  Report"  for  the  European  Parliament  is:  Böhle,  Knud;  Rader,  Michael;  Riehm,  Ulrich
(eds.):  Electronic  Payment  Systems  in  European  Countries.  Country  Synthesis  Report.  Karlsruhe:  1999.  It  can  be
downloaded from the ITAS WWW-Server at http://www.itas.fzk.de/deu/projekt/pez/emuis.htm.

•  An interview with the founder of Mobilcom, Gerhard Schmid, containing thoughts about entering the payments market is

in "Der Spiegel" 46/2000, pp. 138- 142.

[3&2]
What Future for Stored Value?
Michael Walters (MichaelW@cardsetc.com), Cards Etc Pty Ltd, Sydney, Australia
/smart cards/ e-purse/business model/interoperability/CEPS

There has been considerable discussion in recent times in relation to the future of smart card based
stored  value  payment  instruments,  given  their  failure  to  achieve  the  daily  use  and  international
penetration  once  envisaged.  Will  a  globally  homogenous  stored  value  product  ever  emerge?  Can
stored  value  offer  the  utility  necessary  for  it  to  be  broadly  accepted?  Are  the  benefits  to  all

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 41 -

participants  sufficiently  great  to  justify  the  investment?  Will  it  ever  be  as  ubiquitous  as  credit  and
debit  cards?  If  multiple  product  smart  cards  are  rolled  out  in  sufficient  number  over  the  next  five
years, this could be the case.

In  the  early  1990's,  stored  value  was  perceived  by  many  to  be  the  'killer  application'  that  would
underwrite  the  adoption  of  smart  cards  by  the  financial  sector,  ultimately  replacing  the  functionally
constrained magnetic stripe card. Indeed, for many involved at the time, it was difficult to envisage a
financial smart card without stored value. However, through the 1990's a series of high profile projects
failed  to  live  up  to  expectations,  and  as  a  result  most  payment  card  associations  and  financial
institutions placed stored value in the 'too hard' basket.

Over  the  past  20  years,  there  has  been  a  significant  shift  internationally  to  card-based  payment
instruments,  primarily  at  the  expense  of  paper-based  payment  instruments  (e.g.  cheques)  and,  to  a
lesser  degree,  other  electronic  payment  instruments  (e.g.  direct  debits)  and  currency  (i.e.  notes  and
coins).  Today,  card-based  payment  instruments  account  for  around  15%  to  20%  of  transactions  by
gross  value  globally  –  indeed,  Visa  International  alone  claims  nearly  8%  of  global  personal
consumption  expenditure  –  although  cultural,  regulatory  and  commercial  issues  can  result  in
significant variances from one market to the next.

Credit cards (including charge cards – referred to as pay-later card products) are typically used for
higher value, discretionary and / or infrequent payments, with use often greatest in fashion, electrical
and department stores, for travel / entertainment purposes, as well as more recently for the payment of
utility  bills.  Credit  cards  tend  to  compete  against  store  accounts,  cheques  and  giros  and  to  a  lesser
extent  direct  debits  and  currency  (notes),  however  there  is  also  some  degree  of  cannibalisation
occurring in some markets with respect to debit card payments. Based on 1999 Visa International and
Mastercard International figures , the average credit card carries out around 20 transactions per annum
at  an average  value  of  US$90.  Credit cards  are  approaching  maturity  in  many  markets,  with  annual
global growth in gross dollar value down to around 10%.

Debit  cards  (including  account  access  /  ATM  cards  –  referred  to  as  pay-now  card  products)  are
typically  used  for  moderate  value,  budgetary  and  /  or  regular  payments,  with  use  often  greatest  in
supermarkets, petrol stations and food stores, amongst those unable to acquire credit cards, as well as
for cash dispensing purposes. Debit cards tend to compete against cheques and cash (notes), although
in some markets they also compete with credit cards to a significant degree. The average debit card
carries out around 45 transactions per annum at an average value of US$50 – the higher transaction
number than credit cards is primarily driven by regular food and fuel payments. Debit cards are yet to
reach maturity, with annual global growth in gross dollar value of around 30%.

Stored  value  cards  (including  electronic  purses  –  referred  to  as  pay-before  card  products)  are
typically  used  for  lower  value,  frequent  and  /  or  fast  payments,  with  use  currently  greatest  in
payphones, vending machines, transit systems and convenience outlets, as well as closed environments
such  as  campuses,  entertainment  venues  and  the  like.  Stored  value  tends  to  compete  primarily  with
currency (and in particular, coins), although there is some cannibalisation of other card transactions.
Based on the author's experience, with only 50 to 75 million broadly accepted stored value products in
circulation globally – less than one-tenth of the number of debit or credit card products – the average
transaction is between US$3 and US$10 with around 20 to 40 transactions carried out on each card per
annum in the most active schemes.

As a side note, stored value is well positioned to play a significant role with respect to consumer e-
commerce payments. However, its natural advantages (e.g. transaction speed, processing cost) relative
to  other  card  based  payment  products  are  not  as  great  for  e-commerce  as  the  traditional  economy,
particularly given the current large number of 'electronic currencies' and similar purpose built payment
products for e-commerce.

To make its mark, stored value needs to replace at least a moderate proportion the thousand of so
currency transactions made by the average consumer each year. Based on current card numbers and
transaction volumes, stored value has barely scratched the surface. So what will be required for stored
value meet this goal? In short, stored value must be:
•  globally homogenous,

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 42 -

•  broadly accepted,
• 

comparatively beneficial.
Most stored value schemes were based (and often competed) on vastly differing technologies and
functionality,  thus  making  later  interoperability  as  operators  seek  economies  through  interchange
virtually impossible in all but a handful of cases. Together with the growth in travel and e-commerce,
it  soon  became  apparent  to  most  that  stored  value  could  only  succeed  if  the  core  technology  and
functionality  was  standardised,  in  much  the  same  way  as  for  credit,  ATM  and  (increasingly)  debit
cards.  Thus  were  born  CEPS  –  the  Common  Electronic  Purse  Specifications  –  which  are  now
supported (and will be progressively implemented) by around 90% of smart card based stored value
scheme  operators.  Subject  to  commercial  agreements  being  established,  a  smart  card  supporting
Proton's CEPS product issued in Belgium will be able to be accepted for payment by a Visa merchant
in  Brazil  accepting  CEPS  products  for  payment,  possibly  even  across  the  Internet.  Thus,
interoperability  based  on  a  core  set  of  common  technologies  and  functions  will  soon  be  a  reality,
allowing  stored  value  to  operate  in  a  homogenous  manner  globally  whilst  still  supporting  market-
specific cultural, regulatory and commercial variances.

In order to increase typically low transaction numbers, stored value schemes realised that they must
equally saturate consumer 'transaction corridors' with the opportunity to  use  whilst  at the  same  time
ensuring merchants had ample opportunity to accept, and in so doing maximise utility by reducing (or
even  eliminating)  the  need  to  carry  and  accept  currency.  In  particular,  schemes  had  to  co-opt  the
participation  of  merchants  where  consumer  demand  for  stored  value  was  greatest  –  in  particular,
payphone,  vending  machine,  transit  system  and  fast  service  merchants  where  coin  usage  was  most
common. For most schemes, this  was  not  familiar territory.  Apart  from  the  requirements for  unique
card-accepting  devices  and  the  competitive  issues  associated  with  competing  'closed'  stored  value
systems already established by many such merchants, some also required 'contactless' smart cards to
speed up the transaction process. As a result, many vendors are now releasing smart cards with both a
contact and a contactless communications interface connected to a single chip. Whilst it remains to be
seen whether CEPS will adequately support contactless stored value transactions, there is little doubt
in the minds of many that it will have to in order to retain broad industry support.

The final challenge facing stored value schemes is to develop a sustainable business model – with

the primary challenge being to obtain sufficient revenue from cardholders and merchants.

From the cardholder's perspective, there is evidence to suggest that most are willing to pay a fee of
between US$5 and US$20 for a smart card based stored value product, providing it can also be used in
public  transport,  as  a  loyalty  scheme  and/or  as  a  credit/debit  card.  However,  for  all  other  fees,  the
stored value product must be competitive with currency – cardholders may be willing to pay a small
fee to load value in much the same way as they would to obtain cash, but they are not at all willing to
pay a per transaction fee as there is no equivalent for currency. From the merchant's perspective, the
competitor is not just currency but other payment cards. For many, the costs of handling currency are
largely intangible and / or not reduced significantly unless stored value fully replaces cash, and so it is
often difficult to base pricing on the cost of handling currency (with the possible exception of transit,
payphone  and  vending  machine  operators).  Elsewhere,  assuming  consumer  demand  is  strong,
merchants have shown that they will accept pricing of at least the lesser of their current debit card or
credit card fees.

Taking into account the interest earned from the stored value float, it can be argued that in most
cases cardholder and merchant revenue will be sufficient to justify the roll out of a smart card based
stored value product, providing it is globally homogenous, broadly accepted and shares infrastructure
costs (cards, devices, networks)  with  other  smart  card  based  products  (such  as credit,  debit,  loyalty,
digital certificate, etc).

However, it is unlikely that stored value will start to significantly cannibalise currency payment for
five years – it will take this time to roll-out CEPS, deploy commercially contact / contactless cards,
and convince the market of the business case. Further, this timing  will  be  at  least  in  part  dependent
upon the successful deployment of multiple product smart cards, upon which stored value will rely for
much of its infrastructure.

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

Thus,  subject  to  the  changes  outlined  above,  it  is  likely  that  stored  value  will  one  day  be  as
ubiquitous as credit and debit cards in many if not most developed markets, although this will take at
least five years and be dependent upon the broader roll out of multiple product smart cards.

[info]
•  Visa International website: http://www.visa.com/av/press_center/digital/statistics.html
•  Mastercard International website: http://www.mastercard.com/about/press/fy1999.html

- 43 -

[3&3]
An Update on e-Purses
Michael  Rader  (rader@itas.fzk.de),  ITAS,  Karlsruhe,  Germany  with  input  from  ePSO-N-Network  of
Correspondents
/electronic purse/Austria/Belgium/Denmark/Finland/Italy/Switzerland

The article updates the information on electronic purses contained in the "Country Synthesis Report"
produced  by  the  European  Science  and  Technology  Observatory  (ESTO)  network  for  the  European
parliament.  Important  e-purses  from  Belgium,  Austria  and  Switzerland  missing  from  the  original
report are covered in this article as are recent developments in Denmark, Finland and Italy. Although
existing  e-purse  schemes  in  Italy  have  not  yet  progressed  beyond  the  pilot  stage,  it  is  here  that  the
most ambitious plans for smart card based payment cards exist.

The article compiles information on e-purses provided by the ePSO-N network of correspondents in
response to a standard checklist of questions. These have been summarised by ePSO-N's editor.

Austria: There are about 4.8 million "Quick" cards issued by Europay in circulation, most of them
rechargeable and mounted on the bank card, which is still also equipped with the magnetic strip for
use  at  ATMs.  An  anonymous  disposable  card  is  available  but  not  being  widely  advertised.  A  small
number  of  companies  is  accepting  e-purse  payments  for  meals  purchased  in  staff  canteens.  Several
municipalities have installed parking machines accepting e-purses. Overall there seems to be a slight
upward  trend  in  frequency  of  use  of  "Quick"  e-purses.  At  the  same  time,  the  average  value  of
transactions is declining due to the purse slowly finding its niche for the type of payments mentioned.

Belgium: The "Proton" card operated by the Banksys company and issued uniformly by all Belgian
banks  is  widely  regarded  as  the  most  successful  European  e-purse  scheme,  although  the  number  of
cards  issued  (30  million  world-wide)  is  lower  than  the  50  million  claimed  for  the  "GeldKarte"  in
Germany alone. "Proton" is only available in the rechargeable form and it can be used for domestic
use – recharging and payments – over the Internet. Customers wishing to make cross-border payments
can only do this via the "SmartAxis" software, which supports "Proton" as one payment option in a
whole range. The number of cards issued in Belgium is 8 million (July 2000), some 3 million cards
were active in November 1999. The number of transactions in July 2000 was 3.8 million, the average
value per transaction in October 1999 was 150 BEF (under 4 Euros). Correspondingly the main areas
of  application  are  payphones  and  vending  machines.  "Proton"  is  involved  in  an  international
cooperative  effort  to  offer  e-purse  interoperability  based  on  CEPS  (Common  Electronic  Purse
Specification) to start in January 2001.

Denmark: "Danmønt" (Dancoin) is one of the systems already described in the "Country Synthesis
Report".  It  is  a  national  card,  restricted  to  domestic  use  and  currently  not  available  for  use  on  the
Internet. It is available in rechargeable and disposable formats, in fact the disposable cards form the
majority with an estimated 600,000 active cards against 50,000 rechargeable cards in November 2000.
"Danmønt" cards were used for 1.87 million transactions in the third quarter of 2000. Figures on the
average values of transactions are not given, but main use at present is for payments to canteens and
laundries.

Finland: "Avant" was also covered in the ESTO "Country Synthesis Report". It is another national
card restricted to domestic use, available in both rechargeable and disposable form. The card can be
used  both  for  reloading  and  for  purchases  over  the  Internet,  although  its  use  is  probably  currently
restricted to a single merchant. The rechargeable version of the card is mounted on the same chip used

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 44 -

at ATMs for cash withdrawal and can also use these for recharging, Finland having coming a long way
on  the  route  to  converting  its  ATM  infrastructure  to  chip  technology.  The  main  area  for  use  is
probably telephone calls from public phones. A factor that could well be a major barrier is a charge of
2 FIM to recharge the card when it has been spent.

Italy: There are two e-purse schemes, "Minipay" issued by SSB and "VisaCash" issued by Visa,
which have not yet progressed beyond local trials. The Italian Identity Card will in future be based on
smart  card  technology  with  a  roll-out  in  some  of  the  largest  cities  (Rome,  Milan,  Bologna,  Turin,
Florence) beginning in December 2000. It is expected that the issue of cards to all 57 million Italian
citizens will be completed before the beginning of 2003. Beside serving as an identity card, the card
will contain medical data and is also planned to be adopted as a payment means with both credit card
and  debit card  functions.  While  no specific  mention is  made  of e-purses,  it  would  be simple  to  add
such a function.

Switzerland:  The  Swiss  e-purse,  CASH,  which  is  incidentally  also  the  name  of  the  Swedish
system, is based on the Belgian PROTON technology.  It has been in operation since February 1997
and is available only in rechargeable form for purely domestic transactions, a minor exception being
Liechtenstein. There are roughly 3.5 million cards in circulation. These were used for an estimated 17
million  transactions  with  an  average  value  of  five  Swiss  francs  (under  3  Euros)  in  2000.  There  are
about 25,000 points accepting the e-purse so that the average use per  day  per  terminal is  under  two
transactions. Internet use is not yet possible but projected for the future. A major barrier is the refusal
of several major retail chains to accept the e-purse. It can be used in a number of municipalities to buy
transportation tickets and a manufacturer of phones for public use has started equipping phones with a
card reader for e-purses.

Separate articles in this issue cover the development of electronic purse schemes in the Netherlands

and Germany.

[info]
•  Information for  this  article  was  provided  by  ePSO-N  correspondents  Walter Peissl  (Austria),  Leo  van  Hove  (Belgium),
Morten Falch (Denmark), Tuomas Salste (Finland), Piero Bucci (Italy) and Hans-Dieter Zimmermann (Switzerland).
•  The  ESTO  "Country  Synthesis  Report"  for  the  European  Parliament  is:  Böhle,  Knud;  Rader,  Michael;  Riehm,  Ulrich
(eds.):  Electronic  Payment  Systems  in  European  Countries.  Country  Synthesis  Report.  Karlsruhe:  1999.  It  can  be
downloaded either from the IPTS web-site at http://www.jrc.es/pages/f-project.html or from the ITAS WWW-Server
at http://www.itas.fzk.de/deu/projekt/pez/emuis.htm.

•  Leo  van  Hove  maintains    a  selected,  but  very  extensive,  bibliography  on  e-purses  throughout  the  world  at:

http://cfec.vub.ac.be/cfec/purses.htm

[3&4]
E-Purses and Chip Cards in the Netherlands
Simon Lelieveldt (simonl@wxs.nl), Amsterdam, the Netherlands
/Netherlands/e-purse/multifunctionality/interoperability/competition

In  the  Netherlands  fierce  competition  has  lead  to  a  rapid  distribution  of  two  e-purse  schemes.  The
functionality of the two schemes is described with an additional focus on interoperability and the most
successful usage segments for e-purses/chip cards in the future.

In the Netherlands, 20 million debit cards with chips have been issued by the Dutch banks. 13 million
of those cards, issued by a group of 67 banks, contain the electronic purse by the name of Chipknip
(launched in October 1996). The remaining 7 million are so-called Chipper, issued since the launch in
July  1997,  by  the  6  banks  that  are  part  of  the  ING  Group.  Of  these  6  banks  the  Postbank,  with  its
customer base of more than 6 million, is the largest issuer.

The  purse  functionality  of  both  schemes  is  identical  in  terms  of  maximum  loading  amount  (227
euro) and the impossibility to transfer freely between users. Both schemes have national coverage and
are not ready (nor meant) for international use. The purses are reloadable, a pilot with a non-reloadable
purse is currently taking place. Both chip cards are multifunctional. Not only do they allow for e-purse
payments, they can also be used as part of an authentication mechanism for making payments over the

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 45 -

Internet. Some slight differences exist as to the non-financial service options (a phone book, loy-alty
schemes) available on Chipper and Chipknip.

The  loading  procedures  of  the  schemes  differ.  The  loading  procedure  for  the  Chipknip  must  be
performed by using the debit card pin code in separate loading devices, located at banks, or by using a
personal  home  loading  device.  The  loading  of  the  Chipper  takes  place  by  using  a  Chipper  code  at
either a phone cell or in a personal home loading device. The Chipper code must be different from the
debit card pin code. This approach (which prevents a number of attacks on the debit card pin  code)
allows a multitude of private and public low-end loading devices to be used, including the KPN phone
cells.

The total float of both schemes amounted to 25.4 million Euro at the end  of  1999.  Based  on  the
micro-economic assumption that as a result of risk considerations, the e-purse of an active card holder
will hold an average amount of 34 Euro, it can be calculated that in total 750,000 cards are actively
used.  This  would  be  less  than  5  per  cent  of  the  20  million  issued  cards.  As  some  market  research
indicated  that  quite  a  number  of  customers  have  only  initially  loaded  their  purse  (without  using  it
since), the real number of active cards may in fact lower. Reports from public libraries and universities
indicate that the market share (in terms of frequency of use) of Chipper and Chipknip is 50 % each.
This  market  share  is  the  same  as  the  current  payments  market  share  (in  number  of  transactions)  of
Postbank vis a vis all its competitors.

Initially the core focus of the two e-purse schemes was different. Chipper (being a joint venture of
the Postbank and KPN Telecom) mainly targeted the vending and coin segment including  of  course
the  phone  cells  (22,000  in  total).  Chipknip  focused  on  the  current  POS  terminal  base  (160,000  in
total). Confusion in the market as to the benefits of investing in either one or the other scheme led to a
wait and see approach on the side of retailers and cash acceptors. In reaction to this market sentiment
Chipknip  and  Chipper signed in  1999  a  formal  agreement  stating  their  collective  goal  to  make  chip
payments  a  success  and  to  ensure  that  all  terminals  would  be  (made)  interoperable.  Consequently
collective  efforts  were  set  up  to  realize  critical  mass  in  the  parking,  vending  and  public  transport
segment.  Also  a  reduction  of  100  %  was  given  with  respect  to  the  monthly  fee  for  accepting  chip
payments (meaning it would come back when reaching critical mass).

It can be estimated that the number of chip card accepting terminals amounts to 155,000. Included
are the 20,000 KPN phone cells, some 15,000 vending or chip-only terminals and 120,000 upgraded
point of sale terminals. In the evaluation of the Chipknip trial it became clear that the average chip-
payment  was  7.3  Euro.  Recent  figures  show  that  the  average  payment  is  0.81  Euro  in  vending
machines, 2.04 Euro in the catering segment and 7.95 Euro in the POS terminal segment. The number
of transactions is not disclosed however.

The  general  impression  at  the  National  Chipcard  Conference,  which  was  held  in  The  Hague  in
November  2000,  was  that  the  collective  approach  of  the  Dutch  banks  to  focus  on  specific  target
markets  is  a  time-consuming  but  rewarding  approach.  E-purse  acceptance  is  quickly  rising  in  the
parking  segment  for  example.  The  amount  share  of  chip  payment  as  a  percentage  of  total  cash
payments in parking meters rose from 2.17 % for the period May until December 1998, to 5.95 % in
1999,  and  to  7.48  %  for  the  period  January  to  August  2000.  This  is  stimulated  by  a  recent
governmental decision to allow the exclusion of cash as the payment  method  for  payment  of  public
parking fees (which in a formal sense are a tax, which implies that cash payment is a default option to
be  provided).  Given  the  considerable  benefits,  similar  decisions  are  made  by  operators  in  closed
environments (catering segment) and semi-closed environments (universities).

Apart  from  the  above  e-purse  development,  the  most  important  development  within  the  e-purse
framework  is  the  use  of  the  Dutch  chip  card  to  identify  and  authenticate  the  holder  in  on-line
transactions. On this issue, each bank is following its own multi-channel strategy. The essence of this
strategy is  to  provide  the  consumer  with  a  chip  card-reader  which, in  conjunction  with the personal
chip card and either telephone or PC or mobile phone, realizes proper identification. The latter way of
using the chip card is bound to be the most important usage in ten years time; the current use of the
chip card as an e-purse at the point will at that point in time be too expensive or cumbersome in the
light of alternative mobile and infrared technologies.

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

[info]
•  Bank  for  International  Settlements  (BIS),  Committee  on  Payment  and  Settlement  Systems:  Survey  of  electronic  money

developments. Basle: BIS 2000 (available for download at http://www.bis.org/publ/cpss38.htm)

•  Presentations  at  National  Chipcard  Conference  the  Hague,  7  &  8  November  2000  (see  announcement  at

http://www.chipcardcongres.nl/)

- 46 -

[3&5]
Three Years of German e-Purse "GeldKarte"
Ulrich Riehm (riehm@itas.fzk.de), ITAS, Karlsruhe, Germany
/Germany/e-purse/Internet/interoperability/crossborder/multifunctionality

Since 1997 the German e-purse called GeldKarte is in the market. With about 50 million cards issued
it seems to be a great success. But usage is not as good as this figure indicates. Only 0.5 million cards
are  realy  used  and  while  the  number  of  transactions  is  still  increasing  the  value  of  payments
decreased from 1998 to 1999.

GeldKarte is the German electronic purse system supported by the whole banking industry and based
on a formal agreement between the five banking associations within ZKA (Zentraler Kreditausschuss
which is the top level committee for all major decisions dealing with payment systems of the banking
industry).  One  main  advantage  of  GeldKarte  is  that  it  is  based  on  an  open  standard,  so  that  every
interested  provider  fulfilling  the  requirements  of  the  specification  can  contribute  with  hard-  and
software to the system.  GeldKarte  was  tested  during  a  pilot in  1996  in  Ravensburg  and Weingarten
while introduction at the national level started in 1997. The chip for GeldKarte is usually integrated in
the  Eurocheque  Card  or  bank  customer  cards.  So  there  are  about  50  million  e-purses  issued.  This
impressing figure has to be qualified by the fact that only about 0.5 million of these cards are really
used.

What  has  been  achieved  from  1997  to  1999  since  the  national  roll-out?  Let's  look  at  the  figures
provided  by  ZKA  on  the  use  of  GeldKarte.  (The  following  figures  are  monthly  averages  per  year
calculated on the basis of monthly data provided by ZKA statistics.) We have seen a big step forward
in all indicators from 1997 to 1998 but from 1998 to 1999 already the increase slowed down and the
value  of  transactions  and  the  number  of  acceptance  terminals  have  in  fact  decreased  from  1998  to
1999.

The actual data on the use of GeldKarte are as follows:
The  number  of  active  cards  (this  means  at  least  one  loading  or  paying  transaction  per  month)
increased from about 200,000 in 1997, to 410,000 in 1998,  and to  490,000 in  1999. The  number  of
active  acceptance  terminals  (at  least  one  acceptance  per  month)  increased  from  22,000  in  1997,  to
52,000 in 1998, and decreased to 42,000 in 1999.

Looking at the number of transactions per month there were on average 350,000 in 1997, 1,100,000
in  1998  and  this  number  further  increased  in  1999  reaching  1,700,000.  The  average  value  per
transaction decreased from 11 Euro in 1997, to 6 Euro in 1998 and 4 Euro in 1999. This is in line with
the  e-purse  rationale  to  substitute  small  value  cash  payments.  But  the  increase  in  the  number  of
transactions was not sufficient to expand the total volume of payments. While in 1997 the total value
of transactions per month was 3.5 million Euro, and in 1998 7.7 million Euro we saw only 6.1 million
Euro in 1999. This gives a clear picture of the problematic situation  of  GeldKarte  in  Germany.  The
market success is not certain.

There  are  some  areas  where  GeldKarte  meets  market  demand.  This  is  for  example  at  ticketing
machines and car parkings. Some parking space operators accept GeldKarte as an electronic parking
ticket. The car driver can check in with the GeldKarte at the entrance and pays when he is leaving. He
does not need to go to the parking automates, no extra parking ticket is printed. This seems to be quite
useful particularly in such cases where the parking fee is discounted when paying with the GeldKarte.
Some public transport companies have equipped many of their vending machines to accept GeldKarte.
Some of these transport companies, for example in Bremen, have started pilots where GeldKarte is not
only  used  to  pay  for  a  ticket  but  to  substitute  for  the  ticket.  Other  areas  of  applications  are  loyalty

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 47 -

schemes  storing  the  bonus  points  on  GeldKarte.  This  makes  clear  that  the  GeldKarte-System  is  not
merely an e-purse scheme but a multi-application smartcard.

But the breakthrough application for GeldKarte is still missing. In 1998 already, ZKA announced
the use of GeldKarte at public phones. Till now however it has not been realised and it seems unclear
if it will ever happen. One reason may be the fee structure for GeldKarte. The acceptor has to pay 0.3
percent of the transaction  value  with  a  minimum  of  0.01  Euro  for  each  transaction.  Another  reason
could  be  the  cost  to  make  public  phones  ready  for  GeldKarte.  All  in  all,  the  business  case  for
GeldKarte remains unclear.

What  about  e-commerce  and  GeldKarte?  Since  1997  some  payment  technology  providers  have
been  offering  solutions  for  the  use  of  GeldKarte  on  the  Internet.  Since  1999  the  saving  banks  in
Germany have been running a public trial, where you can pay some Internet retailers with GeldKarte.
While  in  this  pilot  low  cost  card  readers  (type  class  1)  have  been  used,  ZKA  requires  more
sophisticated  card  readers  (class  3).  Recently  ZKA  has  certified  the  first  class  3  card  reader  which
integrates a small display and a miniature keyboard. The market penetration of class 3 readers is very
low because of the cost. While class 1 readers cost about 15 Euro you have to pay 50 to 100 Euro for
class 3 readers.

ZKA  is  a  member  of  the  CEPS-Group  (Common  Electronic  Purse  Specifications)  so  GeldKarte
will support CEPS in the future. Until now the GeldKarte system has been exported to Luxembourg
(where it is called mini-CASH) and to France with a pilot in Tours (called Moneo). But these systems
are  not  yet  ready  for  cross-border  payments.  Although  a  project  (PACE)  to  achieve  interoperability
and allow for cross border payments between the three countries started in early 2000, it will be a long
way to go.

[info]
• Statistics of use of GeldKarte by Zentraler Kreditausschuss (ZKA) 1997, 1998, 1999 (not published)
• Böhle,  K.,  Rader,  M.;  Riehm,  U.  (Eds.):  Electronic  payment  systems  in  European  countries.  Country  synthesis  report.
in  pdf-format  at

(FZKA  6386,  available 

for  download 

Karlsruhe:  Forschungszentrum  Karlsruhe  1999 
http://www.itas.fzk.de/deu/projekt/pez/emuis.htm)

• Fluhr,  M.  (Ed.):  Die  Chipkarte:  Multifunktionaler  Schlüssel  im  neuen  Jahrtausend.  Berlin:  inTime  2000  (Proceedings

OmniCard 2000, Berlin, January 2000)

[3&6]
Rise and Fall of E-Payment Methods in Japan
Masanobu Higashida (higasida@ctr.atr.co.jp), Kyoto, Japan
/Japan/mobile telephones/e-commerce/e-money/electronic payment systems/Internet

The overall pattern of development and use of payment systems and electronic commerce in Japan is
not dissimilar to that in Europe: e-money schemes are stagnating and the majority of payments in e-
commerce is made using payment methods also favoured in the bricks-and-mortar world. The costs of
Internet use are a major barrier to the rapid growth of e-commerce as is reluctance to transmit credit
card information across the net. New developments frequently involve mobile telephones.

Though Internet users in Japan number almost 30 million, there is no booming market in e-commerce.
The volume of e-commerce in Japan hit $3 billion in 1999 and is still growing, but remains only 20%
of the US "e-Christmas" market in 1998. The high cost of communication lines is said to be the main
reason for that, because it takes time to find the desired goods by browsing web pages. There are also
restrictions in payments over the Internet which are probably also a barrier.

After the eruption of the Internet in Japan about five years ago, several e-payment trials supporting
e-commerce  were  introduced.  Those  are  electronic  money  (e-money)  payment,  credit  card  payment
and debit card payment. Though debit card payment is definitely a kind of electronic payment means
since it also uses communication lines, this method is only used at "bricks and mortar" shops.

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 48 -

At the early stage, e-money seemed the most promising payment system and several different kinds
of e-money systems were experimentally provided, following Mondex in Swindon in the UK. These
included  VisaCash,  InternetCash  and  Super  Cash.  The  last  two  were  invented  and  developed  by
Nippon Telegraph and Telephone Corporation (NTT). But e-money systems shrank very rapidly after
termination  of  the  experiments,  not  because  of  technical  issues  but  because  of  the  complicated
registration procedures which involved opening an extra account at the bank and receiving a special IC
card holding e-wallet handling software in addition to an ATM card.

At most, only hundreds of thousands IC cards were delivered. Of course, this is one of the reasons
that  e-money  has  not  become  a  popular  payment  system.  If  compared  with  the  hundreds  million  of
credit  cards  in  circulation  throughout  Japan  which  have  established  their  position  as  a  convenient
payment system, the result with respect to competitiveness was clear. People did not wish to acquire
another payment card for use only over the Internet. What's more, only a few million home users could
access the Internet through telephone lines or cable lines where the transmission rate is not so good.
For example, though ISDN users can enjoy 64k bps and CATV users 1.5M bps, people using normal
dial-up systems can only use 36k bps at most. This low bit rate of access to the Internet and high cost
for communication lines discouraged users from purchasing goods at web shops. Though users were
not required to pay any e-money handling costs and did not need to go to the shop, they sometimes
paid more than the conventional purchase price at shops because of the high cost for the lines caused
by both rate and time spent for purchase.

Consequently, it seems very natural for credit card payment to become popular. It is a fact that the
credit card payment system is the most prevalent form of electronic payment. Users, however, often
prefer the remittance system through banks or post offices after they have confirmed the quantity and
quality of goods they wish to purchase at web shops, just as they would do by browsing catalogues
sent by vendors. They do not use the e-payment system though they use the Internet as an accessing
path to web shops. It is said that Japanese customers do not want to send their credit card ID numbers
through  communication  lines  even  though  they  know  the  information  is  securely  transferred  to  the
partner by SSL or SET.

The total amount of trading over the Internet in 1999 was 350 billion yen ($3.2 billion), more than
twice as much as the previous year 1998, but this is less than 0.1% of annual expenditure by customers
in Japan. The average of each transaction is about 13,000 yen ($120). Not all transactions are settled
by credit card, indeed credit card payment over the Internet has not achieved popularity.

Is there any other booming payment system in Japan? Indeed, there is: the J-Debit service launched
this March is now growing rapidly. More than 300 million ATM cards held by customers can be used
in  the  J-Debit  service  using  about  150,000  J-Debit  terminals  located  in  shops  and  branches  of  big
retailers. Total trade for the first half-year surpassed $0.9 billion with 2.4 million transactions. It is not
so clear why Japanese customers prefer this payment compared with credit card payment. But it can be
said that availability in convenience stores, discount sellers, in addition to department stores and gas
stations, as well as participation and cooperation by major banks and local trusted banks are the main
reasons that this system has a good reputation.

The i-mode payment system which has recently become available, consists of two types: One is to
allow NTT DoCoMo to collect the fee for content the user buys at an official site (an official site is a
web  site  where  a  content  provider  opens  a  virtual  shop  to  sell  a  variety  of  contents,  like  signaling
melodies or images for waiting display.) This seems similar to the "900 number" service in the US and
is called as Dial Q2 service in Japan.

In this service, the upper limit is set to 300 yen ($3) a month because NTT DoCoMo assumes the
risk of having to pay the fee for the goods to the vendor if NTT DoCoMo cannot collect the fee from
users.  NTT,  DoCoMo's  parent  company,  had  bitter  experience  in  collecting  fees  for  the  Dial  Q2
service.

The other system is that a user pays the fee for e-trade goods with his/her credit card ID. The users
send their credit IDs through the i-mode browser just as they do through a PC. In this case, users can
buy  goods  more  expensive  than  the  digital  goods  mentioned  above.  Applications  include  telephone
banking  (payment  of  bills  or  remittance),  telephone  e-trade  for  stocks  or  e-registration  for  concert

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tickets or train/flight seats. As is seen by these examples, trading acts themselves are made over the
Internet, but payment acts are not necessarily processed via the same channel.

The latest news is that some more sophisticated payment methods are now being developed at NTT
DoCoMo.  DoCoMo  announced  that  e-money  charged  to  IC  cards  (probably  of  the  wireless  type)
through cellular phones will be available from next March. This e-money can be used in both real and
virtual  shops.  E-tickets  for  soccer  games  held  in  cellular  phones  after  payment  is  completed  by
charging  through  the  Internet  can  be  used  to  enter  the  stadium  just  by  showing  the  ticket  on  the
display.

Thus,  many  ideas  for  e-commerce  and  e-payment  have  been  created  and  tested  by  developing
prototype systems. Some of them have become very popular, supported by emerging communication
tools like low-cost PCs or cellular phones with i-mode.

It  will  be  interesting  to  keep  track  of  these  technical  trends  in  hardware  and  of  the  applications

made available on this hardware.

[3&7]
Interview:  Secure  Electronic  Marketplace  for  Europe  –  Project  Semper  Publishes  its
Results (Part 1 of an Interview with Michael Waidner)
Hans-Dieter Zimmermann (Hans-Dieter.Zimmermann@unisg.ch), University of St. Gallen, Switzerland talks
for EPSO-N to Michael Waidner (wmi@zurich.ibm.com), Project Coordinator of Project Semper, IBM Zurich
Research Laboratory, Switzerland
/Europe/research/security/electronic payment systems

The Semper Project, one of the biggest EU research projects, ended in 1999 and has just published its
results. The first part of this interview with Michael Waidner deals with the goals of Semper and the
results  the  project  reached.  Semper  developed  a  comprehensive  security  architecture  for  electronic
marketplaces  but  no  real  products.  Feedback  from  business  and  the  research  community  was  quite
good. The second part of the interview, which will be published in EPSO-N 4, deals with electronic
payment systems in general. Waidner looks back at the roaring electronic payment scene of the 90s
and gives some remarkable predictions into the future. He points out that the US -based start ups in
the field of security technologies have changed their focus from electronic payment systems to privacy-
friendly technologies.

Zimmermann: The first questions are  about  SEMPER,  the  project in  general.  So,  could  you  please
summarise what were the goals of the SEMPER project as a whole?
Waidner: SEMPER as a project ended early 1999, almost two years ago. When we started the project
in  1995,  the  goal  was to  produce  a comprehensive  security  architecture  for  electronic  marketplaces.
This means an architecture that integrates all the different services that you need for secure electronic
commerce,  like  secure  communication  and  digital  signatures,  contract  negotiations  and  fair  contract
signing, and electronic payments. We wanted to avoid the usual patchwork of disconnected tools, one
providing secure channels, another one payments, and so on, where none of them really interoperates
with  the  others.  Instead,  we  wanted  a  really  integrated  architecture  that  combines  everything  in
processes within a single framework, and a prototype implementing this architecture.
Z: What were the major results of SEMPER as a whole?
W: The most important result is this architecture. Of course, within this architecture some pieces are
more elaborated than others. I think the most elaborated one is our framework for electronic payment
systems.  Other  also  quite  elaborated  pieces  are  a  framework  and  several  new  protocols  for  "fair
exchanges", which is a security primitive needed for secure contract signing or implementing digital
receipts for payments or documents in general. And a legal framework which includes a certification
framework  for  limiting  the  signer's  liability  for  digital  signatures,  in  particular  in  case  the  signer's
secret key becomes compromised.
Z: And how important were payment issues within SEMPER?
W: In principle, payments were just one e-commerce service among others, but in fact the one we put
the  most  time  into,  partly  because  we  had  several  quite  different  concrete  payment  systems  to

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integrate. We followed the general SEMPER approach and constructed a general payment framework
that allows to plug in different means of payment. Based on a simple classification of payment models
into  classes  like  "cash-like"  or  "cheque-like"  we  designed  and  implemented  some  generic  payment
interfaces, and also concrete adapters from concrete payment systems to these interfaces. For instance,
we  did  this  for  SET,  the  anonymous  payment  system  eCash,  the  Dutch  electronic  purse-scheme
Chipper, and an electronic cheque system called Mandate.
Z: So, what were the results a) in terms of payment systems and b) regarding the generic framework in
terms of concrete (software) products, consulting schemes or whatever? Are there outcomes such as
concrete products maybe from IBM?
W: Yes and  no.  It  was  not  our  goal to  design  or implement  new  payment  systems  but  to  provide  a
framework  so  that  consumers  and  merchants  could  use  any  existing  payment  system  through  a
common, uniform interface, and so that payment system providers could easily integrate new payment
systems into this framework. IBM used this architecture to implement our payment tool for merchants.
Z: Coming back to the framework, how flexible would it be? Would it, for example, be possible  to
integrate new payment systems, like Paybox that you have in Germany right now?
W: Whatever fits one of our payment models would be easy to integrate, and so far I haven't seen any
payment system that would not fit. So I assume this would be no problem. This is also the reason why
for  payments  such  a  framework  makes  a  lot  of  sense:  there  are  several  competing  systems,  and
potentially all of them should be supported. For other security services this is not always the case. For
instance, if everybody is using SSL to establish a  secure  channel  then there is  no need to  provide a
framework for secure channel protocols, or to negotiate which secure channel protocol is to be used.
Initially,  we  tried  to  apply  the  framework  idea  uniformly  to  all  services  but  one  of  the  lessons  we
learned is that this was often overkill. If we would redesign SEMPER we would include the payment
framework, and frameworks for electronic certification or digital receipts. But other parts, like that for
secure communication, we would keep much simpler.
Z: In the beginning you said that SEMPER was finished almost two years ago. After two years, which
effects did SEMPER have on developments in the industries for example in other projects? Did you
have follow-up projects in this field specially focusing on payment issues?
W: There is no follow-up payment project, and actually  I don't think there are too  many  interesting
technical research problems left in this area. Now it is mainly a development and deployment problem.
But  we  continued  the  "digital  receipt"  part  of  SEMPER  because  we  expect  this  to  be  the  next
important  security  service  that  will  enter  the  market,  and  we  started  a  new  research  project  on
pseudonym  management,  privacy-friendly  technology,  which  is  something  we  initially  wanted  to
address in SEMPER but could not do much, for lack of time.
Z: Would you say that the results of SEMPER serves as a reference for other (research) projects, for
industry developments, for example, because SEMPER was one of the biggest EU projects ever. So
has it characteristics like a reference framework or a reference architecture?
W:  Of course, the  SEMPER  architecture  is  mainly  a  reference  architecture.  Many  people  looked  at
SEMPER,  and  within  IBM  we  structured  many  things  according  to  ideas  from  SEMPER.  But  it's
really  a  reference  architecture,  not  a  detailed  design  that  you  could  immediately  transform  into
products. By now we would design many parts differently of course, but if you look at the high level
architecture,  the  way  we  structured  the  overall  system  into  components  for  the  different  security
services, and how they interplay, then the SEMPER architecture looks very stable and useful.
Z: You had a huge technical and IT competence, especially in Rüschlikon at IBM, but how did you
address the business aspects of payment systems, e.g., how payment systems have to be integrated in
business processes and so on?
W:  A  large  portion  of  SEMPER  was  actually  focused  on  business  trials  of  the  technology  we
developed. SEMPER was structured into three sub-projects. One on collecting requirements from the
market place, one on developing the technology based on those requirements, and one on performing
trials  and  matching  them  against  the  requirements  from  the  beginning.  These  trials  were  performed
with some typical e-commerce companies. There were the usual intermediaries at that time, payment
system  providers,  Commerzbank  and  Europay  International.  A  couple  of  service  providers,  like  the
mail order retailer Otto Versand from Germany, EUROCOM, a tele-teaching company from Greece,
FOGRA,  a  consulting  company  from  Germany,  and  outside  the  project  a  couple  of  SMEs  provided
some  of  their  services  using  SEMPER  technology.  They  initially  contributed  requirements  and

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- 51 -

actually  used  the  SEMPER  services  in  these  trials.  From  all  this  we  were  quite  confident  that  we
caught and satisfied the most important requirements from the marketplace.
Z: One last question: Did you get any feedback from the financial industry on your proposal for the
generic payment framework?
W: Commerzbank and Europay International were members of the consortium, but we also received
feedback  from  outside  SEMPER.  In  general  everybody  liked  the  concept  of  a  uniform,  simple
interface to several payment systems, and as it supports electronic commerce in general it also appears
to support everybody's interest. So banks and payment system providers were also quite positive. What
we tried out specifically for the payment industry was to develop a generic payment gateway so that
banks  could  support  new  payment  systems  simply  by  integrating  them  into  this  generic  gateway.  I
remember  that  our  partners  from  the  banking  industry  were  quite  enthusiastic  about  this  at  the
beginning, but very quickly it turned out to be so terribly complicated that we had to give up the idea.
... to be continued in ePSO-N No. 4.

[info]
• The  project  SEMPER  –  Secure  Electronic  Marketplace  for  Europe,  was  launched  in  September  1995  and  was  funded
partly  by  the  European  Commission  within  the  Advanced  Communication  Technology  and  Services  (ACTS)  research
program part of the Fourth Framework Program (1994-1998).

• The SEMPER website at http://www.semper.org provides a huge amount of SEMPER related documents and links.
• The results of SEMPER are published in Lacoste, G., Pfitzmann, B., Steiner, M., Waidner, M. (Eds.): SEMPER – Secure
Electronic Marketplace for Europe. Heidelberg: Springer 2000 (Lecture Notes in Computer Science. Vol. 1854, ISBN 3-
540-67825-5).

[3&8]
The future of EBPP
Leo Van Hove (Leo.Van.Hove@vub.ac.be), Free University of Brussels, Belgium
/review/electronic bill payment/electronic bill presentment/home banking

What is the market potential for electronic bill payment (EBP)? How important will services such as
online  presentment,  aggregation,  and  'pay  anyone' be  for  reaching  this  potential?  How  do  different
vendors' offerings compare from a consumer, biller, and financial institution perspective? These are
but a few of the questions that were tackled during the EBP session at the 2nd Electronic Payments
Workshop hosted by the Chicago Fed last October.

On  October  10-11  the  Federal  Reserve  Bank  of  Chicago  hosted  its  2nd  Electronic  Payments
Workshop.  One  of  the  most  interesting  sessions  was  the  session  entitled  "Electronic  Bill  Payment:
Challenges  and  Opportunities".  Electronic  Bill  Payment  (EBP)  has  been  widely  characterised  as  a
potential 'killer application' in the e-commerce arena.  Especially  in the  United  States,  where  writing
checks  and  dropping  them  in  the  mail  remains  the  most  frequently  used  method  for  paying  bills,
experts  believe  that  all  parties  involved  stand  to  reap  significant  savings  from  having  consumers
paying their bills online. If in addition bills are also presented online, the efficiency gains will be even
greater. As an illustration, 18.2% of the 102 billion pieces of first class mail delivered each year in the
US are bills and statements, not to mention the checks and other forms of payment (Van Dyke, 2000).
Hence  the  hopes  that  Electronic  Bill  Presentment  and  Payment  (EBPP)  will  "attract  hordes  of
consumers and businesses to electronic payments" (ibid.). Jupiter Communications believes that over
40  million  US  households  will  use  EBPP  by  2005  (epaynews.com,  2000)  and  Forrester  Research
predicts  that  electronic  billing  will  account  for  13%  of  all  bills  by  2004  –  up  from  only  1%  to  2%
today (Carr and West, 2000).

At the Chicago Fed Workshop, the panel that discussed the future of EBPP was moderated by Jeetu
Patel  Vice  President  of  Research  at  Doculabs  (an  advisory  firm  specializing  in  e-business
technologies),  who  also  did  an  introductory  presentation.  The  actual  panel  was  composed  of  EBPP
solution vendors. The speakers were: Ron Braco, Senior Vice President, Chase Manhattan (presenting
the  Spectrum  solution);  Ravi  Ganesan, Vice  Chairman,  CheckFree; Matthew  Lawlor,  Chairman  and
CEO  of  Online  Resources,  and  John  Tedesco,  Co-Founder  and  CEO  of  PayMyBills.com  (which
recently merged with Paytrust).

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Not  being  an  expert  on  EBPP,  the  first  thing  that  struck  me  when  listening  to  the  different
presentations was the sheer diversity of the players on the market – as exemplified by the composition
of the panel. There are players of different sizes with different backgrounds – ranging from 'old school'
banks to 'pure Internet businesses' – proposing different solutions. In short, as Jeetu Patel noted in his
introduction,  it  is  a  confusing  marketplace.  Spectrum,  for  example,  is  a  company  owned  by  three
banks (Wells Fargo, First Union and Chase Manhattan) and defines itself as an "open, interoperable
mechanism  for  exchanging  online  bills  and  payments".  It  is  embedded  in  the  existing  banking
landscape  and  can  be  likened  to  an  ATM  switch  in  that  it  provides  connectivity  between  banks.
Spectrum is thus essentially  a  B2B  company,  leaving  it  to  the  banks that  participate  in  Spectrum  to
maintain  relationships  with  their  customers  and  to  compete  for  billers.  At  the  other  end  of  the
'spectrum',  there  are  Internet-only  companies  such  as  PayMyBills.com  that  try  to  disintermediate
banks. Somewhere in between there are non-bank players like CheckFree and Online Resources that
try to create a place of their own while essentially using a bank-based model. Online Resources is an
Application  Services  Provider  (ASP)  that  provides  "outsourced  banking,  bill  pay  and  e-finance
services" to community banks. As Matthew Lawlor stressed during his presentation, unlike CheckFree
(and Spectrum), Online Resources sees no need to create a new network but instead tries to leverage
an existing network: payments clear through the ATM network. CheckFree, for its part, initially tried
to become a financial portal in its own right but has repositioned itself. In its current model customers
go to the website of their bank and CheckFree operates behind the scenes.

Where the nature of the solutions is concerned, a distinction can be made between the biller-direct
model,  the  consolidator  model  and  the  consumer-focused  model  (Patel  and  Fenner,  2000).  In  the
biller-direct  model,  billers  (such  as  utility  companies)  build  their  own  infrastructures  for  converting
billing  data  and  host  their  own  web  sites  for  presenting  bills  to  customers  and  accepting  payments.
This approach may make good sense for B2B billing. For B2C billing, however, the complete lack of
customer  convenience  is  a  huge  drawback.  As  Ravi  Ganesan  pointed  out,  the  real-world  equivalent
would be that at the end of the month the consumer takes his car and drives to the phone company to
pay  his  bill,  then  to  the  water  company,  etc.  Another  option  is  the  consolidator  model.  In  the  B2C
market, the leading consolidators are CheckFree and Transpoint (which CheckFree recently acquired).
Consolidators act as aggregators of bills from multiple billers, with the goal of giving payers one site
to pay a good portion of their bills. Banks are also entering the market as consolidators in an effort to
avoid  being  disintermediated.  One  example  is  Spectrum.  Note  that  some  consolidators  (known  as
'thick  consolidators')  serve  up  complete  bill  detail  data  –  disintermediating  the  billers  who  lose  all
control, while others (known as 'thin consolidators') provide only summary data, with hyperlinks back
to  the  biller's  site  for  full  details.  Finally,  a  number  of  consumer-focused  consolidators,  such  as
PayMyBills.com, have emerged. With these services, consumers pay a monthly fee to have  all their
bills sent to the service, where the bills are scanned and posted to a web site.

In  his  presentation,  Ravi  Ganesan  stressed  that  while  Spectrum  is  still  based  on  the  thin
consolidator model, CheckFree is actually leaving that stage. According to Ganesan, in the 'old' model,
the biller still loses too much control since customers are unlikely to follow the URL to the bill detail.
In CheckFree's new model – the 'direct distribution' model – consumers still go to the aggregator's web
site (usually a bank). The novelty is that use is made of emerging browser/web technology to enhance
the power of so-called 'magnets' – little icons that can contain discounts or other propositions. In other
words, the summary is dynamic: customers can interact with the biller to change the summary data,
just as in the biller-direct model.

As is the case with many much-heralded killer applications, EBP has not taken off as fast as many
analysts  had  predicted.  During  the  discussion,  all  speakers  agreed  that  the  EBP  market  still  has  to
overcome  several  challenges.  For  one,  there  is  the  classic  chicken-and-egg  situation:  consumers  are
reluctant to pay online until a significant portion of their bills is available that  way  (5 to  6 bills  per
month  according  to  Ganesan),  and  billers  are  reluctant  to  get  into  EBP  until  a  critical  mass  of
consumers  shows  their  willingness.  Ron  Braco  argued  that  Spectrum  will  deliver  critical  mass.
Spectrum  has  already  signed  up  8 major  utilities,  3  oil  companies,  and  3  other  major  billers.  More

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- 53 -

importantly, according to Braco, it will also bring the internal bills of the participating banks (credit
card, mortgage, auto, student and personal loans) to the Net.

As  mentioned,  a  number  of  consumer-focused  consolidators  such  as  PayMyBills.com  rely  on
scanning  of  paper  bills  in  order  to  create  critical  mass  for  consumers.  In  fact,  PayMyBills.com
guarantees that consumers receive 100% of their bills online. Interestingly, Ravi Ganesan stated that
he does not believe in scan-and-pay and also challenged the notion that all consumers want electronic
bill  presentment.  Ron  Braco observed  that the cost  of  scanning  is  high  and  anticipated  a  move  to  a
more electronic environment over time.

What the speakers did agree on was that in order to bring about the shift in consumer behaviour,
billing  service  providers  must  deliver  added  value  compared  to  traditional  bill  payment  methods  –
such as the option to negotiate the due dates of bills or the ability to conduct financial modeling.

To conclude, the EB(P)P market will clearly be an interesting market to follow. Consolidation has
already started and it will be interesting to watch just how many of the current players will survive –
and  which  model  will  prevail.  Jeetu  Patel,  for  his  part,  believes  in  the  'syndication  model'.  In  this
model,  billers  make  their  bills  available  to  a  wide  array  of  distribution  points  in  order  to  reach  the
widest audience of payers. The future will tell.

[info]
• 2nd  Electronic  Payments  Workshop,  Federal  Reserve  Bank  of  Chicago,  Chicago,  October  10-11,  2000

http://www.frbchi.org/paysys/conferences/EPConference2000.html.

