In the days before credit cards became the dominant payment method on the Internet, a renowned cryptologist named David Chaum invented a sophisticated digital coin system for electronic commerce. In keeping with his deep concern for privacy, payments made under the system were anonymous - as with cash, buyers and sellers never needed to know one another's identity.
From his adopted home city of Amsterdam, Mr. Chaum founded a company, Digicash Inc., to license the system to banks. He earned several patents on it, and trademarked the name "eCash." One U.S. bank hosted a pilot, and several foreign banks - notably Deutsche Bank - also gave it a try. But management problems at Digicash and the complexity of the eCash system spoiled his plans, and, with interest from banks waning, eight-year-old Digicash filed for bankruptcy in November 1998.
A group of entrepreneurs has revived Mr. Chaum's idea, though, and is again trying to market a modified version of Digicash's technology to banks. The group bought software and 16 patents from Digicash, and in May 1999 formed a company called eCash Technologies Inc. in Bothell, Wash.
The heirs to Mr. Chaum's system seem to be enjoying more success than he did. Deutsche Bank 24, a retail bank subsidiary that Deutsche opened in September, has thrown its full weight behind eCash's software, which the parent bank has been piloting since 1997. The Frankfurt-based banking giant took its commitment to the Internet currency beyond the experimental stage in February, when it began offering an eCash account to every new customer of the Yahoo-Deutsche Bank cobranded credit card.
eCash executives say they have built new flexibility into the Digicash technology and are bringing a new business savvy to the academically-born company. Mr. Chaum, a former University of California professor, never quite shook his reputation as a privacy fanatic, and critics said his system, created in a laboratory, was not designed for mass production.
Although only a handful of the company's 50 employees hail from the Digicash days, all of the former Digicash investors have stuck with the concept, including Nicholas Negroponte of the Massachusetts Institute of Technology Media Lab in Cambridge. Some new investors have come in, including Thomas Litle of OrderTrust Inc. of Lowell, Mass.
"Basically we took the best parts of Digicash and added our own proprietary technology to create what we view will be the standard for online payments," said Drew Hyatt, president and chief executive officer of eCash. "We put a stronger business model together for Deutsche Bank - we clearly articulated the product strategy and roadmap."
Mr. Hyatt, 38, the former president of the financial services division at HNC Software Inc. of San Diego, boldly predicts the new eCash vision will finally capture the attention of banks in the United States. Within a year, he said he foresees more than five million consumers and the "Who's Who" of online merchants up and running on eCash.
"Our trick is trying to figure out who the early adopters are," Mr. Hyatt said.
There may be other problems - not the least of which include generating enthusiasm for a concept that may be viewed as past its prime. (To counter that, eCash executives say Digicash was peddling its wares before the market was ready). Moreover, both Digicash and eCash Technologies have had difficulty keeping people from treading on the eCash trademark. For instance, eCash Technologies must use the Web address www.eCash.net, because another unrelated firm that calls itself Ecash has bought the domain name www.ECash.com.
eCash Technologies, which licenses its software to banks, is a "technology enabler," Mr. Hyatt said. Other virtual money systems - like PayPal, which plans to merge with X.com Corp. of Palo Alto, and Bank One Corp.'s eMoneyMail - are owned by banks, Mr. Hyatt said.
He said the eCash system has been improved - it now does not know which bank the buyer and seller use. In the Digicash days, virtual "coins" were exchanged through a closed system: a merchant had to have a depository relationship with same bank the consumer used.
The cornerstones of eCash's strategy are flexibility and an open architecture, which mean that eCash can flow between consumers and merchants with different banks.
eCash "claims to have resolved what was one of the biggest stumbling blocks for its predecessor, and that is the requirement for the merchant and the consumer to bank with the same financial institution," said David Stewart, vice president at Global Concepts, a payments consulting firm in Norcross, Ga.
So far, eCash can be used to buy goods online or to send money to a friend. The company is working with wireless providers so that in the future, mobile phones or Palm Pilots can become the wallet that carries eCash currency. This would let consumers buy movie tickets, books, clothing, or food wherever they travel and shop, the company said.
"You go to Nordstrom's and you want to pay for a pair of slacks, use your eCash from a cell phone," Mr. Hyatt said.
