An Israeli start-up company claims it has solved the smart card business case.
Ultimus Ltd. of Kfar-Saba, Israel, said it answers bankers' most common complaint about the new technology-that they can't see a way to make money from stored-value cash replacement systems-with what it calls the Ultimate Payment System.
Arik Shavit and Mordecai Teicher, principals of the six-month-old company, were prowling the halls at the Cardtech/Securtech conference two weeks ago in Orlando, sharing their strategic plan with anyone who would listen.
Their proposal takes some explaining-not just of technology but also of a mathematical calculation that underpins their economic assumptions. But they believe their way delivers enough benefits to banks, merchants, and consumers to draw them all into an electronic payment system with minimal effort or expense.
One problem with the current stored-value or electronic cash model, they say, is the need for a new and costly infrastructure of terminals that read the chips in plastic cards and, in particular, for specialized devices to reload value on depleted chips.
Ultimus would simply scrap the reloading machines, combine electronic cash functions with conventional bank cards, and rely primarily on the existing credit card networks for clearing and settlement.
In Mr. Shavit and Mr. Teicher's theory, banks would be happy because they would preserve their credit card interchange fees and presumably increase total income because there would be many more transactions. Merchants would have every reason to accept electronic cash because they would be enhancing service to the same population that carries credit cards, while eventually opening their systems to "the credit-less and unbanked."
"We say start with the credit card holder because that gives you a critical mass of card-friendly people," said Mr. Shavik, president of Ultimus, which has patents pending and financial backing from high- technology companies.
"Using the existing debit and credit card infrastructure, you don't need new reloading machines or dual cards," he added. "The banks' merchant service charges would be the same as on credit. This is the business case."
"Normally one would expect to pay more for better performance," said Mr. Teicher, an Ultimus director. "We provide better performance for a lower price because we eliminate the reloading infrastructure."
The Israelis' highly self-assured theories may come across as too pat. Their assumptions about merchants' falling automatically into line do not follow from U.S. banks' experiences with a retailing community that has exhibited wariness toward many card innovations.
They also seem to discount smart cards' successes in simple applications like the pay-telephone cards now prominent in much of Europe. These "must have" services were seen as essentially forced on their users.
But the Ultimus executives are mainly addressing banks and the open, multimerchant payment systems the bank card associations aspire to create. And they are just as surely on solid ground in evaluating the feasibility of the chip card systems tested so far. Bankers in search of a better business case may find that the Israelis are making at least a useful intellectual contribution.
Citing MasterCard's cash card test in Australia, the Mondex launching in Swindon, England, and the Visa Cash program during the Atlanta Olympics last year, an Ultimus white paper said, "All trials have been successful technically but doubtful commercially, mostly because of lack of consumer interest.
"Consumers have found that the cash card inherited most of the flaws of conventional cash: There is often an insufficient amount of value in the card; purchasing or loading the card requires balance awareness and bother; and value is lost with a lost card."
Concurrently managing conventional and electronic cash causes "double the inconvenience without any substantial benefit," Ultimus said. Mondex adds the complication of being able to handle both small and large transactions-"a step backward for consumers who learned to appreciate the advantages of account-to-account payments using a charge card."
The Ultimus answer is to reduce e-cash-the company uses the shorthand word usually associated with a product of Digicash Inc.-to a component of a larger scheme also incorporating credit and debit and a point of sale system called Ultimus Enhanced POS.
A single card would enable all transactions. Customers would have to enter personal identification numbers, and data stored on the card would let payments be made in off-line mode, without inquiring into a credit authorization center.
Transactions would be handled according to a formula set by the bank, automatically and without the consumer's having to make active decisions each time. For example, the bank might designate $25 as the "minimal charge." If a given card contains $14 in its electronic purse, then:
If a point of sale transaction were at least $25, it would be authorized and paid as any credit card item is.
If the transaction were between $14 and $25, the merchant would receive the minimal charge-$25-and return the difference as change to the electronic purse.
If the transaction were $14 or less, it would be paid directly to the merchant as electronic money and debited from the consumer's card.
The key to the economics, Mr. Shavit and Mr. Teicher said, is that cash amounts on the cards would "oscillate" between $0 and $25, determined by random transaction patterns rather than cardholders' feeling compelled to "load up." Over time, the additions to and subtractions from merchant terminals' electronic cash storage would tend to even out.
With bigger-ticket items handled as conventional credit card payments, the entrepreneurs said, electronic cash becomes a "lubricant" in the machinery, rather than an end in itself. The machinery could be primed with a fraction of anticipated sales revenue-$25 million of electronic cash could support $2.4 billion of economic activity, Ultimus' data indicated.
"The essence of e-cash is technical, not monetary," Mr. Teicher said. "It is an enabler, not a system in itself."
"Merchants can expect incremental sales, will handle less cash, and can take payments in on-line, off-line, and dial-up modes," Mr. Shavit said. "This is also ideal for Internet commerce."
The two officials also said their system could be "accountable, unaccountable, and semi-accountable," allowing system operators to decide how much they want to audit transactions or keep them anonymous.
"They are making a lot of assumptions, but it's an interesting concept," said George Hoyem, vice president and general manager of Verifone Inc.'s Internet commerce division in Menlo Park, Calif. Like many new-money proposals, he said, it could conceivably fit in Verifone's open system framework.
To be sure, consumer acceptance of the idea of an all-purpose payment card, let alone the ins and outs of the Ultimus scheme, is untested. But the notion of electronic cash as lubricant has some validity, said Linda K.S. Moore, a payment systems consultant based in Alexandria, Va.
An expert on international electronic money proposals and innovations, Ms. Moore pointed out that France's postal service, La Poste, had explored a similar "pooled transactions" model.
"Pooled transactions is the only way stored value makes sense," Ms. Moore said, because a merchant cannot be expected to pay processing fees of several cents on electronic "microtransactions" that could be well under $1. But the French central bank and commercial banks balked, apparently preferring a system that gives them more verification of individual transactions.
"I believe the risk is addressable," Ms. Moore said. She said Ultimus and La Poste embraced a mathematics-based "theoretical concept" that "banks may not be attuned to."