• Carr,  K.  and  K.  West, 

Increasing  E.bill  adoption,  Document  Processing  Technology,  August  2000

http://www.dptmag.com/editorial2.asp?ID=19.

• epaynews.com,  EBPP 

can 
http://www.epaynews.com/.

save  banks 

annual  USD  1.5  bn, 

epaynews.com,  September  28,  2000

• Patel,  J.  and  J.  Fenner,  Handling  electronic  bill  payments,  Network  Computing,  September  18,  2000

http://www.nwc.com/shared/printArticle?article=nc/1118/1118f2full.html&pub=nwc.

• Van Dyke, testimony, Hearing on The Future of Electronic Payments: Roadblocks and Emerging Practices, Subcommittee
International  Monetary  Policy,  U.S.  House  of  Representatives,  September  19,  2000

on  Domestic  and 
http://www.house.gov/banking/91900van.htm.

—————————————— ePSO-Newsletter Issue 3 – November 2000 ——————————————

- 54 -

ePSO Newsletter – Issue 4, January 2001

Focus: Interchange Fees

[4&1]
Editorial:  Interchange  Fees  –  Are  Consumers  Getting  a  Real  Service  or  is  it  Just  a
Label?
Michael Rader (rader@itas.fzk.de), ITAS, Karlsruhe, Germany
/credit cards/interchange fees/services

The editorial team of ePSO-N at ITAS wishes all our readers a happy and prosperous new year and
all  the  best  for  the  new  millenium,  which  really  started  this  January  1st.  You  will  no  doubt  have
noticed that public demand in most countries of the European Union favoured the year 2000 as the
beginning of this millenium, which in a roundabout way brings us to the theme of our first "focus" of
the year.

Within  living  memory,  there  was  a  time  when  the  majority  of  the  work  force  in  industrialised
countries received weekly wages in cash on "payday". Bank accounts were something reserved for a
privileged minority. Since the second World War this situation has changed dramatically: nowadays it
is the exception not to have a giro account into which the most important regular payment for most
people is a monthly salary or pension. There was a time when holding such an account was virtually
free of charge to its owner: in total all accounts had a positive balance enabling the banks to work with
the money. Gradually, fees have been introduced for all kinds of things such as bank statements, credit
transfers or  even flat rates just  for the  privilege  of  owning  a  bank  account.  Initially  these  fees  have
been justified by rising staff costs and to some extent these have also been offset by transferring some
of the work formerly done by bank clerks to clients, witness the rise of the automated teller machine
and  self-service  printers  for  bank  statements.  More  recently  fees  are  increasingly  being  justified  by
underlining that the person paying the fee is in fact paying for the provision of a service.

Similar developments may be observed in other areas of daily life, where for instance what used to
be  the  plain  old  post  office  selling  a  stamp  or  a  postal  order  is  now  a  logistics  company  selling  a
service  or  product  by  moving  an  object  from  one  location  to  the  other  or  a  bank  making  a  transfer
from  one  account  to  the  other.  Since  these  are  qualified  services  requiring  considerable  skills  and
experience, the fees are no longer as modest as the old prices.

In  many  cases  one  could  be  forgiven  for  thinking  that  familiar  things  are  now  simply  being
marketed  under  new  trendy  headings.  Is  this  really  what  analysts  mean  when  they  say  that  we  are
heading for a service-based economy, or is it just jumping on the bandwagon to make a quick Euro or
two? There is very obviously a need to transform some functions previously fulfilled by the state or
bureaucratic  organisations  into  services  satisfying  the  genuine  needs  of  the  citizen  and  specifically
consumers,  but  there  is  obviously  also  the  danger  of  selling  things  as  services  which  are  only
instruments  serving  the  economic  interests  of  those  selling  them.  This  is  an  area  where  public
regulation and control is very obviously required.

The  focus  of  this  issue  is  devoted  to  the  topic  of  interchange  fees.  These  were  first  applied  for
credit cards,  and  have  increasingly  been  extended to  other  means  of  electronic  payment.  They  have
recently  been  the  subject of  public  scrutiny  in  several  countries  for  much  the  same  reasons  as  have
been  outlined  above.  The  core  question  is:  are  interchange  fees  justified  as  payment  for  a  special
service or not?

Malte  Krüger  sets  the  scene  by  describing  several  examples  of  controversies  over  these  fees  in
various countries and by discussing the important economic parameters involved in the field. This is
followed  by  an  article  authored  by  Anna  Arbussà  and  Jaume  Valls  concerned  with  a  recent
investigation  on  certain  Visa  practices  by  the  European  Commission  following  a  complaint  by  the
retailer  organisation  Eurocommerce.  The  other  recent  event  analysed  in  an  article  by  Australian
consultant Peter Mair is a report by the Australian Central Bank on credit card organisation practices
to encourage the use of instruments by which the card organisation stands to gain most  profits. The

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final article in the focus section is a detailed economic analysis by Christoph Strauch on the case for
interchange fees under different framework conditions.

Following the first meeting  of the ePSO  Steering  Group  in  November,  Knud  Böhle  of the  ePSO
project team at IPTS in Seville discusses some of the legends and holy cows inhabiting the landscape
in  which  the  development  and application  of  electronic  payment  systems  is  taking  place. This  issue
sees the publication of the second half of Hans-Dieter Zimmermann's interview with Michael Waidner
of  the  SEMPER  project.  Whereas  the  first  half  was  concerned  with  the  results  of  the  project,  the
second half centres on data protection technology.

Finally, the subject for Leo van Hove's review for this month is a report on an empirical study by
two  Austrian  psychologists  on  consumer  perceptions  of  electronic  purses.  The  paper  argues  that
consumer  perceptions  do  matter  very  much  in  the  success  or  otherwise  of  new  technology.  Just  as
mathematicians may argue that the true new millenium began in 2001, technologists may argue that e-
purses  have  advantages  over  cash.  If  the  public is  not  convinced,  other  perceptions  will continue  to
prevail. In both cases what is needed is more information.

With this issue we are adding Arnd Weber, formerly with the Freiburg University team involved in
the SEMPER  project, to  ITAS  and the  editorial  team  of  ePSO-N.  Arnd,  who  has  spent the last five
months as a visiting scientist at NTT in Japan, will take over the day-to-day management of ePSO-N
and ensure that we will hopefully meet our self-imposed deadline more regularly in future. You can
look forward to several articles on or inspired by Arnd's visit to Japan, so I'm sure that you will join
me in welcoming him as a valuable addition to the ITAS team.

[4&2]
Interchange Fees in the Line of Fire
Malte Krueger (malte.krueger@jrc.es), Institute for Prospective Technological Studies, Seville, Spain
/credit cards/interchange fees/European Commission

The article sets the scene on recent developments concerning interchange fees for the use of payment
cards. It discusses the economic case for such fees in schemes involving three and four parties. The
article concludes that it is debatable whether there is a justification for such fees to improve efficiency
or whether they are simply serving to keep an inefficient system alive.

Recently,  credit  card  companies  have  increasingly  come  under  public  scrutiny.  In  the  US,  there  are
antitrust  cases  pending  against  Visa  and  Mastercard.  Suits  have  been  filed  against  the  practice  to
prevent  member  banks  from  issuing  cards  of  competitors  and  against  the  pricing  of  debit  card
transactions  of  both  card  companies.  In  the  UK,  an  official  investigation  of  the  banking  industry
criticised  the  level  of  the  interchange  fees  agreed  upon  by  the  large  credit  card  companies.  The
European  Commission  investigated  interchange  fees  and  the  “no-discrimination”  rule.  The
Commission’s  preliminary  conclusion  is  that  a  common  interchange  is  a  restrictive  collective  price
agreement.  Finally,  a  report  on  credit  card  interchange  fees  and  related  matters  published  by  the
Reserve Bank of Australia found that interchanges served as a tool to sustain an inefficient and highly
profitable (for the banks) payment method (see [4&4]). In Germany, there is currently a heated debate
about the banks’ intention to introduce a common interchange for all debit card payments (see [4&5]).
Ironically, the European Commission has used the fact that, so far, there has been no interchange for
debit card payments in Germany as evidence in its case against Visa.

The key element that has been criticised in  most  countries is the interchange  fee.  In  some  cases,
critics argued that the level of interchange fees is too high, in other cases they argued that interchange
fees should be abolished altogether. Bank and credit card fees have always been a controversial issue.
Still, the current level of scrutiny seems unique. Thus, one might wonder why the subject is coming up
with  such  force  at  this  moment.  One  possible  explanation  is  the  success  of  card-based  payment
schemes. The use of credit cards is still broadening and debit cards have been very successful in the
past 10 years. Using figures from the BIS and the ECB it can be calculated that the use of debit and
credit cards in 12 industrial countries (Belgium, Canada, Denmark, Finland, France, Germany,  Italy,

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Netherlands, Sweden, Switzerland, United Kingdom, United States) grew from 9.3 billion transactions
(1987) to 33.7 billion  transactions  (1998).  If  the  US  are  excluded the rise  is  even  more  spectacular,
from  2  billion  to  10.5  billion  transactions.  This  has  important  implications  for  merchants.  Card
acceptance is no longer a tool to attract one or the other extra buyer. For instance, in the UK the share
of card-payments in per cent of all retail payments (incl. financial transfers) rose from 3.4% (1989) to
12.8% (1998). According to its own estimates Visa has a market share of 7.95% of Global Personal
Consumption Expenditure. Thus, card acceptance is becoming more and more a necessary part of the
business. The increasing number of card transactions increases the fees that have to be paid. However,
since cash and checks are still in use there are no corresponding cost savings.

While the interchange fee is mostly discussed  for  credit card  schemes,  it  is  an issue  for  all  four-
party systems (payer, payee, issuer, acquirer). Thus, interchange  fees  may  be  an  important issue for
many types of electronic payment system. The issue arises because in a four-party system two players,
the issuer and the acquirer, jointly produce a service for the payer and the payee.

Payment Flow in a Four-Party System

Payer →Issuer →Acquirer →Payee

Of course, it could be argued that the acquirer can simply charge the payee and the issuer the payer.
However, such a view neglects that the services provided by the acquirer and the issuer are not really
independent. They jointly provide a payment service to the payer and payee. The payee does not just
pay  the  acquirer  for  settlement  services  and  risk  reduction.  He  also  pays  for  access  to  the  group  of
cardholders whom he wishes to become customers. Thus, he does depend on the services of the issuer.
Conversely, the payer (as well as the acquirer) benefits from the network of merchants that accept the
card. Thus, he (as well as the issuer) benefits from the services of the acquirer. Since spill-overs are
positive for both, issuer and acquirer, the interchange could flow either way or even be zero. Thus, if
there  are  spill-overs  there  is  also  a  case  for  an  interchange.  What  should  be  the  exact  size  is  an
empirical question. What can be observed is that most interchange payments are made by the acquirer
to  the  issuer.  However,  in  Australia  debit  card  acquirers  receive  a  fee  from  issuers.  Thus,  it  is  not
entirely  clear  who  should  pay  whom.  Equally,  it  is  difficult  to  determine  the  level  of  fees.  At  the
moment interchange fees vary substantially between countries and between different service providers.
The Cruickshank report uses cost estimates and concludes that interchange fees in the UK should be
lowered.  Similarly,  German  banks  use  cost  estimates  to  justify  the  introduction  of  an  interchange
payment  from  debit  card  acquirers  to  issuers.  However,  cost-estimates  always  involve  highly
subjective  judgements  and  are  a  blurred  guideline,  at  best.  Finally,  when  interchange  fees  are
evaluated it should also be taken into account that three-party systems often charge higher fees overall
than four-party systems.

If, the above argument not-withstanding, interchanges are outlawed, regulators also would have to
consider price-models in three-party systems because a three-party system that covers most of its costs
by  charging  the  merchant  is  having  the  same  affect  as  a  four-party  system  with  an  interchange.
However, instead of outlawing interchange fees outright, one could also shift to a system of bilateral
interchange  agreements.  But  it  is  debatable  whether  such  a  system  would  be  an  improvement  (see
[4&5]).

The  current  debate  over  interchanges  should  also  be  seen 

in  a  wider  context.  Like
telecommunication systems, payment systems are networks and networks are characterised by strong
network externalities. The utility that a particular user derives from using a network depends on the
number of users. The more people are  linked  to a  telecommunication  or  payment  network  the  more
useful it becomes for an individual user. One implication of this is a tendency towards concentration.
Either large competitors gain more and more market share or different players connect their networks.
Consequently, collusion or market power may be issues to be dealt with. Following similar solutions
in  other  areas,  the  Cruickshank  report  therefore  proposes  the  creation  of  a  payment  regulator  who
would have to approve fees.

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Other  implications  of  network  effects  are  “first-mover  effects”  and  “excess  inertia”.  The  market
success of a particular network does not just depend on its efficiency vis-á-vis its competitors, it also
depends  on  timing.  When  new  networks  are  established,  the  one  that  has  a  head-start  profits  from
network effects and may win the market – even if a second system is more efficient. Once there is an
established  network  the  incumbent  enjoys  the  benefits  of  a  large  established  network.  New  entrants
will hardly be able to compete (unless there is interoperability with the existing network). Thus, the
market test “it exists and is profitable so it has got to be efficient” cannot necessarily be applied.
What  follows  for  interchanges?  Interchanges  may  be  a  tool  that  helps  to  build  an  efficient  payment
system. But it may also be a tool to keep an inefficient system alive. In the end, the consumer would
pay for such a system by higher prices. The trouble is that there is no easy way to decide which option
is true. In fact, at the same time while the pricing policy of credit card companies is coming under fire
some observers are arguing that cash is inefficient, keeping prices high and harming consumers.

[info]
• Data:

Bank for International Settlements (BIS): Statistics on Payment Systems in the Group of Ten Countries, Basle, various
issues. http://www.bis.org/publ/index.htm
European Central Bank (ECB): Payment Systems in the European Union, Frankfurt, various issues. http://www.ecb.int/
http://www-s2.visa.com/av/press_center/digital/statistics.html

• Discussion of interchange fees:

Cruickshank, Don: Competition in UK Banking. Report to the Chancellor of the Exchequer, March 2000.
http://www.bankreview.org.uk/final_report.html
For further references see articles in this newsletter and the cited sources.

• Network effects:

Van Hove, Leo: Electronic Purses, Interoperability, and the Internet. First Monday Vol. 4 No. 4 - April 5th. 1999.
http://www.firstmonday.dk/issues/issue4_4/vanhove/index.html
Dowd, Kevin and D. Greenaway (1993): Currency Competition, Network Externalities and Switching Costs: Towards an
Alternative View of Optimal Currency Areas, Economic Journal, vol. 103, 1993, 1180-1189.

• On cash:

Buyst, Erik and Paul De Grauwe: The Economics of a Cashless Society, Future World Conference, Reykjavik, 3 Nov.
1998.
http://notes.visa.is/VISAvefur/visaweb.nsf/06d51987115bdad300256500004fc9db/ca97287b4295aa50002567
a000403018?OpenDocument

[4&3]
Competition in the Credit Card Market
Anna Arbussà (anna.arbussa@udg.es) and Jaume Valls (jaume.valls@udg.es), University of Girona, Spain
/Visa/European Commission/competition/interchange fees

On 16 October 2000, the European Commission issued a press release on some of Visa International’s
provisions,  following  an  enquiry  that  the  Commission  has  been  conducting  at  the  request  of
Eurocommerce, an association of European retailers.

Two  provisions  have  been  the  subject  of  the  investigation.  The  first  one  is  the  "no-discrimination"
rule, which is a rule prohibiting retailers from charging customers an additional fee for paying with a
Visa card. Although a final conclusion has not been reached yet, the Commission plans to accept the
use  of  this  provision  on  the  grounds  that  its  abolition  would  not  substantially  increase  competition.
The Commission decided so, based on results observed in Sweden and in the Netherlands, where the
no-discrimination rule was abolished, and where no significant increase in competition was observed.

It  is  important  to  notice  that  the  no-discrimination  rule  is  effective  "between"  retailers  and
customers. Even if retailers were allowed to charge customers a fee for using credit cards, they might
end up not doing so. This situation could occur because of a retailer concerns that if he were to charge
the customers a fee for paying with credit card, he might be loosing the customers to other retailers not
charging for credit card use. Of course, the possibility would also exist for retailers to agree on the fee
to  charge  customers  and  avoid  competition  among  themselves  on  this  issue.  However,  in  that  case
retailers could be indulging in a practice restrictive of competition. Moreover, if only small retailers
were  to  agree  on  the  fee  to  charge  customers  paying  by  credit  card,  consumers  might  respond  by
purchasing more at large commercial sites, where they would get financing for their shopping. In other

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words,  retailers  may  be  in  a  weak  position  if  they  are  in  a  competitive  market  and  the  no-
discrimination rule is a rule that contributes to making credit cards interchangeable with cash, rather
than a practice restrictive of competition.

The second provision investigated by the Commission is the "interchange fee". The interchange fee
is  paid  by  the  retailer’s  bank  to  the  cardholder’s  bank  for  each  card  transaction.  On  average  the
interchange fee is about 80% of the overall amount paid by the merchant to his bank  every  time  he
accepts payment by a Visa card. The amount of this fee is set by Visa International and is based an
agreement among the member banks of Visa.

As a result of this practice, banks manage to partially avoid competition. A retailer is charged the
same fee regardless of the bank he goes to, and banks are not "forced" to offer lower interchange fees.
In  other  words,  banks  are  able  to  pass  the  interchange  fee  on  to  the  retailers.  In  this  direction,
Eurocommerce’s complaint to the Commission stated that as a result of the interchange fee provision,
small retailers were being compelled to pay the interchange fee set by Visa International (of up to 4%
of  the  total  amount  of  the  transaction)  while  big  commercial  sites  were  able  to  negotiate  discounts.
Although  the  discounts  only  do  not  constitute  a  practice  against  competition  –  discounts  to  best
customers are common practice in business – , the agreement among member banks of Visa on the fee
charged to retailers is considered by the Commission to be restrictive of competition.

Although  the  investigation  of  the  Commission  is  not  closed,  if  Visa  International  is  not  able  to
show that the interchange fee is indispensable for the functioning of the scheme, the provision will not
be  acceptable  under  EC  competition  law.  In  this  respect,  Eurocommerce  pointed  out  that  other
payment card schemes, such as ec-Karte in Germany, may function without interchange fees.

The Commission is investigating other similar cases relating to payment card systems. The analysis
of these markets is complex due to their network structure and it is not straightforward to state what
type of regulation can contribute most to improve market results. There seems to be wide agreement
that the relevant level of business to examine the degree of competition is the level of issuing banks
rather  than  the  credit  card  organisations  (Visa,  Mastercard).  In  a  sense,  the  current  case  of  the
interchange  fee  is  special  because  the  credit  card  organisation  (Visa  International)  has  served  to
facilitate the collusion among its member banks.

[info]
•  Ausubel,  L.  (1991)  "The  failure  of  Competition  in  the  Credit  Card  Market",  The  American Economic  Review,  Vol.  81,

Issue 1, pp. 50-81.

•  Economides,  N.  (  1995)  "Features  of  credit  card  networks"  Review  Federal  Reserve  Bank  of  St.  Louis,

November/December

• European Commission (2000) "Commission plans to clear certain Visa provisions, challenge others." Press Release.

DN:IP/00/1164. Brussels, 16 October 2000. Link to Press Releases:
http://www.europa.eu.int/comm/competition/press_releases/rapid.html

• "El País" (2000) "Bruselas investiga a Visa por permitir que los bancos pacten la comisión por sus tarjetas", Madrid, 17

October 2000.

• Eurocommerce (1998), “EuroCommerce attacks cartel of card issuing banks: merchant fees for accepting payment cards
are  too  high  due  to  lack  of  competition  in  the  banking  sector”,  Brussels,  November.  Link  to  Press  release:
http://www.eurocommerce.be/publications/press_releases/Eft1210.doc

[4&4]
Credit Card Interchange Fees – A Central Bank Speaks
Peter Mair (pmair@ezy.net.au), consultant, Australia
/Interchange fees/credit cards/debit cards/Australia

The Reserve Bank of Australia recently published a report on credit card interchange fees and related
matters,  which  comes  to  the  conclusion  that  the  industry  trade  practice  agreements  governing  the
operation  of  credit  card  schemes  are  clearly  inappropriate  especially  the  level  of  transaction
“interchange fees”. The Reserve Bank’s conclusions are consistent with those of investigations going
on in parallel in Europe. The emerging public policy stance against interchange fees internationally is
potentially  an  important  catalyst  for  developments  in  retail  transaction  networks,  globally  –
especially, electronic money.

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Background

The  Reserve  Bank  of  Australia  has  had  formal  oversight  of  the  payments  system  since  1984  and
legislation in 1998 established the Payments System Board of the Bank with powers to promote the
efficiency  of  the  retail  transaction  system  and  protect  its  safety.  Similar  formal  regulatory
arrangements  have  since  emerged  in  other  countries.  The  BIS  coordinates  comparative  studies  of
transaction system efficiency.

The  main  concern  with  credit  card  schemes  is  the  "interchange  fee"  payable  to  card  issuing
institutions  for  card  purchase  transactions.  For  credit  card  purchases,  now  averaging  some  $100  in
Australia, an ad valorum merchant service fee of some $1.75/1.75% is taken from retailers by the bank
acquiring the transaction and, from that, some $1/1% is paid to the bank that issued the card. Retail
prices are higher as a consequence.

Specific public policy concerns are that the "interchange fee" is a price fixed uniformly between the
scheme members and that  the  fee  fixed  is excessive  in relation to  the  costs  of providing  credit card
transaction  services.  The  industry  trade  practice  agreements  underpinning  credit  card  schemes  have
not been registered with, nor authorised by, the competition regulator nor are they likely to be.

Circumlocution

A notable feature of the Australian report is that a central bank has published it. This is a significant
achievement  in  a  country  where  (like  the  USA)  non-cash  payments  are  still  heavily  dependent  on
signature-authorised cheques and credit cards.

Perusal  of  the  report  illustrates  the  difficulty  central  banks  have  in  calling  commercial  banks  to
account  for  inappropriate  behaviour  –  collusive  price-fixing  and  abuse  of  market  power  –  long
recognised to be against the public interest, but also long tolerated without demur.

The essence distilled from the report, and noted above, was not written clearly in the report. The
report  used  a  characteristically  central-bankerly  style  of  circumlocution,  putting  it  beyond  reach  of
most readers, bar industry insiders.

Key ingredients for distilling the essence from the report include these extracts:
Debit  and  credit  cards  are  a  convenient  means  of  payment...  however,  the  two  instruments  are
different. A debit card is a method of accessing a transaction account... funds  (are)  taken  from  that
account at the time the transaction is made. Such accounts might include an overdraft limit... a debit
card provides a pure payment service... A credit card, on the other hand, provides a payment service
and a credit facility; the latter usually involves an interest-free period before the account needs to be
settled and a pre-approved line of credit, often called a revolving line of credit, on which users pay a
rate of interest. (p. 8)

Removal of the interchange fee would have implications for one card product – the Visa branded
debit card. This card... allows the cardholder to choose to press a 'debit' button and use a PIN, or a
'credit' button and sign for the transaction... whichever button is selected, the funds are drawn from
the  customer's  deposit  account.  The  interchange  fee  flow  is  quite  different.  If  the  debit  button  is
selected,  the issuer  pays  a  flat  interchange  fee  to  the  acquirer...  If  the  credit  button  is  selected,  the
acquirer  pays  the  issuer  the  much  higher,  ad  valorem  interchange  fee  set  for  credit  cards  by  Visa
scheme members... Not surprisingly, (issuers) encourage their cardholders to select the credit button...
By encouraging customers to select the credit button, issuing institutions are being over-compensated
for what is, to all intents, a debit card transaction. (p.70)

A major consequence of current interchange fee and access arrangements in Australia is that the
credit card network has been encouraged to grow at the expense of a less costly alternative, the debit
card. (p. 76)

In summary, the pricing of retail payment services in Australia, in which interchange fees play an
integral  role,  is  distorting  the  payment  choices  facing  consumers.  The  beneficiaries  are  credit
cardholders using the credit card purely as a payment instrument... and financial institutions which...
earn  substantially  higher  margins  from  the  provision  of  credit  card  services  than  from  debit  card
services. (p. 78)

—————————————— ePSO-Newsletter Issue 4 – January 2001 ——————————————

Just  why  the  Reserve  Bank  could  not  clearly  say  the  essential  conclusion  probably  reflects  the

history of this matter not being properly dealt with previously.

What is to be done?

- 60 -

The credit card, as  we  know  it,  should be  displaced  – leaving  debit  cards  (with a  line of  credit)  for
non-cash transactions at the point of sale. The demise of the credit card will obviate debates on, among
other things:
• 
• 

the "cost" of the unnecessary "free credit" forced on credit-card customers;
the nonsense of a "credit card only" rule for purchases over the phone and internet (when the card
cannot be present); and
security, as PINs and secure 'card present' protocols replace manual 'signature' authorisations that
are conducive to fraud.

• 

It  will  be  interesting  to  observe  how  the  authorities  now  engineer  the  displacement  of  credit  card
schemes.

The first step, in both Australia and Europe, has been to invite the credit card schemes to defend
behaviour that, prima facie, is inappropriate. The scheme promoters will respond, as usual, with a self-
justifying defence – as is their natural-justice right to do so.

Globally,  scheme  members  stand  to  lose  considerable  revenue  flows  as  a  consequence  of  policy
initiated reforms, and some may face substantial additional costs for damages arising in conduct found
to be illegal. Faced with this prospect, protracted legal proceedings are in the offing. Member banks'
'net'  reward  for  the  delay  of  protracted  litigation  is  so  great  that  the  please-explain  concession  to
'natural justice' is unlikely to provide a solution.

More  resolute  action  is  called  for,  internationally.  The  way  the  global  economy  now  deals  with
credit  card  schemes  will  test  the  scope  for  appropriate  international  cooperation  on  policy  for  the
development of new transaction networks, especially electronic money.

Implications for the future

One result of the scrutiny of credit card schemes has been insights into transaction networks – both the
great benefits they bring to the community and the dangers of inappropriately collusive behaviour by
network members.

The  insights  included  an  'infant  industry'  case  for  interchange  fees  as  an  incentive  for  member
participation  to  establish  a  network.  Left  unsaid  were  the  implications  for  future  public  policy  –  in
particular the basis on which infant electronic money networks may be established. One implication is
that  the  size  and  duration  of any  interchange  fee  agreements be  carefully  scrutinised  and  monitored
from the outset. If commercial banks are to be the driving force in electronic money networks, there
are obvious dangers in them levying "trade practice taxes" to reward themselves for cooperating. An
alternative  approach,  that  governments  take  the  initiative  to  coordinate  electronic  money  networks,
could not be ruled out – especially as governments will eventually, rightly, sequester the substantial
seigniorage revenues to flow from a ubiquitous electronic-money medium of exchange.

[info]
•  A press release on the report is available at: http://www.rba.gov.au/media/mr_joint_rba_accc.html
•  The report itself is available as a download at: http://www.rba.gov.au/publ/pu_interchange.pdf

[4&5]
Justifications of Interchange from Economic Theory
Christoph Strauch (cstrauch@paysys.de), Consultant with PaySys Consultancy GmbH, Frankfurt, Germany
/credit cards/debit cards/interchange fees/competition

In this article, we will discuss some of the economic basics of interchange. Three different views on
the  function  of  interchange  are  presented  very  briefly.  From  the  acceptance  of  one  of  these  views,
conclusions can be drawn regarding actual setting of interchange. These are not carried out in this
article.

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Introduction

The European Commission has sent a Statement of Objections to Visa International in relation to its
interchange fee, on the grounds that this fee is a restrictive collective price agreement. In the statement
of objections, the Commission says: "As has also bee pointed out by Eurocommerce, other payment
card schemes, such as ec-Karte in Germany, may function without interchange fees."

"Germany's  ZKA  has  decided  to  introduce  a  fee  of  DEM  0.35  for  the  in  the  retail  sector  widely
implemented electronic direct debit scheme." (Press release of HDE, the German retailer association,
of Aug. 8, 2000; ZKA = Zentraler Kreditausschuss, the German banks’ top level committee.)

One may derive from these press clips that either Eurocommerce is right and the German banking
industry is trying to exercise market power or, that ZKA's plans are a hint, that ec-Karte in fact is not
functioning  without  interchange  fees  and  for  a  sound  functioning  in  the  future,  the  extension  of
interchange is a (economic) necessity. According to ZKA's plans, the introduction of a fee of approx.
0.18 Euro (+ 0.05 Euro for POZ [payment with Eurocheque-card without payment guarantee]) for the
signature based debit card schemes (ELV [direct debit] and POZ) would result in additional revenues
of round 93m Euro (based on an estimation of 520m transactions in 1999). Revenues in 1999 from ec
cash [payment  with  Eurocheque-card and  payment  guarantee]  and  POZ  scheme  can  be  estimated  at
round  71m  Euro.  Without  further  reasoning,  it  is  evident  that  the  "interchange  fee"  is  a  hot  and
controversially discussed topic in the  payment  cards  industry.  On  the one  hand,  actual implemented
interchange rules are challenged as (or at least considered to be) anti-competitive by Eurocommerce
and others (Cruickshank report, Reserve Bank of Australia), on the other hand, the payment schemes
insist that an interchange is a necessary mechanism for a functioning payment scheme.

In this article, we will discuss some of the economic aspects of interchange fees. The interchange
fee is defined as a fee in four party payment schemes (e.g., Visa, Mastercard) paid by the merchant's
bank to the cardholder's bank, when processing a transaction. Given that definition, one may ask why
the participants in four party schemes agree to such kind of "side payment" instead of charging their
respective  customers  alone.  Further,  one  may  consider  whether  an  actual  interchange  fee  (possibly:
zero)  results  in  economic  efficiency,  and  if  so,  whether  there  might  be  other  (better)  methods  than
interchange which would result in economic efficiency as well. We will analyse the basic economic
justification of the concept of interchange fees rather than considering actual calculation methods or
actual  fees.  In  particular,  we  will  introduce  three  basic  principles  (P),  which  may  be  accepted  as  a
justification for an interchange fee, namely:
P1: The issuer of a payment card delivers a service to the acquirer when a card transaction takes place

and interchange is the compensation for that service.

P2: Card  based  payment  schemes  exhibit  particular  network  externalities  and  an  interchange  is  an

appropriate method to internalise these externalities.

P3: In  card  based payment  schemes,  issuers  and  acquirers  together  deliver  a  transaction  processing
service  to  cardholders  and  merchants,  and  there  is  a  "imbalance"  between  the  issuer's  and  the
acquirer's costs / revenues, and interchanges settle this imbalance.

The key for an assessment of the proposed justifications is a clear understanding of the economies

of a payment scheme. In a payment scheme, the following agreements are made:
Card acceptance: by signing a merchant contract the merchant is granted by the acquirer to
• 

accept liabilities against cardholders which result from rule compliant presentment of a payment
card as a means of payment and to
sell  such  liabilities  against  cardholders  to  the  acquirer  at  a  pre-agreed  price  (the  merchant
discount)

• 

Card issuing: by buying a payment card the cardholder is granted by the issuer to
• 

access  his  account  by  using  the  card,  i.e.  to  instruct  the  issuer  to  pay  for  presented  liabilities,
which result from rule compliant usage of the card.
So, the acquirer sells to the merchant the opportunity to accept card payments. The price for this
service is mainly based on actual usage of this opportunity (i.e. ad valorem or transaction fees). The
issuer sells to the cardholder the opportunity to access his account by a dedicated device, namely the
card.  The  account  may  be  exclusively  attached  to  the  card  (T&E  cards,  credit  cards)  or  it  may  be

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accessible by other means as well (debit card —> giro account). The price for the issuer's service is
mainly a fixed price p.a., the annual card fee.
1st View

Now,  in  a  four  party  scheme,  where  acquirer  and  issuer  are  not  (necessarily)  the  same,  an  acquirer
obviously  is  able  to  deliver  the  service  only  if  there  is  a  framework  in  place  which  allows  him  to
present  the  bought  liabilities  to  issuers  and  to  get  paid.  Hence,  the  issuer  may  be  considered  as  a
supplier of the acquirer. It is a straightforward conclusion that P1 gives an acceptable justification of
interchanges  in  four  party  schemes  like  Visa  or  Eurocard  /  Mastercard.  Because  there  is  no
competition  between  issuers  to  supply  service  for  a  particular  transaction  to  a  particular  acquirer
marginal cost pricing would be an appropriate method for the actual setting of an interchange. (Note
that the issuer in a particular transaction is determined by the cardholder and not by the acquirer. From
this it follows, that a bi-laterally agreed interchange rate between an issuer and an acquirer would have
no  impact  on  the  output  of  transactions  between  both  of  these,  hence  there  is  no  competitive  price
determination!)  However,  some  issues  remain  to  be  solved:  e.g.,  when  actually  processing  a
transaction, which part of service (in the value chain) does an issuer supply to acquirers and which part
is  the  issuer  delivering  to  the  cardholder?  Especially  taking  into  consideration  that  the  cardholder
benefits from each single usage of the card, one may argue that acquirers should pay only a part of the
marginal  cost.  By  processing  a  card  transaction  the  issuer  delivers  value  to  both,  the  cardholder  –
namely  the  possibility  to  initiate  payments  –  and  the  merchant  (via  the  acquirer)  –  namely  the
guarantee  to  pay  a  presented  transaction,  provided  rule  compliant  processing  of  the  transaction  has
taken place.
2nd View

Further, four party schemes imply specific network externalities: Issuers and acquirers act on separate
market places. Issuers sell cards to consumers, while acquirers sell acceptance contracts to merchants.
Both are producing externalities (E) to the respective other market as follows (interchange and prices
disregarded!):
E1: The  value  of  a  card  for  a  cardholder  increases  with  the  number  of  accepting  merchants,  hence
acquirers are producing an external benefit to issuers by signing merchants. I.e., at a given price,
an issuer will be able to sell more cards, the more merchants are accepting the card.

E2: The value of acceptance of a card brand increases with the number of issued cards of this brand,
hence issuers are producing an external benefit to acquirers by issuing cards. I.e. at a given price
(per acceptance at all!), the merchant will be able to sign more merchants, the greater the number
of cards issued.

E3: An  increasing  number  of  merchants  will increase  activity  of  cards and this  yields  to  increasing

costs for issuers (for processing etc.). Hence, acquirers are producing an external cost to issuers.

E4:  An  increasing  number  of  cards  will  increase  activity  at  a  given  merchant  and  this  yields

increasing costs for acquirers. Hence, issuers are producing an external cost to acquirers.

E1  is  assumed  to  be  obviously  true.  To  see  that  E2  is  true,  one  may  consider  that  merchants
wouldn't  accept  activity  based  prices  for  acceptance  if  the  marginal  benefit  of  activity  were  not
positive.

Due to these externalities, common equilibrium prices for both of the markets are impacted by the
output  of  the  respective  other  market.  It  is  theoretically  not  a  necessity  that  there  exists  a  set  of
merchant and cardholder prices, where both markets are in equilibrium, if acquirers and issuers acted
completely independent of each others. I.e. at a given price, output of one of the markets could lead to
an  under-/oversupply  of  the  other  market.  Interchange  may  be  considered  as  a  mechanism  to
"calibrate" both markets to a common equilibrium. Issues to be solved when this view is adopted are
whether  an  interchange  is  the  only  /  best  method  to  reach  an  equilibrium  and  if  so,  how  the
interchange needs to be calculated (with an outcome which may be positive, negative or even zero).
3rd View

Issuers and acquirers in a four party scheme may be considered as acting "on behalf of a three party
payment scheme". In this view, both parties are taking over particular tasks, which together make up

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the  complete  product,  namely  a  "payment  service".  The  "scheme"  is  building  /  maintaining  an
infrastructure, consisting of the regulative and technical framework and commissioning the delivery of
service to its members, issuers and acquirers. In this theoretical model, costs and revenues are passed
on to the scheme and then re-distributed to the members according to any agreed appropriate or "fair"
principles.  Basically  this  means  considering  four  party  schemes  as  an  extension  of  three  party
schemes. Today's four party payment schemes have their roots in three party schemes, and we suggest
(for the sake of argument) to consider them as three party schemes, which have outsourced large parts
of the value chain to their members. Interchange within this model has the function of a distribution of
costs  /  revenues  between  acquirers  and  issuers,  while  leaving  both  the  freedom,  to  act  as  "profit
centre"  and  hence  having  incentives  to  improve  profitability.  To  give  an  example,  a  very  rough
calculation shows that in the German credit card industry issuers bear approx. 80% of costs but collect
only  40%  of  revenues (before  interchange!),  where  acquirers  bear  20%  of  costs  and  collect  60%  of
revenues. This situation would result in an interchange to be paid from acquirers to issuers to settle the
imbalance.  Another  example  is  Germany's  ZKA's  statement  that  issuer's  losses  in  the  ec  debit  card
schemes  amount  to  round  132m  Euros  annually.  Issues  to  be  solved  when  adapting  this  view  are
clearly to define to which extent imbalances should be settled by the scheme and what principles are
appropriate  for  a  distribution  of  costs  /  revenues.  Again,  in  this  model  the  direction  in  which  the
interchange will flow depends on the actual market situation and is not determined by the theory.

For  an  assessment  of  this  view,  one  should  recognise  that  on  the  one  hand,  three  party  schemes
have elements of four party schemes (e.g., merchant acquiring of Italian Bankamericard for Amex and
issuing  of  Amex  cards  by  NatWest  in  the  UK)  and  on  the  other  hand,  four  party  schemes  have
elements of three party schemes (e.g., exclusive domestic acquirer licenses for Eurocard in Germany
until 1999, Switzerland, Austria...).

Conclusions:

To come back to the cited press clips at the beginning, what can one learn from the discussion about
the German ec-Karte:
1.  It should be noted, that the German ec-Karte based  EFTPOS  schemes  electronic cash  and  POZ,
both are still three party schemes, whereas the interchange is a four party concept. Within both of
these  schemes,  there  is  a  collectively  set  issuer  fee.  In  the  so  called  ELV  scheme,  which  is
basically not a card-based payment scheme, there is indeed no issuer fee. (In the ELV scheme, the
account number from the ec card is read and a direct debit record is generated, but there are no
card  specific  contractual  rules  in  place  for  processing  of  such  transactions,  neither  between
merchant / merchant bank, nor between merchant bank / issuer bank or issuer bank / cardholder.)

2.  From the above presented theoretical outline of the economics of payment schemes, we believe,
one  can  conclude  that  in  general  there  are  some  reasonable  arguments  for  the  concept  of  a
collectively set interchange in four party payment schemes (which is not a defence of the actual
implemented setting).

3.  Each of the three above mentioned views on interchange fees may yield different results for the
actual setting of interchange in a given scheme. Hence any assessment needs to survey carefully
the given framework and market.

[info]
• Press release of HDE of Aug. 8, 2000: http://www.einzelhandel.de/hde02.htm
•  European Commission: "Commission plans to clear certain Visa provisions, challenge others." Press Release.

DN:IP/00/1164. Brussels, 16 October 2000. Link to Press Releases:
http://www.europa.eu.int/comm/competition/press_releases/rapid.html

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[4&6]
On Hype, Sacred Cows, Data Holes, and How to Cope with them
Knud Böhle (bohle@jrc.es), Institute for Prospective Technological Studies, Seville, Spain
/electronic payment systems/ePSO

Analyses of the electronic payment sector are made difficult by the speed of changes, the hype every
announcement of a new payment method or technical advance produces, by the notorious lack of often
the simplest data and empirical information on the state of things, by hidden or insufficiently discussed
controversies and unclear concepts. Against this background it is argued to strengthen the collection
and production of reliable data, to assess implicit or explicit visions of actors involved, to pay special
attention to  long-term  changes like  infrastructure,  and to look at the  development of  retail  payment
systems from an evolutionary perspective.

Payment  systems  were  not  a  hot  topic  beyond  professional  debate  for  a  long  time.  Even  ground
breaking innovations like the move from payment of wages in cash to giro transfers, the introduction
of credit cards and the emergence of the corresponding international payment networks, or the spread
of  ATMs  went  without  major  public  debate.  Times  have  changed  since  then.  Globalisation,
liberalisation,  deregulation,  digitisation,  the  growing  general  interest  in  economic  affairs  and  the
Internet  as  communication  and  e-commerce  infrastructure,  as  catalyst  and  projection  surface  for
visions  and  dreams,  have  brought  about  an  unexpected  wealth  of  new  technological  and  societal
options. In other words it is time to re-define, re-think, restructure and re-regulate social practices in a
broad sense. Vilém  Flusser  once  reminded  the  old  verse  of  the  Rubáiyát  pointing  at  the  new  subtle
meaning of the word “bit” to address the enormous potential to create a new reality based on digital
technology shaping the future information society:

Ah Love! could you and I with Him conspire
To grasp this sorry Scheme of Things entire,
Would not we shatter it to bits – and then
Re-mould it nearer to the Heart's Desire!

I  apologise  for  shifting  to  rough  prose  again  when  talking  about  the  payment  sector.  While  the
overall impression is indeed that there are fundamental changes going on in this field, there is at the
same  time  a  lot  of  hype  befuddling  our  minds  and  making  it  hard  to  distinguish  important
developments  from  secondary  matters.  Almost  every  year  new  waves  of  payment  systems  enter  the
stage. Prepaid cards challenged the EMI in 1994 (in those days: European Monetary Institute), in 1995
the eCash trial on the Internet shocked the central banks etc. Five years later mobile payment systems,
new forms of P2P-payments like PayPal, and new “private currencies” excite the minds and challenge
the observers to assess them appropriately.

The hype can be boiled down if we turn to the infrastructure matters and to a long-term perspective.
The banking network will remain the backbone of the payment system for clearing and settlement in
the near future, and if we look at EMV and CEPS for example, their implementation will take years.
The EMV96 standard for example will not be compulsory before 2005, and the technology firms hold
that CEPS will not be widely implemented in the European Community before 2005.

Having said this, it is easier to take a closer look at the changes taking place. New entrants such as
telcos, technology providers, ISP etc. are already altering the rules of the game. I do not dare to say if
this can be compared to rugby once being morphed to become American football. Those parts of the
payment infrastructure that are close to the customers (merchants and consumers) and those payment
services that have to be established to grease electronic commerce are already under (re-)construction.
The  shift  from  transaction-based  payment  schemes  to  “aggregating  schemes”  bringing  in  new
intermediaries is for instance one important path of developments to be observed. It is not totally new,
think of the services credit card companies or billing services are providing, but it is happening in a
new field. To avoid over-estimation of new payment methods in general, the panacea of asking for the
state of clearing and settlement across countries will work in most cases.

Regarding  the  ups  and  downs  of  new  payment  systems,  a  long-term  evolutionary  perspective  is
also  more  adequate  than  the  boring  guesses  to  identify  the  next  killer-application.  In  the  case  of
failures of payment methods like for example eCash or First Virtual and other start ups it is also not so

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interesting  and,  by  the  way,  not  too  hard  to  understand  why  they  failed,  but  to  see  their  remaining
achievements (cryptographic blinding in the case of eCash or the low cost security solution based on a
clever procedure relying on e-mail exchanges in the case of First Virtual) in the light of the long term
future of electronic retail payment systems.

Sacred  cows  on  the  one  side  and  vague  visions  on  the  other  side  are  to  some  degree  further
obstacles  to  achieving  a  clear  view  of  developments.  Let’s  take  for  example  the  concepts  of
“electronic cash”, the “SmartEuro”, and the “cashless society”. There is no doubt that electronic cash
is  somehow  the  functional  equivalent  to  cash.  But  often  the  implications  of  cash  are  not  taken  into
account. Cash is issued by central banks, it is legal tender, and the costs of the system are more or less
socialised, i.e. paid for by all consumers. It is accepted everywhere in a given payment area, circulates
rather  freely  without  bank  intermediation,  does  not  distinguish  the  role  of  merchants  or  consumers,
and  does  not  discriminate  between  persons  having  accounts  and  cards  and  those  not  having  them.
Therefore the question is not only if digital cash is feasible from a technical point of view, but also
what social and institutional forms are preferable. This question has not been sufficiently discussed so
far.

There are suggestions that central banks should take the role of the issuer thus building up a system
in parallel to the existing cash systems. This proposal was also made when the introduction of the Euro
was on the agenda and some politicians even today lament that the window of opportunity is rapidly
closing. At the same time there are other interpretations of electronic cash as the point of departure to
a new monetary order (see the reference to Malte Krueger in the [info]-section for more on that).

In the same line the vision of the cashless society has to be stated more precisely. In the beginning
when this vision first arose, handling costs and criminal activities were seen as the major drawbacks of
cash,  making  electronic  systems  linked  to  accounts  the  preferred  option.  Now,  as  systems  like
electronic cash can be envisaged the question to be answered is if the cashless society should still be
conceptualised as putting all payments on a record or whether it should also provide for true electronic
cash.

Often  the  main  argument  in  favour  of  electronic  cash  is  its  “anonymity”.  But  anonymity  is  just
another of these sacred cows that require further reflection. What is at stake if we ask for anonymity?
Anonymity for the customer vis-à-vis the merchant, when at the same time the retailer would like to
obtain personal information and may also need a delivery address? Do we ask for general anonymity
of the payer vis-à-vis the payment system provider or do we merely require that  he  does  not  record
each and every purchase? Probably the question of non-traceability (to avoid the creation of personal
profiles  of  purchases  and  habits),  and  the  questions  who  has  access  to  the  records,  how  long  the
records are kept, if customers will be permitted to administer their records enabling them for example
to delete entries of the record, might be of more strategic importance than musing about the value per
se of anonymity.

Another sacred cow might be the favourite idea of the SmartEuro, a virtual Euro to be operational
everywhere  in  the  European  community.  Without  doubt  it  would  be  something  “nice  to  have”.  But
given that CEPS won’t really happen before 2005 and thinking of the enlarged European Community
then,  it  is  not  very  risky  to  say  it  will  really  take  a  long  time  till  the  vision  can  come  true  not  to
mention new payment options emerging during that period of time. Moreover physical Euro cash will
further  reduce the  need  for  a  SmartEuro.  Everyone  can  take  Euro  cash  when  travelling  abroad,  and
entering a foreign country he or she might also want to purchase a “white card” widely accepted in this
country.  The  best  argument  I  have  heard  so  far  in  favour  of  the  SmartEuro  is  its  use  on  electronic
networks for person to person transfers, thus introducing a really cheap transfer mechanism, given that
cross border  credit  transfer  are  prohibitively  expensive  as  the  banks  charge  enormous  fees for these
transfers. It will take years to change this practice, although European politics are strongly urging the
banks to do something about it. In addition the “idée fix” to see e-purses succeeding one day excludes
that it is not clear at all if there will ever be a success in business terms. The e-purse could well be a
dead end street. And this would not even have to be regarded a catastrophe, because what matters here
is the long term development of financial applications on smartcards taking place for various reasons
anyhow: security, new functionality, and costs savings (e.g., so called electronic cash offline).

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An  obvious  lack  of  data  and  a  lack  of  transparency  also  make  analyses  of  the  payment  sector
difficult.  Without  doubt  the  notable  lack  of  data  is  a  real  problem  when  it  comes  to  new  and  old
payment systems. The data of the consultants are not necessarily unbiased, the market players publish
strategic figures (e.g. data on chargebacks are likely to be presented as data on fraud), and very often
data are either not published or not even known by the actors themselves not to speak of that highly
sensitive  information  on  costs.  Available  sources,  e.g.,  the  blue  and  red  book  by  ECB  and  BIS
respectively, are only of reduced value, because they do not relate the data on payment instruments to
payment purposes. For example, you can not tell if a credit transfer is effected to pay a utility bill, to
pay a craftsman, or to pay an online-retailer directly. When it comes to e-purses the available figures
[hard  to  find  anyway,  see  [1&8])  do  for  instance  not  distinguish  payments  for  telephone  calls,
unattended vending machines, internet use, and POS payments in real world shops. It would also be
interesting  to  know  how  incremental  payments  are  presented  in  the  statistics.  Talking  about  new
payment  systems  for  the  Internet,  it  is  already  hard  to  obtain  the  simplest  figures  of  merchants
accepting, and customers using the system not to mention transaction value or volume.

Another field where transparency is lacking as far as we see is the standardisation field, especially
when it comes to online-shopping. There are many activities somehow related to the matter like OTP
(Open Trading Protocol), ECML (Electronic Commerce Modeling Language), SEMPER architecture,
webEDI,  ebXML,  but  who  can  tell  about  the  state  of  implementation  and  deployment?  Where  are
these standards used in the daily online-shopping process? Again, a mere look at isolated spots in the
picture  is  not  enough.  In  the  case  of  the  “shopping-protocols”  the  long  term  analysis  of  the
development process could start with the observation of Brian Kahin who stresses the role of browsers
as the kernel of Internet development. Exaggerating a bit one might say: Before I do not find it on my
browser,  it  does  not  exist.  So  do  shopping  standards really  exist,  and  if  so,  how  did  they  get  to  the
heart of internet development? Who decides about that? The question therefore “who owns the card”
to be heard everywhere in recent times in talks about multi-application smart cards, holds also for the
browser  development  (“who  owns  the  browser”),  especially  when  the  integration  of  the  payment
function and of digital certificates is concerned.

This  article  is  written  after  the  first  ePSO  Steering  Group  Meeting  held  in  Brussels  on  21
November,  2000.  The  purpose  of  this  meeting  chaired  by  Mrs  Christa  Randzio-Plath,  MEP  was  to
define  the  strategic  and  technical  questions  to  be  tackled  within  the  ePSO  project.  The  first  ePSO
background paper elaborates on these issues. This article however picks up some of the more general
recommendations of the  Steering  Group. The  Steering  Group  pointed  especially  at  the  lack  of  data,
encouraged  procedural  analyses,  and  asked  us  to  focus  on  the  real  needs  of  the  actors  involved,
especially of customers, merchants and SMEs. Thinking about these points led to this contribution.

[info]
• Find the Rubáiyát of Omar Khayyám online at http://itsa.ucsf.edu/~ico/poetry/rubayat/rubayat.htm
• Krueger,  Malte  (1999):  Towards  a  Moneyless  World?,  Working  Paper  9916,  Department  of  Economics,  University  of

Durham http://www.durham.ac.uk/Economics/1999.html

• Böhle,  Knud;  Krueger,  Malte;  Herrmann,  Christoph;  Carat,  Gerard;  Maghiros,  Ioannis:  Electronic  Payment  Systems  –
Strategic and Technical Issues. Background Paper No. 1. Electronic Payment System Observatory. December 2000. The
paper is downloadable from http://epso.jrc.es/ (follow the link “Background”)
See http://epso.jrc.es/ for more information on the first Steering Group Meeting.

—————————————— ePSO-Newsletter Issue 4 – January 2001 ——————————————

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[4&7]
Interview:  "Electronic  Payments  Technologies  are  Available  but  Business  Models  are
Missing" (Part 2 of an Interview with Michael Waidner)

Hans-Dieter Zimmermann (Hans-Dieter.Zimmermann@unisg.ch), University of St. Gallen, Switzerland talks
for  ePSO-N  to  Michael  Waidner,  Project  Coordinator  of  Project  SEMPER,  IBM  Zurich  Research
Laboratory, Switzerland
/Europe/research/security/electronic payment systems/privacy

In the first part of this interview, published in ePSO-N [3&7], Michael Waidner spoke about the goals
of  SEMPER  and  the  results  of  the  project.  The  second  part  of  this  interview  deals  with  electronic
payment systems in general. Waidner looks back at the roaring electronic payment scene of the 90s
and gives some remarkable predictions for the future.

