Electronic Money: Toward a Virtual Wallet

Hard currency is disappearing from many everyday transactions along the road to electronic money

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I'm not an early adopter of electronic money. I don't use Quicken to balance my checkbook or pay my bills, I don't shop over the Internet...yet. But on a day-to-day basis, hard currency has already been eliminated from most of my transactions. Many are billed directly to my credit card--my monthly e-mail fees, my newspaper subscription, catalog purchases, the preschool bill. I also use a credit card for most transactions over US $10. I buy gas at automated pumps: it's faster to swipe a card myself than to walk into the gas station to pay. I pay for groceries in "scrip," a currency issued by my son's school for fundraising purposes. Just about the only uses I have left for U.S. government currency are buying the occasional cup of coffee and splitting a lunch check with a friend.

The authors in this special issue on electronic money paint a world from which even those uses of paper currency can be eliminated. A smart card, loaded with electronic money at an automatic teller machine or, eventually, on a home computer, could be used for that coffee and bagel. Technology also exists for "electronic wallets" that can exchange money with each other, making it possible to split a restaurant check electronically or hit up a friend for a few dollars.

The boom of the World Wide Web has intensified interest in electronic money that can be transferred over the Internet. Site operators envision catalog shoppers browsing the Web and doing all their transactions on line; at the rate graphics download on my computer, I can't see that happening any time soon. But they also envision Internet money creating a new type of commerce--that in information, paid for in fractions of a cent--that would sustain hordes of Web sites that are currently bleeding red ink. Given a standard currency and an easy way of obtaining that currency on my computer, I wouldn't mind zapping off a few pennies every time I wanted the text of an article--it's cheaper than photocopying charges at my local library.

How will this be implemented? A host of technologies have been developed. Some are still theoretical, some in testing, and some in commercial use. Some involve electronic forms of "cash," others use debit accounts, others are credit-card based. The workings of these systems are explained by Marvin A. Sirbu, a professor at Carnegie Mellon University in Pittsburgh, David Chaum and Stefan Brands, chief technology officer and distinguished scientist, respectively, of Digicash BV in Amsterdam, and Peter S. Gemmell, a senior member of the technical staff at Sandia National Laboratories, Albuquerque, N.M.

The biggest CAUTION/SLOW sign on the road to electronic money is security. There's a significant chance that unauthorized persons will access financial information over the Internet and use it for fraud, and undetectable counterfeiting is also a real concern. So before electronic money becomes pervasive, security must be tight, yet the stuff be simple to use, with transaction details mostly transparent to the user. SET, a security standard for Internet transactions, was created by Visa and MasterCard. Robert W. Baldwin, the senior engineer at RSA Data Security, Redwood City, Calif., responsible for its SET effort, and C. Victor Chang, RSA vice president of engineering, detail today's technology in the rapidly advancing field of electronic transaction security.

Security concerns are also slowing down implementation of electronic banking over the Internet. Citibank chairman John Reed said at a recent conference on electronic money that it will take 50 to 70 years before most of the people who use banks do their business electronically. He indicated that Citicorp considers banking on the Internet off-limits until security issues are solved. But banking on the Internet has begun, with, some feel, strong enough security in place. Michael C. McChesney, chief executive officer of Security First Technologies, Atlanta, Ga., holds that point of view, and explains his firm's electronic banking technology.

As banking moves to the Internet, stock trading is not far behind. The first-ever Web-based initial public offering was conducted a year ago, by Spring Street Brewing Co. of New York City, and since then 30 companies have followed its lead. Traditional stock markets are moving to the Internet as well. Steven M.H. Wallman, a commissioner on the U.S. Securities and Exchange Commission, discusses that activity, and Alfred R. Berkeley III, president of the Nasdaq Stock Market Inc., chimes in with Nasdaq's view of this evolution. (Both organizations are based in Washington, D.C.)

Perhaps the most active segment of the electronic money category in the past year has been smartcards, reviewed by Carol Hovenga Fancher, North American smart card strategic marketing engineer for Motorola Inc., headquartered in Schaumburg, Ill. Though one of the oldest forms of electronic money, in use in Europe for decades, today's generation of smartcards has generated new interest worldwide. Large tests were conducted this past year: in the United States at the Atlanta Olympic Games, throughout much of Europe, in Iceland, and elsewhere, even as the technology of the cards themselves was questioned by researchers announcing a theoretical method of breaking algorithms related to smartcard security systems.

Most recently, as this issue went to press, attention was focused on the British-developed Mondex smartcard, with MasterCard International buying 51 percent of the international arm of Mondex International Ltd., London, and seven U.S. companies--Wells Fargo, Chase Manhattan, Dean Witter, AT&T, First Chicago NBD, Michigan National Bank, and MasterCard--jointly forming Mondex USA and planning a U.S. rollout. Meanwhile, American Express Co. has licensed the Proton card, designed by a group of Belgian banks.

All the same, while electronic transactions may simplify commerce for the user, they raise regulatory, law enforcement, and economic issues. Today, in the United States, where U.S. Comptroller Eugene Ludwig cautions against premature regulation, the government has not begun to regulate electronic money, but is certainly keeping a close eye on the evolving industry. The concerns of the government and economists are discussed by Edward W. Kelley Jr., a member of the Board of Governors of the Federal Reserve System, Stanley Morris, director of the U.S. Treasury Department's Financial Crimes Enforcement Network, and Mike ter Maat, a senior economist with the American Bankers Association, Washington, D.C.

So is this world of electronic money coming soon? Howard Anderson, managing director of The Yankee Group, Boston, thinks so, and tells why. Is he right? Do you see electronic money taking over your computer and your wallet? Let IEEE Spectrum know.

To Probe Further

An extensive tutorial on electronic money and Internet commerce appears in Digital Money: The New Era of Internet Commerce, by Daniel C. Lynch and Leslie Lundquist (John Wiley & Sons, New York, 1996).

A conference on the security of digital financial transactions will convene Feb. 24­28 on the island of Anguilla, British West Indies. To obtain program and registration information, see www.cwi.nl/conferences/FC97.


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