As for further expansion plans, eCash is planning to add a currency conversion application, so if someone in Germany used eCash to buy merchandise from a U.S. company, the consumer's computer screen would immediately show how much the transaction cost in marks.
Despite Digicash's demise, its system did intrigue several big banks around the world, including Switzerland's Credit Suisse, Finland's Merita Bank, Bank of Austria, Advance Bank of Australia (now St. George's Bank,) Sakura Bank, Den norske Bank of Norway, and Mark Twain Bancshares of St. Louis - all of which conducted pilots. Last year, eCash inherited all remaining pilots - Deutsche, Credit Suisse, Bank of Austria and St. George's. Credit Suisse has since discontinued its trial.
The pilots, involving 30,000 active accounts and 300 online merchants in various countries, were seen as limited-time programs and in some cases were restricted to a controlled group of merchants and customers in order to monitor activity carefully.
Frank Trotter, a former Mark Twain banker, was the drive behind the only Digicash trial in the United States. Mercantile Bancorp. of St. Louis bought Mark Twain in 1997 and did not want to spend money to expand the program, Mr. Trotter said, perhaps because it knew it was a likely takeover candidate. The trial ended in September 1998, and Mercantile was subsequently bought by Firstar Corp. of Milwaukee.
Mr. Trotter, founder and chief executive officer of a three-month-old Internet-only bank called everbank.com, said he had always considered the Digicash system an "ideal" business-to-business payment system.
"It's immediate, it's final, it's completely within the control of the business," he said. "In comparison to the systems that are out there today, it is trivial in cost and it is extremely flexible," Mr. Trotter said. He said wire transfers, electronic data interchange, and automated clearing house systems are more expensive because they require multiple steps and a third party.
"A company is now in control instead of some third party," he said. "This is really a fundamental change in that you are actually moving money directly to your counterpart."
Mr. Trotter said he is still interested in the technology and would like everbank.com to license eCash. "To me, eCash really remains the only secure, transportable, person-to-person and b-to-b electronic payment mechanism that I've seen completely developed," he said.
While Digicash based itself on its blind signature technology, eCash's chief scientist, Yair Frankel, said eCash is offering the opportunity to make payments with or without anonymity. "It doesn't make sense to have a loyalty program where you can't necessarily identify the user," he said.
Mr. Frankel, formerly a cryptologist at Certco Inc., explains the blind signature system using a real-world analogy. A consumer writes a serial number or some other unique identifier on a piece of paper and puts that paper and a piece of carbon in an envelope. Then the bank signs the envelope, validating the piece of paper - the virtual coins - without actually seeing the serial number. Then, when the consumer goes to use the coins, the merchant's eCash software sends a message to the consumer's bank asking if the coins are valid. The bank verifies that the serial number has in fact been signed and not used, and authorizes the payment - all the while not knowing who is connected to that serial number.
"That total message back and forth is even faster than the time it would take to authorize a credit card payment," said Scott Wallace, eCash's senior vice president of marketing. "We're talking a second [or] second and a half."
Mr. Hyatt said eCash is aiming to renegotiate with all pilot banks to restore relationships and get full-scale commitments. Deutsche Bank officials could not be reached for details about its eCash program, but eCash officials said the bank plans to change its marketing strategy and raise transaction limits as part of the new commercial rollout.
During Digicash's prime, Internet commerce was still a scary, perhaps unbelievable futuristic concept. Some predicted credit cards would never work as a way to purchase goods online. Today, the success of credit cards on the Internet leaves open the question of relevance for electronic cash schemes.
"Credit cards are the predominant form of payment on the Net, but they were never designed to be used as such," said Daniel Eldridge, a former vice president at Digicash who is currently forming an Internet startup for data harvesting and analysis called VirginData.com. "The world of electronic money is still an open field, and Digicash's technology provides an advantage over those without it, especially in terms of privacy, and privacy is front page news these days."
Those concerns may work to eCash's advantage. Mr. Hyatt said that in the United States, his company is in negotiations with a regional electronic funds transfer network, a "large" Internet brokerage, an Internet-only bank, a regional bank, and a monoline credit card company.
"The challenges are to make people aware that we offer a lot both to banks and to consumers," Mr. Frankel said. "Often times we're so associated with blind signatures and anonymity that they don't realize our whole business model is 'enabled-banks.' "