Zimmermann: In the first part of the interview  we talked  about  Project  SEMPER.  SEMPER  had  a
duration of three years and has been finished since two years. What has changed in the last five years
in the field of payment systems in general?
Waidner:  There  are  many  important  differences.  We  started  SEMPER  during  the  gold  rush  of
electronic payment protocols, when each week a new system was proposed by someone. Everybody
thought that we would have to manage a large number of different and sophisticated payment systems.
We at IBM in Research developed the credit card protocol iKP which then led to SET, and expected
that the world would quickly move from the not-so-secure "send your credit card number" approach to
secure, real payment systems like iKP and SET. By now inventing new payment systems has become
much less popular and most of the initially proposed systems never made it to the market. But still the
most popular system is "send your credit card number," although, luckily, often encrypted by SSL. It
looks like many people are just happy with this simple approach, so it will exist for much longer than
we  expected  at  that  time.  Sophisticated  secure  payment  systems  like  SET  are  used  for  business-to-
business payments, but it seems to be a longer way before they are adopted for consumer-to-business
payments as well.
Z:  But  from  a  business  point  of  view,  we  are  still  missing  easy  to  use,  (cost-)  efficient  and  secure,
trust-worthy  electronic  payment  systems.  I  think  in  that  respect,  the  situation  hasn't  changed  very
much for the last five years, or even six or seven years.
W:  Yes,  but  five  years  ago  we  had  the  perception  that  those  payment  systems  didn't  exist,  so  we
invented new protocols. But now I would say that there is no real demand for new payment protocols.
It's  more  the  question  whether  they  are  used  in  practice.  For  instance,  there  are  more  proposals  for
micropayment systems than you ever want to have to look at, but there is no real dominant system yet,
not even the business models are really clear yet. But the technology is available.
Z: So, what do you think are the main weaknesses of today's systems?
W: I think it's mainly the lack of convincing business models. When you ask consumers to install new
payment software on their PCs without giving them a real benefit then they will probably not do it.
And If you ask merchants to pay fees for a new payment service without telling them why it is better
for them than the old, maybe cheaper one, then they will not use it.
Z:  So,  what  do  you  think  which  of  the  actual  more  advanced  payment  schemes  besides  credit  card
payment via SSL for example will survive in the future and will have a chance in the future to be the
accepted  payment  system?  Is  it  SET,  is  it  something  like  a  bill  presentment  system,  is  it  eCash  or
Millicent or...?
W: Regarding micropayment systems I really wouldn't make any predictions at the moment. I am sure
that SET, maybe with some modifications, will survive, although I am not sure how soon it will really
enter the market of ordinary consumers. But for B2B I am quite sure that SET is the payment system
of  the  future.  Otherwise  bill  presentment  and  home  banking,  all  sorts  of  what  we  called  indirect
payment systems, will become quite successful.
Z: So, how do you judge bill presentment systems, for example Paynet in Switzerland? What do you
think about it?
W:  That's  a  typical  example  of  such  an  indirect  payment  system.  For  bill  presentment,  as  far  as  I
know, there is no real standard at the moment. What is interesting in this context is that people who
talk about bill presentment immediately talk about how to integrate it into larger processes, and this is

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still the main security problem with electronic commerce: that people don't think in processes. They
think in individual small steps and don't care too much how they are linked.
Z: But couldn't that be a real chance for integrated electronic commerce applications integrating bill
presentment systems into EC-applications?
W: Of course. This is exactly what SEMPER really was about, and therefore I expect that people will
pick up more of the ideas from SEMPER.
Z: Are you aware of any new developments in this field? Remarkable research activities or industry
activities?
W: Remarkable, that 's difficult…
Z: So, if you look back ten years or seven years ago, as you said, there was every week a new payment
scheme, a proposal or whatever, prototype and funny things. So what is going on today in the field of
research?
W:  Clearly  non-repudiation  of  transactions  based  on  digital  signatures  and  electronic  receipts  will
enter  the  market,  although  there  are  no  surprising  new  technical  results.  More  of  a  gold  rush  spirit
exists in the privacy area: many new start-up companies, most US-based, are developing new privacy-
friendly technology, like tools for handling privacy policies, for managing and using pseudonyms on
the  Internet,  or  for  anonymous  shopping  and  sometimes  even  anonymous  delivery  of  hard  goods.  I
think  this  is  a  good  sign  that  something  is  happening,  and  I'm  also  convinced  that  we  need  more
privacy-friendly technologies if consumer-oriented electronic commerce is to become successful.
Z: Do you have a vision about how payment issues will be addressed maybe in five years or even in
ten years?, How will payment problems be solved in electronic commerce transactions? Will it still be
the same as we have it today?
W: My vision is that it will be like it actually should be already today. There are only a few payment
models that make sense in reality, and in principle it is clear how to implement them. So I hope that in
five years we have found better business models, and something like SET will be widely used.
Z:  So,  summarising  your  evaluation  of  the  developments,  technical  concepts  are  available,  the
products are more or less available but the business models are missing.
W:  The  products  are  more  or  less  available  but  they  are  not  sufficiently  integrated,  and  often  the
privacy of consumers is not sufficiently protected. So, this is something where more development is
needed,  and  you  might  say  that  SEMPER  is  still  the  vision  for  how  such  technology  should  be
developed. But still many technologies for secure electronic commerce lack a realistic business model.
Z: Thank you very much.
W: You are welcome.

[info]
• The  project  SEMPER  –  Secure  Electronic  Marketplace  for  Europe,  was  launched  in  September  1995  and  was  funded
partly  by  the  European  Commission  within  the  Advanced  Communication  Technology  and  Services  (ACTS)  research
program part of the Fourth Framework Program (1994-1998).

• The SEMPER website at http://www.semper.org provides a huge amount of SEMPER related documents and links.
• The results of SEMPER are published in Lacoste, G., Pfitzmann, B., Steiner, M., Waidner, M. (Eds.): SEMPER – Secure
Electronic Marketplace for Europe. Heidelberg: Springer 2000 (Lecture Notes in Computer Science. Vol. 1854, ISBN 3-
540-67825-5)

[4&8]
Consumer Perceptions Matter
Leo Van Hove (Leo.Van.Hove@vub.ac.be), Free University of Brussels, Belgium
/review/electronic purse/economic psychology/consumer perceptions

A  recent  paper  by  Elfriede  Penz  and  Erich  Kirchler,  two  Austrian  psychologists,  uses  the  theory  of
social representations "to find out how people cognitively represent various means of payment". The
paper finds that the concept 'electronic purse' differs from 'cash' and the general  concept  'means  of
payment' – implying that consumers do not yet see the electronic purse as an alternative to cash. Also,
they  associate  the  electronic  purse  with  'mistrust'  and  'loss  of  control'.  Hence,  electronic  purse
operators still seem to have a fair deal of educating to do.

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Reading papers that tackle a familiar issue from a familiar angle can be great fun. For one, it makes
one feel very smart. However, reading papers that analyse a familiar topic by means of methods one is
not familiar with, is much more challenging. For me, a recent paper entitled "Is electronic money still
part  of  the  banker's  dream?"  and  written  by  Elfriede  Penz  and  Erich  Kirchler,  two  Austrian
psychologists, was such a refreshing experience. In their paper, Penz and Kirchler use a theory I had
never  heard  of  to  analyse  consumer  perceptions  of  means  of  payment  in  general,  and  the  Quick
electronic purse in particular. Interestingly, their conclusions tally well with the existing literature on
electronic purses.

For the  theoretical framework  of  their  study,  Penz  and  Kirchler  rely  on  an  apparently  fairly  new
approach in market research: the theory of social representations. This theory is "concerned with social
influences  on  the  opinion  system  of  members  of  social  groups".  Penz  and  Kirchler  point  out  that
people's concept of 'electronic purse' emerges from their interaction with other persons as well as from
actual  experience.  The  theory  of  social  representations  thus  seems  to  bear  a  close  likeness  with  a
particular form of consumption externalities that are studied in the marketing science literature and are
often called experience effects. The essence of such effects can be summarised as follows: when a new
product is introduced, there is  uncertainty  among  potential  consumers  about  the  product's  attributes,
especially if it is a high-tech product. As a result, risk averse consumers will rate the product lower
than they would if they were perfectly informed. As more consumers adopt the innovation, word  of
mouth gradually reduces the uncertainty. Provided that the experience is positive, consumers increase
their product valuation, resulting in increased demand. Negative word-of-mouth obviously results in
reduced  demand.  Note  that  there  is  indeed  some  anecdotal  evidence  that  experience  effects  can  be
important for the adoption of electronic purses. In a paper on the VisaCash/Mondex trial in New York
(Van  Hove,  1999),  I  argue  that  the  failure  of  the  trial  was  due  in  part  to  a  combination  of  network
externalities and negative experience effects (generated, among other things, by the malfunctioning of
equipment at the start of the pilot).

In order to gather the empirical data for their study, Penz and Kirchler surveyed two sample groups
comprising  in  total  230  respondents.  One  sample  was  drawn  from  students  at  the  University  of
Economics  and  Business  Administration  in  Vienna;  the  second  consisted  of  respondents  from  four
selected  Austrian  towns  where  the  Quick  electronic  purse  was  introduced  very  early.  Respondents
were  presented  with  a  questionnaire  containing  various  sub-tests  on  three  occasions  –  with  a  time
distance of half a year.

The social representations theory was tested in two ways. Penz and Kirchler first used the so-called
associative network method. In this test, respondents were asked to freely associate words or thoughts
with the different means of payment. This resulted in no less than 4081 diverse words. This number
was  then  reduced  by  asking  two  independent  experts  to  assign  words  to  31  categories  (which  were
developed  on  the  basis  of  preliminary  in-depth  interviews).  Penz  and  Kirchler  then  measured  how
often  each  category  was  mentioned  for  each  means  of  payment,  and  subsequently  applied
correspondence  analysis  to  the  resulting  frequency  matrix.  The  final  results  are  presented  in  a  two-
dimensional graph. A first interesting finding is that the electronic purse was most often described by
words in the categories 'advertising', 'no user friendliness' and 'general negative aspects'. Of particular
interest is the fact that whereas "the means of payment 'ATM-card', 'credit-card' and 'cheque' lie close
to each other, indicating that they are perceived as equal", 'electronic purse' does not lie close to 'cash'
–  implying,  if  my  interpretation  is  correct,  that  the  electronic  purse  is  as  yet  insufficiently  seen  by
consumers as an alternative to cash. Finally, the respondents' associations were also judged as to their
negative, positive or neutral connotation. Unsurprisingly, the cheque and the electronic purse have a
negative 'polarity index', while the other means of payment are judged positively.

The  second  method  that  was  used  to  test  the  social  representations  theory  was  the  conceptual
network method. Respondents were now provided with 25 predefined concepts (such as 'risk', 'control',
'safety',  ...)  and  were  asked  to  connect  each  time  two  in  their  view  coherent  concepts.  Penz  and
Kirchler  then  analysed  the  similarities  in  the  respondents'  answers;  that  is,  they  measured  the
frequency with which couples of concepts appeared. Finally, the strongest links are presented in some
sort of 'tree' structure – with thin or thick 'branches' indicating the relative frequency of the links. The

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concept 'cash', for example, is connected to 'control', 'ATM-card' and 'consumption'. The credit card,
on  the  other  hand,  is  related  to  'consumption',  'high  reputation',  'wastefulness'  and  'loss  of  control'.
Strikingly,  the  electronic  purse  is  associated  primarily  with  'mistrust'  and  'loss  of  control'  –  and  not
with 'cash'. Indeed, in the tree structure 'electronic purse' does not lie close to 'cash', unlike the ATM
card.  In  short,  for  bankers  the  results  will  look  more  like  a  nightmare  than  a  dream...  Although  the
final  surveys  were  conducted in March  1998  so that  things  have  changed  in the  meantime,  it  is  not
particularly  encouraging  that  Penz  and  Kirchler  detect  hardly  any  change  in  consumer  perceptions
between  March  1997  and  March  1998.  As  an  aside,  attitudes  are  also  similar  in  the  two  groups
surveyed.

Somewhat surprisingly, Penz and Kirchler do not elaborate on the normative conclusions of their
results for electronic purse marketeers, whereas related remarks have  been  made  in  the literature  on
electronic purses. Suffice it to quote from my paper on the New York City trial: "The final lesson is
that in order to really 'bring stored-value cards to the top of U.S. consumers' wallets', issuers may still
have  a  fair  deal  of educating  to  do in  order  to  make  the  public  understand  the  real  value  of  stored-
value. Specifically,  what  should be  avoided  is  that consumers,  who  –  as  mentioned  earlier  –  appear
quite  content  with the  convenience  afforded  by  credit  and  debit  cards,  should  compare  stored-value
cards  to  the  former.  As  Good  (1998,  p. 16)  points  out,  "there  does  not  appear  to  be  a  significant
improvement in the consumer's perspective over the last payments innovation, the debit card". Indeed,
compared  to  debit  cards,  stored-value  cards  have  obvious  disadvantages  –  they  must  be  reloaded
periodically, there is the risk of loss and theft, users must keep track of the balance on their cards, and
they lose the float on their money (ibid., Table 7), while the advantages – no PIN is required (ibid.) –
appear  minor.  However,  stored-value  cards  should  not  be  compared  to  debit  cards,  but  to  cash.
Compared to cash, all the above disadvantages cancel out. At the same time, stored-value cards can
offer  important  improvements  over  cash.  Getting  this  message  across  may  be  another  reason  why
issuers of stored-value cards should perhaps concentrate, at least initially, on places which previously
only accepted cash (cf. supra)" (Van Hove, 1999).

To  conclude,  while  I  am  not  qualified  to  evaluate  the  psychological  theories  and  associated
techniques used by Penz and Kirchler, I found it a very interesting paper. In my view, its main merit
lies  in  the  fact  that  it  once  gain  shows,  but  in  a  novel  way,  that  the  adoption  and  use  of  electronic
purses depends to a  large  extent  on  consumer  perceptions.  On a  more  general  level,  the  paper is an
illustration of the fact that looking over the fence of one's own (sub-)field can be very inspiring and
that we all could benefit from more interdisciplinary work.

[info]
•  Good,  B.  A.:  Will  electronic  money  be  adopted  in  the  United  States?  Working  paper  9822,  Federal Reserve  Bank  of

Cleveland, 1998 http://www.clev.frb.org/research/workpaper/1998/

• Penz, E. and E. Kirchler: Is electronic money still part of the banker's dream? Paper presented at the IAREP (International
Association for Research in Economic Psychology) Conference in Baden, July 2000. Dr. Elfriede Penz's home page is at
http://www.wu-wien.ac.at/usr/imm/epenz/

• Van Hove, L.: NYC smart card trial: a research note, International Journal of Electronic Commerce, Vol. 5, No. 2, Winter

2000-2001, p. 119-131 http://cfec.vub.ac.be/cfec/abstract_NYC.htm

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ePSO Newsletter – Issue 5, February 2001

Focus: Internet Payment Systems (II)

[5&1]
Editorial: Tell Your Provider What to Pay and What Not
Arnd Weber (arnd.weber@itas.fzk.de), ITAS, Karlsruhe, Germany
/credit cards/electronic banking/electronic money/payment server

This  issue  focuses  on  Internet  payments.  The  possibility  to  cancel  a  payment  made  by  simple
transmission  of  a  credit  card  number  encourages  ecommerce,  but  is  also  costly.  Alternatives  are
reported, such as online banking, pre-paid cards or digitally signed payment  orders.  The issue  also
addresses redress in online banking. Furthermore, the Octopus purse scheme is analysed.

Imagine  a  wooden  counter.  The  seller  puts  the  goods  onto  it,  the  buyer  puts  the  cash  next  to  it.  In
Internet commerce, one thought one just has to mirror this. The goods were replaced with images and
descriptions of them which were sent to the buyer. The cash was replaced with a payment order, sent
to  the  merchant.  Sometimes,  electronic  cash  seemed  appropriate,  and  so  one  moved  tokens  around.
This approach of mirroring – more or less perfectly – is now being re-considered by the parties, and
this is becoming visible in Internet Payment Systems, which are the subject of our focus.

We start with some of the problems of trusting a remote merchant and  transmitting  a  credit  card
payment order. Rufus Pichler argues that the legal setting in the U.S. is very helpful to support B2C
Internet commerce. It allows consumers to freely surf and buy on the WWW. Pichler argues that in the
absence of rights to undo a transaction, consumers will take up Internet commerce more slowly, as is
happening in Europe.

However,  cancellations  mean  costs  to  the  merchant.  In  a  certain  number  of  cases,  such  as  with
“adult” information, consumers may sometimes pretend to be a victim, in others certainly not. We do
not have figures on that. Anyway, high fees and/or chargebacks exist. There are some basic ways for
the bank to deal with them. (1) Use digital signatures, as with full SET. That requires installation of
code, registration, etc. Now that the position of the supply side of B2C Internet commerce has been
weakened, that code is more difficult to deploy than ever. (2) Use pre-paid cards, which is great for
porn and gambling. (3) Ask the consumers to give the payment order directly to the bank.

All these solutions have in common that they can reduce the number of disputed transactions. They
don’t really help if the merchant fails to deliver. Here the wooden counter is missing, and difficult to
replace with technical means.

Regarding  the  strategy  to  send  payment  orders  to  the  bank,  Tuomas  Salste  reports  from  Finland
how this takes place. We see that the wooden counter at the merchant’s gets replaced with a brand the
parties trust.

When describing the Italian situation, Piero Bucci makes the alternatives visible. The banks have to
continue to support SSL. For an immediate solution for risk averse or anonymity seeking customers,
they  started  issuing  “virtual”  prepaid  cards.  Proposals  for  digital  signatures  are  not  dead,  however.
Banks are considering the issue of EMV-compliant postpay cards providing digital signatures. Also,
non-banks are entering the payment market, planning for a comprehensive payment service, including
signed orders.

There is no need for a payment provider to only accept orders from bank account holders. Money
from  “unbanked”  persons,  such  as  children,  is  also  money.  A  payment  service  provider  can  accept
orders  to  pay  from  every  customer,  whether  pre-  or  postpaid.  There  is  not  even  a  lower  limit  to
transaction values. The telcos earn money while counting ticks in the range of a cent – why not extend
this service to the benefit of other payees? This vision becomes visible in Erik Dahlström’s description
of  the  Jalda  payment  server.  In  the  basic  procedure,  the  user  sends  a  PIN  to  a  server  –  the  mobile
phone  being  the  ideal  basis.  Again,  the  wooden  counter  is  being  replaced  by  a  brand  offering  the
service.

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While the telcos  successfully  market  their  pre-paid  cards,  which  are  rather  special  accounts,  one
may  believe  that  token-based  electronic  cash  such  as  on  smartcards  has  proven  to  fail  to  replace
traditional  cash.  However,  there  is  a  small  place  in  Asia  in  which  electronic  cash,  anchored  in  a
transport application, is used very frequently. Have a look at my article about the Hong Kong Octopus
system.

All  these  prepaid  cards,  whether  token-based  or  “wireless”,  show  that  there  is  demand  for  some
sort of electronic money. A cheap payment instrument, suitable for low value transactions, children,
etc.  is  sought.  As  other  payment  technologies  evolve,  too,  there  is  a  whole  new  wave  of  payment
instruments arriving. This is analysed by David Birch in his interview.

Finally, Leo van Hove reminds every designer to think about customer redress in case something
goes wrong. He reviews papers written by Brian Mantel from the Federal Reserve Bank of Chicago.
Mantel argues if  you  roll-out  payment  systems  without  sufficient  means  of  control  by  the  user,  you
risk low acceptance. So the bracket around all articles is: the trust relationship between the payment
service  provider  and  the  consumer  is  a  great  basis  for  the  whole  transaction,  but  requires  servicing
both the merchant and the consumer.

Thanks to the feedback provided by our correspondents, we will continue discussing both Internet

payments and electronic money in the next issue.

[5&2]
Finality of Credit Card Payments and Consumer Confidence – Different Approaches in
the United States and in Europe
Rufus Pichler (rpichler@mofo.com), Attorney at Law, Morrison & Foerster, LLP, San Francisco, CA, USA
/Internet payment systems/credit cards/law/consumer adoption/USA

The lack of consumer confidence in the electronic marketplace is generally viewed as one of the main
reasons why business to consumer electronic commerce in Europe is far from meeting expectations.
Although  many  e-tailers  are  currently  struggling  in  the  U.S.  as  well,  online  merchants  in  the  B2C
sector apparently do significantly better than their European peers. One reason for these differences
seems  to  be  that  consumers  in  the  U.S.  are  much  more  comfortable  with  using  their  credit  card  in
online  transactions.  The  higher  level  of  consumer  confidence  in  the  U.S.  may  in  part  be  due  to
differences in existing credit card regulation. Online merchants and payment providers may, in fact,
need to reconsider whether finality or non-repudiation of payments should always be the primary goal
with respect to online payment mechanisms.

1. The Merchants’ Concern

One  of  the  main  concerns  of  many  online  merchants  appears  to  be  finality  or  non-repudiation  of
payments.  Unauthorised  use  of  credit  card  data  by  fraudulent  consumers  in  online  transactions  is
without  doubt  a  problem,  and  the  legal  framework  both  in  the  U.S.  and,  e.g.,  in  Germany  clearly
suggests that the merchants’ concerns are well founded. Generally they will have to bear the risk of
loss in the event of such unauthorised use of credit card data.

In the U.S. the use of credit cards is heavily regulated, mainly by the Truth-in-Lending Act (TILA)
and the Federal Reserve Board’s Regulation Z. In the event of an unauthorised use of a credit card or,
in the online context, the card data by a third party the cardholder’s liability is generally limited to a
maximum  of  US  $50.  One  condition  for  imposing  even  this  limited  liability  on  the  cardholder,
however, is that the card issuer has provided a means to identify the cardholder, such as a signature,
photograph,  or  fingerprint  on  the  card.  In  transactions  in  which  the  card  itself  is  not  physically
presented, such as mail order, telephone order or online transactions, this condition is not met, since,
as the official staff interpretations of the applicable rule point out, “the issuer has not provided a means
to  identify  the  user  under  these  circumstances”.  Therefore,  if  a  cardholder’s  credit  card  data  is
compromised  in  an  online  transaction,  the  cardholder  is  –  as  matter  of  law  and  not  as  a  matter  of

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courtesy  by  the  card  issuer  –  not  liable  at  all,  not  even  for  US  $50.  In  this  respect,  statements  of
merchants  and  card  issuers  are  rarely  as  clear  as  a  comment  by  Sean  Healy,  spokesman  for  VISA
USA, who acknowledged that in  most  cases there  will  be “no  consumer  liability”.  As  between  card
issuer  and  merchant,  contractual  agreements  typically  shift  the  risk  of  an  unauthorised  use  absent  a
physical presentation of the card and absent a sales slip signed by the card user to the merchant.

European  law  leads  to  the  same  result.  Art.  8  of  the  European  Distance  Contracts  Directive
addresses  payments  by  card.  It  obligates  Member  States  to  afford  consumers  the  right  (that  in  fact
already exists in most Member States) “to request cancellation of a payment where fraudulent use has
been made of his payment card in connection with distance contracts covered by this Directive” and
“to be recredited with the sums paid or have them returned.” Thus, in the event of an unauthorised use
of credit card data the consumer can only be held liable if her negligent conduct caused the misuse.
However, the transmission of credit card data over the Internet, even over insecure channels, cannot be
deemed to constitute negligent behaviour on the part of the cardholder. Consequently, as in the U.S.,
the  European  cardholder  is  generally  not  liable  for  an  unauthorised  use  of  her  card  data  in  online
transactions. And as in the U.S., contractual agreements between card issuer and merchant ultimately
allocate the risk to the merchant.

It becomes apparent, that the fact that the security and misuse of credit card data is often found to
rank  among  consumers’    most  frequently  expressed  concerns  is  mostly  due  to  a  common
misconception of the legal risk allocation in such cases. That these concerns nevertheless seem to be
an important inhibitor of consumer confidence is most likely the result of widespread confusion and a
lack  of  education.  From  a  legal  point  of  view,  these  concerns,  when  expressed  by  consumers,  are
irrational. To this background, recent “waivers” of the US $50 liability by major credit card companies
are—in  the  online  context—nothing  more  than  clever  marketing  campaigns.  As  shown  above,  with
this “waiver” the companies are not giving anything up other than what they would not be entitled to
in the first place.

Concerns  about  unauthorised  use  of  credit  card  data  are,  of  course,  completely  legitimate  if
expressed by merchants; and they are obviously driving the development of technologies that aim to
reduce such unauthorised use (including well developed address and credit verification systems in the
U.S.). However, merchants would be well advised to think about the consumers’ concerns as well.

2. The Consumers’ Concern

Consumers face a variety of scams and fraudulent “merchants” on the net. Besides many others, there
are cases in which the goods or services the consumer paid for are never delivered. Since setting up an
online “shop” – which  potentially  reaches  a  global  market  –  requires  next to  no start-up  investment
and incurs very low operating costs, the Internet appears to provide an almost perfect environment for
scams of this kind.

And even when a merchant is not actually acting fraudulently, it will have to be conceded that from
time  to  time  things  go  wrong  in  cross-border  transactions.  Goods  might  arrive,  but  they  may  be
defective or otherwise unsatisfactory, and they might arrive late. In all these cases it is the consumer
who will have to take action to get her money back.

These examples are by no means purely theoretical. A study by Consumers International, in which
researchers  from  11  countries  placed  a  total  of  151  orders  from  sites  in  17  countries  between
November 1998 and February 1999 found that 9% of the goods ordered never arrived; that in 20% of
cases the amount actually charged was higher than the  purchaser expected;  and  that,  where  a return
was possible, there were problems in obtaining a refund of the purchase  price  in 21%  of  purchases.
According  to  another  survey,  which  was  supported  by  the  European  Commission,  an  even  higher
percentage  of  goods  –  18.1%  –  never  arrived,  and  of  the  goods  that  did  arrive,  7%  were  either
damaged or late; 27.8% of customers who returned goods did not receive a refund; and in 6% of the
cases in which payment was made by credit card, the account was charged but the goods were never
delivered.

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

- 74 -

Credit card regulation in the U.S. and in Europe deals with these problems, i.e. an authorised use of
the credit card by the actual cardholder and fraudulent conduct or other failure to meet its obligations
by the merchant, in very different ways.

Under  German  law,  e.g.,  the  card  issuer  may  ignore  any  defenses  or  claims  of  the  cardholder
arising out of her transaction with the merchant. The cardholder is liable for the amount charged when
she  authorised  payment.  If  the  cardholder  ever  receives  the  goods  she  paid  for,  if  these  goods  are
defective, or if there are any other problems in the transaction between cardholder and merchant does
not  concern  the  card  issuer.  It  is  a  problem  to  be  resolved  solely  among  the  cardholder  and  the
merchant.  Due  to  the  relatively  small  value  of  consumer  transactions,  legal  remedies,  such  as  court
action, that may be available to the consumer in theory, are hardly ever efficient in practice. Therefore,
as  a  matter  of  fact,  effective  consumer  redress  too  often  does  not  exist.  Arguably  this  absence  of
effective consumer redress is one main reasons responsible for the lack of consumer confidence in the
electronic marketplace.

The  situation  in  the  U.S.  is  very  different.  As  indicated  above  the  use  of  credit  cards  is  mainly
regulated by TILA and Regulation Z. Unlike in Germany, these regulations go beyond protecting the
consumer  from  liability  for  unauthorised  use  of  her  credit  card  or  credit  card  data.  Regulation  Z’s
billing  error  resolution  procedure  allows  the  consumer  to  contest  a  billing  statement  that  reflects  a
charge  for  property  or  services  not  accepted  by  the  consumer  or  not  delivered  to  the  consumer  as
agreed.  If  this  error  is  ascertained  in  the  resolution  procedure,  the  card  issuer  has  to  credit  the
consumer’s  account  with  the  disputed  amount  (chargeback).  One  important  consequence  of  this
procedure is that it protects the consumer against being charged for goods or services that she never
received or that were otherwise not delivered or performed as agreed. The procedure affords cheap and
effective redress to consumers who did not get what they paid for with their credit card.

This  chargeback  mechanism  in  U.S.  credit  card  regulation  is  unique  in  two  regards.  It  does  not
exist anywhere else in the world, and even in the U.S. it does not apply to any other payment system.
While the credit card regulations in most countries are similar with respect to unauthorised payments,
they  are  not  with  respect  to  transactions  that  go  wrong  although  a  payment  has  actually  been
authorised by the consumer. Under the laws of other countries the cardholder may be charged by the
card issuer regardless of whether she actually receives the goods she paid for.

The crucial middle position of payment intermediaries and their ability to guarantee effective and
cheap  redress  to  consumers  and  thereby  foster  consumer  confidence  suggests  that  the  adoption  of
chargeback  regimes  presents  a  policy  alternative  worth  considering.  Consumers  as  well  as  (honest)
merchants could potentially benefit.

[info]
• Australian  Competition  &  Consumer  Commission,  The  Global  Enforcement  Challenge:  Enforcement  of  consumer

protection laws in a global marketplace (Aug. 1997), http://www.accc.gov.au/docs/global/front.htm

• Consumers  International,  Consumers@shopping:  An  international  comparative  study  of  electronic  commerce  (1999),

http://www.consumersinternational.org/campaigns/electronic/e-comm.pdf

• Fraud continues to deter e-shoppers, IT-Analysis.com (Nov. 22, 1999) http://www.it-analysis.com/99-11-22-2.html
• Jupiter  Communications,  Press  Release,  64  Percent  of  Online  Consumers  are  Unlikely  to  Trust  a  Web  Site  (Aug.  17,

1999) http://www.jup.com/

• Carl S. Kaplan, On the Web, It’s Buyer Beware. But Where?, N.Y. TIMES, CYBER LAW JOURNAL (March 26, 1999)

OECD, Consumer Redress in the Global Marketplace: Chargebacks, OCDE/GD(96)142,
http://www.oecd.org//dsti/sti/it/consumer/e_96-142.pdf

• Rufus Pichler, Trust and Reliance—Enforcement and Compliance: Enhancing Consumer Confidence in the Electronic

Marketplace (2000), http://www.law.stanford.edu/library/special/rufus.thesis.pdf or
http://www.oecd.org/dsti/sti/it/secur/act/online_trust/Consumer_Confidence.pdf

• Stiftung Warentest, Electronic commerce in Europe (Sept. 1999)

http://europa.eu.int/comm/dgs/health_consumer/library/surveys/sur11_en.pdf

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

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[5&3]
Internet Payment Systems in Finland
Tuomas Salste (tuomas@salste.net), Helsinki, Finland
/Internet payment systems/credit cards/SET/server wallets/SSL/online banking/Finland

In Finland, for consumer payments to Internet merchants, online bank transfer is the most frequently
used method, followed by credit card payment. The article analyses the methods used today, as well as
technologies currently being developed, such as SET Server Wallets. It is concluded that these means
will lead to decreasing effects of consumer security fears, and thus facilitate further growth of Internet
commerce.

Finland is one of world's leading countries in density  of  Internet servers  and  Internet  users.  Internet
banking  is  extremely  popular.  Despite  these  facts,  electronic  commerce  on  the  Internet  has  not  yet
become overly popular. While 20 % of the population have visited an online shop, less than 2 % make
online purchases more often than once a month. It is said that one of the obstacles is the perceived lack
of security, especially what comes to making payments online.

There  are  two  types  of  Internet  payment  systems  that  are  of  practical  importance.  One  is  online
bank transfer, and the other is credit card. Online bank transfer currently has a much wider acceptance
in terms of number of merchants and consumers.

There  have  been  experiments  with  other  online  payment  systems,  such  as  DigiCash  eCash,  the
Avant smartcard (epurse), and the Money-Penny account-based system, which have not achieved any
commercial success and are thus left out of this article.

Online Bank Transfer

Online  bank  transfer  is  currently  available  from  five  banks:  Merita,  Osuuspankki,  Leonia,
Säästöpankki and Paikallisosuuspankki. Together these banks serve almost all Finnish consumers. The
number of Finnish Internet shops utilising online bank transfer is quickly approaching 500. About 1.6
million  consumers,  of  a  total  population  of  5  million,  have  a  contract  with  their  bank  to  use  online
banking services.

A payment via online bank transfer uses the same systems as conventional online banking, offering
bill payment, buying & selling stock, negotiating a loan, and the like. Online bank transfer is just an
addition  to these  services.  That  explains  the  high  number  of  customers  reachable  with  this  payment
method.

The Payment Process in Practice
The customer visits a web shop. When she is placing the order, the shop asks which bank to use. The
shop  redirects  the  customer's  web  browser  to  the  selected  bank  along  with  transaction  data  such  as
total amount and merchant account number.

The  customer  logs  into the  online bank  system.  The  bank  system  asks  the  customer  to  authorise
payment  of  the  given  amount.  If  authorisation  is  received,  the  requested  amount  of  money  is
immediately transferred from the customer's account to the merchant's. After successful payment, the
bank's web system redirects the customer's browser to a URL on the merchant's site. This URL may
include  data  to  prove  that  the  customer  actually  made  the  transfer.  After  this,  the  merchant  should
deliver the order.

All web traffic is secured with SSL. In addition, the merchant is identified by the bank (by message
authentication code MAC). The bank identifies the customer by a customer identity and a transaction
number.  Having  done  this,  the  customer  keys  in  another  transaction  number  to  authorise  the
transaction. The method to choose a transaction number varies by bank.

At Osuuspankki the customer is also able to log in and authorise payment by using a smartcard and
a card reader. The cards are supplied by the Finnish police since December 1999. The electronic ID
cards are not common yet, and are thus not required to make a payment.

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

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Pros and Cons
Online  bank  transfer  is  very  good  from  the  merchant's  point  of  view  because  payment  precedes
delivery. The payment is irrevocable. The customer, however, pays in advance without any proof of
delivery.  If  the  delivery  doesn't  arrive,  she  doesn't  have  a  way  to  get  her  money  back.  That  is  why
online bank transfer is not suitable for all situations.

There is another problem. The merchant must have an account at every bank. The current systems
don't allow cross-bank payments. (Säästöpankki and Paikallisosuuspankki are an exception: they share
their online systems.) In order to serve the majority of consumers, the merchant must set up an account
and online system to 4 banks! Fortunately, the systems are technically fairly similar.

The costs to receive online bank transfers are reasonable. There is a one-time fee of 170 Euros per
bank, and a monthly fee of 1.70 to 25 Euros (varies by bank). It costs a fixed 0.33 Euros to receive one
payment. This makes it feasible to accept payments of    2 Euros or more.

Online Credit Card Payments

Credit  card  payments  have  been  under  a  security  debate  for  years.  The  security  concerns  led  to  a
situation where there was no practical way to pay or accept payment via credit card. The situation has
changed. It is now possible for merchants to accept credit card payments online for Visa, Eurocard and
Mastercard.

International credit cards are not as popular in Finland as they are in France or the UK. With 225
cards per 1000 inhabitants Finland is at about the same level as Germany or the Netherlands. About
90% of all cards carry the Visa brand. Currently there are about 250 online merchants accepting Visa,
MasterCard and Eurocard.

The  acquirer  for  Visa,  Eurocard  and  MasterCard  is  Luottokunta,  owned  by  the  Finnish  banks.

Credit card payments are possible via SET, SSL or, in the case of Leonia, online banking.

1. SET payments
To make a payment, the customer uses SET Wallet software. The wallet stores the customer's credit
card  details,  digitally  signs  the  payment  order  and  encrypts  the  communication.  The  software
installation process is somewhat cumbersome.

The installation problems will be solved in 2001 when banks are expected to deliver a new solution
to  SET.  The  solution  is  called  a  Server  Wallet.  The  wallet  software  runs  on  a  bank's  server  which
produces the digital signature on behalf of the customer. The customer will log into the software by
using her PIN code.

2. SSL payments
In  1999  it  became  possible  to  accept  credit  card  payments  using  SSL.  In  this  option,  the  customer
types in her credit card number and expiration date on a web form. Optionally, she also types in a 3-
digit Card Identification Number. This number is printed on the card, but is not yet widely known by
customers.

There is an inherent drawback in SSL card  payments.  It  is  the inability  to  identify  the  customer.
The customer might give someone else's credit card data. The security problems have not been serious
in  practice.  However,  the  fear  of  such  problems  is  effectively  preventing  many  merchants  from
accepting SSL payments, and many customers from making them.

3. Credit card payments via online banking (case of Leonia)
The  newest  ingredient  in  the  card  soup  is  a  combination  of  online  banking  and  credit  cards.  This
system is available from Leonia Bank since May 2000.

The  Leonia  solution  is  actually  an  extension  to  their  online  bank  transfer  system  (Leonia
Verkkopankki).  The  customer  logs  on  as  described  earlier.  Instead  of  making  an  immediate  bank
transfer from account to account, the customer authorises the merchant to charge her credit card. No
credit card numbers are transferred online, as the bank knows the customer and her credit card details.
The benefit of this system is that the customer is identified by Leonia. The solution is not in wide
use yet. Its drawback is that it requires both the merchant and the customer to have a relationship with
Leonia. No other bank has announced any plans for a similar solution.

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

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The costs to receive credit card payments in all scenarios is 1.15% of the total sum received, plus

an initial fee of 117 Euros.

Conclusion

Online bank transfer and credit card payments offer a good variety of options for security conscious
customers and merchants. In my opinion, for making purchases of 2 Euros or more, no other online
payment systems are required for Internet commerce to succeed in Finland. The only missing pieces
are the ability to make very small payments and mobile ones.

[info]
•  Finnish banks

Merita: http://www.merita.fi/e
Osuuspankki: http://www.osuuspankki.fi
Leonia: http://www.leonia.fi/english/
Paikallisosuuspankki: http://www.paikallisosuuspankit.fi
Säästöpankki: http://www.saastopankki.fi/en/index.html

•  Credit cards

Luottokunta: http://www.luottokunta.fi
SET: http://www.setco.org

• Other systems

Avant: http://www.avant.fi
Money-Penny: http://www.money-penny.com
DigiCash: http://www.digicash.com (cf. http://www.ecashtech.com)

[5&4]
Internet Payment Systems in Italy
Piero Bucci (p.bucci@computer.org), Rome, Italy
/Internet payment systems/SET/SSL/online banking/Italy

The paper describes the present situation of the Italian market concerning Internet payment systems. It
points out that credit card data encrypted with SSL are the dominant payment method. SET and SET
Light (without cardholder signature) have not been adopted much. The Mover payment provider aims
at  selling  smartcards  for  digitally  signing  payment  orders,  such  as  credit  card  orders.  Meanwhile,
banks have started issuing virtual prepaid card numbers to limit consumer risk.

B2C e-commerce

The  Internet  is  increasingly  used  to  offer  products  and  services.  During  the  last  year,  in  Italy,  the
number of Internet users has reached 11 million (19 % of the population) and has brought Italy to be
the  fourth  country  in  Europe.  According  to  the  “shoplab.it”  observatory,  the  business-to-consumer
electronic  commerce,  at  the  end  of  last  year,  reached  410  million  Euros,  with  more  than  6,000
companies offering products and services.

Information and communication technologies are also creating important opportunities for payment
systems, making them more beneficial for the new economic scenery. The use of credit and debit cards
continues to grow.

SSL for Credit & Debit Cards

At  present,  the  dominating  Internet  payment  system  in  Italy  is  TELEpay  Light,  realised  by  SSB
(Società  per  i  Servizi  Bancari),  which  is  owned  by  Italian  banks.  SSB  is  active  in  the  creation  and
management of information systems for Italian banks in the areas of payment systems, processing of
credit and debit cards, corporate remote banking, and digital signature services. SSB is also one of the
7  Certification  Authorities  registered  in  the  AIPA  list,  the  Italian  Authority  for  Information
technologies in the Public Administration.

TELEpay  Light  ensures  data  confidentiality  since  it  is  based  on  SSL  128-bit  cryptography  and
enables the customer,  after  he/she has clicked  on the  payment  button at a  virtual  shop,  to  insert  the
credit card data in an HTML form, transmit it to SSB and receive the related message on the outcome.

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

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A merchant who wishes to join TELEpay Light must be approved by a member bank and must reach
agreement with the latter on the method of managing the virtual shop, the authorisation methods and
the best suited accounting process. At the end of January 2001 there were about 500 Italian merchants
in operation with TELEpay Light. More than 50 Italian banks offer TELEpay Light to their customers.
Another  interesting  Italian  Internet  payment  system  is  @Pos,  also  developed  by  SSB.  @Pos
consists  of  a  virtual  POS  application  that  makes  it  possible  to  forward  payment  requests  to  the
authorisation circuits, encrypted with SSL. In the Italian market, more proprietary systems, based on
SSL, are present. Typically these are Internet payment solutions developed by a single company or a
consortium owned by a certain number of Italian banks.

Digitally Signed Bank Payment Instruments

In  the  case  of  SET,  the  first  Italian  companies  which  have  obtained  the  certification  from  Europay,
VISA  and  Mastercard  as  a  SET  Payment  Gateway  Service  Provider  have  been  SSB  and  Banca
Antonveneta.  Today  other  financial  institutions,  mainly  the  major  Italian  banks,  offer  SET-based
solutions both for the B2C and B2B market segments.

The  financial  institutions,  operating  on  their  own  or  through  SSB  as  Payment  Gateway  Service
Providers, offer their services as an interface between merchants and the acquirers that operate in the
SET world. The Payment Gateway receives the transactions from vPOS (virtual software point of sale
terminal) installed at the merchant’s premises and ensuring correct management of the SET protocol.
The buyer can make his purchases using the following methods:
•  Full SET: The buyer uses his or  her  digital  signature  and  the  SET  certificate  issued  by  the  card
issuer. In this case authentication of the buyer by the system and “non-repudiation” of transactions
carried out is guaranteed;

•  SET Light: If the buyer does not have a certificate, he/she can use the SET infrastructure, since the
merchant’s  software  is  able  to  accept  non-authenticated  transactions.  In  case  of  dispute,  the
transactions executed in this manner can be rejected.

The merchant has to be equipped with a vPOS, and with a SET certificate issued by the acquirer.
The buyer must be equipped with a SET-compliant software wallet. The adoption of the SET standard
is expected to give a strong boost to electronic commerce because it creates a climate of trust and a
proper  relationship  between  buyers,  sellers  and  financial  entities  such  as  to  assure  successful
completion of transactions. Market adoption is still quite small. Note that migration towards EMV by
2005 will allow banks to include digital signature capabilities into their cards.

Movercard: a Smartcard for Internet Payments

Another Italian Internet payment mean is Movercard, realised by Mover (www.mover.it) a new Italian
non-bank company. The Movercard user must register himself on the Mover Internet site. After that
he/she receives the contract together with two envelopes: one to send back the credit card number and
another one for the expiration date as well as the personal information (name, address, tel. etc). After
delivery of these elements to Mover and a payment of 120,000 Liras (62 Euro), the customer receives
the Movercard kit. This is composed of the Movercard smartcard (that is a payment card for use only
on the Internet) for digitally signing, the signed copy of the contract and a simple smartcard reader for
the PC. At this point the customer is ready to operate. He/she can buy products and services offered by
merchants  who  have  an  agreement  with  Mover.  To  use  the  system  it  is  sufficient  to  insert  the
Movercard in the reader and enter the assigned PIN. The payment will be transferred to the merchant
by Mover (Mover also acts as an Internet payment gateway provider in connecting merchants to card
acquirers). In short, the Movercard is the first non-bank smartcard to use online security that does not
need  participation  from  a  card-issuing  financial  institution.  Because  merchants  never  see  or  store
consumers'  payment  card  numbers,  the  risk  of  theft  is  minimal,  while  buyers  are  identified  using  a
PKI. The company plans to reach 200,000 customers during 2001. In the near future Mover plans to
extend the system for debit card and bank transfer.

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

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Prepaid Card Moneta Online

Banca  Intesa, together  with  Setefi and  Visa  Europa,  have  recently  launched  in  Italy  Moneta  Online
(www.monetaonline.it), which is a prepaid card (for 50, 100, 200 Euro). Moneta Online is delivered to
the user (not necessarily a customer of Intesa banking group) with an identification code and password
necessary to activate the service through the Internet site. The site furnishes to the user a virtual Visa
Electron  card  number  that  will  have  a  limited  temporal  validity  and  it  will  be  usable  for  only  one
Internet  transaction.  The  cost  of  the  service,  independently  of  the  value  of  the  card  and  from  the
number of the effected operations, is 10,000 Liras (5 Euro) per each prepaid card, plus a 30,000 Liras
(15 Euro) fee for registration.

With Moneta Online a virtual card number is activated in order to shelter buyers from the possible
risks of a fraudulent use of their own credit card. The service guarantees security when buying from
Internet merchants that accept the Visa International and Moneta card. To activate Moneta Online it is
sufficient to visit the Internet site, to input the code and to  modify  the initial password. The  system
will furnish the Visa virtual number, that will have a limited temporal validity and it will be usable for
only one operation. In such way it is possible to avoid input of the number of one’s own credit card.
The amount of activated virtual card numbers cannot exceed 300 Euros. In every moment, up to one
year  after  the  end  of  the  service,  it  will  be  possible  to  request  the  reimbursement  of  the  remaining
amount. Moneta Online is available in all Intesa branches and soon in authorised shops.

Online Bank Transfer

Another Internet payment system used in Italy is online bank transfer. At the end of the year 2000, the
number of active Internet banking users has reached 500,000.

Conclusion

Companies and private users face an exciting and potentially profitable period of swift development of
and experimentation with Internet payment systems. It is therefore in the interest of the enterprises and
consumers that Internet payments systems develop in order to create  the  needed trust  on  the  market
that is the only guarantee of real development and establishment of eCommerce.

 [Info]
• Information  on  Internet  use  and  e-commerce  from  USIC  Report  2000  (http://www.usic.org/),  NUA  Internet  Surveys

(http://www.nua.ie/surveys/), Gartner Group http://www.gartner.com, and http://www.shoplab.it

• The  Banca  d’Italia  has  the  web-site  http://www.bancaditalia.it/,  Associazione  Bancaria  Italiana  has  the  web-site

http://www.abi.it/

• You find information on SSB at http://www.ssb.net and on AIPA at http://www.AIPA.it/
• Information on Mover at http://www.mover.it, on Moneta Online at http:www.monetaonline.it

[5&5]
The Jalda Payment Method
Erik Dahlström (erik.dahlstrom@ausys.se), AU-System AB, Gothenburg, Sweden
/Internet payment systems/payment server/mobile payments/pre-paid cards/SET
/Sweden

Jalda is a flexible account-based payment method, using a payment provider server, a merchant API
and secure client authentication. Jalda can handle different kinds of payments, such as pre-paid and
credit  payments,  and  even  payments  for  GPRS-services.  It  has  been  developed  by  EHPT  (Ericsson
Hewlett-Packard Telecommunications). It will be used in the Telia PayIT payment service.

What is Jalda?

Jalda is an old Scandinavian word for pay. The word has come to life again through Jalda, the Internet
payment method developed and promoted by  EHPT.  EHPT  is  a joint  venture  between  Ericsson  and
Hewlett  Packard.  Rather  than  being  a  new  payment  system,  Jalda  defines  a  method  for  Internet

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

- 80 -

payments.  Payment  operators  and  provides  can,  based  on  the  Jalda  payment  method,  develop  and
brand their own payment systems.

EHPT’s  payment  server  based  on  Jalda  is  called  EHPT  Safetrader.  Ericsson  has  also  developed

payment software based on Jalda called Mobile e-pay.

EHPT  aims  to  make  Jalda  a  global  de-facto  standard  for  secure  Internet  payments.  This  is  to  be
achieved  by  partnering  with  Payment  Providers,  which  in  turn  will  sign  up  Content  Providers
(merchants).  Although  Jalda  is  a  non-proprietary,  open  system  enabling  a  flexible  payment  method
this is a rather ambitious goal.

So far five payment providers are offering (or about to offer) Jalda-based Internet payments. Telia
(Swedish mobile operator), World Online (UK-based ISP, offering a scratch card), Lombardia (Italian
web directory service), Wish (Dutch ISP) and Auria (Finish ISP).

How does Jalda Work?

Three parties are involved in the Jalda payment process.

a) A  Payment  Provider,  such  as  a  bank,  mobile  operator,  Internet  Service  Provider  or  credit-card
company.  Ideally,  the  Payment  Provider  is  an  entity  with  existing  billing  relationships  to  a
customer group.

b) A Content Provider, such as an Internet merchant. Signing up with a Payment Provider enables the
Content Provider to offer its services to all customers of the Payment Provider. Jalda also supports
Payment  Provider  “roaming”.  This  enables  different  Payment  Providers  to  connect  to  each  other
and open up for cross purchasing.

c) The customer.

The  payment  process  starts  with  the  customer  making  a  purchase  request  with  the  Content
Provider.  The  Jalda  Application  Programming  Interface  is  a  module  incorporated  with  the  content
provider’s  chargeable  service.  The  API  processes  the  purchase  request  by  transmitting  it  to  the
Payment  Provider.  The  Payment  Provider  then  charges  the  customer,  after  taking  a  commission  or
deducting a fee. Finally, the Payment Provider transacts the payment to the Content Provider.

Jalda is an account-based payment method using digital certificates for authentication and digital
signing. Purchases can therefore be done without any need to send credit-card details over the Internet.
For payments over the Internet from  a  PC,  the  secret  key  is  stored  on  the  hard  drive.  For payments
using mobile phones, the secret key is stored centrally with the Payment Provider. The user authorises
a transaction using a PIN.

A Flexible Solution

One  of  the  advantages  of  the  Jalda  payment  method  is  its  flexibility.  Jalda  is  an  account-based
payment method, enabling both pre-paid and credit-based  payments.  The  accounts  are  managed  and
held by the Payment Provider and the Payment Provider usually acts as the certificate authority.

Second, Jalda  can  be used for  normal  payments  as  well  as  micro-payments.  The  payment  server
registers a small amount and value spent is aggregated to either make up a normal billing transaction,
or a deduction from the pre-paid account.

Third, the Jalda system can charge for different types of products. It charges a user based on so-
called “ticks”. These ticks support various different types of “charging”, enabling the Content Provider
to  choose  in  what  way  it  wants  to  charge  the  customers.  Ticks  can  be  measured  in  the  amount  of
information  downloaded,  time  online,  number  of  mouse  clicks,  number  of  searches,  what  levels,
number of data files (such as articles), airtime, an similar. Particularly interesting is perhaps the ability
for a 3G mobile operator to use Jalda to charge for data packets (of for instance voice, data and video)
and 3G services.

Finally,  Jalda  supports  purchasing  using  various  devices  connected  to  the  Internet  such  as  PCs,

mobile phones and PDAs.

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Jalda vs. SET

The main difference between SET and Jalda is that SET primarily constitutes a secure replacement of
the use of credit cards, whereas Jalda works for smaller payments as well.

Second, the process of registering new users is different. SET requires the user to register, he will
then receive a CD with the software  (this  is  how  it  works  in  Sweden), install  and  then  use  his  SET
wallet. This has been one of the main drawbacks of SET so far. In a way, this speaks for the Jalda-way
when comparing the two.

One similarity though, is that the use of credit card numbers is not needed, making both methods
more secure. Possibly, SET would benefit from further development making it more like Jalda. SET
has the big advantage of having credit card-companies and banks behind it, but the big disadvantage of
the fact that nobody wants to use it. A server-side wallet with easier registration would promote SET.

One  disadvantage  of  Jalda  is  that  it  supports  cross  purchasing,  but  it  does  not  enforce  it.  Two
payment  providers  therefore  need  to  make  an  agreement  before  the  respective  users  can  purchase
goods from the other payment provider’s merchants.

