For all their technological prowess, Japan and its computer industry have not vied with their U.S. counterparts for leadership on the Internet or in matters of electronic commerce. Could that make Japan a useful vantage point from which to understand our confusion about smart cards, digital cash, security and privacy, and other thorny issues?

Hitachi Research Institute, funded by but independent of the electronics company that has made a mark as a supplier to Mondex, may already have answered that question in a book it published last October, "Electronic Money and Open Network Society."

It won't be available in English until March (from FIA Financial Publishing, Lake Forest, Ill.), but the institute's chief researcher, Mitsuo Yamaguchi, has talked it up at conferences in Asia. He indicated to FutureBanking that he not only sees some order in the chaos but also has come to a conclusion with which most people active in U.S. electronic commerce would agree.

"We basically think what we need is large-scale commercial pilot experimentation in a real market, without government or central bank restriction - and with their support," Mr. Yamaguchi said. "What I call 'self-responsibility' of each service provider, bank, and consumer will be most important."

Probing the cyberspace realm three years after completing a similar compendium on "old" payment systems, Mr. Yamaguchi found only Mondex and Digicash's E-cash to be "truly revolutionary" forms of money. The Financial Services Technology Consortium's E-check, Cybercash's Cybercoin and credit card systems, Visa Cash, the First Virtual payment network, and everything else he studied were simply modern forms of older payment methods.

E-cash and Mondex raise the policy issues that must be addressed for full-scale electronic commerce to take off: money-supply implications; compatibility with banking laws; security; privacy; and government and central bank sovereignty in such areas as taxation and cross-border jurisdiction.

For bankers trying to determine where their opportunities lie, Mr. Yamaguchi adapted the old four-quadrant strategic map to show that at least three out of four possible directions aren't bad:

I. Technology leadership. Security First Technologies and Mark Twain Bank of St. Louis are examples of companies that entered early with Internet banking and E-cash, respectively, taking risks for potentially significant rewards on an international scale.

II. Knowledge leadership. Mondex's global electronic cash system, now backed by MasterCard, and Citicorp's seeking multinational patent protection for its Electronic Monetary System are examples of the leveraging of intellectual property.

III. Backward integration, or stringing various components together. Huntington Bancshares' investment in Security First is just a piece of its puzzle; Mondex and an aggressive Internet banking program are just two of many Wells Fargo Bank initiatives. "Many bankers see Microsoft as a backward integrator, as would be a retailer who might invade banking," Mr. Yamaguchi said.

IV. All the rest would be consigned to mass-merchandising, a difficult road because of commoditization and low margins. Broad service menus would be critical and banks would likely have to outsource most of their operations to stay competitive.

Mr. Yamaguchi formed several convictions of his own:

Disclaiming any influence of the Hitachi-Mondex link, he said he views Mondex as especially formidable because "value can be transferred over cable TV, phone lines, the Internet, and chip to chip. Visa Cash is O.K. but is usable only in the existing point of sale environment."

Wholesale and retail systems development must go hand in hand. "If it is not balanced, if one part of the system is not developed enough, it won't work," he said.

Security must reflect costs and benefits. "100% security is technologically possible, but it could cost $1,000 to transfer $100, which doesn't make sense. Same as privacy. It's nice to trace every consumer transaction, but it costs. We don't need 100% traceability in small-value payments."

As for his country, the government is promoting electronic commerce tests, he said, but "Japanese bankers are very conservative and slow to apply new technology." He expects Mondex Japan to take off in 1997.

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