Example – Telia PayIT

Swedish mobile operator Telia will soon launch the PayIT payment service. PayIT will enable Telia
subscribers to pay for digital goods on the Internet, including goods for a few Swedish ore to a few
hundred  kronor  (a  few  dozen  Euros).  There  are  two  ways  for  Internet  shoppers  to  pay  with  PayIT.
Users  can  use  “PayIT  account”  which  uses  a  pre-paid  account  type  of  Jalda.  Users  make  an  extra
payment  on  the  Telia  phone  bill,  to  the  PayIT  account.  To  register  for  the  PayIT  account  the  user
needs to  call  from  a  modem/phone  line. The  server  will  then  register the  number that  the  user calls
from and set the account up based on this phone number. “PayIT phone bill” is not based on Jalda, but
on the Seattle-based payment company eCharge. Purchases are registered as premium-rate phone calls,
enabling the billing of users via their phone bill. To enable this, the user needs to be connected using a
modem/phone line (i.e. no fixed connection or cable-TV connection).

The Future

Whether Jalda  will  become  the  de-facto  standard for  Internet  payment  or  not  depends  as  always  on
penetration. The interesting issues speak in favour of Jalda, though. First, Jalda is open for suppliers to
develop  solutions  for.  Second,  Jalda  addresses  Payment  Providers  as  banks,  mobile  operators,  ISPs
and similar entities. They possess something very valuable in the area of Internet payments – a large
customer base, which they have a billing and trust relationship with. Third, Jalda is a method enabling
mobile operators to charge for the next generation of packed-switched data. Providing 2.5G (GPRS)
and  3G-services  eventually  will  enable  mobile  data  to  reach  the  popularity  of  Japanese  i-mode,
charging for these services will be a central issue. A method (such as Jalda pre-paid) supporting the
youth segment (which often is unable to open credit accounts) is likely to reach greater penetration.

[info]
•  http://www.echarge.com
•  http://www.jalda.com

[5&6]
High Number of Electronic Cash Transactions in Hong Kong Octopus System
Arnd Weber (arnd.weber@itas.fzk.de), ITAS, Karlsruhe, Germany
/electronic purse/public transport/contactless smartcard/Hong Kong

Creative Star,  a  consortium  of  Hong  Kong  transport  operators,  uses  the  Sony  Felica  smartcard  for
fast contactless transit ticket payments with electronic cash. The ‘Octopus’ card can also be used for
payments  outside  the  field  of  transport,  such  as  at  retailers  and  with  vending  machines.  About  36
payments  per  active  card  per  month  are  achieved  –  more  than  in  any  other  major  electronic  cash

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

- 82 -

program. Furthermore, customers even pay a deposit for the card – so together with the high level of
activity the scheme is regarded internationally as highly successful.

In Hong Kong,  numerous  private  companies  operate trains,  ferries and  buses. Typically,  commuters
have to change operators in their daily commute. The operators do not offer any multi-operator paper
tickets. With the exception of ferry boats, operators do not provide season tickets, as they do not wish
to offer significant discounts. Another important element for understanding the Octopus system is that
the operators wish to have a precise distribution of fees among themselves. Prior to the introduction of
the Octopus card, some companies used non-rechargeable magnetic prepaid cards, but this technology
was not able to handle multi-operator payments. In 1992, one of the larger operators, the Mass Transit
Railway Corporation, started designing a new system.

In the past, as well as today, commuters can also pay for transit tickets by cash. For access to the
major railoperator’s systems, gates are used, as well as for checking at the exit.  In  buses, the driver
checks that payment has been made.

In  1997,  Creative  Star,  the  joint  venture  company  formed  by  the  major  transport  operators,
launched the Octopus fare collection system. The primary contractor was the ERG Group of Australia.
The  system  uses  the  Sony  Felica  card  for  contactless  payments.  The  card  uses  a  coil  for  inductive
transmission of data and for powering up the chip. It achieves a transaction speed of less than 300ms.
The chip has a size of 17 mm2. The card allows for a throughput of up to 40 persons per turnstile-like
gate  per  minute.  Payment  works  within  a  distance  of  100  mm.  Customers  can,  e.g.,  place  their  bag
containing the card adjacent to the reader/writer unit. With buses, a reader/writer unit is placed next to
the driver with typically a flat fare charged, thus avoiding a check-out procedure.

The  card  can  also  be  used  for  payments  at  shops,  kiosks  and  phone  booths.  Reportedly,  3,400
Coca-Cola vending machines have been converted. This leads to a total of about 15,000 terminals in
operation. While initially the Hong Kong Monetary Authority restricted usage outside transport, it has
now  approved  Creative  Star  as  a  Deposit  Taking  Company.  As  such  a  company,  Creative  Star  can
extend  to  non-transport  applications  for  up  to  25  percent  of  turnover.  Cards  can  be  purchased
anonymously  with  cash,  or  be  personalised.  Customers  pay  a  deposit  of  HK$  50  (about  7  Euros).
Automatic reloading, at the processing devices, is offered to holders of personalised cards who may
have  their  bank  accounts debited  according  to  a pre-agreed  amount.  When  the  balance  in  their  card
falls below a certain limit, the next time the card is used it is replenished without having to go  to a
reloading  terminal.  This  service  is  currently  supported  by  Dah  Sing  Bank  and  Standard  Chartered.
More banks are expected to follow. Other cards have to be reloaded with traditional cash. Reloading
terminals were installed at all 7-Eleven convenience stores across the city. Convenience stores are a
special  kind  of  supermarkets,  essentially  selling  packaged  food  at  somewhat  higher  prices  than  the
very large supermarkets. They are opened all around the clock. 7-Eleven is a chain of close to 20,000
shops world-wide, 400 of which are in Hong Kong.

The card can also be used by children. It is expected to have a life of up to 10 years. Furthermore,

there is a Felica watch sold, containing the Felica chip and the coil.

The security on the system is based on mutual authentication of card and terminal,  using secret key

cryptography. All transactions are traced. Reportedly, no successful  attack has yet been instigated.

About 7 million cards have been issued, of which 1.4 million have been sold to children. As Hong
Kong has a population of 6.7 million, it is believed that a significant share of residents have obtained a
second card, just to make sure that they always have one available when needed. Currently, there are
about  40  transport  companies  and  other  service  providers  accepting  the  card.  About  6  million
transactions per day are made, generating a turnover of about 37 million HK $ (5 million Euros) per
day. Usage with kiosks and other non-transit card acceptors is below 1 percent of turnover – which are
over 1 million non-transport transactions per month, with a value of about 11 million HK $ (almost 2
million Euros).

About  36  transactions  per  active  card  per  month  are  being  reported  (4.9  million  active  cards  in
January 2001). This compares very favourably with between two and three transactions (per activated
card per  month)  in the Swiss  and the  Luxemburg  bank-owned  electronic  cash  schemes  –  which  are

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

- 83 -

considered to be the most successful ones in Europe. In the VisaCash trial in Barrie (Ontario, Canada)
about six transactions per month per activated card are achieved. Note that the Barrie trial also has an
emphasis on the payment of buses and on vending.

The  system  shows  that  it  is  possible  to  generate  far  greater  numbers  of  transactions  than  those
achieved by the major bank-run electronic cash schemes, leading to significant economies of scale. As
the  cards  are  even  distributed  against  a  deposit  in  an  environment  such  as  Hong  Kong  transport,
profitability  is  much  higher  than  in  other  schemes.  Creative  Star  reports  that  transactions  costs  are
significantly smaller than with cash. Thus, the Octopus card has become a ‘hill of hope’ for all who
want to issue electronic cash or sell smartcards to transport operators. However, the success in terms
of numbers of transactions may not easily be repeated in schemes where season tickets are dominant.
Also  gates  are  needed  for  achieving  a  high  number  of  transactions.  What  I  find  remarkable  is  that
Creative  Star,  ERG  and  Sony  managed  to  get  an  electronic  purse  flying,  i.e.  to  identify  a  suitable
environment, to develop a technology being fast enough, and to root it so deeply in everyday life that
people will most likely wish to increasingly use it outside transport – and all this managed smoothly,
without any problems of acceptance.

The  Felica  purse  is  currently  tested  in  Singapore.  Here,  a  roll-out  of  5  million  cards  is  planned.
Felica will also be introduced in China. In Japan, Sony and their local partners are planning a national
roll-out  of  their  technology,  branded  as  “Edy”.  The  Japanese  situation  will  be  analysed  in  the  next
issue of ePSO-N.

[info]
• Dah  Sing  Bank:  Dah  Sing  Credit  Card  Introduces  the  Innovative  ”Octopus  Automatic  Add-Value  Service”

http://www.dahsing.com.hk/etopup.htm

• ERG Group. http://www.erg.com.au/transit/projects/content.htm
• Hove,  Leo 

(Which)  way 
http://www.firstmonday.org/issues/issue5_7/hove/index.html

van:  Electronic 

purses: 

• Sony: Felica Contactless Smartcard System.  http://www.world.sony.com/Electronics/felica/

to 

go? 

In: 

First  Monday, 

July 

2000

With thanks to Brian Chambers, Creative Star Consultant.

[5&7]
Interview: The Future of Retail Payment Systems
Knud  Böhle 
(knud.bohle@jrc.es), 
(dave@consult.hyperion.co.uk), Director of Consult Hyperion, Guildford, United Kingdom
/Internet/payment infrastructure/competition/smartcards/technology assessment

IPTS/ePSO, 

Seville, 

Spain, 

talks 

to  David  Birch

David Birch is specialist in the field of electronic commerce. He is particularly active in the field of
electronic money: consulting, publishing and organising (Please follow the links of the [info]-section
for more). This talk is mainly about the future of  retail  payment  systems  considering the  relation  of
POS and virtual POS, bank and non-bank competition, short term and long term developments, and
the changing payment infrastructure.

Knud Böhle: Obviously  there  is  no  success  story  like  GSM-phones to  tell  about  electronic  payment
systems. Observers however – like Ovum (see [info]-section) – have  detected  light  at  the  end of the
tunnel  identifying  a  "second-generation  breed  of  e-payments".  Do  the  new  trends  (P2P,  mobile
payments, scratch cards etc.) justify the talk of a second wave or second generation?
Dave  Birch:  Yes  I  think  that  they  justify  the  talk.  The  Net  has  a  lot  to  do  with  this,  since  it  is
generating requirements for small (cash-like) transactions over networks and stimulating another cycle
of evolution in the sector after the failure of early experiments like First Virtual and BarclayCoin.

The interesting question is why given that digital money got off to such a poor start, is it back in
the news again? A major difference between today's landscape and that facing the early pioneers (i.e.,
a  couple  of  years  ago)  is  that  there  is  a  growing  recognition  that  the  role  of  banks  may  be  limited.
When interest in digital money began to grow it was assumed that the natural route to market for this
technology  would  be  through  banks.  Banks  would  licence  the  new  money  technologies  –  whatever

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- 84 -

• 

they might be – and then carry on with business as usual. It seems, however, that the replacement of
notes and coins by cool new technology has been taken up more enthusiastically by non-banks:
• 

In the Netherlands Shell have begun to issue drivers with contactless smartcards in the form of key
fobs. The driver pulls up at a pump, punches in his PIN code, fills up and drives off. The cost of
the fuel is automatically deducted from his nominated bank account. Mobil Speedpass in the US
look similarly successful (and is already in a pilot with McDonalds).
In  Scandinavia,  digital  mobile  phones  are  already  used  to  pay  for  car  parking  and  other  small
ticket items. In the particular example of car parking, Stockholm has car parking areas that accept
payment  cards  (where  petrol  company  cards,  not  bank  cards,  dominate),  electronic  cash  and
mobile phones (expected to dominate the next phase of development).

•  The Hong Kong mass transit smartcard, Octopus,  handles around  6  million transactions  per  day
through  15,000  readers  throughout  the  territory.  The  scope  of  the  system  has  already  been
extended  beyond  transit and the  cards  can  be  used  in  phone  booths,  drinks  machines  and  snack
bars (see ePSO-N 05&6).
In  the  US,  five  McDonald's  restaurants  in  Santa  Ana  have  reached  an  agreement  with  the  local
transportation authority to  allow  motorists to  zip  through  their  drive-through  lanes  and  have  the
customers' Fastrak electronic toll transponders billed instead of using cash.

•  Mobile payment schemes, such as Iti Achat, Paybox and Movilpago, are all the rage in Europe and

• 

given the number of handsets in circulation it looks like at least one of them will make it.

Banks in Europe have, where they've done anything, concentrated their effort on the smartcard. But
even  if  my  bank  did  send  me  an  electronic  purse  (a  smartcard  that  can  carry  digital  cash,  like  a
Mondex card or the 50+ million GeldKarte in Germany), I wouldn't be able to use it because I don't
have  a  smartcard  reader  on  my  Macintosh.  American  Express  solved  this  problem  with  their  Blue
smartcard in the US: anyone that applied for one got a free smartcard reader in the post. Why can't our
banks  do  that  same,  and  solve  the  problem  of  paying  on  line  for  good?  French  banks  are  charging
450FF for a PC smartcard reader (and guess what: no-one's buying them).

I was talking to somebody (well, e-talking to them as they were in America) about this recently and
their response – which was along the lines of 'who wants digital money' – surprised me: because I do,
for one. In fact, I want it every time I find myself rummaging around the house for 20p coins so that I
can park at the train station: I'd happily use my mobile phone to pay if I could. I want it every time I'm
trying to get some information that I really need but can't be bothered to subscribe to a web site: I'd
happily send the OED 10p from my Mondex card for the odd occasion when I need to look something
up (OED = Oxford English Dictionary). I want it every time I need to send my brother the £10 that I
borrowed from him down the pub.

In  summary:  the  demand  for  digital  money  in  the  physical  world  is  still  there  and  it's  been

augmented by the demand coming from the virtual world.
KB: It is interesting to see that most of the applications you picked up are somehow related to the use
of  automobiles  (gasoline  stations,  drive-through  lanes,  parking,  public  transport).  Apparently  the
"mobile"  society  has  been  neglected  by  far  when  new  payment  schemes  were  first  envisaged  and
deployed.
Birch: I would say that mobile telecommunications and transport are, indeed, the sectors creating real
alternatives  to  "traditional"  bank-issued  schemes.  I'm  not  sure  that  banks  actively  neglected  these
sectors, but they certainly had no existing acquiring business and therefore overlooked them in favour
of the straightforward retail POS.
KB: Regarding payments by mobile phones, in all three schemes you mention, banks (Groupement des
Cartes Bancaires, Deutsche Bank and BBVA) are heavily involved and that appears as no surprise as
this  approach  reinforces  the  traditional  giro  system.  If  the  mobile  phone  becomes  a  mobile  POS
terminal then the position of banks remains as is, wouldn't you agree?
Birch: It  may  be  conceivable  that the  operators’  payment  systems  could  take  over some  part  of the
retail  payments  franchise  at  the  expense  of  bank  products.  Banks  don't  make  that  much  money  on
payment  systems:  even  in  Europe's  largest  economy,  Germany,  all  three  point-of-sale  (POS)  debit
system – electronic cash, the banks' POZ and the retailers' own ELV – all lose money.

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It  could  be  that  banks  should  stick  to  higher  value  and  more  efficient  cashless  credit  and  debit
payments  through  national  and  international  networks  and  leave  the  rest  (in  particular,  cross-border
small  payments)  to  non-banks.  But  retail  banks  have  no  choice  but  to  invest  in  the  retail  payment
instruments of the future because of the gap between their payment revenues and their payment-driven
revenues. Payment revenues might be small, but payment-driven revenues are much higher.

What  constitutes  payments-driven  revenue?  One  example  is  interest  foregone  by  consumers.  If
consumers  keep funds  in  current  accounts  to  service  debit  card,  cheque  and  ATM  transactions  then
they  are  not  keeping  those  funds  in  deposit  accounts.  By  and  large,  the  less  liquid  the  consumer's
funds, the more interest they receive. So current account funds pay less interest than deposit account
funds and the interest foregone means increased revenue for the bank. Thus debit cards, for example,
contribute  far  more  to  bank  revenues  than  merchant  service  charges  (where  margins  are  thin  and
Europe is moving towards a single acquiring marketplace, with downward pressure on the fees to be
earned through 'commodity' card acquiring). Remember that 40% of European adults have debit cards
and  that  seven  out  every  ten  card  transactions  made  by  Europeans  are  debit  card  transactions.  The
amount  of  money  kept  in  current  accounts  to  service  these  transactions  is  vast  and  the  interest
foregone correspondingly huge. It generates £5.1 billion per annum in income for the top four retail
banks in the UK alone and in the US accounts for an additional $50 billion in bank income.

Banks have no choice but to work with others (e.g., mobile operators) but the interesting question
is  about  the  optimal  division  of  functionality  for  both  parties.  I  think  there  are  some  reasons  for
thinking that if a third party, or a bank/third party joint venture, operates the payment system but the
bank provides the line of credit behind the payments system then this could be economically attractive
for all concerned.
KB:  Yes,  often  the  bank  vs.  non-bank competition  is  presented as  fierce  and  exclusive,  while  a  new
division  of  labour  as  you  envisage  seems  to  me  quite  more  realistic  leaving  space  for  win-win
situations. But let's turn now to the Internet and the demand for payment systems in the virtual world.
It looks as if instead of a unique solution there are many clubs offering membership: the SET club, the
CEPS  club, the  Cyber-COMM  club, the Mondex club,  e-gold, beenz,  InternetCash  and  many  others
(not to talk of 'dead poet clubs' around Ecash or CyberCash). How do you manage to distinguish the
essential  innovations  and  developments  from  accidental  ones?  What  are  the  really  important  needs
and motivations that will make (if ever) successful Internet payment systems happen?
Birch:  I've  always  been  of  the  opinion  that  schemes  that  are  only  for  the  Internet  are  as  limited  as
schemes  that  are  only  for  the  physical  world.  This  is  why  I  continue  to  see  smartcards  as  the  way
forward.
KB: Let me insist on the future of Internet-payments. There are some indications that smartcards will
be  used  in  the  future  for  payments  also  on  the  Internet.  Projects  like  C-SET  or  Cyber-COMM,  an
increasing number of e-purses claiming to be prepared for use on Internet, interoperability efforts like
EMV,  CEPS  and  new  intermediaries  like  SmartAxis  show  the  direction.  But  in  terms  of  real
deployment and acceptance we have not yet seen very much. And experts (see ePSO-N 02&6) tell us
that the migration to EMV and CEPS will take till 2005. So at least in the meantime other approaches
may prevail.

And  to  be  more  precise,  there  are  alternatives  to  smartcard  based  solutions  making  the  picture
more  coloured.  Think  of  the  very  popular  electronic  giro  system  in  Finland  integrating  smoothly
online-shopping  and  credit  transfer  via  homebanking  (see  ePSO-N  05&3).  Another  candidate  are
microbilling systems linking for instance Internet purchases to a phone bill (e.g. Net900 in Germany),
and recently the virtual account type approach (like Virtual C@ash+, InternetCash or Paysafecard) –
bringing the phonecard model to the Internet – have risen some interest. Do you think that neither of
them will be in the future bunch of Internet payments?
Birch: In the short term, I agree that other instruments – such as network-based pre-paid accounts –
will be used on the Internet but I suspect that in the medium term consumers will want to use only a
small number of payment mechanisms. Right now, the developments that interest me most are the pre-
paid schemes such as the American Express Internet Shopping Card in the US or Splash Plastic (aimed
at  teenagers)  in  the  UK.  With  the  success  of  pre-paid  payments  in  the  mobile  field,  I  think  these
schemes could do well.

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Microbilling (e.g., eCharge, iPin) also looks good, but again you have to distinguish between short
term and medium term. If, in the medium term, everyone in Europe has a smart credit/debit card and a
smart purse card, as well as a mobile phone with another smartcard inside it, I would have thought that
most payments will move over to this obvious platform.

Also in the medium, I expect smartcard PKI (e.g., Identrus and similar) to lead to electronic cheque
and direct credit/debit transfers to take a substantial fraction of the online payments market. In places
where  Internet  Giro  works  well  (e.g.,  Scandinavia)  it  is  very  popular.  So  I  don't  see  these  kind  of
instruments as an alternative to smartcards: I think smartcards will be an essential part of their take up
in the mass market.
KB: I understand the crucial role of smartcard technology shaping the payment systems infrastructure
of  tomorrow.  It  combines  security  and  mobility,  real  and  virtual  world  POS  payments,  enhances
prepaid schemes and reinforces giro payment instruments on open network. Would you say that this
shift  at  the  level  of  infrastructure  will  bring  about  also  a  greater  harmonisation  of  payment
instruments? Or the other way round: Isn't there a considerable need for different Internet payment
methods independent of the technological basis: think of groups without bank account, differences of
national payment cultures, and especially the need of merchants offering digital products and services
(e.g.  digital  rights  problems,  adult  content  and  anonymity,  micropayments  of  fractions  of  a  cent).
Hence, what mix of payment methods addressing the multiple needs do you expect?
Birch:  I  think  that  there  are  really  three  parts  to  the  answer  to  your  question.  Harmonisation  at  the
infrastructure level does not necessarily mean harmonisation at the product level, and I can see at least
two levels where competition will be intensified (much to the benefit of payment system users) if there
could be some harmonisation at the infrastructure level to build on.

The harmonisation that we are really talking about at the infrastructure level is the harmonisation of
the security infrastructure. While the exact implementations may differ from channel to channel, it is
clear that the general outlines of this harmonisation are already visible and the relevant technologies
(such as smartcards, public key infrastructure and so on) are already being deployed. We already have
experience in  their  practical use.  It  is  reasonable  to assume  that this  harmonisation  will  continue  so
that,  in  the  medium  term,  the  cost  of  the  technologies  and  their  deployment  and  management  will
continue to fall.

To see how all this harmonisation at the infrastructure level can lead to intensified competition at
the product level consider the example of magnetic stripe cards. A particular area of interest at present
is the flowering of pre-paid magnetic stripe card based payment instruments. The card and the stripe
are  standardised,  as  are  the  readers,  but  this  does  not  diminish  the  level  of  competition  in  terms  of
products. The Visa Buxx product in the US, the Splash Plastic product aimed at teenagers in the UK
and the American Express Internet Shopping Cards work in different ways and have different markets
but they all share elements of the same infrastructure.

What  is  more  interesting  to  consider  in  the  medium  term  is  that  this  level  of  competition  may
extend to evolution of entirely new payment instruments. Harmonisation at the infrastructure level in
fact  makes  it  easier  for  new  entrants  to  experiment  with  new  instruments  and  test  them  in  the
marketplace.  Consider  this  straightforward  thought  experiment:  suppose  Mondex  would  become
successful and be established as the standard electronic purse platform throughout the world (it's only
a thought experiment, remember!) then in the short term one might expect novel instruments such as
beenz (that have developed from existing product) gravitating to that platform. In the longer term one
could imagine entirely new currencies appearing and using the existing platform to disseminate. If I
were to  decide  to launch  a  currency  based  on,  say,  bandwidth  futures,  I  would  simply  originate  the
currency and get it out into the marketplace on the Mondex cards that are already out there.

In summary, I think it is not only entirely consistent but also a very practical view of the future to
suggest  that  some  harmonisation  that  will  occur  through  the  integration  of  new  technologies  at  the
infrastructure level will in fact stimulate competition at the product level and ultimately lead to very
new kinds of payment instrument (so long as they have a real demand from consumers, merchants and
other players).
KB: Dave, thanks a lot.

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

[info]
• More about Hyperion: http://www.hyperion.co.uk/
• More about Dave Birch: http://www.birches.org/dgwb/
• More about the 4. Digital Money Forum: http://www.consult.hyperion.co.uk/forum/digmon4.htm
• Some  information  about  the  Ovum  Report  "Second  Generation  E-Payments:  E-Business  Beyond  the  Credit  Card"  by
(August  2000)  at  http://www.ovum.com/cgi-

Duncan  Brown,  Christina  Kasica  and  Paola  Bassanese 
bin/showPage.asp?Doc=EPY

- 87 -

[5&8]
Why US Citizens Hesitate to Pay their Bills Electronically:
Theory & Empirical Evidence
Leo Van Hove (Leo.Van.Hove@vub.ac.be), Free University of Brussels, Belgium
/review/Internet/electronic banking/electronic bill payment/consumer adoption/USA

In  two  related  papers  Brian  Mantel  analyses  the  factors  that  influence  consumer  adoption  of
electronic  bill  payment  (EBP).  Mantel  argues  that  consumers  basically  make  rational  decisions
regarding the use of payment instruments and that using a broader list of financial and non-financial
factors, beyond just cost and convenience, explains the 'irrationality' that is sometimes  attributed to
consumers. Mantel's research suggests that, in the US at least, fundamental consumer-defined product
features still need to be addressed before a broader portion of consumers will find EBP solutions more
attractive.

This month I would like to bring to the attention of the ePSO-N readers two related papers by Brian
Mantel,  an  economist  with  the  Federal  Reserve  Bank  of  Chicago,  on  the  adoption  of  'electronic
banking  products'.  In  the  first  paper  Mantel  develops  a  theoretical  framework  for  describing  why
consumers use (or do not use) products such as electronic bill payment (EBP), credit and debit cards,
electronic purses, and eCash. In the second paper Mantel analyses the results of a survey on EBP.

In his theoretical paper, Mantel proposes a general 'consumer decision-making framework', based
on a survey of the literature, a review of a Federal Reserve survey, and original qualitative research
comprising  35  in-depth  interviews  with  consumers.  The  framework  includes  three  primary  factors.
The first level relates to wealth. This is not surprising. Several studies have demonstrated that where
payment  instruments  are  concerned,  income  is  an  important  characteristic  of  early  adopters.  Mantel
points  out  that  while  the  level  of  income/wealth  influences  the  availability  of  instruments  that
consumers  can  choose,  the  stability  of  income  and  expenditures  may  be  just  as  critical  a  factor  as
wealth itself. For example, consumers that experience brief financial shortfalls may choose not to use
pre-authorised electronic debit (in order to avoid the risk of having their bank account overdrawn).

The second factor in Mantel's framework pertains to personal preferences.  Based on  focus  group
interviews,  six  general  preferences  were  identified:  (1)  control,  recourse,  and  customer  service;  (2)
budgeting and record-keeping; (3) incentives and low cost; (4) convenience; (5) privacy and security;
and (6) personal involvement. The third and final type of factors are transaction-specific and relate to
the size of the payment, where it is being made, whether it is recurring or not, etc. For instance, the
extent to which bills are for fixed amounts positively influences the likelihood of using pre-authorised
debit.  Mantel  then  combines  all  three  types  of  factors  into  a  comprehensive  decision-making
framework  (in  Appendix  1).  The  combination  of  three  levels  of  household  wealth  (low,  moderate,
high), six types of consumer preferences and eight different payment scenarios results in a large table
with no less than 144 different situations. For each of these, Mantel indicates the type(s) of payment
instruments consumers might choose. Mantel then builds on this to explain, for example, why the use
of EBP increases only moderately.

In  his  empirical  paper,  Mantel  concentrates  on  bill  payment  instruments  and  analyses  a  national
1,300-person survey conducted on behalf of the Federal Reserve Banks of St. Louis and Atlanta. The
survey collected data pertaining to consumer characteristics and self-reported payment preferences and
evaluations of different payment options. Mantel uses these data to examine – by means of binomial
logistic regressions – how the factors discussed in his theoretical paper (and some additional factors)

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influence the likelihood of (high) EBP use. That is, Mantel compares non-users with users, and low
users with high users of EBP. He also examines the factors that influence the use of EBP for specific
types  of  bills.  For  clarity’s  sake,  it  should  be  stressed  that  EBP  was  defined  as  direct  debits  or
consumer-initiated  debits  by  PC  banking.  Server-based  bill  presentment  (and  payment)  was  not
addressed since at the time of the survey – in 1998 – it was still essentially a concept. According to
Brian Mantel, even today fewer than 1% of bills are presented electronically.

Three general findings merit attention. First, demographic and financial characteristics are indeed
important  in  influencing  whether  consumers  use  EBP.  For  instance,  somewhat  surprisingly,  older
individuals  are  more  likely  to  use  direct  electronic  payments  than  younger  individuals.  Moreover,
women are 49.2 percent more likely to use EBP. The significance of household income is also clear-
cut.  Second,  several  consumer  preferences  –  such  as  preferences  for  greater  'control'  –  prove  to  be
factors that distinguish users from non-users (as well as high users from low users). For example, self-
reported 'dislike of the idea of someone automatically withdrawing money from one's bank account' is
associated with a 20 percent decreased likelihood of EBP use. On the other hand, contrary to a priori
expectations,  Mantel  does  not  find  strong  support  for  the  importance  of  increased  convenience  in
distinguishing users from non-users. Finally, payment-specific factors are also important.

Mantel's main point throughout the two papers is that consumers basically make rational decisions
regarding  the  use  of  payment  instruments,  rather  than  being  'irrationally'  resistant  to  change.
Concerning  the  future  of  EBP  in  the  US,  Mantel's  analysis  contains  both  a  negative  and  a  positive
note. The negative message is that increased adoption is not just a question of time since cheques and
some  EBP  services  (such  as  pre-authorised  debit)  are  not  perceived  to  be  close  substitutes  by  a
significant fraction of consumers and for a significant portion of bill types. For instance,  consumers
with low and moderate incomes often prefer the ability to pay late, to make partial payments, and/or
easily stop payments. The positive message is that migration may depend not so much on overcoming
consumer resistance to change, but rather on firms' willingness to offer additional features in order to
tailor EBP to the differ customer segments that surface from Mantel's empirical analysis. In Mantel's
view,  financial  institutions  should  promote  PC  banking  solutions  or  telephone-based  services  that
allow for easier changes in payments. With PC banking, for example, non-standing orders can usually
be revoked up to 2-3 days before the payment occurs. Note that at the time of the survey, features such
as error resolution and customer service were – according to Brian Mantel – not nearly as good as they
are for credit cards.

To conclude, what are the strong and weak points of Mantel's analysis? Concerning the empirical
paper, the main problem seems to be that Mantel had to use a dataset that was not  collected for  his
purposes. Crucially, the survey instrument does not allow one to distinguish between consumers who
pay bills electronically through automatic, pre-authorised ACH debits or those who pay bills through
PC banking (o.c., p. 37). Given that the two payment options have different characteristics (in terms of
convenience,  ability  to  control  payments,  ...),  such  a  broad  definition  of  EBP  makes  it  difficult  to
interpret several of the regression results. For example, chances are that the coefficients of variables
such as 'computer ownership' are biased (since one does not need a PC for direct debit).

As for Mantel's theoretical framework, it is not as simple as announced in the executive summary
and  drawing  up  a  similar  table  for  another  country  would  require  quite  a  lot  of  interpretation  and
judgement.  Also,  in  my  view,  the  framework  treats  network  externalities  in  an  all  too  stepmotherly
fashion: the importance of the number of acceptance points is only implicitly seen as a determinant of
'convenience',  and  as  Mantel  recognises,  the  interaction  between  merchants  and  consumers  is  not
considered at all. Mantel therefore at times seems to be reading too much into his consumer decision-
making  framework.  For  example,  in  my  understanding  the influence  of  consumers  on  the  uptake  of
electronic cheque conversion is limited.

Summing up, while not without hiatuses, Mantel's framework is a useful framework  for  thinking
about  payments.  Its  forte  is  that  it  emphasises  that  there  is  more  to  consumer  payment  choice  than
meets the eye: the list of factors is long, there is heterogeneity of preferences among consumers, and a
particular consumer's preference may be heterogeneous across payment scenarios. Mantel's papers are
therefore a useful reminder for academics like myself who rely on the network externalities theory to

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explain the adoption of payment instruments, and as a result tend to neglect other factors and tend to
assume that consumers are homogeneous. If only someone could marry the two frameworks ...

[info]
• Mantel,  B.:  Why  don't  consumers  use  electronic  banking  products?  Towards  a  theory  of  obstacles,  incentives,  and
opportunities,  Emerging  Payments  Occasional  Paper  Series  EPS-2000-1,  Federal  Reserve  Bank  of  Chicago,  September
2000a http://www.chicagofed.org/paymentsystems/publications.cfm.

• Mantel, B.: Why do consumers pay bills electronically? An empirical analysis, Economic Perspectives, Federal Reserve

Bank of Chicago, Fourth Quarter, 2000b, p. 30-45
http://www.chicagofed.org/publications/economicperspectives/index.cfm.

With thanks to Brian Mantel for the e-mail discussions.

—————————————— ePSO-Newsletter Issue 5 – February 2001 ——————————————

- 90 -

ePSO Newsletter – Issue 6, March 2001

Focus: Internet Payment Systems (II)

[6&1]
Editorial: The Rise of Convenience: Clickable, Convertible, Contactless
Arnd Weber (arnd.weber@itas.fzk.de), ITAS, Karlsruhe, Germany
/payment server/electronic money

In this issue we continue to focus on Internet payments. Our emphasis is on solutions which require
little technology on the consumer  side,  just  a few clicks.  This  includes innovative  pre-  and  postpaid
solutions.  Prepaid  solutions  are  also  the  subject  of  our  country  report  on  Japan,  focusing  on
contactless  payments.  If  any  such  new  technologies  are  incompatible,  providers  can  make  them
convertible, therefore we discuss the cases of Bibit, SmartAxis and TWYP. Finally, we report about the
Norwegian payment systems and the EU’s Financial Internet Working Group.

We  continue  to  focus  on  Internet  Payments  Systems.  After  the  review  of  systems  in  the  last  issue,
Knud  Böhle  works  out  in  this  issue  that  server-based  solutions  offer  basic  advantages,  such  as
independence of user device and channel, while allowing the selection of different payment methods.
In the basic approach, the user simply has to key in a PIN.

Ease  of  use  is  also  a  core  characteristic  of  scratch  cards  which  are  known  from  prepaid  mobile
phones. While one of the first such card schemes used for general payments appears to have already
disappeared, Michael Rader discusses the benefits of these cards in his article. As an example  Peter
Paul  Sint  analyses  the  “Paysafecard”  which  is  designed  to  become  a  scratch  card  usable  in  many
European countries. It is being targeted at children, as well as for gambling or buying adult content,
but  has  properties  which  could  attract  consumers  to  e-commerce,  who  have  held  back  due  to  data
protection  or  security  concerns.  It  is  also  feasible  to  make  micropayments  with  instruments  of  this
type.

Simon Lelieveldt argues in his article that the lack of standardisation of Internet payment schemes
needs  not  result  in  a  lack  of  interoperability,  if  payment  providers  such  as  Bibit  or  SmartAxis  find
organisational and technical solutions for converting technologies and currencies.

Also outside the Internet, players continue to develop and test new kinds of electronic money, as in
Japan. In my article I point out that transport companies play a crucial role in such systems. Of course,
other forms of vending and e-commerce also play a role in the plans being made.

In his Review Corner, Leo van Hove analyses a report by the Norwegian Central Bank. It provides

a wealth of data, even about the prices of payment instruments.

With  this  issue  ePSO-N  incorporates  a  new  section  where  EC-funded  projects  in  the  area  of
electronic  payments  introduce  themselves.  We  are  especially  delighted  to  have  Charles  Goldfinger
start, presenting the Financial Internet Working Group, because ePSO and FIWG are complementary
projects working close together. Finally there is a tiny innovation to be announced: each article is now
directly linked to the ePSO-Forum to make spontaneous comments more easy.

[6&2]
Access is King: About the Bright Future of Server-based E-payment Systems
Knud Böhle (bohle@jrc.es), Institute for Prospective Technological Studies, Seville, Spain
/payment server/Internet payment systems/innovation/technology assessment

Looking at recent Internet payment developments, a paradigm shift from a decentralised to a central
server  approach  is  observed.  At  first  sight  it  is  about  front-end  innovations  substituting  payment
software in the hands of customers and merchants by access to a central payment server. But the new
approach holds further promises as an innovation of the payment infrastructure: integrating different

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payment  methods,  integrating  i-payments  and  m-payments,  enhancing  the  mere  payment  service  by
additional services such as bill presentment or Internet banking functions.

Concepts like electronic cash, e-purses, and software-wallets have stressed the individual as the bearer,
owner and immediate spender of money. The autonomy and the liberty to pay as you go were assumed
to be as high as with real cash. Experience however has shown that the mobility granted was limited
and  that  the  price  of  liberty  in  terms  of  convenience  was  high:  long-winded  registration,  software
download,  installation,  upgrading,  and  tedious  learning  to  use  the  payment  software.  Not  only
customers  and  merchants  had  to  pay  a  price,  those  offering  these  systems,  distributing  them,
explaining  them,  upgrading  them,  and  answering  permanent  requests  by  their  clients  also  had  their
costs.

At  C@shWorld  2001ne  of  the  recurring  e-payment-conferences  in  Germany  with  a  certain
reputation,  I  received  the  impression,  that  a  paradigm  shift  from  the  decentralised  approach  to  a
centralised approach is currently taking place. This change is being accompanied by catchwords like
"server-based wallet", "payment hosting" and "virtual account".

The change is evident looking at recent SET developments. Today it is frankly  admitted that  the
"thick wallet approach" has by and large failed, and in Europe VISA and Eurocard are committed to
3D  SET  pushing  its  implementation.  They  provide  server-based  wallets  for  cardholders  and  server-
based POS for merchants. There are obvious advantages of this new approach:
•  mobility for the customer,
• 
•  device independence.

independence of operating system, and

Consequently Tilo Schürer of Bankgesellschaft Berlin, which is pioneering 3D SET in Germany,
regarded the server-based wallet approach as the right balance between security and ease of use for the
time  being.  But  maybe  the  most  important  advantage  of  a  central  server  approach  is  ease  of
maintenance, making upgrades and implementation of new releases a lot easier. Looking for example
at  payment  technology  providers  such  as  EHPT,  the  joint  venture  between  Ericsson  and  Hewlett
Packard, or Brokat we can observe an analogous shift to server-based solutions regarded as part of a
new networked payment infrastructure (see [info]-section).

The paradigm shift observed is not restricted to credit card payments or card payments in general.
Payment instruments once paper-based and requiring a handwritten signature can be incorporated too.
There are quite popular forms of direct debit at the POS (e.g. in Germany ELV and POZ) requiring a
handwritten signature. On Internet this signature is missing, but that does not prevent either consumers
or  merchants  from  regarding  it  as  a  rather  welcome  payment  method  as  two  recent  studies  confirm
(see [info]-section). As with SET there can be a server-based approach to direct debits too. Asking a
promoter of 3D SET at C@shWorld he had to admit that from a technical point of view this payment
instrument  could  be  integrated  in  the  3D  approach,  although  he  saw  no  need  for  banks  to  do  so.
Consumers and merchants might argue differently.

The  Finnish  Internet  payment  system  "electronic  giro"  (see  ePSO-N  05&3)  shows  that  credit
transfers can also follow the same procedural logic. And even more Internet payment systems based
on so called "prepaid virtual accounts" suitable for micropayments and P2P, can also be regarded as a
type of server-based payment method following the same logic of access. Therefore they can be added
to  the  portfolio  of  payment  methods  a  payment  host  can  manage.  In  other  words:  all  account-based
payment instruments can be modelled in the same way, with a payment host between customers and
merchants on the one hand and the banking networks on the other hand.

One major difference to earlier approaches is the front-end innovation replacing payment software
by mere access to a central server. The procedure is always – more or less – the same, and that means:
it is  standardised. This  way  of  doing  things  has  been  demonstrated  before  already  by  those  popular
central  mail  services  like  hotmail,  freemail  etc.  which  can  be  accessed  from  everywhere.  That  is  to
say, the shift in the payment world does not come as an isolated one. The required steps are:

1.  Click the "pay" button at the merchant site,
2.  Automatic redirection to the payment server

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3.  Authentication at the payment host and approval of payment
4.  Dialogues from host to customer and merchant, end of payment.

It can be pinpointed that this shift embraces m-payments too, and even more: it is required for m-
payments as software downloads are not a viable option here. M-payments therefore may function as
catalysts pushing the new approach.

The  central  server  approach  may  also  open  new  opportunities  for  additional  services.  At  the
conference  already  mentioned,  P.S.K.  (Österreichische  Postsparkasse)  showed  its  EBPP  solution
"bezahlen.at"  –  basically  a  combination  of  billing  and  a  direct  debiting  mandate.  With  regard  to  e-
commerce  it  resembles  the  procedure  outlined  above:  Clicking  on  the  shopping  basket  of  an  e-
merchant leads to the production of a bill. The customer accepts and the payment is directly feasible
online. To pay this way, a Java applet sent from the payment server appears on the user's screen and
the user types in her name and a password. The additional service for consumers is the storage of all
bills at the server for later access by customers. It would also not be too far fetched to envisage the
integration  of  the  server-based  payment  approach  and  the  already  server-based  Internet  banking
approach.

This presentation has been extremely rosy – for the sake of profiling the "new approach". Therefore
its  potential  drawbacks  have  not  been  discussed.  This  shortfall  is  compensated  now  by  two  quickie
questions: If access is king,  what's  the role  of smartcard-based  payment  products?  If  access  is  king,
where's a place for dreamers about true digital bearer instruments and electronic cash?

[info]
• C@shWorld. IIR-Kongress Zahlungssysteme im eBusiness, 6.-8.2.2000. Proceedings. Frankfurt am Main: IIR 2001.
•  C@shWorld  Conference  report  by  Knud  Böhle  available  from  the  ePSO-Forum  archive  of  February  2001;  previous

registration required http://www.jrc.es/archives/epso-forum.html

•  The two studies about preferred Internet payment systems referred to are Berlecon Research: Getting your bills paid in e-
commerce http://www.berlecon.de/studien/zahlungssysteme/en/index.html (analysing the merchants' point of
view); see also EZIN News 08.02.2001: E-Payment: das Risiko trägt der Händler at
http://www.ecin.de/news/2001/02/08/01525/index.html.

•  Results of the survey by University of Karlsruhe "Einstellung von Konsumenten zu Internet-Zahlungsmitteln" (attitudes of

consumers towards Internet payment means) are provided at http://www.iww.uni-karlsruhe.de/IZV4/

•  The  Jalda  approach  to  payment  infrastructure  was  already  presented  by  Erik  Dahlström  in  ePSO-N  05&5.  At
http://www.brokat.com/en/products/pay/index.html  some  information  on  the  server-based  payment  solutions  of
Brokat can be found.

[6&3]
Scratch Cards: Here to Stay?
Michael Rader (rader@itas.fzk.de), ITAS, Karlsruhe, Germany
/scratch cards/prepaid schemes/micropayments/anonymity

Recently several systems for low-value payments on the Internet based on “scratch cards” have seen
the light of day in different countries. While these have several attractive features in common which
suggest that they stand a  good chance  of  achieving  a  breakthrough  in use  by  young  people  and for
anonymous payments, one  of  the  earliest  schemes  from  the  US,  Cybermoola,  has vanished  from  the
scene. The article identifies some factors which might have been responsible for failure, such as lack
of backing by a major bank, costs and lack of complete anonymity.

The recent past has witnessed the emergence of a number of payment systems for use on the Internet
involving the use of the “scratch cards” familiar from pre-paid schemes for mobile telephony. One of
the earliest examples was the now seemingly defunct “Cybermoola” system in the US, and there have
been schemes in the UK (World Online) and Sweden as part of the “Jalda” solution, and most recently
in Austria with roll-out plans for Germany (“Paysafecard”). The US “InternetCash” scheme is another
example  of  this  type.  All  are  variants  of  the  central  server  based  approach  to  Internet  payments
described in the preceding article by Knud Böhle [6&2].

As in telephony, the user buys a plastic card, usually in a protective envelope. On its back, the card
bears  a  16-digit  PIN,  which  is  revealed  by  scratching  away  a  coating  applied  to  hide  the  PIN  from

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view, and this is used to set up and later access an account containing the amount the user has paid in
advance.  The  PIN  number  is  used  instead  of  a  signature  to  make  payments  from  the  account  to  a
merchant in an Internet transaction. There are obviously other possible ways to communicate the PIN
to  the  account  holder,  such  as  cards  without  protective  coating  or  e-mails,  but  scratch  cards  are
currently finding favour.

At first glance, schemes of this kind would seem to stand an extremely good chance of achieving a
breakthrough  as  a  complement  or  an  alternative  to  the  credit  card/debit  card  schemes  currently
dominating Internet payments:
•  The card bearer does not need to have a bank or credit card account;
•  Anonymous payments are possible;
•  There is no need to transmit any details of bank or credit card accounts across networks perceived

to be vulnerable to interception;

•  The solution does not require consumers or merchants to invest in any kind of technology  or  to

download special software;

•  The payment mechanism is familiar to many users from mobile telephony;
•  The schemes can potentially be used on a range of platforms, including PCs, mobile phones and

other hand-held devices, set top boxes;
It is possible to make very low-value payments.

• 

Solutions  of  this  kind  are  particularly  attractive  to  young  people  without  bank  accounts  of  their
own, who have considerable spending power and by this means are able to extend their reach to the
Internet and e-commerce or m-commerce. Beyond this group, which is itself sufficiently attractive to
spur the development of payment schemes, there are other users who for a number of reasons prefer
payment instruments with one or more of the properties mentioned.

There  are  many  potential  customers  for  electronic  commerce,  who  are  at  present  deterred  by
privacy or security concerns, such as transmitting their card or account numbers across the network,
fear of misuse of account details by fraudulent merchants, or fear that personal information could be
compromised,  sold  or  communicated  to  third  parties.  Another  group  of  customers  being  targeted
deliberately  by  some  of  the  schemes  are  the  visitors  to  so-called  adult  content  and  gambling  sites,
which are the subject of a large number of disputed payments and chargebacks. Obviously, this is also
a segment of e-commerce where there is demand for anonymity and merchants active in this field are
eager  for  methods  of  irrefutable  payment.  Some  schemes  are  issuing  separate  cards  for  minors  to
prevent their use on adult sites. Finally, there is demand for a means of low value payment for sites
that operate on a “pay-per-view” or “pay-per-click” basis, such as content providers.

The  use of  scratch  cards  as  a  payment  “front  end”  permits  different  organisational  arrangements
behind  the  scenes.  These  differ  considerably  and  are  probably  an  equally  important  factor  for  the
success or otherwise of the schemes as the features mentioned above.

As originally launched, the “Cybermoola” scheme required payment into the account by credit card
or cheque. The account was administered by the Cybermoola company itself, which acted as a portal
to  the  sites  accepting  this  means  of  payment.  All  payments  were  made  at  the  Cybermoola  site,
merchant  sites  bore  no  indication  that  they  accepted  Cybermoola.  This  arrangement  meant  that
merchants  themselves  attracted  virtually  no  new  users  to  Cybermoola,  and  that  the  Cybermoola
company was in exclusive possession of all information created by the payment processes. Merchants
were paid via the conventional Visa Network. At the end of 2000, cards were being sold to a limited
extent  in  bricks-and-mortar  outlets  such  as  supermarkets  and  filling  stations,  thus  for  the  first  time
offering the option of anonymity.

Although  there  was  an  article  mentioning  this  scheme  published  as  late  as  February  2001,
Cybermoola disappeared from the market in that same month, with losses of $3.5 million. Its failure
could be due to lack of co-operation with a major bank, but equally to real or imagined compromise of
personal  data,  meaning  that  the  scheme  did  not  afford  the  same  kind  of  anonymity  as  cash.  There
might also have been problems related to cost, since merchants had to shoulder not only the costs for
Cybermoola's services, but also the costs arising from the need to involve the Visa Network.

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

- 94 -

The situation in the recent European schemes based on pre-payments and scratch cards is different.
Each application seems to involve the setting up of an account at a major bank, which is a full partner
in the scheme. The bank has no need to know any personal  details  of  the  account  holder,  since  this
person has paid cash into the account at one of the outlets, such as supermarkets, newsagents or filling
stations,  which  sell  the  card.  The  merchant  receives  payment  from  the  bank  into  his  or  her  bank
account, which need not be at the same bank as that which is partner in the scheme.

The  main  hurdle  to  this  kind  of  scheme  at  the  moment  would  seem  to  be  to  attract  a  sufficient
number of shopping sites to accept payments by these means. It is probably a more simple barrier to
overcome  than  in  other  schemes,  since  there  is  no  special  hardware  required  and  customers  do  not
need to register. In case there should be occasion for customers to interact with the merchant, issuing
an electronic receipt is probably sufficient for most purposes.

At  present,  the  major  drawback  on  most  schemes  is  that  they  do  not  function  for  cross-border
payments. While this might not have any major impact on the minors segment of e-commerce where
both parties in a transaction are usually located in the same country, it makes payments by this method
less attractive to the other groups targeted by the schemes.

Of course, it is conceivable that there will be arrangement made for clearing cross-border payments
between  the  banks  participating  in  the  schemes  in  the  individual  countries,  but  the  establishment  of
such  arrangements  on  any  kind  of  permanent  basis  depends  heavily  on  the  expected  volume  of
business.

Because  of  their  simplicity  and  basic  familiarity  to  many  users,  it  would  seem  that  scratch  card

based payment schemes stand a good chance of success if they overcome the critical threshold.

[info]
• The Paysafecard site has many press articles on the Paysafecard scheme: http://www.paysafecard.com
•  InternetCash: http://www.internetcash.com
•  The  article still mentioning Cybermoola in February 2001 was by Karen J. Bannan: No Credit? No Problem! Digital Cash
Made  Easy  –  Allergic  to  plastic?  We  evaluate  alternatives  to  credit  cards  for  online  shopping.  PC  World  Magazine,
February 2001, http://www.pcworld.com/resource/printable/article/0,aid,36806,00.asp

•  An article critical of the prospects of Cybermoola was: Aragon, L.: Cybermoola wants  your kids’ money. Red Herring,

September 17, 2000. http://www.redherring.com

•  An article announcing the failure of Cybermoola: Dennison, G.: Good night, sweetheart. Red Herring February 13, 2001,

http://www.redherring.com/index.asp?layout=story_generic&doc_id=RH920018292]

[6&4]
E-money Solution from Austria: Paysafecard.com
Peter Paul Sint (sint@oeaw.ac.at), Austrian Academy of Sciences, Vienna, Austria
/scratch cards/prepaid schemes/micropayments/anonymity/Austria

Paysafecard operates a payment service using prepaid cards with identification numbers for limited
amounts of money. Different cards for adults and minors are sold. First acceptance is good, and the
service will be offered in an increasing number of European countries.

All  major  Austrian  banks  have  some  form  of  account  management  or  electronic  banking  over  the
Internet. Direct payment solutions on the other hand are offered by multinational companies, partially
based  on  SET,  SET  Light,  direct  debiting  via  mobile  phone  (Paybox  over  GSM  and  proprietary
solutions  of  phone  companies),  and  other  technically  advanced  but  not  yet  widely  used  e-payment
systems or standards.

A most interesting development originating in Austria seems to be the fully operational installation
of prepaid cards with identification numbers for limited amounts of money. The service was started by
the Austrian company Paysafecard, in November 2000, and launching of the full service in Germany
is expected for May 2001.

The  customer  buys  the  card,  which is  similar to  those  in  use  for  pre-paid  mobile  telephony,  and
scratches off a protective layer covering a 16-digit PIN. Cards for amounts of 300 Austrian Schillings
(21,8  Euro),  500  ATS  (36,34  Euro)  or  1000  ATS  (72,67  Euro)  are  sold  by  a  wide  network  of

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

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distributors. As the banking partner is BAWAG and its affiliate Postsparkasse, with its strong links to
the post administration, all post offices offer the cards, together with the Niedermeyer and Hartlauer
photo  and  consumer  electronics  stores  and  a  growing  number  of  additional  outlets.  Besides  the
mentioned photo enterprises, the books and stationary chain Libro, the book distributor Morawa and a
steadily growing number of Web-shops accept the card. Partners are screened for their reliability and
ability to provide the offered goods or services.

Cards are sold in two varieties: blue cards for adults, and red cards for the use by minors up to the
age of 18. Use of red cards is restricted to web sites considered suitable for minors. As the system is
otherwise  completely  anonymous  this  is  the  only  way  to  control  access,  although  it  is  not  hard  to
imagine  that  blue  cards  will  find  their  way  into  the  hands  of  youngsters.  Paysafecard  may  be  used
from  any  Web  terminal.  A  customer  visiting  a  site  displaying  the  appropriate  logo  can  select  the
Paysafecard  option  at  checkout.  He  or  she  is  redirected  to  the  site  of  Paysafecard.  The  Web-shop
simultaneously  inquires  at  this site  whether  the  amount  is  sufficient  for the requested  payment.  The
customer  enters  his  or  her  PIN  and  optionally  an  additional  pass  phrase  to  confirm  payment.  The
customer  is  directed  back  to  the  shop  and  the  shop  server  receives  a  direct  confirmation  of  a  valid
payment (or a “not ok”). The shop may get credited immediately, may opt for the crediting at a later
date (e.g. after dispatch or delivery of the goods) and has the opportunity to refund the amount, e.g. in
case of inability to deliver parts or the whole of the promised goods. One payment may use the value
of  up to  10 cards.  At the  lower  end  payments  may  start  with  10  Austrian  Groschen  or  1 cent-Euro,
enabling  real  micropayments.  This  enables  the  payment  of  software,  download  of  games,  access  to
single items in knowledge data bases, pictures, MP3, news or video on demand, distance learning and
other forms of teleshopping. Adult users are attracted by complete anonymity and by inherent security.
All cards may be used together with a pass phrase. To link the card with a pass phrase the customer
has to visit the Paysafecard server before the actual payment. At any later time the customer may visit
the  Paysafecard  server  to  enquire  about  the  status  of  his  cards.  There  is  no  charge  to  customers,
although the amount not spent two years after first use of the card or three years after the production
date visible on the card is gradually reduced at a rate of 2 Euro/month. Changing the pass phrase is
enough  to  prolong  the  first  2-year  period.  Simple  transfer  of  PINs  (with  remaining  credit)  between
ordinary  owners  of  the  PIN  seems  feasible.  However,  compared  to  transfer  to  Web-shops  some
additional trust between the partners has to be established outside of the system in this case and the
amount transferred is not easily redeemable. Therefore there is doubt whether this is a “real” form of
e-money, namely electronic cash in the sense of Chaum or even of the e-money Directive, but for most
practical purposes it comes close. The company has announced its willingness  to  support  person-to-
person payments in the future.

The system has obviously to be financed by the recipients of the funds, mainly the Web-shops that
benefit by the guaranteed crediting because of pre-payment and the possibility of micropayments. An
additional  attraction  compared  to  credit  cards  is  the  lack  of  chargeback  rates  if  delivery  fails.
Compared  to  credit  cards,  the  cost  for  these  benefits  is  a  slightly  increased  charge  for  Web-shops
(about  5%  for  all  tangible  goods,  varying  from  10  to  15%  for  downloadable  goods,  being  high  for
erotic  shops  and  low  for  scientific  information).  The  company  also  provides  technical  support  for
Web-shops starting co-operation with the service. Paysafecard may easily be integrated into platforms
providing comprehensive payment solutions for shops, such as Wirecard or PowerCash21.

All  consumers  may  communicate  with  the  Paysafecard  server  with  a  Web  browser  with  SSL
security  level  2,  an  encrypted  communication  mode  with  reasonably  high  security,  which  involves
certification of the server. Web-shops on the other hand communicate with Paysafecard using SSL v3,
which asks also for authentication of the shop. As long as one is fairly sure that no keystroke sniffing
mechanism  is  built  into  it,  one  may  trust  a  public  terminal.  That  means  not  even  an  own  Internet
access is necessary. In the worst case, damage is limited to the prepaid amount on a card.

According to Paysafecard, experience in Austria seems to indicate very good acceptance. Although
a very limited public relation effort was made and not too many shops accepted the cards, sales of the
cards in the pre Christmas period exceeded expectations. About a third of the cards sold in the early
period were red cards for young persons under 18. They are a major target for the system: while the

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majority  of  visitors  to  many  Web  sites  are  juniors,  the  majority  of  customers  are  of  the  older  age
bracket.  Availability  of  payment  mechanisms  definitely  provides  the  youth  segment  with  the
opportunity  to  participate  in  e-commerce.  Youth  oriented  shops  and  services  with  small  unit  value
sales  are  main  partners.  The  system  is  not  necessarily  restricted  to  scratch  cards.  Prepaid  accounts
accessible by PIN may also be sold via the Internet, using electronic banking, direct debiting or credit
cards. This will enable reloadable PINs for those willing to accept a slightly higher risk. Preparations
to offer such services this year are already being made.

Preparations  for  the  start  of  the  service  in  Germany  are  well  advanced:  In  this  case  the  banking
partner  in  Germany  is  Commerzbank  and  other  outlets  for  the  sale  of  the  cards  (50,  100  and  200
DEM)  will  be  tobacconists,  filling  stations,  national  lottery  agencies  and  electronics  chains.  Co-
operation with mobile phone companies is being discussed (first implementations in re-loading mobile
cards  using  paysafe-PINs  in  Austria  exist).  Paysafecard  Germany  is  located  in  Düsseldorf  and  the
larger scale starting efforts will concentrate on the industrial centres in Nordrhein-Westfalen along the
Rhein/Ruhr and the larger towns of Germany, most likely during May 2001 with sale of cards in about
5000  outlets  and  about  50  companies  with  Web-shops.  Significant  also  for  Austria  may  be  the
involvement of Bertelsmann Media. The technology partner of Paysafecard is IBM which will provide
the service in European countries in which Paysafecard is not yet present. There are already definite
plans for two further European countries and one non-European.

A similar service has been announced in Denmark (Webcard) but according to its Web page this
seems not to be nearly as advanced as the Austrian initiative. Scratch cards are used in Spain to load
Movistar Activa Cards of a mobile phone service operator, which can also be used for e-payment.

The idea behind this scheme was triggered by the fact that the founder of Paysafecard in Austria,
the physicist Armin Sageder, was the victim of a credit card fraud during an extended absence, while
visiting the Kilimanjaro in Tanzania.

The system limits the loss to the prepaid amount and results in no further unusual complications in
case  of  the  loss  or  misuse  of  the  card.  Pass  phrase  protected  cards  (the  phrase  with  up  to  30
alphanumeric  characters)  will  be  useless  to  unauthorised  persons.  As  Germany  and  Austria  are  not
well equipped with credit cards and minors cannot have them anyway, this is a viable form to market
anonymous eMoney. It meets the cash oriented consumer behaviour in those countries.

[info]
• The  web  site  of 

the  Paysafecard  company,  which  contains  an  extensive  collection  of  press  references:

http://www.paysafecard.com

•  The web sites of the two platforms incorporating the Paysafecard as an option among others:
- http://www.inatec.com
- http://www.wirecard.de
•  The site of a company announcing a similar solution for Denmark: http://www.mywebcard.dk
•  The Spanish mobile phone company: http://209.238.115.27/tsm_eng/sp990722.htm (Movistar Activa Cards)

[6&5]
Solving  the  Standardisation  Problem  of  Internet-payments:  The  Case  of  Bibit,  TWYP
and SmartAxis
Simon Lelieveldt (simonl@wxs.nl), Amsterdam, the Netherlands
/standards/regulation/competition/integrators

Many policy-makers and politicians believe that the multitude of local payment methods constitutes a
barrier to cross-border electronic trade over the Internet. As a result they call for standardisation of
payment  methods.  The  lack  of  standardisation  could  however  also  be  viewed  as  a  business
opportunity. This article describes how this business opportunity is being exploited for both chipcard-
based and other payment instruments on the web.

Since the beginning  of  the  1990s,  non-bank  players  have  stimulated  the  Dutch  financial  industry  to
determine  their  strategic  position  and  to  decide  how  to  develop  new  card-  and  Internet  payment
products. As for Internet-payments the Dutch banks were prepared to sign a deal with DigiCash, until

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

- 97 -

its CEO publicly stated that the chipcard-systems of banks were unsafe. Since then, the Dutch banks
set  out  to  develop  an  account-based  product  of  their  own  with  the  name  I-pay.  During  the  official
introduction of this banking product in  1997,  representatives  of  Bibit, a  start-up  that  had just  begun
providing Internet payments and Internet billing services, filled a small part of the  exhibition  space.
Most bankers present felt compassion for Bibit, being a small start-up with little experience and trying
to put themselves on the map as far as possible with the limited funds available.

Four years later, the I-pay product has been upgraded to become SET-interoperable and has been
extended to allow payments with debit-cards. The I-pay product is however seldom used, while Bibit
has  attracted  series  of  investors  and  has  established  itself  as  a  recognized  provider  of  payment
solutions on the Internet, offering a complete, easy to integrate, payment back-office for organisations
on  the  web.  Bibit  processes  a  diversity  of  Internet  (SSL,  SET,  I-pay)  or  non-internet  payment
mechanisms (credit-transfers or one time  direct  debits  from  a  number  of  countries)  with the slogan:
Global Commerce, local payments. In practice a merchant can sign up with Bibit in such a way that
consumers  shop  at  the  merchants’  web-site,  but  are  redirected  to  the  Bibit-payment  engine  at  the
moment  of  payment  for  goods  or  services.  An  indication  of  the  leading  role  of  Bibit  is  that
KPNTelecommerce (a direct competitor in providing Internet payment solutions) recently decided to
migrate its clients (that used the KPN-solution Nettransact) to Bibit’s payment solution.

Bibit offers web-merchants two different payment packages. The Standard Payment Services could
be seen as a ‘national payment service’ as it facilitates payments in one currency only and by means of
the payment methods of that country only. In this package merchants are obliged to use the Bibit-logo
on their website. Also, the individual SSL credit-card payments may not exceed an amount of  EUR
450. The payments are routed via Bibit to the merchant, who pays a subscription fee of EUR 70 per
month  as  well  as  a  transaction  fee  between  EUR  1.0  and  EUR  0.42.  On  top  of  those  Bibit-fees,
merchants need to pay the bank (EUR 0.30 for a Dutch credit-transfer) or credit-card costs (varying
from 3 or 4 % of the value for credit-card payments). In the Plus Payment Service, which has a more
international flavour, merchants are allowed  to use a  choice  of currencies  and payment  instruments,
use their own connection number  with financial  institutions  or  credit-card  organisations and  can  get
the funds credited to their accounts directly. There is no obligation to display the Bibit-logo and credit-
card payments by SSL may exceed the amount of EUR 450. These additional features can be obtained
by paying the higher monthly subscription fee of  EUR  130.  In  both  packages  merchants  may  buy  a
monthly block of 2000 transactions for EUR 883. In this case every transaction costs EUR 0.42. The
additional cost of a refund is EUR 2.97 and the additional cost of a charge back is EUR 5.95.

The  business  strategy  of  Bibit  over  the  past  years  has  been  to  establish  a  solid  user  base  and
technology  and  team  up  with  good  local  partners.  Computercentrum  C.  Van  de  Velden  (CCV),
supplier of over 50,000 physical payment terminals in The Netherlands, has been signed up to sell and
support  Bibit's  Internet  Payment  Service  in  The  Netherlands.  Also  an  agreement  was  made  with
E.trade, a provider of standard merchant software for the small and medium sized companies. E.trade
has repackaged Bibit’s Standard Payment Package into a separate product called Pay-it-Now, which is
only available for merchants whose credentials have been checked with the Chamber of Commerce.
This product feature aims to increase the trust on the side of the consumer. The monthly subscription
price for Pay-it-Now is EUR 42 instead of the EUR 70 of Bibit. All other transaction fees are the same
as in the Bibit Standard Package.

Having established its home base, Bibit has started to operate in other countries such as Germany,
France, Belgium and has signed a joint marketing agreement with Alysis Technologies, a US provider
of end-to-end, component-based electronic bill presentment and payment (EBPP) software, in order to
penetrate  the  US  Market.  On  the  technology-side  Bibit  has  enabled  WAP-payments  and  Internet-
billing mechanisms, while it has also attracted some experienced staff to be able to fulfil its ambitions.
ING Group is the only Dutch financial institution that has reacted to the success of Bibit by setting
up its own organisation called TWYP (The Way You Pay). TWYP provides a similar service as Bibit
does, although it is limited to usage of the domestic currency. The charges for TWYP are a fixed fee
of EUR 70 and a transaction fee of EUR 0.30 - EUR 0.75 per transaction (depending on volume). On
top of those charges the regular fees are levied for usage of credit-card of bank payment instruments.

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

- 98 -

Whether or not TWYP is a success is hard to establish. In general retailers tend to believe that both
Bibit and TWYP are quite expensive, especially when fees are compared to the Dutch domestic retail
payment fees. Yet, many retailers choose to use Bibit on the basis of a make-or-buy analysis and the
argument that it would be more cumbersome and costly to operate their own payment engines.

A  company  that  is  similar  to  Bibit  is  SmartAxis,  which  offers  web-payment  solutions,  with  a
specific focus on integrating all kinds of smart-card payments. It currently facilitates payments  with
the Mondex and Proton purses, and signed a similar deal with Clip in March 2000. In January 2001 it
signed an agreement with Network for Electronic Transfers Singapore Pte Ltd (NETS), the operator of
the Singapore CashCard programme, to promote international CashCard payments over the  Internet.
The difference to Bibit is that SmartAxis aims at positioning itself as an integrating payment brand on
top of all existing brands. The success of SmartAxis is currently not as clear, probably because of the
lack of usage of electronic purses, but perhaps also because users need to download and run software.
The Internet-world, on the other hand, is now orienting itself towards other revenue models, in which
the e-purse payment mechanism may get a prominent role. So the ambition of SmartAxis to become
the Visa-equivalent of the virtual e-purse may some day even become a reality.

[info]
• Overview  of  development  of  chipcard-initiatives  in  the  Netherlands:  Bank  for  International  Settlements:  Survey  of

electronic money developments, pp. 62-65. http://www.bis.org/publ/cpss38.pdf
and 

DigiCash 

between 

inside 

story 

deal 

the 

on 

•  The 

Dutch 

banks 

(in 

Dutch)

http://www.shmoo.com/mail/cypherpunks/feb99/msg00047.html

•  Bibit: http://www.bibit.com         List of merchants using Bibit: http://www.bibit.com/clients/moreclients.asp
•  SmartAxis: http://www.smartaxis.com
•  Press announcement launch of Pay-it-Now (in Dutch): http://home.etrade.nl/nieuws/persbericht_pin.htm
•  Discussion  of  standardisation  competition  and  regulatory  intervention  on  the  basis  of  Dutch  case  studies:
Lelieveldt,  Simon  L,  Standardising  Retail  Payment  Instruments.  In:  Jacobs,  K.  Information  Technology  Standards  and
Standardisation: A Global Perspective. Hershey, 2000, pp 186-197.   http://home.planet.nl/~simonl/leliev.pdf

[6&6]
Fast Electronic Purses and Transport Tickets in Japan
Arnd Weber (arnd.weber@itas.fzk.de), ITAS, Karlsruhe, Germany
/electronic money/public transport/contactless smartcard/magnetic cards/transport ticket/Japan

Japanese  companies  from  different  industries  have  developed  and  already  started  to  deploy  fast
contactless  electronic  purse  and  transport  ticketing  schemes.  The  purses  are  expected  to  be  used
mainly  in transport,  but  also at  other  vending  machines,  in convenience stores,  and  in  both  normal
and cyber shops. Mobile phones are planned to be used for payment and reloading.

In Europe, the national smartcard-based electronic cash schemes have difficulties in achieving a high
usage,  with  figures  of  between .3  to  3  transactions  per  active  or  activated  card  per  month.  In  Hong
Kong,  Creative  Star,  using  the  Sony  Felica  card,  has  achieved  a  high  usage  of  electronic  cash  in
transport.  There,  citizens  will  probably  use  it  increasingly  outside  transport  (see  ePSO-N  5&6).  In
Japan, several companies are currently aiming at repeating this success in a large country, under more
difficult  conditions  than  in  Hong  Kong.  To  understand  the  Japanese  situation  in  payment  and
transport, the following background information will be helpful.
•  The  large  trials  of  electronic  cash  in  the  Tokyo  area,  with  VisaCash  in  Shibuya  and  NTT
Supercash  in  Shinjuku,  did  not  lead  to  high  transaction  numbers  (see  ePSO-N  3&6).  The  most
important vending machines, i.e. those in public transport, were, however, not converted (with the
exception of the relatively small Tokyu Railway in the Visa trial).
Japan is a country with a high rate of cash/GDP (about 11 percent compared to about 5 percent in
the U.S. and the EU) and little use of payment cards at points of sale. Even utility company bills
are frequently paid in cash, which can be done in so-called convenience stores.

•  Convenience stores are a kind of supermarkets, which essentially offer packed food all around the

• 

clock. They are very wide-spread.

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• 

•  The  usage  of  debit  and  credit  cards  is  increasing  rapidly.  Currently,  Tokyo  is  full  of
advertisements for Visa, Mastercard and J-Debit cards, thus it can be assumed  that  the  usage  of
postpay cards will increase, much like it did during the last 10 years in Europe.
In Japan, about 2.3 million drink vending machines are operational, with electricity available for
cooling or heating drinks.

•  Public transport typically uses gates for checking in and out of stations and buses. The gates have
magnetic  card  readers.  In  the  Tokyo  area  several  railway  companies  operate  different  lines.  In
addition,  there  are  different  bus  companies.  These  place  the  gates  just  behind  the  bus  doors.
Commuters  often  use  several  operators.  Many  commuters  use  season  tickets  for  their  normal
route. Other forms of discount are given as well, such as sales of batches of tickets at a reduced
price. When customers make a trip outside the validity area of their season tickets, they often have
to pay different operators. So far, this has been done via cash. Postpay cards can hardly be used;
though Japan Rail is a Visa card issuer, it accepts only Visa card payments from cards issued by
itself. The use of gates can lead to queues, therefore these have to be designed to operate at high
speed. In the Shinjuku station in Tokyo a single gate can handle up to 70 persons per minute. The
Japanese public transport situation is thus similar to that in Hong Kong, with many operators, each
using gates. However, there is the important difference that pre-sold tickets at reduced prices are
available.

Currently, there are different initiatives in the field of purses and transport tickets.

Edy: Sony has started a joint venture to promote an electronic purse, based on its Felica card. It will
be branded as Edy. Sony Corporation and Sony Finance will have a 47 percent stake in the venture,
smaller stakes  will  be  held  by  the telecoms  NTT  DoCoMo  and  KDDI,  and  by  Toyota.  The  Sakura,
Sanwa and Tokyo-Mitsubishi banks will participate as well. The Denso Corporation is also among the
partners and will participate in the production of reader/writers. The Edy card is to be deployed later
this year. It has an inductive interface. Currently, it is being tested in the Gatecity shopping centre in
the Ohsaki area of Tokyo. Here, a pendant with the chip and coil in it, to be worn around the neck, can
be used instead of the card. It is of similar size to the watches sold in Hong Kong.

In the rollout, planned for October 2001, purse payments will be possible at vending machines and
convenience stores. Payments on the Internet and in mobile commerce are also foreseen.  30  million
users, 25,000 real outlets, 30,000 cyber outlets, 1 million vending machines and 15 million personal
terminals are to be deployed within 5 years.

Matsushita (Panasonic) plans to test a system based on the Felica card and  mobile phones  in  the
underground railway of Sapporo. It is not yet known whether the Felica coil and chip will be put into
phones, or whether there will be a reader/writer in phones, or whether both options will be tested.
Suica: Also during this year, the East Japan Railway Company (JR East), which operates in the Tokyo
area and to the East of it, will introduce Felica for fast verification of season tickets, and for payment
of single tickets. As JR East intends to keep its gates, it will use the “touch-and-go” principle of card
usage.  This  leads  to  the  requirement  of  having  a  transaction  processed  in  200  ms.  This  scheme  is
nicknamed Suica.
Passnet:  20  railway  companies  in  the  Tokyo  area  started  rollout  of  a  prepaid  magnetic  card  called
“Passnet”,  late  last  year,  and  plan  to  finalise  it  this  year.  The  card  is  disposable,  and  available  in
denominations up to 5,000 Yen (about 50  Euros).  It  will  abolish  the  need  to purchase  single  tickets
against cash.
Related  initiatives:  There  are  more  initiatives  in  the  field  of  smartcards,  purses  and  transport
ticketing.  NTT,  the  former  national  telecom,  published  they  developed  a  smartcard  allowing  for  a
digitally  signed  purse  payment  in  less  than  400  ms.  Furthermore,  banks  plan  for  the  transition  of
smartcards at a national scale. Sumitomo Bank, for instance, will issue 8 million smartcards. Toyota
intends to issue smartcards as well.

The  above  developments  raise  the  question:  which  purse  technology  will  be  included  in  which

future card? Compared to Hong Kong, the situation is more risky for the players, for two reasons.
1.  There are discount tickets available, so the benefit of using electronic cash in public transport is

smaller than in Hong Kong.

2.  There is the risk that purse schemes will not be inter-operable, thus making it less attractive for

consumers to load money onto them in the first place.

Thus, for increasing network effects, the following elements it will be important:

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

Inter-operability

• 
•  Usability at convenience stores, including possibilities for reloading
•  Usability of mobile phones for payment and reloading
•  Automatic reloading for bank account holders, as available in Hong Kong.

It will be interesting to watch whether the players will provide these characteristics. Given the high
numbers  of  vending  machines  and transport  gates, they  have  a  chance  to  operate  a  national  scheme
providing a lot of convenience to the consumers.

- 100 -

[info]
• Card Technology, several issues
•  Gatecity: http://www.gatecity.co.jp/edy/index.html
•  Japaninc: Wireless train commuter cards. http://www.japaninc.net/jin/2001/issue_116.html
•  NTT Communications Corporation. Nippon Telegraph and Telephone Corporation. NTT Com, NTT Realize World's First
IC  Cards.

of  Public-Key  Encryption  Using  Combined  Contact/Contactless 

High-Speed  Processing 
http://www.ntt.co.jp/news/news01e/0102/010202.html February 2, 2001

•  Sony: Eleven Companies Collaborate to Promote the "Edy"  Prepaid Electronic Money  Service  for  the  IT  Era.  Dec.  25,

2000 http://www.world.sony.com/News/Press/200012/00-1225E/

•  Supercash: http://www.s-cash.gr.jp
•  Tokyo 
Convention 

& 
http://www.tcvb.or.jp/tou_info/new/0009/passnet.htm

Visitors 

Bureau: 

•  Visacash: http://www.shibuya-smart.com/

Get 

around 

Tokyo 

with 

One 

Little 

Card!

Note:  “Excite”  offers  a  service  for  automatic  translation  of  Web  sites  in  Japanese.  It  works  as  follows.  Have
Java/Active  X  enabled.  Go  to  http://www.excite.co.jp/world/url,  a  field  starting  with  <http://>  will  be  shown.
Paste the URL  which points to a page  with Japanese characters  you  want to have translated into it. Under the
field, you will find a box. The left field is pre-selected. Tick the right field, it is for obtaining translation from
Japanese  to  English.  Hit  the  orange  button  on  the  right  hand  side  of  the  URL-field.  Wait  and  enjoy  the
translation.

[6&7]
European Commission's Financial Internet Working Group Outlines its Work
Charles Goldfinger (CHARLES_GOLD@COMPUSERVE.COM), Chairman of FIWG, Brussels, Belgium
/Cyberfinance/electronic payment systems/internet/security/electronic banking/EC project

The  “Financial  Internet  Working  Group”  is  a  cross-sectoral,  cross-institutional  forum  that  brings
together  financial  institutions  and  technology  providers,  traditional  players  and  newcomers,  public
authorities and the private sector. Its overall objective is to facilitate the deployment of cyberfinance
within  Europe  with  a  focus  on  three  areas:  institutional  payment  systems,  retail  banking,  securities
markets. FIWG is a project of Key Action II (New Methods of Work and Electronic Commerce) and
forms  as  such  part  of  the  European  Commission's  Information  Society  Technologies  (IST)  specific
program. Although it is EC funded FIWG acts independently.

Internet  is  often  described  as  a  "digital  tornado".  Financial  services  are  in  the  eye  of  the  "digital
tornado". Their mutation is rapid and far-reaching, and its pace and reach are likely to accelerate in the
next  five  to  ten  years.  Contrary  to  widespread  perception,  European  companies  have  acquired
significant  know-how  and  expertise  in  several  areas  of  electronic  finance.  For  instance  in  financial
smart cards, EFT-POS or home banking, European banks and technology providers have achieved a
market penetration, which is considerably higher than in the US or in Japan.

However,  the  Internet  tornado  introduces  a  threat.  European  institutions  and  actors  have  been
unable to capitalise on their technological advance and to impose their solutions as global standards.
Unless  this  situation  is  speedily  remedied,  European  companies  may  be  placed  at  a  competitive
disadvantage, relative to their US counterparts. European banking and financial markets in particular
need to adapt to the twin challenges of Internet (cyberfinance) and euro (eurofinance).

Recognising  the  critical  importance  of  electronic  finance,  the  European  Commission  decided  to
create  in  1996  a  Financial  Issues  Working  Group  (FIWG).  The  overall  aim  of  FIWG  has  been  to
stimulate the development of financial infrastructure, systems and transaction mechanisms necessary

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

- 101 -

for the successful growth of electronic commerce within the European Union. Since July 1997, FIWG
has benefited from European Commission’s support as an Accompanying Measure (Esprit Project no
26029).

Financial  Internet  Working  Group  builds  upon  this  earlier  work.  Its  efforts  will  be  more
specifically  focused  on  cyberfinance,  hence  the  slight  but  significant  change  in  the  Working  Group
name. FIWG has decided to focus on three areas due to their strategic importance within the cyber-
finance  domain:  institutional  payment  systems,  retail  banking,  and  securities  markets.  For  each  of
these areas a Working Party is planned, comprising representatives of various sectors concerned with
cyberfinance: financial services institutions, IT suppliers, regulatory authorities, service providers, and
research establishments. Working Parties will seek to enhance a shared understanding of interactions
between  technological,  business  and  regulatory  aspects  of  cyberfinance  and  to  stimulate  innovative
cyberfinance initiatives and projects. FIWG will also develop a knowledge base on the areas of interest
and  co-operate  with  organisations  sharing  similar  interests  in  the  European  Union  and  in  G-8
countries.  The  Working  Parties  on  securities  markets  and  payment  systems  have  already  been
established.

• 

Three types of deliverables are foreseen:
Issue  papers,  identifying  and  analysing  key  business,  technological  and  regulatory  issues  whose
resolution is critical to further development in the area,

•  Position papers, defining a consensus within the group and within the concerned parties on these

issues

•  Action plans including proposals for interoperability initiatives and pilot projects. Such proposals
could  be  submitted  for  funding  to  the  European  Commission.  FIWG  staff  and  members  will
participate in the promotion and development of these proposals

FIWG activities will be accompanied by an active dissemination program, targeting key users and
decision-making  audiences,  through  both  physical  (seminars,  conferences,  publications)  and  virtual
means.  The  FIWG  Web  site  will  also  constitute  a  key  vector  of  co-operation  within  and  among
members of Working Party forces.

[info]
• For more information on FIWG and its work see http://www.fininter.net. See also the IST Project Fact Sheet on FIWG

at http://dbs.cordis.lu/fep-cgi/srchidadb?ACTION=D&CALLER=PROJ_IST&QM_EP_RCN_A=53706

[6&8]
Payment Systems Data: Norges Bank Shows the Way
Leo Van Hove (Leo.Van.Hove@vub.ac.be), Free University of Brussels, Belgium
/review/payment systems/costs of payment systems/pricing/Norway

The recent Report on Payment Systems by the Norges Bank presents a clear picture of the Norwegian
payment system and provides a wealth of statistical data. It is easily the best report of its kind and an
example for other central banks. Especially the data on price trends of payment instruments and the
resulting impact on the use of the different means of payment are of interest.

Since 1987 the central bank of Norway has published an annual report on domestic payment systems.
The most recent version relates mainly to 1999 and was released in November last  year. The report
presents  the  main  features  of  the  Norwegian  payment  system  and  gives  an  account  of  the  most
important events (Chapter 2). The report also touches on international aspects (Chapter 3), and – most
importantly – provides a wealth of statistical data on transactions, turnover and prices (in Chapters 4
and 5, as well as in a statistical annex). A short chapter on Norges Bank's specific responsibilities in
connection with payment systems concludes the report.

Chapter  2  –  the  'descriptive'  chapter  –  covers  both  clearing  and  settlement  systems  and  retail
payment systems. It presents a clear picture of the way the Norwegian payment system is structured,
sets  out  the  legal  framework  and  summarises  recent  developments.  In  2000  the  legal  framework

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

- 102 -

changed drastically since the 1999 'Act relating to Payment Systems, etc.' entered into force. Before
this,  there  was  no  separate  regulation  of  payment  systems  in  Norway.  The  Act  introduces  an
authorisation  requirement  for  establishing  and  operating  interbank  systems  and  gives  Norges  Bank
responsibility for supervision. It also introduces mandatory notification of the Banking, Insurance and
Securities Commission when establishing a retail payment system. The Commission may then order
the  operator  to  implement  changes.  The  Act  also  regulates  "electronic  cash  card  systems  that  are
backed  by  customer  accounts  in  banks  and  financial  undertakings"  (p.  13).  As  for  recent
developments, the report notes a dramatic increase in the use of net banking services (home banking
via the Internet). Not surprisingly, in Norway too, 'traditional' means of payment dominate electronic
commerce. So far, there are no fully operational e-money systems in Norway. Invoicing proves to be
increasingly used, together with COD (cash on delivery) and credit cards. However, in 2000, BBS –
the Norwegian banks' central clearing house – launched a service called BBS ePay, a simplified SET
solution  for  card  payments  over  the  Internet.  And  a  number  of  Norwegian  banks  were  planning  to
launch  a  Proton-based  electronic  purse  for  use  with  digital  pay-TV  –  with  additional  applications
being  considered.  The  introduction  is  part  of  a  larger  project,  called  'Smart  Card  Norway  Project',
initiated  by  four  of  Norway's  largest  banks  in  co-operation  with  BBS.  The  project's  objective  is  to
convert all Norwegian bank cards to EMV-compliant smart card technology by the end of 2004.

Chapter 3 discusses the introduction of TARGET (to which Norges Bank has not been allowed to
link up, but Norwegian banks  with  branch  offices in the  EU  have  access to TARGET through  their
branches), and explains how cross-border payment transactions are handled by Norwegian banks. One
of the tables in the annex shows that there is ample room for improvement here: on January 1, 2000
sending a cheque of NOK 100 (some 12 euro) to another country cost on average NOK 135.86 for a
paper-based cheque and NOK 60.89 when the payment order is submitted via an electronic channel –
 with the highest price being as high as NOK 175.00 (and the lowest being NOK 10.00).

Finally, Chapters 4 and 5 clearly show that over the years the Norges Bank has put a lot of work
into  collecting  data  on  transactions,  turnover  and  prices.  It  is  obviously  impossible  to  summarise
everything  here.  Let  me just  point  out  that the use  of  payment  cards  has  increased  sharply  over  the
period 1988-1999, while the use of cheques has declined markedly. In 1999, the use of cheques was
one-tenth  of  what  it  was  ten  years  earlier,  whereas  payment  cards  were  used  nine  times  more
frequently  than  in  1989.  Between  1998  and  1999  alone,  the  number  of  cheques  dropped  by  33%.
Furthermore, the use of electronic giro services has risen at the expense of paper-based giro services
and there are indications of stagnating ATM use. Overall, the report notes that while in 1994 Norway
lagged behind the other Nordic countries in terms of efficiency of the retail payment system (measured
as  the  share  of  electronic  payments  in  the  total  number  of  cash  payments),  it  has  considerably
narrowed the gap since.

As I already mentioned in ePSO-N 2, the above developments have a lot to do with the fact that
Norwegian banks have increasingly tried to make explicit the costs of the different means of payment
in  the  prices  they  charge.  The  Norges  Bank  has  been  monitoring  these  price  trends  since  1989,
resulting  in  an  unparalleled  wealth  of  data.  Compared  with  1999,  prices  for  2000  –  collected  on  1
January – prove to have increased for most payment services. The report notes that "this increase is a
continuation of a long-term trend in the 1990s towards more cost-based pricing for payment services.
Thus, to a greater extent than earlier, current prices reflect banks' real costs for payment services" (p.
28).  Importantly,  prices  have  risen  most  for  paper-based  services,  such  as  giros  delivered  at  the
counter  and  personal  cheques.  Between  1999  and  2000  alone,  the  price  for  processing  cheques,  for
example, rose by 20%. The result is that prices for electronic services are generally significantly lower
than for paper-based services. For example, at the beginning  of  2000,  the  price  for  a telephone  giro
was NOK 2.38 and the price for a giro paid over the Internet was NOK 2.31. This is considerably less
than  the  price  of  their  'competitor',  the  mail  giro,  which  costs  NOK  4.84.  Interestingly  enough,  the
spread  in  the  individual  banks'  prices  turns  out  to  be  relatively  large  for  many  payment  services.
However, the variation for paper-based services is substantially less pronounced than the variation for
electronic services. All banks have high prices for giros paid by account debits at the counter, giros
paid in cash at the counter, cheques and remittances with payment instructions.

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

- 103 -

To conclude, as far as I know, this is the best central bank report on payment systems available –
especially insofar as retail payments are concerned. It is very comprehensive and therefore very useful
for  outsiders  – either  foreigners like  myself  or  non-specialists –  on  their  first  acquaintance  with  the
Norwegian  payment  system;  especially  so  because  the  report  presupposes  very  little  in  terms  of
advance  knowledge.  For  example,  the  report  takes  pains  to  explain  typical  Norwegian  payment
practices such as mail giros and oil company cards. As a researcher, I was particularly impressed by
the amount and detail of the data in the report, especially concerning prices. The report also reflects a
commendable  openness.  For  example,  not  many  central  banks  publish  data  on  the  rate  of  return  of
banknotes and their average life. In short, the Report on Payment Systems is a model report. Let us
hope that it induces other central banks to publish similar reports so that the ECB and BIS publications
(see ePSO-N 1) become more informative.

[info]
• Norges Bank, Payments Systems Report 1999, Norges Bank, November 2000
http://www.norges-bank.no/english/publications/paymentsystems/
With thanks to Malte Krüger for suggesting the topic of this review.

—————————————— ePSO-Newsletter Issue 6 – March 2001 ——————————————

- 104 -

EPSO Newsletter – Issue 7, May 2001

Focus: European Regulation of Electronic Money Institutions

[7&1]
Editorial: Europe – A Levelled Field for Electronic Money?
Arnd Weber (arnd.weber@itas.fzk.de), ITAS, Karlsruhe, Germany
/EMI Directive/electronic money/regulation

This issue focuses on the EU regulation of electronic money. The history, objectives and contents of
the  relevant  Directives  regulating  Electronic  Money  Institutions  (EMIs)  are  analysed,  discussing
issues such as innovativeness, monetary control, emerging markets, scope for national legislation, and
costs of running an EMI.

EU regulation of electronic money – isn’t this a boring subject? Here are the reasons why you should
continue reading:
•  Electronic  money  is  not  dead.  There  are  chances  that  we  will  see  it  for  the  teenage  market,  for

• 

public transport, for loyalty schemes, for on-line sales of music and videos, etc.
Innovative  money  schemes  have  to  comply  with  several  EU  Directives,  forthcoming  laws  and
supervision by the national authorities. We discuss whether this will hinder the innovativeness of
European ventures in this field.

•  The EU Directives say that not only traditional banks should be allowed to issue electronic money.
We learned, however, from the European Commission that national legislators have the freedom
to require traditional bank status. What does that mean?
We  start  the  focus  theme  with  a  contribution  by  Marc  Vereecken,  author  of  a  forthcoming
commentary  on  EU  banking  regulation.  He  gives  an  overview  of  the  objectives  and  contents  of  the
Directive  on  Electronic  Money  Institutions  (EMI  Directive).  He  tells  us  that  there  are  actually  two
Directives concerning electronic money, the second one ruling that Electronic  Money  Institutions  in
some  respects fall  under  the  regulation  concerning  credit institutions. The  latter are  regulated  in  yet
another Directive. Vereecken questions the need to bring e-money issuers into the realm of  banking
regulation.

While  the  Directives  were  adopted  in  the  year  2000,  it  is  now  already  10  years  ago  since
enthusiasts of European unification envisaged what was called an “electronic ECU”. The idea was to
introduce the European currency earlier than coins and bank notes, so that citizens would have been
able to use a smartcard-based ECU in their daily lives. Recall that already in the eighties, European
banks had started tests of electronic cash, such as a UBS trial in Swiss St. Moritz, in which a smartcard
purse  was  usable  in  a  variety  of  shops,  even  for  higher  values.  Thus,  one  objective  of  the  early
proposals for a European Directive was to support monetary unification. After we’ve seen the lack of
profitability of many e-purses, and the lack of need for electronic cash in e-commerce, the Directive
may now appear to be unnecessary, as there is not much to regulate. However, as Hugo Godschalk’s
article or the report on the Digital Money Forum show, this may change.

The  articles  of  Marc  Vereecken,  Simon  Lelieveldt  and  Hugo  Godschalk  show  that  the  draft
Directive  was  changed  substantially  under  the  influence  of  the  European  Central  Bank.  Therefore,
Malte Krueger interviewed Koenraad de Geest from the European Central Bank to learn more about
their  position.  De  Geest  highlights  the  crucial  distinction  between  supervision  and  payment  system
oversight. He also stresses the ECB’s concern that the “waiver” should be used prudently. Under this
waiver, issuers in a “limited local area” and other smaller issuers are exempted from the requirements
for Electronic Money Institutions. This leads, e.g., to the question whether regional transport operators
will be allowed to operate under the waiver when issuing value which can also be used by merchants
in their areas.

Once an Electronic Money Institution has obtained the so-called “passport”, the Directive regulates
that other member states cannot hinder their operation. Given (1) that the current usage of electronic

—————————————— ePSO-Newsletter Issue 7 – May 2001 ——————————————

- 105 -

money  on  the  market  is  rather  low,  and  (2)  that  many  regulators  favour  traditional  banks,  it  is  less
surprising that we learned that the pre-dominant Commission opinion is that member states are free to
request  that  only  traditional  banks  should  be  allowed  to  issue  money.  Their  interpretation  of  the
Directive goes like this:

The EMI Directive spells out minimum requirements for the European passport of the Electronic
Money  Institutions.  Member  states  are  free  to  impose  more  stringent  requirements  for  electronic
money issuers. Member states can limit the issuance of electronic money to traditional banks. There is
no obligation for member states to allow EMIs in the sense  of the  Directive,  i.e.  smaller  companies
with lower capital and operational requirements than traditional banks. Member states are, however,
obliged to allow operation of EMIs from other member states. In this respect, they will have to remove
any legal obstacles.

This can lead to the interesting situation that a foreign issuer, such as a telecom, or more precisely
its subsidiary, issues electronic money in a member state, while the non-banks residing in that state are
not allowed to do the same.

What exactly will be required from a potential national issuer will thus depend very much on the
principles and the details of the national regulations. How stringent will requirements be, how difficult
will it be to comply? In other words, the national legislators can substantially influence the  costs of
setting up and running an EMI. Note that speakers at the Digital Money Forum identified that existing
types  of  electronic  cash  are  not  yet  as  usable  as  traditional  cash  regarding  universality,  anonymity,
tangibility etc., so new ventures could make sense.

The remainder of this newsletter is devoted to two articles. One is Karsten Stroborn’s review of the
University  of  Karlsruhe’s  German  Internet  payment  survey.  Consumer’s  security  concerns  become
clearly  visible,  such  as  their  preference  for  payment  after  receiving  the  goods,  and  needs  for
cancellation. Finally, Leo van Hove reviews a report from the Bank of Japan analysing the future role
of financial intermediaries.

[[[[info]]]]
•  Bündner Zeitung: Heute beginnt in St. Moritz das Mikrochip-Karten-Zeitalter. Dec. 1, 1989

[7&2]
A Harmonised EU Legal Framework for Electronic Money
Marc Vereecken (marcvereecken@hotmail.com), Brussels, Belgium
/EMI Directive/electronic money/regulation

This  article  briefly  describes  the  objectives  and  content  of  the  recent  E-money  Directives.  The  most
important objective is to grant the “single passport” for the issuance of E-money to non-traditional
credit  institutions,  so-called  “E-money  institutions”.  Some  shortcomings  are  also  discussed.  These
concern  the  definition  of  “E-money”  and  the  inclusion  of  E-money  institutions  in  the  Community
definition of “credit institution”. For a more in-depth analysis, see the [info] section below.

Introduction

On 18 September 2000, two Directives on Electronic money (hereinafter “E-money”) were adopted.
The main one is the European Parliament and Council Directive 2000/46/EC on the taking up, pursuit
of and prudential supervision of the business of electronic money institutions (“the Directive”), which
will be discussed in more detail hereunder.

Directive  2000/28/EC,  the  “other”  E-money  Directive,  merely  amends  the  Codified  Banking
Directive (2000/12/EC),  which  bundles  a  number  of  Directives  in  the  field  of  EU  banking  law  (the
First  and  Second  Banking  Directives,  the  Own  Funds  Directive,  the  Solvency  Ratio  Directive,  the
Consolidated  Supervision  Directive  and  the  Large  Exposures  Directive  as  well  as  all  the  Directives
amending  provisions  of  any  of  these  Directives)  into  one  new  Directive.  This  new  Directive
constitutes  a  code  of  EU  banking  law,  hence  it  is  called  the  “Codified  Banking  Directive”.  The

—————————————— ePSO-Newsletter Issue 7 – May 2001 ——————————————

- 106 -

amendments  provide  that  E-money  institutions  are  added  to  the  notion  of  “credit  institution”  as
defined in  the  Codified  Banking  Directive  and  that  E-money  issued  by  traditional  credit  institutions
should also be redeemable.

Objectives of the E-money Directives

The E-money Directives have multiple objectives:

A first objective is to grant the single passport for the issuing of E-money also to non-traditional
credit  institutions,  so-called  “E-money  institutions”.  To  that  effect,  a  minimum  set  of  harmonised
prudential  rules  is  agreed  upon  in  the  Directive.  E-money  institutions  that  have  been  found  by  the
competent  authorities  of  one  Member  State,  the  home  Member  State,  to  fulfil  these  harmonised
prudential rules (principle of “home country control”), receive an authorisation which entitles them to
issue E-money throughout the EU, either by providing these services at a distance to residents of other
Member States or by establishing a branch providing E-money issuance in those Member  States (or
both).  The  competent  authorities  of  the  host  Member  State  are  no  longer  entitled  to  require  that  E-
money institutions authorised in other Member States respect further supervisory requirements above
what is agreed at EU level, nor are they allowed to perform additional controls to check whether these
harmonised supervisory requirements are fulfilled. They recognise the soundness of the home Member
State’s competent authorities’ supervision (mutual recognition).

A  second  objective  is  to  protect  the  consumer  and  to  ensure  bearer  confidence.  The  prudential
framework  set  up  by  the  Directive  aims  at  safeguarding  the  financial  integrity  and  stability  of  E-
money  institutions.  Moreover,  the  consumer  at  all  times  benefits  from  the  right  to  exchange  his  E-
money back into coins and banknotes of the same amount (=redeemability at par value).

A  third  objective  is  to  avoid  any  distortion  of  competition  for  the  issuance  of  electronic  money
between traditional credit institutions and E-money institutions by subjecting both kinds of institutions
to prudential supervision. In order to level the playing field, the lighter prudential regime of E-money
institutions  is  balanced  by  the  restrictions  on  E-money  institutions’  business  activities  and
investments.

Finally,  by  harmonising  the  legal  framework  for  E-money  in  the  EU,  the  Directive  aims  at

establishing the legal certainty necessary for E-commerce to develop.

Directive 2000/46/EC

With Directive 2000/46/EC, the EU gives E-money institutions the “single passport” allowing them to
issue  E-money  on  a  cross-border  basis  or  to  establish  branches  in  other  Member  States  on  the  sole
basis of the authorisation delivered by the home Member State authorities.

Host Member States  allow  service providers from  other  Member  States to  provide services  or  to
establish branches on their territory because the latter fulfil the commonly agreed minimum prudential
requirements set out in the Directive. This prudential framework guarantees the financial integrity and
stability of the E-money institution as well as the protection of the host Member State consumers. E-
money institutions are thus also subjected to most of the provisions of the Codified Banking Directive
(except Title V, chapter 2, which deal with own funds, a solvency ratio, large exposures and qualifying
holdings outside the financial sector) and to the provisions of the Money Laundering Directive. They
are also subject to initial capital and own funds requirements as well as to limitations on the activities
they are allowed to carry out or the investments they are allowed to make.

The fact that E-money institutions must obtain an authorisation implies that third country schemes

are not entitled to remotely issue E-money in the EU.

A defect of the Directive is that the definition of “E-money” provides that E-money is “issued on
receipt  of  funds  of  an  amount  not  less  in  value  than  the  monetary  value  issued”.  It  is  logic  that  E-
money  schemes  should  not  be  allowed  to  issue  more  E-money  than  the  amount  of  legal  tender  or
scriptural money received in return. Otherwise, E-money issuers could expand the monetary mass in
an  uncontrolled  and  uncontrollable  way,  impacting  on  price  stability.  However,  such  a  prohibition
should have been included in a substantive article. Instead, it is contained in a definition. As a result,
any  E-money  scheme  where  monetary  value  is  being  created  and  which  has,  as  a  consequence,  an

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impact on monetary policy, is not captured by the definition of “E-money”. It is thus excluded from
the scope of this Directive and is not subject to the prudential and consumer protection measures set
out therein. This gap is to be filled as a matter of priority.

The  inclusion  of  E-money  institutions  in  the  Community  definition  of  credit  institution  seems  to
have  obeyed  political  imperatives  rather  than  the  declared  objective  of  levelling  the  playing  field
between E-money institutions and the traditional banks that issue E-money. The political imperative is
that the ECB (European Central Bank) wished to have the possibility to impose reserve requirements
on E-money institutions in order to fulfil its primary task of maintaining  price  stability  in the  Euro-
zone.  The  Protocol  on  the  Statute  of  the  ECB  and  the  ESCB  (European  System  of  Central  Banks),
however, provides only for the imposing of reserve requirements on “credit institutions”.

By  imposing  upon  credit  institutions  the  duty  to  maintain  substantial  amounts  of  money  on  an
account  with  a  central  bank,  the  ESCB  creates  an  artificial  lack  of  liquidity  in  the  market.  Credit
institutions,  whose  first  role  it  is  to  extend  credit  to  market  participants,  are  therefore  compelled  to
take up credit with the ESCB at the central interest rate set by the latter in order to be able to do so.
Obviously, the credit institutions will charge more for the credit they grant to market participants than
the central interest rate charged to them by the ESCB. In this way, the ESCB is able to steer the market
interest rate and, consequently, to make it more/less costly for market participants to take up credit. As
a  result,  investments  are  slowed  down/boosted  and  the  upwards/downwards  pressure  on  the  general
price  level  (=  inflation)  decreases/increases.  Reserve  requirements  are  thus  a  useful  tool  to  control
price stability. Given that E-money institutions do not extend credit, however, there is in the author’s
opinion no justification why they should be the subject of reserve requirements and therefore there is
no  reason  either  why  E-money  institutions  needed  to  be  included  in  the  EU  definition  of  “credit
institution”.

Finally, it should be noted that the application of this Directive can be waived for some E-money
schemes, e.g. when the amount of outstanding liabilities is limited to a maximum of 6 million EUR or
to a limited local area. These will, however, not be able to benefit from the single passport.

[[[[info]]]]
•  This  article  is  derived  from  a  commentary  by  the  same  author  on  “Payment  System  Rules  in  the  European  Union:  A
critical analysis of the EU Payment System Recommendations, the Cross-border credit transfer Directive, the Settlement
Finality Directive and the E-money Directives”, to be published in: Van Empel, M., Banking and EC Law Commentary,
Amsterdam Financial Series, Kluwer, Chapter 16; see also an article to be published shortly in European Business Law
Review,  “Electronic  Money:  EU  legislative  framework”,  Kluwer,  as  well  as  the  article  “Single  market  for  electronic
money”, Journal of International Banking Regulation, Vol. 2, No. 2, July 2000, p. 55-75.

•  The Directives are:
•  Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit of
and  prudential  supervision  of  the  business  of  electronic  money  institutions.  In:  Official  Journal  of  the  European
Communities of 27 October 2000, L 275, 39-43. http://europa.eu.int/eur-lex/en/lif/dat/2000/en_300L0046.html
•  Directive  2000/28/EC  of  the  European  Parliament  and  of  the  Council  of  18  September  2000  amending  Directive
2000/12/EC relating to the taking up and pursuit of the business of credit institutions. In: Official Journal of the European
Communities of 27 October 2000, L 275, 37f. http://europa.eu.int/eur-lex/en/lif/dat/2000/en_300L0028.html

•  Directive  2000/12/EC  of  the  European  Parliament  and  of  the  Council  of  20  March  2000  relating  to  the  taking  up  and
pursuit of the business of credit institutions. In: Official Journal of the European Communities of 26 May 2000, L 126, 1-
59. http://europa.eu.int/eur-lex/en/lif/dat/2000/en_300L0012.html

•  The author is an official of the European Commission working in the Internal Market Directorate General’s unit dealing
with banking services. He is also an assistant at the Katholieke Universiteit Leuven (KUL), Belgium. The views expressed
in this article are personal and they do not purport to represent the views of the European Commission.

—————————————— ePSO-Newsletter Issue 7 – May 2001 ——————————————

[7&3]
Interview: The Directive on Electronic Money Institutions –
A View From the European Central Bank
Malte  Krueger 
(malte.krueger@jrc.es),  IPTS/ePSO,  Seville,  Spain, 
(koenraad.de_geest@ecb.int), European Central Bank, Frankfurt, Germany
/EMI Directive/electronic money/regulation

- 108 -

talks 

to  Koenraad  de  Geest

Koenraad  De  Geest  is  Deputy  Director  General  in  the  European  Central  Bank’s  Payment  Systems
Directorate  General.  This  talk  is  mainly  about  the  role  of  the  European  Central  Bank  in  payment
system oversight, in particular regarding electronic money and the EU Directive on Electronic Money
Institutions.  It  covers  issues  such  as  the  role  of  the  waiver,  redeemability  of  electronic  money,
competition and regulation, and inter-operability.

Koenraad De Geest is not a newcomer in the field of e-money. When working for the National Bank
of  Belgium  he  contributed  to  an  internal  document  that  may  well  have  been  the  first  central  bank
report on e-purses. Later he participated in drafting the European Monetary Institute report on prepaid
cards  and  the  G10  and  ECB  (European  Central  Bank)  reports  on  e-money.  Malte  Krueger  had  the
opportunity to talk with De Geest about the ELMI (Electronic Money Institutions) Directive.
Krueger:  After  some  controversial  discussion  with  the  EU  Commission  the  EU  Directive  regarding
Electronic Money Institutions has been published in October 2000. Are you happy with the result?
De Geest: In effect, the Directive meets the concerns of the ECB to a very large extent. However, the
national authorities, when implementing the Directive, may under certain conditions grant a waiver for
some or all of the obligations imposed on the issuers of e-money. This avenue of the waiver could, of
course - if applied widely – undermine the set-up of the regulatory framework – I refer to our opinion
as communicated in particular in the ECB Monthly Bulletin [November 2000]. We continue to hold
the view that this waiver should be implemented prudently and be granted restrictively. We have also
said that we would welcome a minimal level of harmonisation to limit market risks for ELMIs. It is
also important to notice that the Directive regulates the issuance of e-money but it does not cover the
requirements which we may have for an e-money scheme. Most e-money schemes have many issuers.
As  payment  systems  oversight  authority  we  look  at  the  scheme  as  such.  Different  parties  may  be
involved  in  such  schemes:  the  operator,  the  technical  infrastructure,  there  may  be  a  clearing
mechanism built in. We will look at all these components together and assess whether the scheme is
robust or not. The existence of different issuers is only one element to be considered. So as payment
system overseers we will not look at the individual issuing institution because that is more an issue for
prudential regulators.
Krueger:  The  current  regulatory  approach  focuses  very  much  on  institutions  (‘banks’,  ‘ELMIs’).
However,  we  currently  observe  increased  division  of  labour  in  the  payment  sector.  Non-banks  run
bank's  IT,  do  processing,  write  software,  implement  package  solutions  for  payment  provisions,  etc.
Given these trends isn't the idea to safeguard the payment system via banking regulation out of date?
De  Geest:  I  am  very  glad  that  you  raise  this  question  because  it  allows  me  to  further  illustrate  the
difference between banking supervision and payment system oversight. For prudential supervision the
starting point is the financial health of credit institutions and other financial institutions. However, the
scope of payment system oversight of the central bank is not determined by the involvement of credit
institutions in a payment arrangement. Just to give one example, SWIFT is not a credit institution – it
is  not  even  a  payment  system  in  itself.  But  it  is  so  important  for  the  well  functioning  of  payment
systems world-wide that it is subject to central bank oversight.  So,  I  think  that  because  the  way  the
payment  system  oversight  competence  is  defined  and  not  limited  to  credit  institutions  the  risk  you
mentioned does not materialise.
Krueger: So if IBM runs the Bank of Scotland back-office it would also be or could potentially be the
subject of oversight?
De Geest: We would not take a large interest as long as IBM does the payment processing of a single
bank. But if the same company runs an essential infrastructure for the payment industry, for a rather
wide number of banks, then of course we could become interested. I also understand that prudential
supervisors  –  from  their  perspective  –  consider  and  apply  policies  in  relation  to  outsourcing  of  key
functions of banking activities. Thus, also from that angle, there is awareness for the issue you refer to.

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Krueger: So returning to the ELMI Directive this would not be really a replacement of your general
function. You would not see a conflict between a regulation that focuses on institutions and one that
focuses on functions like payments?
De  Geest:  No.  Just  to  give  you  a  very  brief  example.  The  ELMI  Directive  does  not  specify  the
technical  security  requirements  for  the  issuance  of  e-money.  We  as  central  banks  have  defined
standards to be met by e-money schemes with respect to the technical reliability, security and so on.
We are now in the process of specifying those technical security requirements in more detail. That is
perfectly compatible and complementary with the approach taken by the Directive.
Krueger:  When  comparing  the  Commission’s  and  the  ECB’s  attitudes,  do  you  think  it  is  fair  to
describe the ECB as more concerned about risk and security and less about competition?
De  Geest:  I  think  we  are  both  concerned  with  all  of  these  elements.  In  fact,  the  promotion  of  the
smooth functioning of the payment system encompasses safety, meaning protection against systemic
risk,  efficiency  and,  I  would  say,  confidence  in  the  currency.  It  is  true,  the  European  Commission
focuses more on competition aspects but, of course, you should not forget that also the ECB is subject
to the general principles of a market economy with free competition. This is in our statutes but it takes
a very specific flavour for payment systems. In order to get an efficient infrastructure you need some
level  of  co-operation  between  banks  that  are  competitors.  And  finding  this  balance  between  co-
operation  and  competition  is  one  of  the  dimensions  of  our  work  as  central  banks  which  we  have
permanently  to  consider.  Whereas  the  Commission,  I  think,  focuses  more  on  competition  and
consumer protection. But I think that all this is complementary. It is normal that public bodies like the
Commission and the ECB specialise in their focus areas. This follows perfectly from their mandates.
Krueger: Nevertheless one has the feeling that the ECB was very keen on restricting anything that had
to do with payments largely to credit institutions and was very uncomfortable with the idea that non-
banks entered the field.
De Geest: I think that is true, in particular for e-money. But I think we have good reasons for that. For
us  it  is  essential that  e-money  is  redeemable. That  means  that it  can  be  easily  exchanged, at  par,  in
central bank money. Without this redeemability you risk to lose the link between central bank money
and  commercial  bank  money.  The  functioning  of  the  economy  is  based  on  the  –  implicit  for  many
people but it is good to make it explicit from time to time – perfect substitutability of commercial bank
money and central bank money. And therefore we think that limiting the issuance of e-money to credit
institutions or institutions which have been given this very specific status which is very close to the
one of credit institution is a perfect compromise. It takes into account our concerns and at the same
time it makes sure that the burden to become an e-money issuer is rather low. Capital requirements are
reasonably low and there is a lighter regulatory regime in general. But in substance the regime is very
similar to that applicable to credit institutions. I think the right  balance has been found  between the
concerns to limit e-money issuance to credit institutions and the concern that by limiting it to credit
institutions you won’t allow for enough competition and innovation.
Krueger: In the November issue of the ECB’s Monthly Bulletin the ECB expresses concern about the
waiver and suggests ‘prudent implementation’ and ‘restrictive granting’. Thus, it was reiterating what
many  perceived  as  a  hard-line  stance  of  the  ECB.  However,  in  the  same  Bulletin  the  ECB  also
introduces a distinction between ‘limited-purpose’ and ‘multi-purpose’ electronic payment instruments
which opens the possibility to free a number of schemes from the obligation to become an Electronic
Money Institution or even a bank. So, is the ECB ‘softening’?
De Geest: No, we have always kept the same stance. If you read our earlier report you will already
find  this  distinction.  The  question  of  an  appropriate  regulatory  framework  has  been  settled  by  the
Directive  including  the  borderlines  within  which  the  waiver  can  be  granted.  The  reason  why  we
mentioned  this  distinction  in  the  Monthly  Bulletin  is  to  illustrate  that  there  is  a  difference  from  a
monetary policy point of view between a limited-purpose and a multi-purpose instrument. A limited-
purpose purse can only be used with the issuer itself and with very few other entities. Therefore it is
less likely that it becomes a real substitute for money. Our viewpoints have always been inspired by
the  fact  that  we  have  seen  electronic  money  as  a  potential  substitute  for  traditional  money.  This
potential  is  much  less  present  for  limited-purpose  schemes.  But  the  distinction  is  not  new.  It  is  a
distinction which is in practice not so easy to handle whereas it is very clear between single-purpose
and multi-purpose.
Krueger:  There  are  still  some  uncertainties  regarding  the  interpretation  of  the  ELMI  Directive.  For
many observers it is not clear what the status of bonus points is and whether the new pre-paid schemes

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that rely on server-based wallets or ‘virtual accounts’ qualify as electronic money. How does the ECB
see this?
De  Geest:  Bonus  schemes  are  a  very  tricky  point.  In  the  end  the  question  whether  the  Directive
applies has to be answered by the Commission and maybe by the European Court of Justice – not by
the ECB. But having said that, for us it is even not the first question which would come to our mind.
We  would  look  to  these  schemes  and  monitor  them  from  a  wider  payment  system  perspective.  We
would make our judgement based on the question whether a scheme has the  potential to  disturb  the
trust in the currency in a particular geographical area and whether this scheme takes on the function of
money to an extent wide enough to raise our concerns. I think, up to now, all these questions can be
answered negative for bonus schemes. But we follow such schemes irrespective of whether they fall
under  the  Directive  or  not.  On  the  point  you  made  about  server-based  wallets:  I  think,  here  you
carefully have to assess the features of each scheme. There are so many existing schemes and they are
all slightly different. In the end, it depends on the actual features they have.
Krueger:  When  it  comes  to  Internet  transactions  it  is  conceivable  that  people  in  the  EU  will  use
schemes issued in third countries. Should this be restricted? Can this be restricted?
De Geest: It is not so clear whether, legally speaking, the use of schemes established outside the EU
can be restricted. But what we could certainly do as central bank when we see that a provider  from
outside the  EU is in  the  market  and  when  we think  that  such  a  scheme  is  not  sound  then  we  could
publicly  discourage  the  use  of such a  scheme.  That is  one  thing.  The  other  thing  is  that  we  operate
rather closely with other central banks in the world. So, in case such schemes would appear we could
easily get more information from other central banks in the world to better assess the risks.
Krueger: What was behind the question is the following: If the US  have  a  somewhat  less  restricted
scheme like, e.g., PayPal – could they not compete the Europeans out of the market?
De Geest: I am not so convinced. I think that an adequate and balanced regulatory frame as we have in
Europe  is  probably  a  better  promoter  of  payments.  When  it  comes  to  payments  people  want
confidence  and  when  you  look  at  the  reason  for  the  lack  of  Internet  payments  it  is  really  that  most
people think that the way you can pay over the Internet is not considered safe enough most of the time.
So, I think it is a different tradition, a different approach. But when you look what has really taken off
I would not say that Europe is lagging behind in this area. It is rather more advanced in this field than
the US.
Krueger: But when we look at P2P one wonders whether a scheme like PayPal which came almost out
of the blue could have appeared in Europe. After all there might also be pent up demand in this area in
Europe  because  especially  cross-border  P2P  is  difficult.  Surprisingly,  the  regulators  in  the  US  have
decided that funds paid into schemes like PayPal are only liabilities and not deposits so that PayPal
can  operate  without  a  banking  licence.  Do  you  think  for  Europe  this  lighter  regulation  would  be
dangerous?
De Geest: When you take the legal approach of the Directive this question is settled. I don’t think the
requirements  for  ELMIs  are  an  un-surmountable  obstacle  for  the  development  of  such  schemes.  I
would  even  argue  that  one  of  the  problems  with  e-payments  is  that  there  are  too  many  initiatives
which  are  incompatible  and  maybe  a  certain  level  of  regulation  can  also  contribute  that  only  those
schemes come to the market which have at least the reasonable potential  of  achieving  critical  mass.
You cannot demonstrate in abstracto who is right and even ex post it would always come down to the
question ‘What would have happened if or if not?’ So, it is always difficult to decide. Confidence in
the payment system is very important and maybe the Europeans are more sensitive to that. And on top
of that we are in the process of introducing a new currency. Under these circumstances we can take
even  less  risks  with  regards  to  confidence.  In  a  country  where  a  currency  has  been  established  for
many years it may be somewhat different.
Krueger:  The  ECB  emphasises  that  it  is  important  to  create  a  level  playing  field.  However,  the
restrictions  placed  on  ELMIs  seem  to  carry  much  more  weight  than  the  privileges  they  enjoy.  In
particular,  for  larger  players  such  as  telcos  becoming  an  ELMI  hardly  looks  promising.  Therefore,
some observers have argued that we will see hardly any ELMIs in the future. How do you see this?
De Geest: I think it is a bit early to make a judgement. The Directive has not been implemented in the
Member States. So it is really difficult to answer this question. The future will tell.

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Krueger: The ECB stresses the importance of interoperability. Does the ECB have any concrete ideas
how  this  can  be  achieved?  Will  there  be  pressure  on  market  players  as,  for  instance,  in  the  case  of
cross-border payments?
De  Geest:  I  think  we  can  contribute  directly  and  indirectly.  We  can  act  as  a  catalyst  in  the
standardisation process - like we did, for instance, in the case of retail cross-border payments where
the  definition  and real  concrete  formulation  of  the  M103+  standard  message  type  in  STP  mode  has
been elaborated with the ECB more or less in the driving seat. If we see that the market fails to agree
on a standard we might play again this catalyst role. But now in this field we have the CEPS standard.
Some details of it still require refinement. Unfortunately we have to see that since e-money is really
underdeveloped in most countries the banks do not have the incentive to think of the cross-border use.
This may be a mistake because I think the banks are a bit slow in realising that we have a euro-area
and that customers expect that they can use the same payment device in different countries – as long as
they are in the euro-area.
Krueger: Maybe we need some more non-bank competition.
Is the ECB involved in any form in the current implementation process of the ELMI Directive? How
does  the  ECB  monitor  the  implementation  process,  and  is  there  already  information  available,  how
different countries (for instance Germany or France) will open their regulation to allow for ELMIs?
De  Geest:  The  monitoring  of  the  implementation  is  a  task  of  the  Commission.  We  are  not  directly
involved.  We  are  informed  by  the  Commission.  Nevertheless,  there  is  a  possibility  for  us  to  be
consulted  by  national  legislators.  This  is  not  mandatory.  The  ECB  has  to  be  consulted  when  the
Council  prepares  new  legislation  in  its  field  of  competence.  It  has  also  to  be  consulted  by  national
legislators  on  draft  legislation  in  the  ECB’s  field  of  competence.  But  in  case  that  it  is  just  the
implementation of an EU Directive this consultation is not mandatory. But a voluntary consultation is
possible  and  the  ECB  welcomes  the  opportunity  to  provide  its  opinion.  Consultations  are  currently
under way. In some countries, the transposition of the e-money Directive is part of a wider law and
therefore we are consulted.
Krueger: Mr. De Geest, thank you very much for the interview.

[[[[info]]]]
•  European  Central  Bank:  Opinion 

of 
http://www.ecb.int/pub/legal/op9856en.htm

the 

European  Central  Bank 

of 

January 

18, 

1999.

•  European  Central  Bank:  Issues  arising  from  the  emergence  of  electronic  money.  In:  ECB  Monthly  Bulletin,  November

2000, 49-60

[7&4]
Genesis of the EU-Directive on Electronic Money Institutions
Hugo Godschalk (hgodschalk@paysys.de), PaySys Consultancy, Frankfurt, Germany
/EMI Directive/electronic money/regulation

The  article  analyses  the  history  of  the  EU-Directive  on  Electronic  Money  Institutions.  The  author
describes  how  the  barriers  for  the  entry  of  non-banks  were  raised  during  the  discussion  of  the
Directive. Subsequently it is argued that the original object of regulation lacks a business case. The
author raises the issue that innovative schemes such as e-loyalty-points may be hindered as they will
have to be issued by banks and EMIs.

More  than  two  years  passed  between  the  first  draft  of  the  EU-Directive  on  Electronic  Money
Institutions  (“on  the  taking-up,  pursuit  of  and  prudential  supervision  of  the  business  of  electronic
money institutions“) in July 1998 and the final version (2000/46/EC) published in the Official Journal
of the European Communities on 27 October 2000. In this period one could see the usual interaction
between Commission, committees of the European Parliament, central banks, ministers of finance and
last  but  not  least  European  Central  Bank  (ECB).  The  remarkable  disharmony  between  the  liberal
position  of  the  Commission  and  the  regulative  position  of  the  ECB  characterised  the  interaction.
During the whole pregnancy one could see a strong influence of the ECB interests on the foetus. Even

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after the compromise draft – the so called common position of 29 November 1999 – the ECB called
for  the  fulfilment  of  more  far-reaching  interests.  Parents  with  different  interests  and  horizons  augur
badly for the new-born Directive. Now what is the outcome?

Remember  the  former  optimistic  arguments  of  the  EU  Commission  concerning  the  initiative  in

1998:
•  To realise small cross-border payments in Euros before notes and coins are introduced
•  To facilitate the development of e-commerce
•  To encourage new market entrants (non-banks)
•  To stimulate competition and e-money product innovations

Member states must implement the Directive not later than April 2002. At the moment there are no
indications  for  earlier implementation  in  member  states.  So  the first non-banks  with  a  licence  as  an
Electronic Money Institution will enter the e-money-market – if at all – not before 2002. The Directive
will thus have no influence on e-money as digital cash denominated in Euro before notes and coins are
introduced.  But  it  is  consoling  that  the  e-money  issued  by  traditional  banks  has  also  lost  the  race
against Euro cash. Cross-border payments with e-money based on CEPS outside pilots are  expected
not before the end of 2002.

Let’s  consider  the  second  argument  of  facilitating  the  development  of  e-commerce.  In  the
Explanatory Memorandum on the first draft the Commission still argued in 1998 about software-based
e-money “emerging as the payment instrument for the growing electronic commerce on the Internet“.
Since 1998 there has been a tremendous growth of e-commerce, but without the usage of e-money at
all. Traditional payment schemes (credit cards, money transfer, direct debit etc.) and innovations based
on these traditional schemes have settled down in the e-marketplace. Some ambitious software-based
e-money initiatives of banks have failed. Regarding the total e-money figures within the EU, the ECB
concludes in its monthly bulletin of November 2000: “the usage of software-based electronic money
remained  negligible“.  Some  could  argue  that  the  reason  behind  this  development  is  the  lack  of
competition from non-banks, who can still not  enter  this  market  without  bank  status  due  to existing
regulation  in  most  of  the  member  states.  But  the  lack  of  e-money  as  a  payment  instrument  for  e-
commerce is world-wide. Even in countries with a liberal laissez-faire regulation regarding e-money
and a huge volume of e-commerce like USA the phenomenon of e-money is very rare.

That brings us to the main arguments of the Commission for introducing the Directive: to stimulate
competition  and  innovation  by  entrance  of  new  competitors  outside  the  traditional  banking  area  by
creating  the  special  status  of  Electronic  Money  Institution  for  non-banks  within  a  light  regulatory
framework of national supervisory authorities. It sure was a good idea, but what has come out at the
end of the day?

By changing the definition of “credit institution” in the First Banking Co-ordination Directive all
issuers of e-money (traditional banks and Electronic Money Institutions) are credit institutions subject
to prudential supervision and the monetary requirements of the ECB. That implies that even Electronic
Money  Institutions  who  enjoy  a  waiver-position  (small  e-money  schemes),  could  be  subject  to  the
reserve requirements and statistical reporting requirements of the ECB.

In contrast to the first draft the crossbar for market entrance as an Electronic Money Institution has

been lifted by 100%. The requirement on initial capital has been raised from 0.5 to 1 million Euro.

On  the  other  side  the  elbowroom  for  Electronic  Money  Institutions  for  which  a  waiver  can  be
granted is narrowed by 50%. The first draft proposed a waiver for Electronic Money Institutions with
outstanding e-money that normally does not exceed EURO 10 million, the final Directive limits this
volume to 5 million.

So from regulation point of view the barrier for entrance of the e-money market is only half-open
for non-banks, like telcos, retailers, public transport authorities, ISPs, etc. But are they still interested
in entry?

Since the first draft of the Directive in 1998 e-money markets have changed dramatically: no show
with software-based products and no business case with e-money based on chipcards. In 1998 only a
few heretics claimed there was no business case for prepaid applications on chipcards, now three years

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later there is almost no one world-wide, who claims any more that you can earn money solely with this
application.  It  took  some  time,  but  today  the  players  in  the  payment  industry  are  aware  that  the
emperor  is  “naked”, so  why  should  non-banks  enter  this  playing-field?  An indication  of  the  lack  of
interest in the market was the missing echo in the press and specialised literature following the passing
of the final version of the Directive in 2000.

Maybe the product strategy of bank-issued e-money was wrong. By creating digital cash they tried
to imitate real cash like coins and notes. E-money – so the bank issuers – has to be a virtual copy of
traditional cash: denomination in national currency, anonymous, widespread acceptance (even cross-
border in Euroland), high liquidity and potential as a micro-payment instrument. But it is a hard job to
beat the market leader „cash“ which has had this undisputed position for more than 2000 years.

As  a  way  out,  maybe  we  should re-engineer the  product “e-money“  using  its  unique  features.  In
contrast  to  traditional  cash  you  can  “program“  digital  money.  You  can  limit  the  usage  of  monetary
value to closed groups, to certain acceptance points, to a limited time frame, to certain products and
services etc. You can start new monetary circuits and loops based on new monetary value units (like,
for  example,  the  internet  currency  “beenz“).  One  could  argue  that  we  leave  the  e-money  market  by
entering the e-loyalty-scenery: e-vouchers, e-bonuspoints, e-rewards, e-coupons, e-miles, e-rewards, e-
airtime  etc.  But  if  these  schemes  are  based  on  the  legal  e-money-characteristics  (monetary  value
presented  by  a  claim  on  the  issuer,  stored  on  an  electronic  device,  issued  on  receipt  of  funds  and
accepted  as  means  of  payment  by  undertakings  other  than  the  issuer)  we  are  still  in  the  e-money
environment  and  subject  to  the  regulatory  framework  of  the  new  Directive.  In  several  EU  member
states one can already see this innovative „new e-money“ phenomenon based on chipcards and issued
by non-banks (like the state-wide BonusCard in Schleswig-Holstein (D), Isis-Card and Multi+Card in
Belgium, Shell Smart in UK and several citycards in Bordeaux (F), Narbonne (F), Metz (F), Dublin
(Ireland),  Essen  (D),  Kulmbach  (D),  Eichstätt  (D),  Troisdorf  (D)  etc.).  A  high  market  potential  is
expected. If the facts of the case based on the definition on e-money in Article 1 of the Directive are
fulfilled,  issuance  of  new  e-money  will  be  restricted  to  traditional  banks  and  Electronic  Money
Institutions. The consequence could be the end of this innovative e-money-development.

But even if  non-banks  set  up  Electronic  Money  Institutions to  issue new  e-money  within  loyalty
schemes they will find a new barrier built up by the ECB. The issuer of e-money has to redeem it at
par value in legal tender at any time to the bearer (Article 3). So an issuer is allowed to introduce a
new monetary unit, but only with a fixed exchange rate to the Euro or national currency. Even after the
common  position  of  November  1999,  which  still  lacks  the  “at  par“  redeemability,  ECB  insists
vehemently on this amendment of the Directive in order to preserve the monopolised unit-of-account
function  of  the  central  bank  money.  It  will  defend  one  of  the  last  remaining  roles  of  central  bank
money as the sole unit of account and therefore, the legal dependence of privately issued bank money
on central bank money. Regarding the institutional role of ECB in monetary policy this regulation may
be adequate and necessary, but on the other hand it will stifle ongoing e-money innovation.

I don’t like forecasts, they usually miss the ball. But from today’s point of view in 5 years we may

need a strong magnifying glass to track down Electronic Money Institutions in the market place.

[[[[info]]]]
•  The Explanatory Memorandum is available at: http://www.systemics.com/docs/papers/1085en.html
•  European  Central  Bank:  Issues  arising  from  the  emergence  of  electronic  money.  In:  ECB  Monthly  Bulletin,  November

2000, 49-60

•  Regarding the so-called new-e-money schemes, see:

http://www.beenz.com
http://www.shell.com/uk-en (Shell smart UK)
http://www.mybonuscard.de (Bonuscard Schleswig-Holstein)
http://www.Sutter-verlage.de/essencard (Citycard Essen)

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[7&5]
Why is the Electronic Money-Directive Significant?
Simon Lelieveldt (simonl@wxs.nl), Amsterdam, the Netherlands
/EMI Directive/electronic money/electronic vouchers/regulation/competition/

The  development  of  the  Directive  on  electronic  money  institutions  is  discussed  with  a  view  to
understanding  some  of  its  ambiguities  and  its  significance  for  the  market.  It  is  argued  that  the
Directive  is  most  important  as  a  signal  to  both  current  players  and  new  entrants  in  the  banking
market.  Given  this  signalling  function,  its  practical  relevance  and  application  will  most  probably
remain limited to the smaller niche players only.

In the early 1990s a number of pre-paid electronic payment products were developed. Products such as
Danmønt,  Mondex,  Proton  and  eCash  received  considerable  attention,  not  only  because  of  their
technical design, but also as a result of the fact that some of those products were developed by non-
bank organisations. Both existing market players (banks) and regulators (central banks, ministries of
finance) reacted. Depending on the actual market threat banks or groups of banks decided to either buy
a license  for those  products  and  bring  a  local  version  on the  market  or  to build  similar  concepts  on
their  own.  This  resulted  in  the  introduction  of  a  multitude  of  local  electronic  money  schemes  in
Europe. European central banks, the institutions that faced direct competition between their bank notes
and  the  electronic  purses,  reacted  in  1994  by  publishing  the  policy  position  that  organisations  that
issued  e-money  could  be  considered  to  take  deposits,  which  meant  that  those  organisations  would
require supervision under banking supervision law.

Since then  a  string  of research  and  policy  reports  has  been  produced  in  the  course  of a  complex
discussion  between  banks,  central  banks,  the  European  Commission  and  non-bank  issuers.  In  this
discussion, it  became  clear  (for  example  in a  speech  by  a  representative  of  The  European  Financial
Services  Directorate  at  an  IPTS-workshop  in  Amsterdam)  that  the  European  Commission  felt  that
limiting  the  issuance  of  e-money  to  banks  only,  would  be  too  narrow  and  too  restrictive  for
competition.  It  also  became  clear,  through  publications  in  the  Financial  Times,  that  the  European
Central Bank, while formally only an observer to the legislatory process, was very keen on modifying
important  elements  of  the  Directive.  These  interventions,  especially  with  respect  to  the  need  for
redeemability  of  e-money,  may  have  been  the  reason  for  what  could  be  called  ‘design  ambiguities’
with respect to the definition of e-money and the applicability of redeemability in the EMI Directive.

The ECB Opinion on electronic money stated that the meaning of electronic money must be clearly
defined.  Currently,  two  definitions  are  available.  One  definition  can  be  found  in  the  Council
Regulation  concerning  the  collection  of  statistical  information  by  the  European  Central  Bank.  E-
money is defined as: “an electronic store of monetary value on a technical device, including prepaid
cards,  that  may  be  widely  used  for  making  payments  to  entities  other  than  the  issuer  without
necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument.” The
second definition is found in the EMI Directive and is essentially the same but it adds the condition
that e-money should be issued on receipt of funds of an amount not less in value than the monetary
value issued: "electronic money" shall mean monetary value as represented by a claim on the issuer
which is:  (i)  stored  on  an  electronic  device; (ii) issued  on  receipt  of  funds of  an  amount  not  less  in
value than the monetary value issued; (iii) accepted as means of payment by undertakings other than
the issuer.”

The consequence of the definition in the EMI Directive is that if an organisation would issue 100
Euro of electronic pre-paid value against a payment (or a load) of 99,9999 Euro, this would in a literal
sense  not  fall  under  the  definition  of  e-money.  Although  the  reasoning  would  be  that  it  would
economically  not  viable  to  operate  such  an  inflated  e-money  scheme  given  a  redeemability
requirement, it should be noted that the redeemability requirement as specified in the Directive is not
applicable, as it uses the same definition of e-money. As a result e-money schemes in which the value
loaded is higher than the value paid for (schemes in which the digital Euro is cheaper than the physical
Euro)  do  not  fall  under  the  Directive.  This  consequence  is  quite  interesting  as  it  appeared  that  the
ECB-interventions were mostly driven by the fear for the introduction of inflated digital Euros.

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The  significance  of  the  above  error  in  the  construction  of  the  Directive  is  that  apparently  the
regulators involved felt it wiser to stop discussing the issue in order to finish the cumbersome political
discussion  and  avoid  the  risk  of  disagreement  and  further  delay.  Yet,  this  implies  that  the  national
regulators, as a part of their implementation process, will have to decide on the best way to overcome
the mentioned ambiguities of the Directive. The result may be that the definitions of e-money in the
different national laws are not all the same and perhaps broader than the definition in the Directive.
Still, the theoretic possibility remains that local regulators stick to the literal text and thus exempt all
inflationary  e-money  schemes.  Whether  or  not 
this  Directive  actually  achieves  minimum
harmonisation  is  therefore  determined  by  the  quality  of  additional  co-ordination  between  local
implementers of the Directive.

Interestingly enough, the EMI Directive will serve its function regardless of the definitions applied.
Its  main  significance  is  that  it  ends  a  long  debate  on  the  question  of  supervision  of  e-money.  The
Directive sends out the clear message that every issuer of electronic money will for prudential reasons
be supervised (either as a credit institution or as an electronic money institution). So any organisation
that wants to enter the business somehow has to do its prudential homework. Meanwhile the Directive
also sends out the signal that an organisation does not have to be a fully fledged credit institution to be
active in this market. Credit institutions may take this as a warning and may assume similar regulatory
approaches in the future. They can no longer assume that the supervisory entry barrier will remain as
high as it has been in the past.

Given the Directive, non-bank issuers will hardly be able to escape a supervisory regime in Europe
and  turn  to  establishing  the  most  rational  way  to  comply  with  regulation.  Investigating  the  options,
non-bank  market  parties  who  want to issue  electronic  money  on  a  global  scale  might  choose  to  co-
operate with a global bank or with a European bank if they intend to operate on a European scale. By
doing  so,  they  outsource  the  regulatory  compliance  issues.  Non-bank  operators  might  also  choose
between becoming a credit institution, an electronic money institution or acting as an intermediary for
credit  institutions  (resulting  in  a  very  mild  supervision  regime).  My  guess  would  be  that  of  these
options, the supervisory regime originating from the e-money Directive is the least  attractive  due to
the  limitations  it  imposes  on  the  supervised  organisation.  I  therefore  expect  larger  organisations  to
choose for different regimes, and that, if any, only some smaller and local schemes will fall under the
(waivers of the) EMI-regime.

[[[[info]]]]
• Report  to  the  Council  of  The  European  Monetary  Institute  on  prepaid  cards  by  the  Working  Group  on  EU  Payment

Systems. May 1994. http://www.iang.org/money/EU_prepaid_cards.html

•  Extract  of  Chapter 

III.2 

(Opinion  on  electronic  money) 

from  1997  Annual  Report  of 

the  EMI.

http://www.systemics.com/docs/papers//EMI_1998_opinion.html#n1

•  Council  Regulation  (EC)  No  2533/98  of  23  November  1998  concerning  the  collection  of  statistical  information  by  the

European Central Bank http://europa.eu.int/eur-lex/en/lif/dat/1998/en_398R2533.html

•  Informal notes of the IPTS-Round Table Workshop on e-money (31st March, 1999)  in  Amsterdam  with  explanation of

position of European Commission http://www.iang.org/money/EQ_roundtable.html

•  Commission  proposal  for  European  Parliament  and  Council  Directives  on  the  taking  up,  the  pursuit  and  the  prudential

supervision of the business of electronic money institutions http://www.iang.org/money/1085en.html

•  Financial Times reports of postponed decision making on the EMI Directive (November 1999)
http://globalarchive.ft.com/globalarchive/articles.html?print=true&id=991108015374
http://globalarchive.ft.com/globalarchive/articles.html?print=true&id=991109015358

•  Financial Times comment on the ECB-position

http://globalarchive.ft.com/globalarchive/articles.html?print=true&id=991110015458

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[7&6]
Report from the Digital Money Forum: Between Compulsion and Use by Children
Arnd Weber (arnd.weber@itas.fzk.de), ITAS, Karlsruhe, Germany
/electronic money/public transport/mobile payment systems

Existing forms of digital cash are not as beneficial as traditional cash. This became visible at Consult
Hyperion’s  ‘Digital Money  Forum’.  Participants  discussed  new initiatives  in  the  field  of  traditional
bank  stored  value  cards,  such  as  the  Ducato  trial  of  CEPS,  and  usage  of  scratch  cards  such  as
Paycash.  Payments  via  phone  were  also  discussed,  such  as  Sonera  Mobile  Pay  offering  pre-  and
postpayment.  Transport  and  entertainment  were  identified  as  important  areas  for  future  cash-like
payments.  Cheap  and  convenient  ways  of  postpayment  were  also  presented,  such  as  PayPal  and
Purseus.

Bank-issued Smartcard- and Software-Cash

From April 25 to 26 the 4th Annual Consult Hyperion ‘Digital Money Forum’ took place in London.
Simon Lambert of Barclaycard worked out that existing forms of digital cash are not as beneficial as
traditional  cash.  The  latter  is  accepted  universally,  it  is  tangible,  has  a  low  infrastructure  cost,
payments are quick and non-repudiable, and it can be used if anonymity is sought. Existing types of
electronic cash do not provide these characteristics in a sufficiently compelling way. As Mondex, Visa
and  others  have  already  discovered,  the  significant  displacement  of  cash  will  take  many  years.
Accordingly,  current  usage  is  low.  Benjamin  Sahel,  who  is  the  main  author  of  the  recent  European
Central Bank paper on electronic money (see [info]) reported that in last June, Euros 140 million of
electronic money were in circulation – not quite nothing, but only 0.003 % of M3, as he put it. Figures
provided by Dominique Hautain of Proton World showed that the company has  so   far  issued  more
than 60 million cards, with which, however, only 226 million transactions have been made. Due to the
low transaction value, this low overall level of transaction numbers leads to relatively high costs for
acquiring merchants and processing transactions. Given the benefits of traditional cash, it is surprising
that person-to-person payments from one mobile phone to another were not discussed by the banks at
the Forum. Nor has usage in public transport been discussed by banks. Nevertheless, bank issuers are
working on improvements. For instance, Proton and partners have initiated the Ducato-project to make
cards  usable  across  borders  according  to  the  CEPS-standard  (Banksys,  CB,  Interpay,  Sermepa,
Europay,  Visa,  Sistema  4B),  so  that  a  purse  denominated  in  Euro  will  become  usable  at  foreign
terminals  also  accepting  Euros.  However,  the  low  usage  of  purses  and  their  difficult  business  case
became  visible  through  the  demise  of  SmartAxis  [see  ePSO-N  6&5],  which  provided  software  for
inter-operability  of  smartcard-based  purses.  The  company  had  the  support  of  Europay,  Proton  and
Mondex, but usage of purses on the Internet was not sufficient to show a way towards profitability.
Also  eCash  by  the  former  company  DigiCash  has  just  been  discontinued  by  Deutsche  Bank.
Apparently, there are no plans to create something like an off-line usable type of eCash. The concept
of blinding, however, is not dead, as Victor Dostov’s Russian company “Paycash” uses it for its net-
money, and Bob Hettinga is  proposing  a  blinded  Internet  Bearer  Certificate  representing  a  claim  on
stock (IBUC).
Micropayments for Young Customers

Scratch cards as used for pre-paid mobile phones are easy to use, can be bought by children, and are
therefore  quite  popular  from  the  UK  to  Russia.  However,  handling  and  selling  them  is  pretty
expensive. Participants at the conference mentioned figures from 15 to 20 percent of face value. While
this  is  acceptable  in  a  business  with  zero  marginal  costs,  such  as  the  mobile  phone  business,  it  is
highly  incompetitive  in  the  payments  business.  Will  it  be  possible  to  reduce  the  costs  for  loading
server-based  digital  cash?  Barclaycard  has  developed  a  terminal-based  “top  up”  service  that  allows
individuals  to  hand  cash  over  at  selected  merchants  to  top  up  a  “pre-paid”  account  domiciled
elsewhere.  The  first  partner  for  the  new  service  in  the  UK  is  Vodafone  who  have  teamed  up  with
Barclaycard Merchant Services to allow the topping-up of pre-paid mobile phone accounts. They will
soon be joined by other network operators. The key driver for the phone companies has been the high

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premium they have paid to merchants for “scratch cards”. It also seems likely that operators of prepaid
mobile phones will want to provide for a second type of stored value in their phones since they face
the challenge of differentiating between the cost of calls and the cost of “shopping”. This could also be
topped up by cash through the same channel, an important feature for the Teenage market where cash
is the standard for payments.
Digital Cash and Compulsion

Simon  Lambert  observed  that  digital  cash  schemes  work  satisfactorily  with  some  degree  of
compulsion,  as  in  canteens.  Also  in  Singapore,  where  e-money  is  going  to  become  legal  tender,
merchants will have to accept it. In Europe, this would certainly face problems of acceptance, see the
recent debate on changing to the Euro. Several speakers mentioned on-line purchase of music (Simon
Lambert, Tim Jones, Marian Feltham) against some sort of payment. Downloading music against cash
certainly is a candidate. Similar ideas have been reported from Germany (Kobil).
Premium Number Billing

In certain market segments, payment via the phone bill can be used for small value transactions. Low
value  payments  are  not  only  relatively  easy  to  manage  risks,  but,  according  to  market  research
conducted by Sonera Mobile Pay, also what consumers find attractive. Päivi Helanto called car wash
the “killer application in vending”. As the car driver simply has to dial a premium number for use, it
was said this would really make operation easier. Note that Finnish mobile phone users are typically
billed. She said vending was – from a business point of view – not a killer application, but more of a
good  show  case.  Nevertheless, sales from  phone-operated  drinks  machines  increased  by  30  percent,
and  since  1997  more  than  800  machines  have  been  converted.  Helanto  also  pointed  out  that  cities
charging for on-street parking would no longer need meters if checking in and out is done via phone.
She noted that bill payment is expensive in clearing, and believes prepayment will become dominant.
She  also  reported  on  ongoing  preparations  for  a  European  pilot  of  payment  and  ticketing  in  public
transport through mobile phones. The customer will have a copy of the ticket available in his phone
and RF-tag.
Phones and Postpayments

At the conference, the use of mobile phones for debit and credit payments as we know them from bank
cards was also discussed. Speakers referred, however, to the dangers of loss of phone, and to potential
lack of battery power. It has also been remarked that it is easier to hand over a card, instead of dialling
the shop’s phone number, handling SMS-messages etc. It appears that at least UK phone operators are
not enthusiastic about having a second smartcard slot. Barclays Bank closed down its trial with dual
slot phones and VisaCash. In France, however, Paiement CB Sur Mobile was reported as being well
accepted. What remains is to either replicate bank cards in SIMs/UIMs (Oberthur’s Marian Feltham),
or to use a server-based approach, such as Movilpago (presentation by Alberto Sanz). Their scheme
appears  to  be  similar  to  competing  schemes  such  as  Jalda  or  Twister,  while  they  aim  at  patenting
significant parts or the process. Sanz pointed out that liasing with existing payment systems means that
the  costs  for  acquiring  merchants  are  significantly  lower  than,  e.g.,  for  the  Paybox  approach.  In  a
Sonera  Mobile  Pay  system,  pizzas  can  be  bought  using  credit  card  or  direct  debit  (see  their  press
release).

Cheap Postpayments

At  the  conference,  two  initiatives  were  presented  for  reducing  the  costs  of  postpayments.  One  is
PayPal. They no longer focus on PDA-payments, nor on funding by credit-cards. Rather, they position
themselves  as  a  cheap  and  fast  payment  method  for  SMEs,  charging  about  2  percent  instead  of  4
percent, while being faster than paper cheques. They aim at having their customers bring money into
the  accounts  through  ACH  transactions  or  cheques,  as  opposed  to  expensive  credit  card  payments.
They  are  supported  by  ING,  Deutsche  Bank  Tech  Ventures,  an  undisclosed  UK  bank  and  other
companies.  Another  initiative  for  cheap  postpayments,  the  Purseus  project  by  the  former  CEO  of
Mondex, Tim Jones, aims at creating a global solution for cheap cross-border payments, based on the

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SWIFT message format, currently targeting transaction values from about 10 British Pounds up to 10
million.
Outlook for Digital Cash

Summarising one can say that most presentations focused on payments which are (1) cheap, and thus
suitable for small values, and (2) usable by young people, forming a replacement for physical cash in
the  real  world,  particularly  in  vending,  and  in  the  virtual  world,  when  downloading  music  or  even
films. While the globally usable kind of digital money can not yet be identified, it was pointed out by
Mike Hendry that from next year on, many British merchants will accept the physical Euro.

[[[[info]]]]
• For  the  conference  slides,  and  for  information  about  the  presentations  not  mentioned  here,  including  URLs,  see:

http://www.consult.hyperion.co.uk/forum/digmon4.htm

•  European  Central  Bank:  Issues  arising  from  the  emergence  of  electronic  money.  In:  ECB  Monthly  Bulletin,  November

2000, 49-60

•  Khamitov, Ildar: PayCash Internet Payment System. http://www.paycash.ru/new/eng/system/crypto.htm
•  Kobil: www.kobil.de
•  Sonera: http://www.sonera.fi/english/pressinfo/releases/EngSonera2001/2001/12.html

[7&7]
Internet  Payment  Systems  in  Germany  –  the  Technologically  Advanced  Consumers'
View
Karsten Stroborn (stroborn@iww.uni-karlsruhe.de), University of Karlsruhe, IWW, Karlsruhe, Germany
/survey/payment systems/consumer perceptions/collection systems/electronic money

New payment systems on the Internet are appearing and disappearing. Apparently not only technical
reasons are behind the failure of certain systems. This article deals with the results of an online survey
carried out at the University of Karlsruhe. It shows clearly that certain systems ignore the  needs  of
consumers, especially security needs and convenience aspects. No system seems to be the one and only
solution for paying on the Internet. Different systems along with fully accepted conventional payment
systems like invoices may very well coexist.

ECash and CyberCoin, both prototypes of electronic money, have consistently been discussed among
experts.  They  have  completely  disappeared.  Their  failure  is  symptomatic  for  certain  problems  of
acceptance  of  innovative  payment  schemes,  not  only  in  Germany.  The  focus  has  always  been  on
technical  sophistication,  while  neglecting  the  consumers'  wishes.  This  is  one  of  the  motives  for  the
online-survey called “Internet Payment Systems from a Consumer Perspective” (IZV), carried out at
regular  intervals  since  1998  by  the  research  group  of  Prof.  Dr.  Karl-Heinz  Ketterer,  University  of
Karlsruhe.
The Survey

Between November 2000 and January 2001, nearly 6000 Internet users completed the questionnaire.
The  survey  does  not  lay  claim  to  reaching  a  representative  cross-section  of  the  population.  Since  it
uses an online questionnaire, especially savvy Internet users with much shopping experience took part
in the survey. The main part of the participants was aged 19 to 45, with one third being female. The
survey aimed at drawing a picture of Internet payment preferences. If the savvy user does not accept
new payment systems, it is easy to foresee the fate of those systems.
Acceptance of Payment Methods
Which specific consumer needs concerning Internet shopping and payment can be identified?

The  survey  results  in  a  cross-section  of  the  requirements  laid  down  by  consumer  protection
organisations. In case of accident, the abuse of data material should be avoided and the online shopper
should be safeguarded more efficiently.

In  numerous  comments  the  participants  articulated  the  need  for  improved  service  and  more
information: “...complete cost listing at an early stage (packaging and delivery included)”, “terms and

—————————————— ePSO-Newsletter Issue 7 – May 2001 ——————————————

- 119 -

conditions  written  out  explicitly”,  “complete  business  address”,  “improved  delivery  service”,  “the
order's status via email” etc.

Low costs, ease of use as well as the possibility of cancellation are consumers' main requirements
for payment systems. Moreover, coverage in case of loss and the point of time when the customer gets
charged play an important role (payment after delivery).

Consumers prefer conventional payment systems. When asked how they wish to pay, invoices are
ranked first by German consumers (55,1%). This fits with consumers' needs in an anonymous Internet
world. Payments via direct debits are preferred by 15%, followed by Credit Card Payments at 13,2%
(insecured, SSL and SET). Cash on Delivery payments sum up to 10,1%. M-Payments, (micro)billing
and  pre-paid  systems  together  only  account  for  roughly  5%.  There  are  several  reasons  for  this:  the
systems  are  relatively  new  on  the  market  and,  as  a  consequence,  they  are  not  well  known.
Additionally,  it  takes  a  long  time  before  consumers  change  their  payment  habits  –  just  think  of  the
introduction of the debit-(ec)-card in Germany, which took about ten years.

One more aspect might be the kind of goods or services sold on the Internet. The new systems have
their strength in providing a possibility to pay for intangible goods and services, but there is still not
enough digital content available.
Collection and Pre-paid Systems

Looking at the Editorial of ePSO-N of March 2001 “The rise of convenience”, collection systems such
as Net900 and Firstgate have to be considered along with pre-paid systems (Paysafecard). More than
every second German consumer shows willingness to employ pre-paid systems, but the end of eCash
and CyberCoin shows that adequate systems are not yet available. Even though less than half of the
consumers like collection systems, these are enjoying commercial success. For instance, the software
needed to use Net900 has been downloaded more than three million times. What is more important,
120,000 users have been shopping in three different online-shops with Net900.

In theory, collection systems should be an ideal platform for micropayments. However, it is quite
surprising that the participants are willing to use collection systems for amounts between less than 10
Pfennige and up to more than 50 Marks. Reasons for lack of favour of collection systems are similar to
those for prepaid systems: lack of control over the budget, lack of confidence in technical realisation
and the systems’ lack of transparency.

Asked for their favourite operator of collection systems, 77% of the participants voted in favour of
banks,  nearly  60%  were  in  favour  of  credit  card  companies  (multiple  replies  possible),  and
independent third parties – though these are at the moment the main collection service providers – are
only mentioned by every fifth user. Consumers' confidence in banks handling money is quite obvious.
Although convenience is a key factor for the payment system's success, security plays a major role
as  the  survey  reveals  for  collection  systems.  User  comments  on  Firstgate  click&buy  were  mainly
negative:  “as  long  as  there  are  systems  such  as  Firstgate,  the  Red  Cross  will  pay  my  bills!”,  “my
preferred payment system is Firstgate from Cologne, because my newsgroup showed me how to easily
hack  the  system”.  The  central  point  of  criticism  of  Firstgate  participants  is  the  fear,  or  the  actual
experience, of the abuse of their own account – well known from credit card number fraud. Net900
proved  to  be  more  secure,  although  the  registration  procedure  is  a  little  more  complicated.  With
Firstgate one can start shopping  immediately  after the  online-registration  process,  while  Net900  can
only be used after the required input of a PIN one gets via bank account. The PIN is communicated
with  a  one  Pfennig  credit  transfer.  Firstgate  too  has  this  mechanism,  but  for  the  consumer´s
convenience allows shopping before the PIN is entered, for approximately one week.

The  survey  confirms  customers'  readiness to  endure  additional efforts to  obtain  a  higher  level  of

security. Participants especially liked the idea of digital signatures in E-Commerce environments.
Conclusion

Due  to  the  variety  of  solutions  already  existing,  the  consumer  is  able  to  select  a  suitable  system.
Unattractive payment systems do not actually impede purchases on the Internet. It is more likely that

—————————————— ePSO-Newsletter Issue 7 – May 2001 ——————————————

- 120 -

the additional  benefit the consumer  needs to  go  shopping  on  the  Internet,  concerning  both  goods  as
well as innovative payment systems, is not yet big enough to leverage online-shopping.

Apart  from  the  bill,  it  does  not  seem  that  a  single  payment  system  will  win  the  race  for  the

consumer's grace. However, the lack of importance of smart cards in Germany is striking.

Their  triumphal  procession,  foreseen  in  the  medium-term  by  Dave  Birch  and  Knud  Böhle  in
[ePSO-N 5&7], seems to have frozen before the race – with the German participant GeldKarte – has
actually begun.

[[[[info]]]]
•  Detailed information in German language on the survey including the questionnaire:

http://www.iww.uni-karlsruhe.de/izv4  .There  one  can  also  find  a  detailed  study  dealing  with  the  results  of  IZV4

(liable for

costs). Whoever is interested in a longer version in English, may have a look at conference documentation of COTIM
2001 (Conference on Telecommunications and Information Markets), which will take place in Karlsruhe from July 18th-
20th: http://ritim.cba.uri.edu/cotim01/index.html

[7&8]
The IT Revolution and the Banking Industry: a View from Japan
Leo Van Hove (Leo.Van.Hove@vub.ac.be), Free University of Brussels, Belgium
/review/financial institutions/monetary policy/Japan/

In  December  1997,  the  Bank  of  Japan  established  the  “Forum  on  the  Development  of  Electronic
Payment Technologies and Its Implications for Monetary Policy”. After releasing an interim report in
May 1999, the Forum expanded the scope of its examinations to the IT revolution in general, and the
Forum's name was changed accordingly (see [info]-section). Recently, the English translation of the
80 pp. final report has been published. It tries to paint a picture of the future outlook of the financial
industry and examines the influence of the IT revolution on monetary policy.

The final report of the Forum – basically a working group composed of experts from academia and the
Bank of Japan – discusses an extremely wide reach of issues ranging from information asymmetries,
the failure of the Law of One Price on the Internet, the impact of IT on productivity, and globalisation,
to  securitization,  economies  of  scale  in  the  banking  industry,  currency  substitution,  and  monetary
policy  transmission  mechanisms.  The  main  points  of  the  report  can  be  classified  in  two  categories:
statements on the banking industry and statements on  monetary  policy.  This review  concentrates  on
the  former.  Concerning  the  latter,  let  me  just  mention  that  the  Forum  notes  that  "there  is  a  strong
likelihood  that  the  development  of  electronic  payment  technologies  including  'electronic  money'  ...
will structurally and unstably decrease the demand for the monetary base, similar to the effects from
the spread of MMFs [Money Market Funds] and credit cards in the past" (p. 59). However, the Forum
does not expect this reduction in demand to exert a significant influence on the present frameworks for
money  market  operations:  "in  principle  there  is  no  reason  why  central  banks  will  lose  the
controllability of short-term interest rates" (ibid.).

Concerning the structure of the financial industry then, the Forum argues that while the Internet has
greatly  reduced  consumers'  search  costs,  direct  transactions  cannot  resolve  the  agency  problem  in
transactions  where  the  asymmetry  of  information  between  buyers  and  sellers  is  problematic.  Thus,
contrary to what some assert, middlemen will not be eliminated. The Forum is therefore of the opinion
that the essential functions of the financial industry – such as the provision of payment and settlement
services, the intermediation of risk, the screening of borrowers, and the provision of liquidity – will
remain unchanged. However, the Forum expects major changes in the 'contents' of financial products
and  services,  and  in  the  financial  institutions  that  provide  them.  For  example,  the  Forum  notes  that
advanced  information  technologies  increase  the  potential  for  the  unbundling  of  existing  integrated
financial functions and the recombination of their constituent parts into new forms. Together with the
improved  quality  of  customer  databases,  this  makes  it  possible  to  offer  increasingly  customised  (as
opposed to uniform) financial services.

—————————————— ePSO-Newsletter Issue 7 – May 2001 ——————————————

- 121 -

Where the organisational forms of financial intermediaries are concerned, the report notes that the
future direction is not yet clear. On the one hand, the IT revolution offers the potential to achieve gre-
ater economies of scale, resulting in greater concentration. On the other hand, the IT revolution may
be  promoting  diversification;  that  is,  the  advent  of  financial  institutions  specialising  in  particular
services as well as new entry by firms from other industries. In Japan, firms in the distribution industry
and  IT-related  firms  are  moving  to  enter  the  financial  intermediation  business  via  the  Internet.  The
Forum argues that these two opposite trends may well continue to coexist since strong economies of
scale  may  be  limited  to  certain  financial  services  such  as  payment  and  settlement  services.  Hence,
while concentration may continue in such fields, diversification may advance in other fields.

Finally,  concerning  globalisation,  the  Forum  notes  that  in  the  real  world,  international  portfolio
diversification is not progressing to the level projected in economic theory. Rather, a strong preference
for  domestic  financial  assets  is  observed.  According  to  the  Forum  experts,  the  development  of  the
Internet has the potential to mitigate this 'home bias' if it makes foreign financial transactions easier
than in the  past.  Also,  with  the  expansion  of  cross-border  e-commerce,  the  use  of  the  dollar  for the
settlement  of  B2B  transactions  in  particular  might  accelerate.  A  last  remark  is  that  the  Forum  ap-
parently sees offshore banking as a major threat: "the possibility that financial transactions in domestic
markets may be relocated to foreign markets from slight differences in regulations and tax systems is
rising  to  an  unprecedented  level.  To  avert  this,  efforts  toward  the  international  harmonisation  of
regulations and tax systems are becoming even more important than in the past" (p. 50).

Overall, the Forum report provides an interesting overview of relevant literature. However, in my
view, the report has two (interrelated) flaws. Firstly, while I can see the need to broaden one's scope
when analysing the development of electronic payment technologies, the Forum has gone somewhat
too far in this. In what I interpret to be an attempt to cover everything that was discussed, the report
makes too many side-steps, thus blurring the general thread of the argument.

Secondly, and related to my first point, the observations produced by the Forum are rather general
and  vague.  On  several  occasions  the  argument  is  not  pushed  far  enough.  For  example,  while  the
Forum  notes  that  there  is  a  need  on  the  Internet  for  "third-party  institutions  with  a  high  level  of
expertise  to  produce  information  on  dealer  credibility  on  behalf  of  consumers"  (p.  9),  and  that
"financial intermediaries will continue to provide great value from their expertise in the screening and
monitoring of financial transactions (information production)" (p. 28), there is not one word on PKI in
the  report  and  the  Forum  does  not  elaborate  on  the  potential  role  for  banks  in  this  area.  Another
example  is  that  the  report  talks  about  the  potential  increase  in  international  trade  and  financial
transactions  brought  about  by  the  Internet,  but  has  nothing  to  offer  on  the  question  whether  this
implies that there is a need for international means of payments – cf. the standardisation vs. integrators
debate in Lelieveldt [ePSO-N 6&8]. A final example is that while the report points out that in the past
banks  competed  primarily  on  the  basis  of  geography  (p.  25),  and  that  the  IT  revolution  makes  it
possible to offer increasingly customised financial services (p. 24), it does not elaborate enough on the
potential future models of financial services: are we going to see a lot more customer-based banks that
focus  on  a  segment  of  the  market;  will  'virtual  portals'  (which  use  technology  to  integrate  financial
services  from  a  variety  of  specialised  providers)  gain  currency,  etc.  Summing  up,  in  my  view  the
Forum would have benefited from a narrower scope, perhaps by splitting up the broader theme into a
number of specific topics.

[[[[info]]]]
• Tachi, R. et al.: Forum on the Development of Electronic Payment Technologies and Its Implications for Monetary Policy
2000.

2000-E-6, 

Interim 

IMES, 

Paper 

Japan 

Bank 

No. 

of 

- 
http://www.boj.or.jo/en/ronbun/dps00.htm

Discussion 

Report, 

•  Tachi,  R.  et  al.:  Technological  Innovation  and  Banking  Industry/Monetary  Policy:  Forum  on  The  Development  of
Electronic  Payment  Technologies  and  Its  Implications  for  Monetary  Policy  -  Report,  Discussion  Paper  No.  2001-E-3,
IMES, Bank of Japan 2001. http://www.boj.or.jp/en/ronbun/dps01.htm

—————————————— ePSO-Newsletter Issue 7 – May 2001 ——————————————

- 122 -

ePSO Newsletter – Issue 8, July 2001

Focus: Security

[8&1]
Editorial: Security – Newspeak, Assurance and Trust
Arnd Weber (arnd.weber@itas.fzk.de), ITAS, Karlsruhe, Germany
/security/smartcards/public key infrastructure

This  issue  focuses  on  security.  In  this  editorial,  the  benefits  of  public  key-based  authentication  and
signatures are analysed. Questions are addressed such as what the benefit of such instruments is in
insecure environments, and whether the underlying technology is robust enough. There is demand for
the use of clear notions, i.e. “certificates” should not be confused with “secret keys” used for signing,
and  it  is  asked  whether  the  contractual  situation  should  be  discussed  publicly,  and  clear  rules  for
revocation of signatures be provided.

There appears to be widespread belief that with “PKI” or “certificates” many criminal attacks, such as
the disputed “card not present”-transactions, can be prevented easily. I would like to challenge this.

Non-repudiation or shared secrets? Frequently, payment providers seek non-repudiation through
authentication based on smartcards and password-verification, or on digital signatures. About 25 years
since  the  invention  of  digital  signatures  have  passed.  Attempts  to  spread  digital  signatures  widely,
such  as  SET,  have  failed.  With  SET  the  cosy  atmosphere  of  netizens  having  fun  and  conducting
business with each other was meant to be changed to one in which the buyer’s power to revoke would
have  been  weakened.  Are  new  plans  for  rolling  out  digital  signatures  necessary,  or  would  using
passwords or transaction numbers, such as pseudo credit card numbers, be more appropriate?

Liability  or  newspeak?  Players  increasingly  talk  of  “certificates”,  instead  of  “secret  keys”  or
“non-repudiation”.  Some  get  so  puzzled  that  they  even  write  about  signing  with  a  certificate.
“Certificates” sounds calming, but I think the use of this word has obtained an element of Orwellian
newspeak.  The  objective  of  using  a  client  certificate  is  to  fight  against  abuse  of  customer  card
numbers,  through  criminals  and  dishonest  customers,  to  reduce  the  number  of  disputes,  so  that  the
client is liable for the remaining transactions. With digital signatures, the construction is to say that it
becomes binding because the user has a computer under his or her control, with the appropriate code,
such that the user can be made liable. If the user cannot control the computer used, signing digitally is
meaningless. If a bank administrator controls a server, then the administrator may be able to sign, but
the clients are not controlling the server. If a password is sent to a bank server, its administrator may
state that the machine digested the password. But unless that server were a verifiably sealed, provably
secure  machine,  making  it  sign  on  behalf  of  the  client  is  meaningless  for  creating  evidence.  The
confusion becomes more general when “PKI” is meant to be client authentication, while we actually
need  a  PKI  even  for  the  authentication  of  merchants  with  SSL.  The  situation  has  also  become
confusing because for using public key cryptography for authentication or signatures, you don’t need
certificates at all. It would be sufficient to look up a public key on a server, see what it is meant for,
who is its holder, and whether it has been revoked. For finding the proper server, one would of course
need  some  identifier.  Certificates  are  only  a  cheap  means  of  checking  off-line  who  a  public  key
“belongs” to. To do so, they need to be transmitted, so they need not be stored securely. In widespread
use  of  public  key  cryptography,  many  people  will  lose  control  over  their  secret  keys,  and  it  will
become less meaningful to handle certificates off-line in the first place, as they need to be checked on-
line  against  revocation.  So  I  rather  think  the  intentions  of  using  public  key  cryptography  should  be
spelt  out  clearly,  to  create  transparency  and  trust.  If  secret  keys,  certificates,  authentication  and
liability  are  confused,  user  interfaces  and  manuals  and  contracts  are  likely  to  become  hard  to
understand.

Are  public  key  cryptography  and  smartcards  robust  enough?  The  underlying  public  key
technology  is  not  as robust  as  more  simple  technologies  are, such as  shared  secrets  (PINs)  or  using
transaction  numbers.  Imagine  a  criminal  finds  a  method  to  learn  the  secret  key  out  of  a  smartcard

————————ePSO-Newsletter Issue 8, – July 2001———

- 123 -

being  inserted in  a  merchant terminal,  by  measuring  differences  in  power  consumption.  Or  imagine
that organised crime finds an efficient way to factorise prime numbers, and keeps this knowledge for
exploitation. Inventions have been made giving raise to such fears (Kocher 1999, Pollard 1988). Will
more  be  made  and  kept  secret?  Another  nasty  threat  is  that  the  secret  key  used  for  verifying  the
validity  of  public  keys  might  be  compromised,  i.e.,  in  usual  settings,  the  top-level  certification
authority’s  secret  root  key.  Doesn’t  this  mean  we  need  well-evaluated  smartcards,  implementations
with a second algorithm, and a second channel to learn about compromised root keys?

Lack  of  secure  smartcard  environments:  There  is  a  lack  of  secure  personal  smartcard
environments.  No  assurance  can  be  given  that  existing  PCs  can’t  be  efficiently  manipulated  by
criminals  for  having  smartcards  authenticate  or  sign  other  amounts  or  beneficiary  accounts  than
intended.  Attacks  may  be  made  as  quickly  as  macro  virus  attacks  have  spread.  Users  could  claim
rightly or falsely that it was a new kind of Trojan horse making the transaction, which deleted itself
after the attack was made.
•  This means that if a transaction is authenticated with a smartcard in an insecure environment, we
need to give cardholders means to revoke a payment. That may be different if card readers, such as
merchant terminals, which are usually secure enough, can be authenticated.

•  Banks  should  support  the  development  of  secure  general  purpose  computers,  which  protect
applications  from  each  other  perfectly  (Pfitzmann  et  al.  2001).  Otherwise,  disputing  secured
transactions might become a new kind of “sport”.

•  Alternatively,  one  could  use  specially  designed  smartcard  readers,  with  user  input  and  output.
They should be evaluated by a third party certifying they are bullet-proof against attacks from the
network.
In  principle,  the  mobile  phone  could  be  designed  to  become  such  a  secure  reader.  It  is  a  huge
challenge to produce something close to a provably secure mobile phone, given that the industry
aims at opening them for mobile code. We already have witnessed the first flaws and attacks, and
mini-virus  scanners  are  on  sale.  One  could  wait  and  see  what  the  hardware  manufacturers’  OS
specialists  will  achieve.  They  will  probably  aim  at  controlling  the  quality  of  the  code  and  the
honesty  of  programmers.  But  what  assurance  can  be  given  with  code-signing  if  one  has  a
community of many thousands of programmers, as is claimed for mobile Java? Will these phones
be designed so that they can be certified to be highly protected against malicious code?

• 

In short, we must make sure that security instruments won’t become an “attractive nuisance”, as a
representative of NSA reportedly put it, meaning I believe that an unproven instrument in an insecure
environment won’t be capable of providing a high level of assurance (Harrison 2000).

Revocation essential in case of errors, insider fraud, and broken user identification: There is
no guarantee that errors and insider fraud won’t take place. Remember the early days of using shared
secrets  at  cash  dispensers.  This  lead  to  the  discussion  of  “phantom  transactions”,  only  to  learn  that
maintenance personnel mixed up backups, and that bank insiders spotted passwords (Jack Committee
1989, Whybrow 1991). Is it true that similar attacks can’t happen in a PKI infrastructure? Even if we
had secure machines, it could still happen that a criminal spots or guesses the password, and even if
biometrics were used, that a false acceptance takes place. This means that for such cases, too, some
right of cancellation, some insurance should be available, to the benefit of the customer.

Mandatory  participation?  Given  the  problems  we’ve  seen  of  making  Internet  users  sign  SET-
contracts, it is reasonable to ask whether signing such contracts and increasing their liability will go
smoothly  if  done  as  a  matter  of  course  when  obtaining  a  new  card  or  phone.  So  having  good
explanations  ready  for  the  public  why  this  is  needed,  and  how  users  can  nevertheless  challenge
transactions  when  the  merchant  did  not  deliver  as  promised  or  when  they  lost  control  over  their
password, will be essential.

Tough contracts, or insurance and good-will? It is difficult to learn what the contracts to be used
with new methods for public key-based user authentication or signatures will be like. I think there is a
chance to see in parallel, as was the case with SET, relatively hard contracts (“you are liable for using
your  password”),  soft  contracts  (“you  are  in  principle  liable  unless  an  attack  occurs”)  and  liability
combined with insurance (“you are liable, but in case of attacks you only have to bear a damage  of

————————ePSO-Newsletter Issue 8, – July 2001———

- 124 -

Euro X”). For instance, if future mobile phones handle different “certificates”, wouldn’t it make sense
to visualise the different degrees of bindingness in the user interface?

Deploy signatures as a service? I think digital signatures would be appreciated by many parties if
their  use  were  also  designed  as  a  service.  Some  players  have  already  started  distributing  digitally
signed tickets, such as Net-up. Similarly, it would be great if merchants accepting signed or otherwise
SC-based payments would be obliged to provide signed offers,  signed  payment  receipts, and  maybe
put into a position to request a signed purchase order. In case of a consumer claiming wrong or late
delivery,  it  could  easily  be  compared  whether  offer,  order  and  payment  match.  Digital  signature
technology would then not only be used for producing evidence usable against the customer.

This Issue

Simon  Lelieveldt  looks  in  his  article  at  some  new  proposals  made  by  Visa  and  Mastercard.  In  the
mobile world, many discussion groups consider many approaches for securing mobile payments, see
Clara Centeno’s article on “Mobile Payment Industry Fora”. Subsequently, we look at some security-
related projects. First, Stefanos Karapetsis reports about achieving co-ordination and compatibility of
smart card-based solutions at a European level in “eESC”. Marc Bourreau and David Bounie from the
STAR-project  look  at  the  economics  of  using  special  smartcard  readers.  In  the  remainder  of  this
newsletter, we have Knud Böhle’s review of Net Profit Finance’s study “Electronic payments 2001”,
and two articles addressing the pricing of payment instruments. One is Peter Mair’s report about “free
banking”  in  Australia,  the  other  one  is  Leo  van  Hove’s  review  of  a  report  on  the  costs  of  payment
instruments in the Netherlands.
[[[[info]]]]
•••• Harrison,  Ann:  Government 

In:  Computerworld 

vendors. 

security 

official 

blasts 

2000.

July 

28, 

www.infoworld.com/articles/hn/xml/00/07/28/000728hnnsa.xml

•  Jack Committee, Report (Review Committee on Banking Services Law, Chairman Robert Jack). London 1989
•  Kocher, P.; Jaffe, J.; Jun, B.: Differential power analysis. In: IACR 1999, LNCS 1666, Berlin 1999, 399-397
•  http://www.net-up.de/
•  Pollard,  John:  Number  Field  Sieve.  Cf.  Buchmann,  Johannes:  Wie  sicher  kann  Sicherheit  sein?  In:  Müller,  Günter;

Reichenbach, Martin: Sicherheitskonzepte für das Internet, Berlin, Heidelberg, New York 2001, 7-26

•  Birgit Pfitzmann, James Riordan, Christian Stüble, Michael Waidner, Arnd Weber: The PERSEUS System Architecture;
IBM  Research  Report  RZ  3335  (#93381)  04/09/01,  IBM  Research  Division,  Zurich,  Apr.  2001.  http://www-
krypt.cs.uni-sb.de/~perseus/

•  Whybrow, M.: ATM Security. Ghost in the machine. In: Banking Technology 1991, 39-43

[8&2]
New Payments Authentication Methods for Use on the Internet
Simon Lelieveldt (simonl@wxs.nl), Amsterdam, The Netherlands
/credit cards/internet payment systems/security/wallet/consumer adoption

During  the  recent  Second  Edinburgh  Financial  Cryptography  Engineering  Conference  [info]  Paul
Guthrie, Chief Technology Officer of Brodia, held an impromptu speech on the issue of the future of
authentication mechanisms for credit-card payments over the Internet. This article briefly describes,
on the basis of his speech, the three models which may be adopted by Visa (3D secure), Mastercard
(Secure Payment Application) and Maestro.

Internet payments with SET haven’t taken  off. The  complexity  and  cost  of implementing  SET  have
been an important barrier, as well as the fact that all stakeholders involved must need an incentive to
implement it. In this respect, one should take into account that the liability shift announced by Visa
(the  3D  model)  [info]  has  the  consequence  that  if  a  merchant  accepts  3D  SET,  the  SSL-credit-card
transactions that are done with that merchant will not be open for reversal. So, with 3D SET especially
issuers don’t have a business case to invest many dollars in an infrastructure which then obliges them
to take liability for transactions  made  by  their  customers. This is  a cost  for the issuing  bank.  Given
these  costs,  most  SET  trials  and  3D  SET  trials  are  slowly  shutting  down,  with  the  exception  of  a
number of Scandinavian trials. So as far as safe and widely accepted payment mechanisms for use on
the Internet are concerned, we’re back to square one.

————————ePSO-Newsletter Issue 8, – July 2001———

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One of the mechanisms available in the market is a concept in which a surrogate card number will
be used. An example of this is the Orbiscom O-card [info]. In this concept, a 16 digit card number is
issued to the consumer by his or her bank or card issuer for one transaction only. The customer uses
the  number  at  a  merchant  website  and  the  merchant  validates  the  number  with  the  issuer  through  a
standard  credit  card  transaction.  A  number  of  implementations  of  this  mechanism  is  currently
available. Some implementation problems do arise however, as merchants tend to store this number in
their  database  for  future  usage  and  use  the  numbers  in  ways  that  are  unanticipated  by  the  issuer
system,  causing  errors  or  not  catching  fraud.  Although  a  solution  could  be  to  lock  a  number  to  a
merchant-ID, one should consider the fact that a large merchant may use multiple merchant ID-s, or
may switch merchant IDs at any time. Another question is the issuance and validation of the surrogate
card  number.  It  may  be  difficult  for  issuers  to  integrate  these  functions  properly  with  the  existing
legacy systems, as a result of which operational errors or large expense may occur.

If we consider the lessons learnt so far, it appears that any successful Internet payment mechanisms
must be beneficial to all stakeholders. Also, it must be noted that in fact the fraud levels are not really
high, except for two types. The first is the situation, especially in porn or gambling industry, where the
client does something but later denies it. The second is the gross exposure of card numbers if they are
not protected well enough. To address these specific issues, Visa USA, Mastercard and Maestro are
considering  new  solutions.  The  first  of  these  solutions  can  be  expected  to  become  available  in  the
market  as  of  the  third  quarter  of  2001.  Usage  of  the  protocols  will  possibly  be  mandated  by  the
organisations involved at some point.

The proposed Mastercard solution is named SPA for secure payment application and rests on the
basis  that  one  needs  more  than  the  credit-card  number  [info].  It  utilises  the  Universal  Card  Holder
Authentication  Field  (UCAF)  infrastructure  to  validate  the  transaction.  The  UCAF  itself  is  a  hash,
generated at the time of the transaction. If a customer wants to buy something and agree to a merchant
offer, a redirection will take place to a server of the issuer, were the hash is being calculated on the
basis  of  data  elements  in  the  offer  to  the  consumer  as  well  as  a  secret  cryptographic  key.  The
consumer agrees to the transaction and also (but invisible to the consumer) sends the UCAF field to
the  merchant.  The  merchant  will  process  the  transaction  and  route  the  UCAF  to  the  issuer  for
validation.  All  in  all  this  is  a  simple  scheme  (as  it  requires  receiving  and  passing  through  one
additional field of data), yet it does not work yet in the linux and wap environment. Furthermore, the
scheme requires a consumer wallet, which most probably will be a server-side wallet.

The  proposed  Visa  USA  solution  is  called  3D  secure    (and  falls  within  the  Visa  Payment
Authentication  program)  and  is  SSL-based  [info].  Basically  customers  are  registered  as  3D  secure
users and merchants do a lookup in a central registry to verify if a specific card’s number is indeed
registered  for  3D-secure  payments.  If  that  is  the  case  a  server-side  wallet  will  start  to  operate  in  a
separate  window  where  transaction  details  are  filled  in  as  far  as  necessary  (user  data  are  filled  in
beforehand on the basis of the registration process). The server-side wallet then signs the transaction
on behalf of the client. The merchant will then check the bank's signature on the transaction.

The proposed Maestro solution will also be based on a server side client wallet. In this solution the
regular  (but  pseudo)  cardnumber  will  be  used,  yet  the  expiration  date  will  be  changed  for  each
transaction (instead of the card number itself). The issuer will issue and validate this expiration date as
in  the  Mastercard  solution  and  upon  validation  will  add  the  track  2  information  belonging  to  the
Maestro-card 
the
transaction  (this 
application/registration  procedure).  From  there  on,  the  transaction  will  be  directed  off  the  web  and
treated as a regular Maestro transaction. After authorisation/validation the ok will be transferred to the
merchant and consumer.

is  obtained  as  a  part  of 

is  used 

info 

that 

the 

in 

The  common  element  in  the  schemes  will  be that  the  issuer  may  determine  the  method  of  client
authorisation. This could be either a login/password procedure over SSL, the use of EMV smartcards
with a 0 dollar purchase, the use of smart cards within the framework of a PKI-solution or a scheme in
which a virtual smartcard is emulated in software. The specific method chosen could vary on the basis
of  parameters  such  as amount. The  difference  between  the  schemes  is that  with  the  Mastercard  and

————————ePSO-Newsletter Issue 8, – July 2001———

- 126 -

Maestro  solution  the  issuer  has  to  do  the  validation  as  well  as  generating  and  issuing  UCAFs,  new
expiration dates, and with the Visa solution the merchant has to do the validation.

Empirical data on a number of different banks and payment mechanisms show Brodia that a secure
payment  mechanism  may  result  in  increased  higher  average  value  of  payments  over  the  web.  The
future  will  reveal  which  of  the  different  payment  authentication  mechanisms  will  turn  out  to  be  the
best, and how interoperability will be achieved.
[[[[info]]]]
• The Second Edinburgh Financial Cryptography Engineering Conference - 22/23 June,

http://www.efce.net/programme.html

•  Visa announcement of 3D-application and Payment Authentication methods

http://www.visa.com/av/news/press_release.ghtml?pr_form_edit=324&edit_file=

•  The Orbiscom O-card, pseudo number: http://www.jrc.es/cfapp/invent/details.cfm?uID=180
•  The Secure Payment Application: http://www.jrc.es/cfapp/invent/details.cfm?uID=181

[8&3]
Mobile Payment Industry Fora – Consolidation of Initiatives Expected
Clara Centeno (clara.centeno@jrc.es), IPTS, Seville, Spain
/mobile payment/security/mobile forum/eEurope Smart Cards/

In this article the different mobile fora concerned with secure payments are presented: MeT, Mobey
Forum,  GMCIG,  WAP  Forum  ECOMEG,  Radicchio,  mSign,  ETSI  EP  m-Commerce  WG1&2  and
ECBS  Mobile  Commerce  Expert  Team.  Overlap  and  co-operation  between  them  and  the  need  for
convergence are discussed. The specific role of the eEurope Smart Cards Trail Blazer on e-payments
(TB5) to improve the communication among the fora and to support convergence is stressed.

Forrester Research estimates in its last related report [info] that mobile payments will amount to €26
billion  in  2005  and  gross  profit  to  €1,3  billion.  Thus,  as  mobile  payments  are  becoming  a  field  of
priority, an increasing number of solutions are being developed, tested, piloted or rolled-out [info].

Business drivers for mobile commerce are different for each player: telco operators have invested
high  amounts  of  money  on  license  purchasing  [info]  and  need  to  recover  investments  through  the
increase of the voice and data traffic; banks seek to use the mobile device as a new delivery channel
for  financial  services  and  to  maintain  their  role  as  payment  service  providers;  new  business
opportunities  appear  also  for  mobile  device  manufacturers,  technology,  application,  service  and
content providers.

the need for providing measurable service quality,

However, these opportunities do not go without a number of challenges, such as:
•  understanding consumer requirements,
• 
•  providing service ubiquity,
•  defining and reaching adoption of multiple standards, and
•  providing cost-effective secure payment services.
Moreover, as pointed out by Forrester Research, the main supplier side actors – the mobile industry
and financial institutions – need to find a balance between the competitive forces and the need for co-
operation, otherwise, estimated revenues for mobile payment would be endangered.

Nevertheless,  the  path  for  co-operation  is  well  underway,  judging  from  the  numerous  cross-
industry  forums  and  working  groups  recently  created  to  co-ordinate  the  definition  of  requirements,
specifications  and  standards.  The  most  important  of  these  are:  MeT,  MobeyForum,  GMCIC,  WAP,
Radicchio, mSign, ETSI and ECBS (see below for a more detailed description).

————————ePSO-Newsletter Issue 8, – July 2001———

Mobey Forum (www.mobeyforum.org)
Members :

MeT – Mobile electronic Transaction (www.mobiletransaction.org)
Members: 

- 127 -

Mobile handset manufacturers (Ericsson, Motorola, Nokia, Siemens, Panasonic,
Sony)
Financial institutions (BBVA, Interpay Nederland, Mobey Forum, Wells Fargo),
Telco operators (France Telecom, Radiolinja, Telia), Service providers, Solution
vendors
To create a common technology framework for secure mobile transactions
that ensures a consistent user experience, independent of device, service and
network. The initiative will be based on existing relevant specifications and
standards.
General specifications: MeT Core specification, MeT Consistent User
Experience,
MeT Personal Trusted Device (PTD) Definition, MeT PTD Security
Requirements
Usage Scenarios: MeT Account-Based Payment, MeT Event Ticketing, MeT
Retail Shopping,
MeT SET Wallet, MeT WAP Banking, MeT WAP Shopping
Discussion documents: MeT Static Conformance Requirements, MeT Ticketing
Framework

Financial Institutions (VISA International, ABN AMRO Bank, Bank of Ireland,
BBVA, BSCH, BNP Paribas, Barclays Bank, Crédit Agricole, Credit Suisse,
DBS, Deutsche Bank,
HSBC Holdings, Nordea, Royal Bank of Scotland, Sampo-Leonia, Svenska
Handelbanken),
Mobile handset manufacturers (Ericsson, Nokia, Siemens)
Service and content providers, Solution and application vendors
To encourage the use of mobile technology in financial services such as
payment, remote banking and brokerage.
To focus on the business needs of the financial institutions and their customers to
develop secure financial services in the mobile world.
To provide requirements to standardisation bodies and promote open, non-
proprietary technology standards.
Preferred Payment Architecture (Business Documentation, Technical
Documentation)

Financial Institutions and payment service providers (Mastercard International,
Europay International, Austria Card, Bank of Nova Scotia, Banksys, Deutsche
Postbank, Euronet
Worldwide, First Data, GIE Cartes Bancaires, JCB, Key Bank USA, Merita
Bank, Mondex
International, Regal Treasury Private Bank, SSB, Svenska Handelbanken), Telco
operators (BT,
NTT DoCoMo, Orange, Telefónica Móviles), Mobile handset manufacturers,
Mobile technology providers, Content providers, Solution vendors.
To provide a global and open co-ordinated organisation to develop secure and
interoperable wireless payment standards that will be submitted to existing
wireless standards organisations (WAP, ETSI, Radicchio, others)
Introduction to Digital Mobile Payments Over Open Networks, Remote EMV
Payments Using a Mobile Devices, Remote Wallet Server Architecture, Remote
EMV/SET
Payments Using a Mobile Device

Associate Members: 

Purpose: 

Deliverables:

Associate Members:
Purpose:

–

–

– 

Deliverables:

Purpose: 

–

Deliverables:

GMCIG: Global Mobile Commerce Interoperability Group (www.gmcig.org)
Members:

————————ePSO-Newsletter Issue 8, – July 2001———

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WAP Forum (www.wapforum.org) – E-Commerce Expert Group ECOMEG
Members:  

Openwave, Mobile handset manufacturers (Ericsson, Motorola, Nokia),
Telco operators (France Telecom, Telstra, Vodafone, etc), Financial institutions
(Mastercard International, VISA International, UBS, Nordea, Citibank, HSBC,
Societe Generale, Deutsche Bank, Barclays, etc), American Express, Service
providers, Content and application software providers, Infrastructure providers.
To understand how WAP can help support a variety of payment architectures.
To identify missing features and lobby their incorporation in the WAP
specification (working with WAP-EFI, WAP Security group-WSG, WAP-STK,
liaise with ECML forum).
To engage the mobile telephony industry in the development of card payment
technologies.
Not planned, as working in co-operation with WAP Forum working groups.

Purpose: 

Deliverables:

–
–

–

Radicchio (http://www.radicchio.cc)
Radicchio and mSign have signed a strategic partnership in February 2001, to merge both international activities
later in the year.
Members: 

Certification authorities, Telco operators (MTN, Omnitel Pronto Italia, Orange,
Telefónica Móviles, Vodafone-Airtouch), Solution vendors, secure application
providers, Mobile handset manufacturers (Ericsson), Smart card manufacturers,
Financial Institutions (Mastercard International, Visa International)
Global partnership for the development of secure wireless e-commerce and
the promotion of PKI for wireless devices and networks
White papers on: PKI fundamentals, PKI Opportunities, PKI legislation,
PKI Best practices (choosing a smart card for secure wireless e-commerce)

Purpose: 

–

Deliverables:

mSign - Mobile electronic Signature Consortium (www.msign.org)
See also Radicchio
Members: 

Solution and information technology providers, Mobile handset
Manufacturers (Siemens), Telco operators (Deutsche Telekom, VIAG Interkom),
Smart cardmanufacturers, Financial institutions (Bank of Tokyo - Mitsubishi,
Crédit Agricole Indosuez Luxembourg, Hypo Vereinsbank, West LB)
To define a worldwide de facto standard for the economic and technical
deployment of the mobile digital signature via mobile phone.
MSign protocol (mobile operator - service provider)

Purpose:

–

Deliverables:

ETSI – European Telecommunications Standards Institute (www.etsi.org)
EP m-Commerce Working Groups WG1 & WG2

Members:

Purpose:

Deliverables:

Administrations, Telco operators, Device manufacturers, Technology
providers, Research bodies, Standard organisations, Payment associations

– WG1: To analyse the current contents provided in the m-commerce market
place and to list requirements both from users’ and providers’ point of view.
– WG2 : To understand the payment methods being used for m-commerce and

highlight specific security aspects used for m-commerce.
No deliverable published yet (expect to publish requirements by October 2001).

————————ePSO-Newsletter Issue 8, – July 2001———

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ECBS – European Committee for Banking Standards (www.ecbs.org)
Mobile commerce expert team

Members:

Observers:

Purpose:

Deliverables:

European credit sector associations (Banking Federation of
The European Union, European Association of Co-operative Banks, European
Savings BankGroup), National Banking representatives
European Central Bank, Europay International, VISA International, SWIFT,
Euro Banking Association, Mondex, Non-EU/EFTA banking associations
To raise awareness on m-commerce and related issues (Awareness Report
planned).
To develop banking requirements.
To establish formal liaison with standardisation groups (ETSI, WAP, Mobey).
No deliverable published yet.

From  the  previous  list,  one  could  wonder  why  there  are  so  many  industry  led  initiatives  pursuing
similar  objectives,  with  apparently  similar  industry  participation,  trying  to  lead  or  influence  the
definition  of  what  is  referred  to  as  non-proprietary  specifications  and  standards  for  secure  mobile
payment.

Indeed, although Mobey Forum, GMCIG, ETSI and ECBS seem to have some common objectives
on  secure  payments,  they  have  significant  constituency  differences.  ECBS  members  are  exclusively
representing  the  financial  organisations,  Mobey  Forum,  driven  by  financial  institutions  has  a  more
open constituency but has no participation from telco operators, ETSI has a strong telecommunication
colour.  GMCIG,  however,  has  a  wider  cross-actor  participation,  including  a  significant  number  of
telco  operators  and  also  financial  services  operators.  It  looks  like  this  would  be  the  only  true
discussion forum where the financial and the telco actors meet.

While  MeT  is  driven  by  handset  manufacturers  and  concentrates  on  user  experience  and  the
Personal  Trusted  Device  (PTD)  –  the  new  name  for  the  mobile  handset  –  for  all  kinds  of  services,
Mobey  Forum  and  GMCIG  have  a  wider  focus  and  look  at  the  global  architecture  for  financial
services, including the requirements for the PTD. One should note that although there is co-operation
between MeT and Mobey Forum, only Motorola, among the MeT members, is part of GMCIG, which
questions  to  which  degree  PTD  requirements  from  GMCIG  will  be  endorsed  by  the  handset
manufacturers.

It is also interesting to note that, in general, the intention of these fora or working groups is not to
define new standards and eventually compete with standardisation organisations, but to influence and
liaise with them: WAP Forum, ETSI, EESSI, CEN/ISSS, GSM, Radicchio, etc.

To  this  list  of  forums  and  working  groups,  one  needs  to  add  a  complementary  activity,  of  a
different nature, initiated by the European Commission: the eEurope Smart Cards Trail Blazer on
e-Payments (TB5).

TB5 is one of the action lines of the EC eEurope Smart Cards initiative consolidated in April 2000
with the adoption of the Smart Card Charter, presented in our ePSO-N [1&7]. This Charter was further
elaborated in September 2000, where twelve action lines or Trail Blazers were defined, among which
e-Payments is one.

TB5  has  acknowledged  the  need  for  co-ordination  in  the  e-payments  field  across  the  multiple
access industries. Indeed, while user access devices multiply (physical marketplace, Internet, mobile,
iTV), ubiquity of payment tools remains a strong user requirement. In addition, new access channels
are  expected  to  face  similar  challenges  of  industry  co-operation  for  the  definition  of  requirements,
specifications  and  standards  for  payments. TB5  is  thus  covering  this  cross  industry  co-ordination  in
order to facilitate the convergence of standards and solutions towards an accelerated adoption of smart
cards for e- and m- payments.

Moreover, it is a stated aim of the TB5 to improve communication  between  the  different forums
and working  groups  in  the  mobile  payment  arena, to  examine  the  potential  convergence  of  some  of
them and to study how to bring closer together the telecommunication and banking sector actors.

————————ePSO-Newsletter Issue 8, – July 2001———

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Here below is described its membership and purpose:

eEurope Smart Cards – Trail Blazer e-payments (TB5)
Members:                         Banks, banking operators and banking associations, Mobey Forum,

Purpose:

GMCIG, ETSI, ECBS, Smart card manufacturers, Mobile handset manufacturers,
Telco operators, Solution providers, ePSO
– To facilitate the ubiquity of the use of debit/credit EMV cards and e-purse

cards.

– To achieve an e-Euro by end 2002.
– To harmonise user interfaces by respecting users’ needs.
– To use smart cards for secure Internet payments.
– To accelerate the choice of m-payment architecture.
– To accelerate banks and telecommunication operators business dialog on e-

and m- payments

In  addition,  ePSO,  the  electronic  Payment  Systems  Observatory,  supports  TB5  by  providing  a
complementary  environment  for  cross-sectorial  discussion  on  e-  and  m-payments  covering  also  the
non-smart card based market.

We  could conclude that, looking  at the  high  number  of  forums  existing  in  the  mobile  payments,
additional co-ordination efforts would be required, firstly, within the mobile arena and, secondly, for
other access industries, such as Internet and iTV. This effort  would  not  only  increase  efficiency  but
would also avoid the potential conflicts among the different initiatives that could endanger the ultimate
objective of developing mobile commerce.

On the other hand, observing current merger initiatives (Radicchio and mSign) and considering the
purpose  of  the  TB5  group,  we  could  maintain  that  this  additional  co-ordination  has  already  started.
Although  far from  a  won  battle,  we  could  consequently  expect  to  observe  a  convergence  of  mobile
payment  forums  in  the  short  to  medium  term  perspective.  This  is  necessary  for  the  deployment  of
ubiquitous and secure payment services as an enabling factor for mobile commerce.

[[[[info]]]]
• Forrester Research, May 2001 Report “Mobile Payment’s Slow Start”
•  ePSO  Database  on  e-Payments.  (ePSO:  electronic  Payment  Systems  Observatory  at  the  DG  Joint  Research  Centre  –

Institute for Prospective Technological Studies. http://epso.jrc.es/paysys.html)

•  According to UMTS forum Report No. 13, European mobile operators have already invested  more than $100 billion in

acquisition of licences for 3G spectrum (http://www.umts-forum.org/reports.html)

[8&4]
eEurope Smart Cards, 14 Months after the Smart Card Charter
Stefanos  Karapetsis  (s.karapetsis@mellon.com.gr),  Vice-Chairman  of  the  Payments  Trailblazer  (TB5),
Athens, Greece
/eEurope/European Commission/smart cards/standards/interoperability/security

The article describes the eEurope Smart Card initiative. While there is very active participation from
many industries, a major challenge for eEurope Smart Card (eESC) will be achieving co-operation for
cross-industry consensus building and co-opetition for the exploitation and widest diffusion of results.
Regarding  payments,  eESC  is  focussing  mainly  on  the  synchronisation  of  EMV  roll-outs,  on  the
interoperability  of  Euro-based  e-purses  and  on  the  convergence  of  smart  card  based  payments  and
mobile payments.

My thanks to Henry J F Ryan, eESC Secretary for reviewing a draft of this article and for his helpful
suggestions.

This  article  is  a  personal  reminiscence,  not  an  assessment  or  a  status  report.  It  is  an  informative
account of the eEurope Smart Card initiative from somebody who has actively participated since the
very  first  meetings  and  who  assisted  in  drafting  the  Smart  Card  Charter  back  in  February  2000  (cf.

————————ePSO-Newsletter Issue 8, – July 2001———

- 131 -

eeurope-smartcards.org).  eESC  follows  a  work  programme  directed  by  a  15  member  Steering
Committee  and  based  on  12  Working  Groups,  called  Trailblazers,  or  TBs.  250  organisations
participate  regularly  in  eESC.  Members  of  the  European  Commission  are  present  at  meetings,
constructive in their contribution, but the ball is not in their hands. Industry and users have taken over
both  the  leadership  and  the  running  of  the  two-year  project.  CEN,  ETSI  and  EUROSMART  are
successively providing the eEurope Smart Card secretariat. The eEurope Smart Card initiative is open
to  all.  Formal  high-level  framework  contacts  have  been  established  with  Japan  and  with  the  US.
Funding has been secured to materialise the overall work-plan and this framework.

As open networks, the Internet, mobile networks and so on require more security, smart cards are
becoming more and more recognised as essential. The eESC trailblazers Protection Profiles, Security
Certification  (TB3)  and  Trailblazer  Generalised  Card  Reader  (TB  4)  are  responsible  for  security
issues.  TB4  for  example  will  address  the  security  of  readers  in  a  generalised  environment  and  will
include amongst others embedded devices which use smart cards.

Main Challenge

The  main  challenge  involved  in  the  work  being  done  is  the  fact  that  in  order  to  achieve  the  main
objective, the parties involved must address issues of co-operation and co-opetition.

The cross-border collaboration is until today has not posed serious problems. Problems have been
identified  in  conflicts  of  national  legislative  restrictions,  e.g.  cross-border  health  services  based  on
smart  cards  have  encountered  serious  judicial  and  administrative  obstacles  beyond  technological  or
interoperability  problems.  The  European  Electronic  Signature  Standardisation  Initiative  (EESSI),
although  important,  does  not  eliminate  the  existing  underlying  “political”  fragmentation  that  is  a
recognised  barrier  to  smart  card  mass  deployment  in  particular  and  ICT  convergence  in  general  in
Europe.

The  cross-sector  collaboration  difficulties  are  more  manifest:  Despite  numerous  initiatives  and
pilots the issues of “who controls the customer” between the financial sector and telecommunications
operators  is  a  major  underlying  issue  in  the  discussions  on  e&m-payments.  But  the  initiative’s
dynamism has created a very positive attitude by all. In an extremely productive meeting hosted by TB
5 e-Payment and m-Payment in April all standardisation and implementation initiatives addressing the
issue  of  mobile  commerce  and  payments  presented  their  work,  discussing  means  of  communication
and co-operation.

Governments, new to smart card technology, while receptive are still taking an exploratory attitude.
Some like the Finnish Ministry of Interior are proudly rolling-out their PKI based smart cards to the
entire population. Others are more cautious and non-committal. It is therefore not surprising that the
TB  e-Government  (TB10)  is  not  so  advanced  as  others  in  terms  of  defining  its  plans  of  action.
However, this too is changing and a special implementation initiative called eEpoch is being launched
with participation from over a dozen sites in 10 countries. This project aims to act as a nucleus for the
future  role  out  of  millions  of  smart  cards  for  e-Government  applications.  In  particular  the  pan-
European interoperability aspects provided by eEpoch will comprise a common  European  electronic
identity function and support for digital signatures. It is expected to provide real added value to local
implementations and to the realisation of European wide interoperability.

The  other  TBs  focused  on  standardisation  and  technology  are  well  on  track:  TBs  Protection
Profiles,  Security  Certification,  Generalised  Card  Reader,  Contactless  Smart  Cards  and  Multi-
application  Smart  Cards  are  progressing  with  their  ambitious  plans,  involving  most  prominent
participants from most European countries.

So  too  are  the  TBs  addressing  the  main  eESC  objective  i.e.  those  on  Public  Identity,  and  on

Identification and Authentication.

The  work  on  e-Payment  and  m-Payment  is  also  very  advanced  as  mentioned  above.  The  first
months’  work  has  established  an  inventory  of  the  work  being  done  in  Europe  concerning  EMV
migration,  mobile  and  TV  payments.  More  than  35  pilots  including  mobile  payments  have  been
identified in Europe, none of them interoperable. The financial industry is moving ahead, albeit with
some  phase  differences,  in  substituting  more  than  one  billion  debit  and  credit  cards  with  the  EMV

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based  smart  cards.  This  complete  rollout  will  take  place  in  the  next  3-4  years,  providing  an
interoperable  infrastructure  for  all consumer  based electronic transactions involving  debit  and  credit
payments. Next on the agenda of eESC is the processing of the information gathered in order (a) to try
to synchronise  EMV roll  out  and  migration in  Europe  and (b) to facilitate  the  discussion  on  mobile
payments  in  order  to  avoid  multiple  and  non-interoperable  architectures  and  solutions.  At  the  next
TB5  meeting  the  issue  of  electronic  purse  will  be  addressed,  following  developments  towards  the
ambitious  goal  of  providing  Europeans  with  an  interoperable  Euro  based  e-purse.  There  are  several
important  related  European  initiatives  in  this  field.  One  is  a  new  CEN  workshop  called
CEN/WS/FASTEST, on transport interoperability which is closely linked to TB 9 Public Transport.
Another example is an EU-project called COMBI-CEPS, which is focusing on making CEPS-purses
fast enough for public transport requirements.

Finally, I would like to make some future oriented remarks.

First, privacy is mentioned in eESC, but it is not really being thoroughly addressed in a systemic
manner at present. Responsibility for this horizontal concern which is applicable to all is being shared
between the Steering Committee and the User Requirements Trailblazer. Notwithstanding the public
consultation  currently  underway  on  the  possible  role  of  standardisation  in  support  of  the  Data
Protection Directive 95/46/EC, there is an immediate requirement for eESC to address data protection
issues. One option that I believe may be widely supported is the creation of a Privacy Trailblazer.

I  foresee  three  other  very  critical  developments  already  in  progress  which  will  assist  greatly  in

advancing eESC to meet its objectives.
1.  There  is  need  for  a  more  efficient  mechanism  to  carry  the  results  from  this  genuinely  pan-
European  effort  to  every  member  state  (and  to  the  applicant  countries  as  well)  and,  on  the
opposite, to bring the national work to eESC. This is already happening though the multi-national
pilot project eEpoch which will establish the nucleus for the eventual implementation of millions
of smartcards in support of eGovernment applications throughout Europe and elsewhere.

2.  There  must  be  closer  collaboration  forged  with  the  rest  of  the  eEurope2002  actions,  which  will
help  co-ordinate  and  facilitate  mutual  actions  and  mutual  inputs.  In  addition  there  needs  to  be
harmonisation  between  developments  in  Europe  and  those  occurring  in  Japan,  USA  and  other
areas.  Such  collaborative  work  has  also  been  initiated  under  the  Framework  Workpackage  of
eEpoch.

3.  There  needs  to  be  greater  visibility  of  the  work  to  the  European  citizen.  Already  this  is  well
advanced via the eESC website. Here you can find details about the constituency, the organisation
of eESC, public documents including presentations from the open meeting in Stockholm in June,
the  TB5  event  in  April,  and  the  User  Requirements  conference  hosted  by  the  UK  DTI  in
conjunction  with  TB8,  etc.  In  addition  to  this  “pull-information”  the  need  for  an  active  “push-
information”  on  relevant  developments  and  work  in  progress  to  the  various  different
constituencies is being served by the launch of a new eESC newsletter.
Through the work progress of the eESC constituency and the tailored information exploitation and
dissemination  activities  already  underway,  eEurope  Smart  Cards  and  eEurope  2002  in  general  will
irrevocably  revolutionise  and  facilitate  the  decision-making  processes  and  actions  of  many
stakeholders.

[[[[info]]]]
• Data Protection Directive 95/46/EC http://www.cenorm.be/isss/Projects/DataProtection/IPSE/Cover.htm
•  European Electronic Signature Standardisation Initiative: http://www.ict.etsi.org/eessi/EESSI-homepage.htm
•  eESC: http://eeurope-smartcards.org. The first issue of the eESC newsletter will be made available in July 2001. For

copies
please send a request to info@europe-smartcards.org.
CEN workshop FASTEST: http://www.cenorm.be/isss/Workshop/fastest/default.htm

————————ePSO-Newsletter Issue 8, – July 2001———

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[8&5]
STAR Project Outlines its Work
Marc  Bourreau  (marc.bourreau@enst.fr)  and  David  Bounie  (david.bounie@enst.fr),  Ecole  Nationale
Supérieure des Télécommunications, Paris, France
/card readers/security/electronic payment systems/France

The  STAR  project is focused  on  the  analysis  of the  development  of  the  Digital  Economy  in  Europe.
One of the studies of the STAR Project entitled "E-Payments: Which System in Europe for the Coming
Years?"  is  to  examine,  among  some  electronic  payment  systems,  the  competitiveness  of  the  secured
protocol for the payment by smart card called Cyber-COMM with regards to the generally accepted
SSL solution.

The  STAR  (Socio-economic  Trends  Assessment  for  the  digital  Revolution)  project  focuses  on
analysis  of  the  development  of  the  Digital  Economy  in  Europe,  in  order  to  contribute  to  better
understanding of the conditions leading to sustainable social and economic growth patterns – how to
survive  the  transition  phase.  STAR  is  an  initiative  of  the  EU  Information  Society  Programme  Key
Action  II  “New  Ways  of  Working  and  Electronic  Commerce”.  Its  partners  are  a  team  of  highly
specialised  researchers,  including:  Databank  Consulting  (DBC),  INK-SPRU  (University  of  Sussex),
Ecole  Nationale  Supérieure  des  Télécommunications  (ENST),  Empirica  and  University  of  Athens.
Evidence on the multiple changes brought about by the new economy in the socio-economic system
and their policy implications will be analysed. The consortium will interact with a Forum of experts
within  and  outside  the  IST  Programme  to  receive  feed-back  and  insights  on  STAR  results.  STAR
project started in October 2000. STAR results will be published as a series of Issue Reports, Executive
Briefings,  and  workshop  presentations  addressed  to  policy  makers,  industry  managers  and  research
experts. Results will be available on: www.databank.it/star.

One of the issue reports of the STAR Project is entitled “E-payments: Which Systems in Europe for
the Coming Years?”. Its main objective is to examine, among some electronic payment systems, which
system can take the lead in the European market in the next years.

In a first part, we propose a brief typology of the main electronic payment systems (EPS) in order
to grasp the evolution. EPS are defined as  the whole of the secured transmission modes of financial
obligations  via  open  network.  Two  generic  classes  are  distinguished:  account  based  EPS  and
electronic  money.  Account  based  EPS  are  the  systems  which  allow  the  secured  transmission  of
payments from funds held in accounts. In this context, the money which can be defined as a claim on
an issuing institution is registered on accounts and some procedures allow to secure the payment order
between the economic agents. Two subclasses are illustrated: EPS articulated around banking accounts
(e.g. SET, 3D SET, SSL) and EPS articulated around non-banking accounts (virtual prepaid accounts
(InternetCash) or the loyalty systems (beenz)). A technical evolution however allows to overtake the
claim  and  the settlement  in  account:  electronic  money.  Electronic  money  can  be  defined  as  a  claim
registered on an electronic device and thus refers to a stored value on prepaid  products that  allow  a
record of the funds or value available to consumers and to all interested economic parties to be held on
an electronic device in their possession.

Some systems are likely to become competitive solutions in the future in the micropayment domain
for instance electronic money or virtual account based systems. In “regular payment” domain that we
study,  mobile  payment  and  server  based  systems  (e.g.  3D  SET)  are  really  promising.  Nevertheless,
these are still at the initial stages, and sometimes do not have the “universal” character of the “banking
systems”. Take-off and adoption by the users of some systems  will surely  take  several  years. These
remarks lead us to limit the scope of our analysis and focus on certain EPS. Two kinds of EPS are thus
analysed either because consumers broadly adopt the system or because the system is technically ripe
and well promoted by European and banking institutions. The first is the well known secured protocol
named SSL and the second is a secured protocol for the payment by smart card called Cyber-COMM.
The object of the second part is then to analyse the competitiveness of the Cyber-COMM system with
regards  to  the  generally  accepted  SSL  protocol.  Cyber-COMM  is  a  company  resulting  from  the
convergence of three e-commerce pilots, CyberCard (C-SET), e-COMM and SEC, that were launched
in 1997. The mission of Cyber-COMM is to promote a secure payment system over the Internet, using

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the  SET  protocol,  smart  cards  (B0’  and  EMV  specifications)  and  secure  smart  card  readers  (soon
FINREAD). Cyber-COMM is owned by French and international shareholders such as card schemes
(Groupement  des  Cartes  Bancaires  “CB”,  Europay  France,  Visa,  etc),  major  French  financial
institutions,  security  organisations  and  technology  providers.  Cyber-COMM  is  also  supported  by
European  policies  aimed  to  promote  leading  edge  technology  in  banking  applications.  Up  to  now,
readers  are  available  in  the  French  banks,  over  Internet  or  from  French  retailers  for  a  price  of  68
Euros. Several thousand readers have been distributed but, up to now, the solution has not really taken
off.

To determine if the Cyber-COMM solution can compete in the next years with SSL, we set up an
economic model. Basically, we suppose Cyber-COMM card readers will be competitive if reader costs
to  the  cardholder  are  less  than  the  expected  loss  due  to  fraud  with  SSL,  and  if  a  high  number  of
merchants  support  the  solution.  The  merchants  are  interested  to  adopt  the  solution  if  the  necessary
number of transactions to finance the cost of the system allows them to reach their break-even point.
From this simple model, we test six scenarios, ranging from the current situation to likely evolution.
The first scenario which simulates the current situation confirms the difficulties of the development of
Cyber-COMM. Cardholders always prefer to use SSL insofar as the costs of the reader are higher than
the expected losses due to the SSL fraud and the Cyber-COMM addressable market. In consequence,
merchants  are  not  encouraged  to  adopt  Cyber-COMM  even  if  break-even  point  is  reached.  Under
these conditions, what incentive is there for merchants and cardholders to adopt Cyber-COMM? Three
economic measures are envisaged: a banking subsidisation of the cost of the reader, modification of
the  banking  charge-back  policy  for  SSL fraud,  and  a  decrease  in  merchant  commission.  By  making
simulations with each new hypothesis, we show that the Cyber-COMM system  is  tempting  both for
merchants and  cardholders  when the  cost  of the  smart  card  reader  is  decreased  to  30  Euros  and  the
annual merchant subscription commission is modified. In this case, the rate of increase of merchants
and cardholders using Cyber-COMM is higher than that of SSL. The “lock-in effect” related to SSL
does not exist any more and a change of solution then takes place. But price incentives are not the only
solutions. An improvement in the multifunctionality of the product could incite consumers to adopt the
Cyber-COMM  system  such  as  an  increase  in  the  complementarity  of  the  proposed  services  via  an
extension of the functionality of the secure smart card reader (e-banking, e-trading, remote recharging
of  the  electronic  purse  as  well  as  non-banking  activities  with  the  statement  of taxes,  registry  office,
etc.).

[[[[info]]]]
• E-payments: Which System in Europe in the Coming Year. Available at http://www.databank.it/star
•  http://www.cyber-comm.com

[8&6]
Electronic Payments 2001 – Food for Thought
Knud Böhle (knud.bohle@jrc.es), IPTS, Seville, Spain
/review/Internet payment systems/electronic money/mobile payment systems/regulation/ competition

The 150 page report by Net Profit Finance on electronic payments is mainly about Internet payments
in  the  B2C  segment  of  e-commerce,  however  some  information  about  t-payments  (digital  TV),  m-
payments and other real world POS payments, and the B2B segment is also provided. As there is an
executive summary available on the web (see [info]-section) we have chosen to concentrate on those
ideas we found especially stimulating, i.e. e-money and the EMI Directive, loyalty schemes, and the
challenges banks and credit card associations face today.

The report is a mix of reasoning about crucial e-payment issues and related "case studies" (on average
two  pages).  The  more  important  issues  tackled  are:  micropayments,  loyalty  schemes,  e-money,
security,  regulation,  m-payments,  role  of  banks,  and  competition.  The  "case  studies"  provide  some
details  about  particular  payment  systems  and  stakeholders:  Banksys,  Mondex,  Proton  World,

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SmartAxis,  Visa,  PayPal,  Qpass,  Earthport,  Flooz,  beenz,  Webmiles,  First  Data,  Purseus,  Identrus,
Oakington, Paybox, Nokia, PhonePaid, e-gold, Citibank. In addition "case studies" on pioneers of e-
payments, Finland, LETS schemes, and initiatives by the UK government are presented. The report is
framed  by  a  background  chapter  about  money  in  general  and  the  role  of  banks  in  payments  at  the
beginning and by a look at "crazy ideas which just might fly" at the end.

E-money and EMI Directive

The  idea  which  the  authors  stress  is  the  role  of  compulsion.  A  high  degree  of  control  over  the
individual's  payment  behaviour  and/or  exclusion  of  alternatives  helps  to  introduce  e-money
successfully. The examples given are military camps in the US, forced migration in Bosnia to prevent
cash  dollars  undermining  the soft local  currency,  oil  stations  in  Siberia  where  bandits  were  a  major
problem [20], and the highly acclaimed Octopus scheme [see for Octopus ePSO-N 5&6] the success of
which has to be seen in the light of a lack of payment alternatives for commuters [120]. In the opinion
of Net Profit more government support is required for successful nation-wide solutions [5]. Behind the
debate  on  whether  government  support  and  compulsion  are  required,  another  fundamental  question
arises: How can e-money compete with cash as long as cash is the only legal tender and its costs are
hidden to consumers?

Another  interesting  question  with  respect  to  the  business  case  of  e-purses  is  the  role  of  float
earnings. The Net Profit authors find that e-money schemes make scarcely any money on the float [8],
but at the same time they refer to Banksys holding that the "cost of the infrastructure for Proton is less
than returns from the float" [26]. The interesting thing here is the vision behind the debate.  Can  we
assume  that  some  day  e-money  schemes  could  be  operated  cost  effectively  on  the  basis  of  float
earnings  alone?  If  this  comes  true,  e-money  would  be  perceived  more  easily  as  a real  substitute  for
cash  as  neither  merchants  nor  customers  would  have  to  pay  fees.  This  reasoning  leads  smoothly  to
comments on the EMI Directive.

The authors regard EMIs as deposit-takers that are not permitted to lend their deposits as credits at
risk [100]. That's what distinguishes them from normal banking businesses. This does not exclude that
interest can be paid on e-money accounts. The authors point out that EMIs are in a sense a revival of
the  100  year-old  "narrow  bank"  concept.  It  is  further  argued  that  there  is  no  level  playing  field
between banks and non-banks issuing e-money, because banks are free to invest the float created by e-
money schemes as they wish, while EMIs are highly regulated in this respect and are required to have
capital  of  at  least  2%  of  their  outstanding  issuance  of  e-money  to  cover  the  operational  risk.  The
authors also conclude that the EMI Directive is only attractive for smaller non-bank schemes, because
whenever an undertaking has the capital needed to become a bank (5 million Euro instead of 1 million
for EMIs) it seems to be more attractive to go for this option.

Loyalty and reward schemes

The authors are optimistic about future forms of value points schemes such as "leisure points" [134]
and LETS analogue reward schemes [107]. Regarding "new forms of currencies" available today they
are  more  sceptical.  They  point  out  that  the  purpose  of  "loyalty  points",  namely  to  make  sure  users
return to a shop or use a service again, contains what we could call an implicit contradiction: the more
universally  the  value points are  accepted  the  more  currency-like  they  become,  but  at  the  same  time
merchants  participating  in  such  schemes  will  find  it  harder  to  differentiate  from  competitors  and  to
lock  customers  in.  E-tailers  are  therefore  already  seeking  other  strategies  to  create  loyalty,  e.g.
introducing  their  own  closed-loop  loyalty  schemes,  offering  instantly-redeemable  rewards  and
increasing  their  niche  marketing  efforts  [61].  Apart  from  their  function  in  customer  relation
management, value points can perform another function on the internet. Although it might sound a bit
cynical the second function mentioned by the authors is in essence the result of customer confusion:
"how to present value in the face of shopping robots that can find the cheapest prices" is the question
posed and the answer is that retailers "with a reward programme can strike back with a price structure
and the opportunity for an innovative personal experience (or leisure points) that are much harder for
robots, or even humans, to quantify" [63].

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Challenges for banks and credit card associations
It's  common  sense  that  banks  and  credit  card  organisations  are  under  some  pressure  from  new
innovative companies and payment schemes. The incumbent players have consequently to evolve [16]
and  keep  pace  with  technological  innovation.  The  major  challenges  for  banks  may  be  seen  in
companies that enable poor and/or young people without bank accounts to transfer money from P2P
and  C2B  circumventing  the  standard  bank  relationship.  The  major  challenges  for  credit  card
companies are to enter the P2P and B2B segment and to prepare for new application areas and devices
such  as  mobile  phones/m-commerce  and  Set-top  boxes  for  digital  TV  and  t-commerce  [43].  In
addition they have to defend their unique position in the field of cross-border payments.

There  are  sufficient  examples  in  the  report  to  show  that  banks  and  credit  card  companies  have
started to accept the challenge (for example by offering P2P payments) or to form alliances, which are
visible,  for  example,  in  the  m-payments  field.  But  competition  does  not  take  place  exclusively
between new start-ups and big old players. The "case studies" reveal that technological innovation is
also  an  opportunity  to  re-define  the  relation  of  banks  and  credit  card  organisations.  Net  Profit  for
example  believes  that  big  banks  like  Citibank  can  effectively  bypass  credit  card  companies  e.g.  by
offering a global payment mechanism with lower merchant fees (the c2it solution suitable for P2P and
cross-border  payments  being  the  case  in  point)  [143].  Competition  gets  even  more  varied  when  we
think  of new  payment  service  providers  offering  "virtual  accounts"  or  (micro)billing  services.  Their
customers fund their virtual accounts by credit cards or get their credit card account debited at the end
of  a  bill  aggregation  period. The  new  payment  service  providers  claim  the  fees  they  have  to  pay  to
credit  card  companies  prevent  them  from  lowering  their  own  charges.  A  spokesperson  from  the
microbilling company Qpass is quoted in the report describing credit card settlement as "a millstone
around the company's neck" and the efforts of PayPal to reduce credit card funding in favour of ACH
transactions  are  well  known.  The  discontent  with  the  fee  structure  of  credit  card  companies  might
therefore  be  seen  as  an  opportunity  for  banks  to  strengthen  their  relation  with  the  new  breed  of
payment service providers.

With  respect  to  the  challenge  by  mobile  operators  the  authors  are  very  euphoric  about  mobile
operators "threatening banks in the payment market" [111] and see a prospect for the mobile phone "to
replace  the  card  as  the  payment  device  for  both  online  and  physical  world  purchases"  [127].  The
general message of the report is however more down to earth and boils down to a limited involvement
of mobile operators in the payment business. First, mobile operators may act as service providers for
banks  and  get  paid  for  the  network  and  the  security  they  provide;  second,  micropayments  or
microbilling  services  can  be  offered  based  on  prepaid  cards  and  accounts  or  billing  relationships,
respectively. The idea that mobile operators could offer "light" bank accounts for teenagers, the poor
and enable cross border payments is considered more sceptically, and the idea of basing P2P payments
on Bluetooth technology (and thus of reviving the true electronic cash vision, now as phone to phone!)
is regarded as having no near-future prospects.

Final remark
To close, it is amazing to see how quick things change. The study finalised in January 2001 still talked
about  Cybermoola,  SmartAxis,  eCash  by  Deutsche  Bank  and  CyberCash  as  things  existing  in  the
market place. A revised version of the report is already planned. I expect that this opportunity will also
be  taken  to  eliminate  some  vagueness  (typology  of  payment  systems,  Mondex  and  float  earning,
distinction  of  digital  signatures/certificates,  and  3D  SET).  All  in  all,  as  shown  above,  the  report
contains  plenty  of  food  for  thought.  In  addition  it  is  well  written  with  nice  expressions.  I  liked  the
comparison "like a tacky mail-order catalogue" [8] to characterise typical lists of merchants displayed
on the payment portals in the early days.
[[[[info]]]]
• Dawsen, Dave; Rowell, Elinor; Schiller, Ben; Shirreff, David: Electronic payments 2001. The Challenge to the Banks. A
report by Net Profit Finance. London: Net Profit Publications 2001. (£445.00 excluding: VAT); executive summary to be
found at http://www.netprofit.co.uk/excec_summ.html

• Net Profit is a London-based research and publishing company claiming to independently analyse all areas of electronic

business. Net Profit Finance homepage: http://www.netprofiteurope.com/

My thanks to Elinor Rowell of Net Profit who enabled this review forwarding my request and sending me a free copy of the
study.

————————ePSO-Newsletter Issue 8, – July 2001———

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[8&7]
Australia "Abolishes" Bank Fees
Peter Mair (pmair@ezy.net.au), consultant, Windang NSW, Australia
/competition/costs of payment systems/payment cards/financial institutions/pricing/ regulation

In Australia, bank customers with high balances have not usually paid explicit transaction fees. In the
lead up to the national election, basic 'fee free' transaction accounts have also been re-created for less
well-off customers. This article argues for invisible fees, such as payee fees, to be abandoned in favour
of explicit fees and interest paid on deposit balances, instead of cross-subsidies. (In which case poor
customers of banks may need government assistance.)

There  is  nothing  like  the  prospect  of  a  national  election  to  both  take  a  contentious  issue  off  the
political  agenda  and  to  substitute  politically-correct  illusions.  In  Australia,  recent  retail  banking
posturing fits this mould neatly.

Developments Worth Noting

First, confusion was 'resolved' about whether it was the central bank or the competition authority that
was  to  be  responsible  for  addressing  price-fixing  in  credit  card  schemes.  In  Australia,  uniquely,  it
turned  out  this  issue  was  a  matter  for  the  central  bank  and  not  the  competition  authority,  which  in
deference to the central bank, withdrew its prosecution of credit card schemes.

The central bank, the Reserve Bank of Australia, accordingly designated bank credit card schemes
and promised to set 'pricing' and  'access'  standards  for  them  by  the  end  of 2001 (after  the  election).
Notwithstanding the similarity of the issues, the central bank's commitment is to deal with credit card
schemes  first  and  separately  from  other  transaction  network  schemes,  for  debit  cards  and  bill
payments, that it proposed to deal with  'next  year'.  This  decision  struck joy  into  the  hearts  of  credit
card scheme members, mindful of the Reserve Bank's sympathy for continuing credit card interchange
fees with minor adjustments. A central banker's dilemma – distinguishing credit cards from debit cards
with a line of credit – has apparently been deferred until next year. But perhaps not: in a rare display
of authority, a Parliamentary Committee has recently asked the Reserve Bank to "act more quickly on
ATM and EFTPOS fees". Seeing will be believing – but probably still not until even further after the
election.

Second,  with  the  election  in  sight  and  under  heavy  pressure  from  both  political  parties  (wielded
through  a  process  of  public  parliamentary  committee  inquiry),  the  Australian  banking  industry
association 'surrendered' to the idea that they had a 'social obligation'. Practically this meant that banks
agreed to restore basic 'free transaction' accounts for their relatively poor customers. These customers
do not meet the 'minimum balance' requirements that are otherwise necessary to be eligible for 'free of
charge' transactions. This decision reversed the politically unpopular trend in recent years for banks to
impose  explicit  transaction  fees  (mainly)  on  the  relatively  less  well-off  customers.  Subsequently,
hardly a word was heard in the media about bank fees. Indeed, so convincing was the banks' display of
'social conscience', it recently precipitated a public rethinking by the chief executive of the bank likely
to  be  most  affected.  Because  this  bank  has  a  disproportionately  large  share  of  'poor'  customers  that
now pay transaction fees, its competitive viability will be eroded by a commitment to 'free banking' for
all. This chief executive has foreshadowed that next year (after the election) the industry commitment
to providing 'free' transaction services will be re-negotiated by his bank

Assessment

Though  Australia  shows  the  inability  typical  of  many  countries,  to  deal  purposefully  with  retail
banking issues, these outcomes are nonetheless disappointing. The price-fixing 'issues' associated with
credit cards and their corollary – the attendant excess profits accruing to ever fewer major retail banks
– will not simply go away. The resolution of these issues in any country may well require international
cooperation  in  developing  and  coordinating  effective  competition  policy  approaches.  Meanwhile,
asking  a  central  bank  to  both  curb  bank  profit  taking  and  to  underwrite  'financial  stability',  is  a
contradiction.

————————ePSO-Newsletter Issue 8, – July 2001———

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The  apparent  inability  of  the  banking  and  competition  authorities  in  many  countries  to  deal
effectively with the abuse of market power in retail banking is a reasonable concern. It suggests that
the  regulatory  focus  is  incorrect.  Perhaps  it  is  time  to  reconsider  the  consequences  for  competitive
efficiency of allowing banks to retain the profit 'endowment' inherent in the underpayment of interest
on retail transaction account deposits.

I  would  prefer  transparent,  explicit  customer  prices  for  transactions.  Hidden  prices  often  hide
inefficiency and profiteering  because the customers  do  not  have  a  clue  'how  much'  they  are  paying.
The payment of a market rate of interest on deposits would help to restore market disciplines.

[8&8]
The Price of Cash Revisited
Leo Van Hove (Leo.Van.Hove@vub.ac.be), Free University of Brussels, Belgium
/review/costs of payment systems/retailers/pricing/the Netherlands

A recent study commissioned by a Dutch retail federation takes another look at the costs of various
means of payment for Dutch retailers. An interesting finding is that for amounts between NLG 29 and
NLG  67,  cash  payments  may  be  cheapest  for  retailers,  but  not  for  society  as  a  whole.  The  authors
argue that for this range of amounts, debit card payments should be promoted by making explicit the
real  cost  of  cash.  This  cost  should  be  borne  by  the  party  that  initiates  the  transaction;  that  is,  by
consumers; they should be charged for ATM withdrawals.

In ePSO-N 2, I reviewed a report published by the Hoofdbedrijfschap Detailhandel (HBD) – a Dutch
retail trade association – on the costs of various means of payment for retailers. The most salient result
was that the cost of an average cash transaction is still substantially lower than that of a typical debit
card payment, with 21 cents (0.095 Euro), and 48 cents (0.22 Euro) respectively. A new study, again
commissioned by the HBD, builds on the survey results of the first report to further analyse the costs
involved, and to show how a more 'correct' pricing of debit card vs. cash payments could lead to more
efficient  usage.  The  study  has  been  executed  by  Thijs  ten  Raa  and  Victoria  Shestalova  at  Tilburg
University.

In  their  paper,  ten  Raa  and  Shestalova  do  not  concentrate  on  the  cost  of  an  average  transaction.
Rather they try to estimate just how the costs incurred by retailers – their 'private' costs – relate to the
transaction  amount.  To  that  end,  they  rely  on  data  generated  in  the  HBD  survey  for  2  means  of
payment – cash and debit cards. For each means of payment, ten Raa and Shestalova regress the total
costs  incurred  on  the  number  of  transactions  and  the  associated  turnover.  The  results  are  then
presented in a graph with the transaction amount on the horizontal axis (see Figure). The line for cash,
for  example,  indicates  that  for  each  cash  payment  there  is  typically  a  fixed  cost  of  4  cents  (the
intercept), and an additional 0.25 cents for each guilder (the slope). ten Raa and Shestalova find that
cash is cheapest for retailers for amounts up to NLG 67 (some 33 Euro); for higher amounts debit card
payments are cheaper. This is because the 'fixed' costs associated with debit card payments (here: costs
that  are  not  a  function  of  the  transaction  amount)  are  substantial:  retailers  have  to  buy  or  rent
terminals;  there  are  the  telecom  costs;  the  EFTPOS  operator  charges  a  monthly  subscription  plus  a
fixed  fee  per  transaction;  etc.  On  the  other  hand,  many  of  the  costs  related  to  cash  payments  are
(estimated  to  be)  proportional  to  turnover:  Dutch  banks  charge  a  combination  of  a  fixed  fee  plus
0.07%-0.1% when retailers deposit receipts; on the basis of the survey the cost of theft is estimated at
0.04% of turnover; etc. An interesting question is how electronic purses would fit into the picture. ten
Raa and Shestalova anticipate the fixed costs to be lower compared to debit cards (cheaper terminals,
hardly any telecom costs), and the variable costs to be higher (commissions are typically a percentage
of turnover). Given this cost structure, there would be a second 'break-point' – this time between cash
and electronic purses – somewhere between 0 and 67 guilders.

ten Raa and Shestalova then go on to estimate the social costs involved; that is, the private costs of
both merchants and consumers plus the costs incurred by the commercial banks and the central bank.

————————ePSO-Newsletter Issue 8, – July 2001———

- 139 -

Obviously, the costs incurred by these 'upstream' suppliers may only be added to the extent that they
are  not  paid  for  by  merchants  and/or  consumers.  Unfortunately,  the  necessary  data  proved  to  be
lacking  for  the  Netherlands.  The  two  Dutch  researchers  therefore  rely  on  data  for  Norway.
Specifically, they use estimates of how much a typical ATM withdrawal and a debit card payment cost
to Norwegian banks. This raises the cost per cash transaction from 21 cents to 30 cents. The situation
is different for debit cards since the prices charged by the Dutch EFTPOS operator reportedly cover
the costs so that the private costs equal the social costs. In terms of social costs the 'break-point' now
lies at a substantially lower level: at NLG 29 (some 13 Euro) instead of NLG 67. Interestingly, this
implies that for amounts between NLG 29 and NLG 67, cash payments may be cheapest for retailers,
but  not  for  society  as  a  whole.  ten  Raa  and  Shestalova  also  show  that  a  1  cent  reduction  of  the
commission  paid  by  retailers  on  debit  card  payments  lowers  the  private  break-point  to  NLG  74  -  a
result that can also be achieved by making cash payments more expensive for retailers.

Private and social costs of cash vs. debit

0,45

0,40

0,35

0,30

0,25

0,20

0,15

0,10

0,05

0,00

•
29

74

67

• •

private costs of cash

social costs of cash

private/social costs of
debit

private/social costs of
debit, if price + 1 cent

0

20

40

60

80

100

Transaction amount (in NLG)

Source: based on Figure 3 in ten Raa and Shestalova (2001a, p. 31).

However, ten Raa and Shestalova argue that it is the consumer, not the merchant, who should bear
the transaction costs since it is the consumer who initiates the transaction. They stress that while such
an arrangement may seem beneficial for the seller and outright disadvantageous for the buyer, this is
in fact an illusion. Retailers pass on the costs to  consumers  by  including  them  in  the prices  of their
goods.  Making  the  real  costs  of  payment  services  visible  would  therefore  also  hold  benefits  for
consumers:  more  efficient  payment  behaviour  would  eventually  result  in  lower  prices.  ten  Raa  and
Shestalova  point  out that  the  social  savings  to  be  reaped  are  substantial:  the  difference  between  the
social cost of cash and that of debit payment amount to NLG 0.63 per NLG 100 in turnover. ten Raa
and  Shestalova  's  policy  recommendations  are thus  straightforward:  while  consumers  should  remain
free to pay in whatever way they want, they should be rewarded when paying efficiently, and punished
when  paying  inefficiently.  And  paying  efficiently  means:  using  debit  cards  for  transaction  amounts
above NLG 30, and using cash or electronic purses for smaller amounts.

ten Raa and Shestalova 's calculations can obviously be criticised on several points. For one, they
inherit all the flaws of the initial report, which for example did not take into account the time cashiers
spend on  receiving  payments.  Also, ten  Raa  and  Shestalova  's  estimates  of the social  costs are  very
rough, but the authors are aware of this. Another point is that economies of scale are treated in a rather
stepmotherly  fashion.  If  payment  behaviour  does  effectively  become  more  efficient,  the  fixed  costs
associated with cash usage have to be spread over a smaller number of transactions (which raises the
intercept). The opposite is true for debit cards (see my review in ePSO-N 2). This dynamic effect does

————————ePSO-Newsletter Issue 8, – July 2001———

- 140 -

not appear in ten Raa and Shestalova 's model. On the other hand, even if one disagrees on the way
private and/or social costs are computed and thus doubts the actual figures put forward by ten Raa and
Shestalova  for  the  break-points,  there  is  still  merit  in  their  analysis  in  that  the  general  picture  is
undoubtedly correct and that their graphical presentation makes it possible to gauge in what direction a
higher or lower estimate would influence the final outcome. For example, taking into account the time
cashiers  spend  on  receiving  payments  would  worsen  the  competitive  position  of  cash  and  lead  to  a
lower break-point (provided that cashiers spend more time on receiving cash payments than debit card
payments). Overall, the paper is a valuable addition to the original HBD study if only because it sheds
a different light on the same cost estimates. And the point that making explicit the cost of cash would
brighten up the outlook for electronic means of payment is a point worth repeating.

[[[[info]]]]
• Jaarsma, K. and W. V. M. van Rijt-Veltman, De kassa rinkelt niet voor niets - Afrekenen kost ook geld! Editie 1999,

Hoofdbedrijfschap Detailhandel (HBD), The Hague, May 2000.

•  ten  Raa,  Th.  and  V.  Shestalova,  Via  tarifering  naar  efficiënter  betalingsverkeer:  een  economische  onderbouwing  van
maatschappelijk  gewenst  betaalgedrag,  paper,  Department  of  Economics,  Tilburg  University,  March  2001a
http://www.hbd.nl/downloaden/Rapport_Betalingsverkeer.pdf.

•  ten  Raa,  Th.  and  V.  Shestalova,  Met  tarieven  beter  betalingsverkeer,  Economisch  Statistische  Berichten,  Vol.  86,  Nr.

4309, May 11, 2001b, p. 414-416. Short article that summarises the results of the report.

————————ePSO-Newsletter Issue 8, – July 2001———

- 141 -

[8&9]
Masthead
Electronic Payment Systems Observatory-Newsletter
ePSO-Newsletter – 2001 – No. 8 – July 2001
Homepage: http://epso.jrc.es/newsletter
Subscription page: http://epso.jrc.es/newsletter/subscribe.cfm

The  Electronic  Payment  Systems  Observatory-Newsletter  (ePSO-N)  is  an  activity  within  the
"electronic  Payment  Systems  Observatory"  (ePSO)  project  of  the  Institute  for  Prospective
Technological Studies (IPTS), one of the eight institutes of DG Joint Research Centre. The Institute
for  Technology  Assessment  and  Systems  Analysis  (ITAS)  of  Karlsruhe  Research  Centre  edits  this
newsletter.

The editorial staff currently consists of Michael Rader, Ulrich Riehm and Arnd Weber, supported
by a network of highly qualified correspondents. This network consists of the following members (in
alphabetical order):

Ülle Adamson - Latvia
Anna Arbussà – Spain
Knud Böhle - Spain
Piero Bucci – Italy
Clara Centeno -Spain
Erik Dahlström – Sweden
Laura Edgar – United Kingdom
Morten Falch – Denmark
Andreas Furche – Australia
Rüdiger Grimm – Germany
Masanobu Higashida – Japan
Stefanos Karapetsis - Greece

Malte Krüger - Spain
Simon Lelieveldt – Netherlands
Peter Mair – Australia
Walter Peissl – Austria
Rufus Pichler – USA
Oliver Steeley – United Kingdom
Valls, Jaume – Spain
Leo Van Hove – Belgium
Michael Walters – Australia
Torsten Wichmann – Germany
Hans-Dieter Zimmermann – Switzerland

Disclaimer:  The  views  and  opinions  expressed  in  the  articles  of  ePSO-N  do  not  necessarily  reflect
those  of  the  European  Commission,  DG  Enterprise,  IPTS  or  ITAS.  All  articles  are  regarded  as
personal statements of the authors and do not necessarily reflect those of the organisation they work
for.

The  editors  retain  copyright,  but  reproduction  is  authorised,  except  for  commercial  purposes,
provided  the  source  is  acknowledged.  The  editors  would  appreciate  a  short  message  if  articles  of
ePSO-N are reproduced.

Contact: Michael Rader
co-ordinating editor
rader@itas.fzk.de
Institute for Technology Assessment and
Systems Analysis (ITAS)
Research Centre Karlsruhe
– Technik und Umwelt –
Postfach 3640
D-76021 Karlsruhe, Germany
Phone.: +49-7247/82-0
Fax: +49-7247/82-4806
WWW: http://www.itas.fzk.de/

Contact: Yannis Maghiros
ePSO project leader
ioannis.maghiros@jrc.es
Institute  for  Prospective  Technological
Studies (IPTS)
Directorate General Joint Research
Centre, European Commission W.T.C.
Isla de la Cartuja s/n
E-41092 Sevilla, Spain
Phone: +34-95-448 8318
Fax: +34-95-448 8300
WWW: http://www.jrc.es/welcome.html

————————ePSO-Newsletter Issue 8, – July 2001———

Table of Contents 2 - organised by topics

About ePSO-N, Contacts, Correspondents and Disclaimers

[1&1]   Editorial: ePSO-N: What is it good for? 

[8&9]   Masthead

General analytical articles on e-payment developments

[4&6]   On hype, sacred cows, data holes, and how to cope with them

[5&7]   The Future of Retail Payment Systems

[6&5]   Solving the Standardisation Problem of Internet-payments: The Case of Bibit,

        TWYP and SmartAxis

[7&6]   Report from the Digital Money Forum: Between Compulsion and
             Use by Children

Internet Payment Systems

[5&1]   Editorial: Tell Your Provider What to Pay and What Not

[6&1]   Editorial: The Rise of Convenience: Clickable, Convertible, Contactless

[5&3]   Internet Payment Systems in Finland

[5&4]   Internet Payment Systems in Italy

[5&5]   The Jalda Payment Method

[6&2]   Access is King: About the Bright Future of Server-based E-payment Systems

[6&3]   Scratch Cards: Here to Stay?

[6&4]   E-money Solution from Austria: Paysafecard.com

Mobile Phone Payment Systems

[2&1]   Editorial: Payments by mobile phone more convenient than e-wallets?

[1&2]   The common future of wallets and ATMs? Mobile phones! 

[1&3]   Where EMI Directive and mobile phone payment systems will meet ... 

[1&4]   Country report: Mobile financial services and m-payments in Italy 

[1&5]   Imagine your telco is your bank, but a bank it ain't

[1&6]   Interview: Paybox, a new mobile payment product claims convenience and
             potential for international use. Knud Böhle talks to Peter Seipp, Chief
             Operating Officer of Paybox.net AG

[2&2]   M-Payments and the role of telcos

[2&3]   Dual-slot Phones as an Electronic Wallet. Universal or merely local solution?

[2&4]   Use your mobile phone as your payment card – the Danish way

[2&5]   Mobile Internet in Japan - lessons for Europe?

[3&6]   Rise and Fall of E-Payment Methods in Japan

- 142 -

9

141

64

83

96

116

71

90

75

77

79

90

92

94

24

11

13

15

16

18

25

28

30

31

47

[8&3]   Mobile Payment Industry Fora – Consolidation of Initiatives Expected

126

————————ePSO-Newsletter Issues 1 – 8, Table of Contents 2 -———

Electronic Purses

[3&1]   Editorial: Interoperability or Obsolescence: Which First for e-Purses?

[3&2]   What Future for Stored Value?

[3&3]   An Update on e-Purses

[3&4]   E-purses and Chip Cards in the Netherlands

[3&5]   Three Years of German e-Purse "GeldKarte"

[5&6]   High Number of Electronic Cash Transactions in Hong Kong Octopus System

[6&6]   Fast Electronic Purses and Transport Tickets in Japan

European Regulation of Electronic Money Institutions

[7&1]   Editorial: Europe – A Levelled Field for Electronic Money?

[7&2]   A Harmonised EU Legal Framework for Electronic Money

[7&3]   Interview: The Directive on Electronic Money Institutions –
             A View From the ECB

[7&4]   Genesis of the EU-Directive on Electronic Money Institutions

[7&5]   Why is the Electronic Money-Directive Significant?

Country Reports

[1&4]   Country report: Mobile financial services and m-payments in Italy 

[2&4]   Use your mobile phone as your payment card – the Danish way

[2&5]   Mobile Internet in Japan - lessons for Europe?

[3&6]   Rise and Fall of E-Payment Methods in Japan

Interchange Fees

[4&1]   Editorial: Interchange fees – Are consumers getting a real service or is it just
             a label?

[4&2]   Interchange fees in the line of fire

[4&3]   Competition in the credit card market

[4&4]   Credit Card interchange fees – A central bank speaks

[4&5]   Justifications of interchange from economic theory

[8&7]   Australia "Abolishes" Bank Fees

Consumer Aspects

[5&2]   Finality of Credit Card Payments and Consumer Confidence –
             Different Approaches in the United States and in Europe

[7&7]   Internet Payment Systems in Germany –Technologically Advanced
             Consumers’ View 

- 143 -

39

40

43

44

46

81

98

104

105

108

111

114

15

30

31

47

54

55

57

58

60

137

72

118

————————ePSO-Newsletter Issues 1 – 8, Table of Contents 2 -———

- 144 -

Security

[8&1]   Editorial: Security – Newspeak, Assurance and Trust

[8&2]   New Payments Authentication Methods for Use on the Internet

European Projects and Initiatives

[1&7]   eEurope Action "Smart Cards for Secure Electronic Access"

[2&7]   The e-Payment Systems Observatory FORUM opens it doors

[3&7]   Secure Electronic Marketplace for Europe – Project Semper publishes its results:
             Part 1 of an Interview with Michael Waidner

[4&7]   Secure Electronic Marketplace for Europe – Project Semper publishes its results:
             Part 2 of an Interview with Michael Waidner

[6&7]   European Commission's Financial Internet Working Group Outlines its Work

[8&4]   eEurope Smart Cards, 14 Months after the Smart Card Charter

[8&5]   STAR Project Outlines its Work

Reviews

[1&8] Survey of electronic money developments: impressive, but far from perfect
Committee on Payment and Settlement Systems (CPSS): Survey of Electronic
Money Developments, Bank for International Settlements, Basel, Switzerland,
May 2000

[2&6] European smartcard industry takes a position on e-purse interoperability
SmartEuro project partners (on behalf of EUROSMART): The Euro in the
Electronic Purse. Interoperability issues of smartcard based e-payments in
Europe. A White Paper. Paris: ARTTIC 2000

[2&8]  The price of cash – on a report for a Dutch retail association

Jaarsma, K. and W. V. M. van Rijt-Veltman: De kassa rinkelt niet voor niets –
Afrekenen kost ook geld! Editie 1999, Hoofdbedrijfschap Detailhandel (HBD),
The Hague, May 2000.
[3&8] The future of EBPP

2nd Electronic Payments Workshop, Federal Reserve Bank of Chicago, Chicago,
October 10-11, 2000

[4&8] Consumer perceptions matter

Penz, E. and E. Kirchler: Is electronic money still part of the banker's dream?
Paper presented at the IAREP (International Association for Research in Economic
Psychology) Conference in Baden, July 2000.

[5&8] US Citizens Hesitate to Pay their Bills Electronically:Theory & Empirical

Evidence,
Mantel, B: Why don't consumers use electronic banking products?
Towards a theory of obstacles, incentives, and opportunities, Emerging Payments
Occasional Paper Series EPS-2000-1, Federal Reserve Bank of Chicago, September
2000a and
Mantel, B: Why do consumers pay bills electronically? An empirical
analysis, Economic Perspectives, Federal Reserve Bank of Chicago, Fourth Quarter,
2000b, p. 30-45

122

124

21

35

49

67

100

130

133

22

34

36

51

68

87

[6&8] Payment Systems Data: Norges Bank Shows the Way

Norges Bank: Payments Systems Report 1999, Norges Bank, November 2000

101

————————ePSO-Newsletter Issues 1 – 8, Table of Contents 2 -———

[7&8] The IT Revolution and the Banking Industry: a View from Japan

Tachi, R. et al: Technological Innovation and Banking Industry/Monetary Policy:
Forum on The Development of Electronic Payment Technologies and Its Implications
for Monetary Policy - Report, Discussion Paper No. 2001-E-3, IMES, Bank of Japan 2001.

[8&6] Electronic Payments 2001 – Food for Thought

Dawsen, Dave; Rowell, Elinor; Schiller, Ben; Shirreff, David: Electronic payments
2001. The Challenge to the Banks. A report by Net Profit Finance. London: Net
Profit Publications 2001.
[8&8] The Price of Cash Revisited

ten Raa, Th. and V. Shestalova: Via tarifering naar efficiënter betalingsverkeer:
een economische onderbouwing van maatschappelijk gewenst betaalgedrag, paper,
Department of Economics, Tilburg University, March 2001

- 145 -

120

134

138

————————ePSO-Newsletter Issues 1 – 8, Table of Contents 2 -———

Index

- 146 -

This Index includes names and acronyms found in the ePSO-N articles.  Names of ePSO-N authors
and all names related to sources and the [info] sections have been excluded.

@Pos, 78
3D secure, 124, 125
3D SET, 91, 124, 133, 136
3G, 81
7-Eleven, 82

A

ABN AMRO Bank, 127
AIPA, 77
Alysis Technologies, 97
American Express, 84, 85, 86, 128
Amex, 63
AOL, 33
au, 32
Auria, 80
Austria Card, 127
Avant, 43

B

B0’, 134
Banca Antoniana Popolare Veneta. See BAPV
Banca Antonveneta, 78
Banca Nazionale del Lavoro. See BNL
Banca Popolare di Milano. See BPM
Bandai  Ltd, 33
Bank for International Settlements. See BIS
Bank of Ireland, 127
Bank of Japan, 120
Bank of Nova Scotia, 127
Bank of Scotland, 108
Bank of Tokyo, 128
Bankamericard, 63
Banksys, 116, 127, 134
BAPV, 15
Barclaycard, 116
Barclaycard Merchant Services, 116
BarclayCoin, 83
Barclays, 128
Barclays Bank, 117, 127
BAWAG, 95
BBS, 102
BBVA, 17, 20, 84, 127
beenz, 85, 86, 113, 133, 135
Bertelsmann Media, 96
bezahlen.at, 92
Bibit, 13, 97
Birch, David, 120
BIS, 22, 59, 103
Blu, 16
Blue smartcard, 84
Bluetooth, 12, 16, 136
BNL, 16
BNP Paribas, 127
Böhle, Knud, 120
BonusCard, 113
BPM, 15
Braco, Ron, 51, 52
British Retail Consortium, 37

Brodia, 124, 126
Brokat, 91
BSCH, 127
BT, 127
BTX, 26, 33
BULL Italia, 16

C

C@shWorld, 91
c2it, 136
Card Bancaire, 20
CASH, 44
CashCard, 98
CATV, 48
CB, 116
CCV, 97
CeBIT 2000, 16
Cellonet, 11
CEN, 131, 132
CEN/ISSS, 129
CEN/WS/FASTEST, 132
CEPS, 10, 22, 34, 39, 42, 43, 47, 64, 65, 85, 111, 112,

116

Chase Manhattan, 51, 52
Chaum, David, 95
CheckFree, 51, 52
Chipknip, 39, 44, 45
Chipper, 44, 45, 50
cHTML, 32, 33
Citibank, 128, 135, 136
Clark, Dave, 9
Click & Pay Net900, 26
click&buy, 119
Clip, 98
Coca-Cola, 82
Codified Banking Directive, 105, 106
COMBI-CEPS, 132
Commerzbank, 50, 51, 96
Committee on Payment and Settlement Systems. See

CPSS

Common Electronic Purse Specifications. See CEPS
Computercentrum C. Van de Velden. See CCV
Consult Hyperion, 116
Consumers International, 73
CPSS, 22, 23
Creative Star, 82, 83, 98
Crédit Agricole, 127
Crédit Agricole Indosuez Luxembourg, 128
Credit Mutuel, 17
Credit Suisse, 127
Cruickshank report, 56
C-SET, 85
CyberCard, 133
CyberCash, 19, 24, 85, 136
CyberCoin, 118, 119
Cyber-COMM, 85, 133
Cybermoola, 92, 93, 136

————————ePSO-Newsletter Issues 1 – 8, INDEX -———

D

Dah Sing Bank, 82
Dahlström, Erik, 25
Dancard, 31
Danmønt, 43, 114
Data Protection Directive 95/46/EC, 132
Databank Consulting. See DBC
DBC, 133
DBS, 127
DDI Corp, 32
debis, 18
Dembeck, Chet, 22
Denso Corporation, 99
Deutsche Bank, 17, 19, 20, 84, 116, 127, 128, 136
Deutsche Bank Tech Ventures, 117
Deutsche Postbank, 127
Deutsche Telekom, 28, 33, 128
DigiCash, 75, 96, 116
Digital Money Forum, 116
Directive 2000/28/EC. See EMI Directive
Directive 2000/46/EC, 106. See EMI Directive
DoCoMo, 31, 32, 33, 48, 99
Doculabs, 51
Dostov, Victor, 116
Ducato, 116
Dutch Postbank, 13

E

E.trade, 97
Earthport, 135
ebXML, 66
eCash, 19, 23, 24, 50, 64, 65, 67, 75, 114, 116, 118, 119,

136

ECB, 22, 23, 35, 103, 107, 108, 109, 110, 111, 112, 113,

114

ECBS, 126, 129, 130
ec-cash, 29
eCharge, 81, 86
ec-Karte, 63
ECML, 66
Ecole Nationale Supérieure des Télécommunications. See

ENST

ECOMEG, 126, 128
e-COMM, 133
E-Commerce Expert Group. See ECOMEG
ec-POZ, 29
EDIFACT, 20
Edy, 83, 99
eEpoch, 131, 132
eESC, 130, 132
EESSI, 129
eEurope, 21
eEurope Smart Card initiative, 131. See. See eESC
eEurope Smart Cards, 129, 130
eEurope Smart Cards Trail Blazer on e-Payments. See

TB5

e-gold, 85, 135
EHPT, 79, 91
electronic cash, 63
Electronic Cash Bradesco, 23
Electronic Commerce Modeling Language. See ECML
electronic ECU, 104
electronic giro, 91
Electronic Mobile Payment Services. See EMPS
Electronic Money Institution, 108, 111, 112, 113. See

EMI

electronic Payment Systems Observatory. See ePSO

- 147 -

ELMI, 110
ELMI Directive, 109, 111
ELV, 61, 63, 84
EMI, 64, 104, 135
EMI Directive, 10, 14, 17, 104, 105, 114, 115, 134, 135
e-money Directive. See EMI Directive
E-money institution, 107. See EMI
Empirica, 133
EMPS, 16
EMV, 10, 16, 22, 31, 40, 64, 71, 78, 85, 102, 125, 127,

130, 131, 134

Entenmann, Mathias, 18
ePSO, 130
ERG, 83
ERG Group, 82
Ericsson, 11, 12, 13, 79, 91, 127, 128
Ericsson Hewlett-Packard Telecommunications. See

EHPT

Esprit Project, 34, 101
ETSI, 126, 129, 130, 131
Euro Banking Association, 129
Eurocard, 31, 62, 63, 76, 91
EUROCOM, 50
Eurocommerce, 57, 58, 61
Euronet, 127
Europay, 16, 17, 22, 78, 116
Europay France, 134
Europay International, 50, 51, 127, 129
European Association of Co-operative Banks, 129
European Central Bank, 107, 129. See ECB
European Commission, 14, 55, 57, 61, 73, 100, 101, 109,

114, 129, 131

European Court of Justice, 110
European Distance Contracts Directive, 73
European Electronic Signature Standardisation Initiative.

See EESSI

European Monetary Institute, 64
European Parliament, 111
European Savings BankGroup, 129
European System of Central Banks. See ESCB
European Telecommunications Standards Institute. See

ETSI

EUROSMART, 34, 35, 131
EZ-Access, 32
EZ-Web, 32

F

Fastrak electronic toll transponders, 84
Federal Reserve Bank of Chicago, 51, 87
Federal Reserve Board, 72
Federcomin, 15
Felica, 82, 83
Felica card, 99
Feltham, Marian, 117
Financial Internet Working Group. See FIWG
Financial Issues Working Group. See FIWG
Financial Times, 114
Financial Transactional IC Card Reader Project. See

FINREAD

FINREAD, 10, 134
First Banking Co-ordination Directive, 112
First Data, 127, 135
First Union, 52
First Virtual, 24, 64, 65, 83
Firstgate, 119
FIWG, 34, 100
Flooz, 135
Flusser, Vilém, 64
FOGRA, 50

————————ePSO-Newsletter Issues 1 – 8, INDEX -———

France Telecom, 17, 28, 29, 30, 127, 128
France Telecom Mobiles. See FTM
FTM, 17, 29

G

Ganesan, Ravi, 51, 52
GeldKarte, 39, 46, 84, 120
Gemplus, 30, 34
General Packet Radio Service. See GPRS
Gesellschaft für Zahlungssysteme mbH. See GZS
GIE Cartes Bancaires, 127
GiSMo, 28
Global Mobile Commerce Interoperability Group. See

GMCIG

GMCIG, 126, 127, 129, 130
GPRS, 33, 79, 81
Groupement des Cartes Bancaires, 28, 84, 134
GSM, 129
Guthrie, Paul, 124
GZS, 18

H

Hartlauer, 95
Hautain, Dominique, 116
HBCI, 10
HBD, 36, 37, 138, 140
HDE, 61
Healy, Sean, 73
Hendry, Mike, 118
Hettinga, Bob, 116
Hewlett Packard, 79, 91
Hong Kong Monetary Authority, 82
Hoofdbedrijfschap Detailhandel. See HBD
HSBC, 127, 128
Hypo Vereinsbank, 128

I

IBM, 28, 50, 67, 96, 108
Identrus, 86, 135
IDO Corp, 32
IETF, 9
iKP, 67
i-mode, 32, 33, 48
Information Society Technologies specific program. See

IST

ING, 44, 97, 117
INK-SPRU, 133
Institute for Prospective Technological Studies. See IPTS
Institute for Technology Assessment and Systems

Analysis. See ITAS

Internet Payment Systems from a Consumer Perspective.

See IZV

InternetCash, 48, 85, 92, 133
Interpay, 116, 127
I-pay, 97
iPin, 86
IPTS, 35
ISDN, 48
Isis-Card, 113
Italian Authority for Information technologies in the

Public Administration.. See AIPA

Italian Identity Card, 44
ITAS, 24, 36
Iti Achat, 29, 84
Itineris, 28, 29, 30
IZV, 118

- 148 -

J

Jalda, 79, 80, 81, 92, 117
Japan Telecom Ltd, 32
Java, 92
JCB, 127
J-Debit, 48, 99
Jones, Tim, 117
J-Phone, 32
J-Sky, 32

K

Kahin, Brian, 66
KDDI, 32, 99
Ketterer, Karl-Heinz, 118
Key Action II, 100, 133
Key Bank USA, 127
Kobil, 117
KPM, 33
KPN, 13, 45, 97

L

Lambert, Simon, 116, 117
Lawlor, Matthew, 51
Lelieveldt, Simon, 121
Leonia Verkkopankki, 75, 76
LETS, 135
Libertel, 13
Libro, 95
linux, 125
Lombardia, 80
Luottokunta, 76

M

M103+ standard message type, 111
Macintosh, 84
Maestro, 124, 125, 126
Mandate, 50
Mannesmann, 17
Mark Twain Bank, 24
Mastercard, 16, 17, 22, 55, 58, 61, 62, 76, 78, 99, 124,

125

Mastercard International, 41, 127, 128
Matsushita (Panasonic), 99
McDonalds, 84
Merita, 16, 75, 127
MeT, 126, 127, 129
Millicent, 67
Minipay, 44
Minitel, 26, 33
Mitsubishi, 128
Mobey Forum, 13, 126, 127, 129, 130
Mobicarte, 28
Mobil Speedpass, 84
Mobilcom, 17, 21, 27, 40
Mobile electronic Signature Consortium. See mSign
Mobile electronic Transaction. See MeT
Mobile e-pay, 80
Mobilepay, 28
Mobilix, 29, 30, 31
Mondex, 48, 84, 85, 86, 98, 114, 116, 117, 127, 129, 134,

136

Monedero-4B, 39
Moneo, 39, 47
Money Laundering Directive, 106
Money-Penny, 75

————————ePSO-Newsletter Issues 1 – 8, INDEX -———

Monte di Paschi di Siena. See MPS
Morawa, 95
Motorola, 12, 17, 127, 128, 129
Mover, 78
Movercard, 78
Movilpago, 17, 84, 117
Movistar Activa Cards, 96
MPS, 15
mSign, 126, 128, 130
MTN, 128
Multi+Card, 113

N

NatWest, 63
Net Profit Finance, 134
Net900, 85, 119
NETS, 98
Nettransact, 97
Network for Electronic Transfers Singapore Pte Ltd. See

NETS

Niche Consulting, 15
Niedermeyer, 95
Nippon Telegraph and Telephone Corporation, 32. See

NTT

Nokia, 11, 12, 13, 16, 127, 128, 135
Nordea, 127, 128
Norges Bank, 101, 102
NSA, 123
NTT, 31, 32, 33, 48, 99
NTT DoCoMo, 127
NTT Supercash, 98

O

Oakington, 135
Oberthur Card Systems, 15
Oberthur Smart Cards, 17
Octopus, 72, 81, 82, 83, 84, 135
OED, 84
Official Journal of the European Communities, 111
OFX, 10
Omnitel, 15
Omnitel 2000, 15
Omnitel Pronto Italia, 128
Online Resources, 51, 52
Open Trading Protocol. See OTP
Openwave, 128
Orange, 127, 128
Orbiscom O-card, 125
Österreichische Postsparkasse. See P.S.K.
Osuuspankki, 75
OTP, 66
Oxford English Dictionary. See OED

P

P.S.K, 92
PACE, 39, 47
Paiement CB Sur Mobile, 28, 29, 30, 117
Paikallisosuuspankki, 75, 76
Päivi Helanto. See Helanto, Päivi
Panasonic, 127
Passnet, 99
Patel, Jeetu, 51, 53
Paybox, 18, 19, 20, 25, 26, 27, 50, 84, 94, 117, 135
PayCash, 23, 116
PayIT, 81
Pay-it-Now, 97

- 149 -

PayMyBills.com, 51, 52
Paynet, 67
PayPal, 64, 110, 116, 117, 135, 136
Paysafecard, 85, 92, 94, 95, 119
Paytrust, 51
PBS, 30, 31
PDC, 32
Personal Digital Cellular. See PDC
PhonePaid, 135
Plus Payment Service, 97
Postbank, 44
Postsparkasse, 95
PowerCash21, 95
POZ, 61, 63, 84
Proton, 23, 34, 39, 42, 43, 44, 98, 114, 116
Purse Application for Cross-border use in Euro. See

PACE

Purseus, 116, 117, 135

Q

Qpass, 135, 136
Quick, 43, 69

R

Radicchio, 126, 128, 129, 130
Radiolinja, 127
Rahtgen, Preben, 31
Randzio-Plath, Christa, 36, 66
Regal Treasury Private Bank, 127
Regulation Z, 72, 74
Reserve Bank of Australia, 55, 59, 61, 137
Rowell, Elinor, 136
Royal Bank of Scotland, 127
Rubáiyát, 64
Ryan, Henry J F, 130

S

Säästöpankki, 75, 76
Sageder, Armin, 96
Sahel, Benjamin, 116
Sakura, 99
Sampo-Leonia, 127
Sanwa, 99
Sanz, Alberto, 117
Schürer, Tilo, 91
SEC, 133
Second Edinburgh Financial Cryptography Engineering

Conference, 124

Secure Electronic Transactions. See SET
Seipp, Peter, 18
Self Trade, 15
Semper, 49, 50, 66, 67, 68
Sermepa, 116
SET, 10, 19, 30, 31, 48, 50, 67, 68, 71, 75, 76, 77, 78, 81,

85, 91, 94, 97, 102, 119, 122, 123, 124, 127, 133

SET Light, 77, 78, 94
Shell, 84
Shell Smart, 113
Shestalova, Victoria, 138, 139
Siemens, 127
Simpson, John, 37
Sistema 4B, 116
Smart Card Charter, 21, 129, 130
Smart Card Norway Project, 102
SmartAxis, 43, 98, 116, 135, 136
SmartEuro, 65

————————ePSO-Newsletter Issues 1 – 8, INDEX -———

SmartTrust, 12, 13
Società per i Servizi Bancari. See SSB
Societe Generale, 128
Socio-economic Trends Assessment for the digital

Revolution. See STAR

Sonera, 12, 28
Sonera Mobile Pay, 116, 117
Sonera SmartTrust, 17
Sony, 81, 82, 83, 98, 99, 127
SPA, 125
Spectrum, 52
Splash Plastic, 85, 86
SSB, 15, 44, 77, 78, 127
SSL, 10, 31, 48, 50, 67, 71, 75, 76, 77, 78, 95, 97, 119,

122, 124, 125, 133, 134

Standard Chartered, 82
STAR, 133
Suica, 99
Sumitomo Bank, 99
Super Cash, 48
Svenska Handelbanken, 127
SWIFT, 108, 118, 129

T

TARGET, 102
TB5, 129, 130
T-D1, 33
Tedesco, John, 51
Telecash, 28
Telecom Italia Mobile. See TIM
Telefónica, 20
Telefónica Móviles, 17, 127, 128
TELEpay Light, 77, 78
Telia, 80, 81, 127
Telstra, 128
ten Raa, Thijs, 138, 139
The Way You Pay. See TWYP
TILA, 72, 74
TIM, 15
Tokyo-Mitsubishi, 99
Toyota, 99
Transpoint, 52
Trebecq, Olivier, 34
Trintech, 17
Truth-in-Lending Act. See TILA
Twister, 117
TWYP, 97

U

UBS, 104, 128

- 150 -

UCAF, 125, 126
UMTS, 40
Universal Card Holder Authentication Field. See UCAF
University of Athens, 133
University of Economics and Business Administration in

Vienna, 69

University of Karlsruhe, 118
University of Sussex, 133

V

VIAG Interkom, 128
Virtual C@ash+,, 85
Visa, 13, 16, 22, 31, 34, 42, 55, 56, 57, 58, 61, 62, 76, 78,

91, 93, 99, 116, 124, 126, 134, 135

Visa Buxx, 86
Visa International, 41, 57, 58, 61, 127, 128, 129
Visa Network, 93
Visa USA, 125
VisaCash, 44, 48, 83, 98, 117
VisaCash/Mondex trial in New York, 69
Vodafone, 116, 128

W

WAP Forum, 126, 128, 129
We@TIM, 15
Webcard, 96
webEDI, 66
Webmiles, 135
Wells Fargo, 52, 127
West LB, 128
WIND, 16
Wirecard, 95
Wish, 80
Woolwhich, 13
World Online, 80, 92

X

XHTML, 33

Y

Yahoo Europe, 15

Z

Zentraler Kreditausschuss. See ZKA
ZKA, 34, 46, 47, 61, 63

————————ePSO-Newsletter Issues 1 – 8, INDEX -———