Trying to shake free of the smart card doldrums, Mondex International is changing its tune.

Though its struggles to break through to the mass consumer market are shared by others, the MasterCard-controlled venture looks to many like an underdog in a market that may not appreciate one. It trails numerically, with roughly 2 million chip-enhanced cards in circulation versus 23 million in the Visa network.

At the same time, Mondex is widely admired for its electronic cash technology, enjoys support from some of the biggest and best retail banks in the world, and has franchised its system in 75 countries.

Chief executive officer Michael Keegan, who has been under pressure to get Mondex's advantages more widely recognized and exploited, says he has found some answers - outside the banking industry.

"Banks are critically important, but not the most critical element for success," he said recently. Market inroads are most likely to come through "partnerships with service providers."

By that he means companies and industries that are connecting with consumers over the Internet and can benefit from an efficient and immediate cash-like payment mechanism. Such activities might include on-line sales of music or other digital properties, special-event and subscription television, interactive games, and state lotteries.

Mondex already cooperates with nonbank entities. Several own shares of regional franchises. But Mr. Keegan clearly wants to open and diversify his lines of communication.

Like others promoting smart cards, he is optimistic about the near-term spread of card-reading devices, an important element of the vision. They are being built into personal computers, set-top boxes for digital and pay television, and other appliances, and are almost standard with certain types of wireless phones that London-based Mondex views as crucial to the mobile subset of electronic commerce.

Mondex has demonstrated some of what Mr. Keegan would describe as "nonbank-driven" applications of its advanced cards. For example, another British company's Internet site, www.smartaxis.com, offers to sell Mondex cards and readers. The SmartAxis system also enables customers at Webshack, a cafe in London, to buy and pay for goods and services such as MP3 music files and screensavers.

With the lottery agency Norsk Tipping in Norway, Mondex and its Norwegian franchise, consisting of national postal and telecommunications companies, have shown the ability to accept payments from, and pay winnings to, the computer chip on the smart card.

The theory is that if those types of operators want it to happen, it will, and banking companies and their smart cards will naturally and logically follow. Bankers should admit, Mr. Keegan said, that their attempts to push the concept directly to the retail market have simply failed.

"We are trying to reposition ourself," he said. "The market is consumer-driven and service-provider-driven, not bank-driven."

Mr. Keegan explained some of his rethinking this month at Cartes '99, an international smart card conference in Paris. He argued not only that the Internet needs a cash payment mechanism that banks are uniquely capable of providing with maximum trust and reliability, but also that such a system would effectively sell smart cards into real-world retailing.

That idea has been expressed before, but mainly by people selling technology. For one, Wave Systems Corp. of Lee, Mass., which includes smart cards in its digital rights and privacy management systems, has marketed more to the media industry than banks. It recently scored a coup by being selected to participate in Cyber-COMM, the French banks' Internet transaction system based on smart card readers and the Secure Electronic Transaction protocol.

GlobeID Software of Paris, also ready for smart cards, has seen retailers and systems integrators as the best immediate outlets for its on-line payments software and digital wallets. It plans take its show to the banking community during the Bank Administration Institute Retail Delivery Conference Dec. 7-10 in Miami.

Much of the smart card world thinks and acts differently, first developing networks of stores, mass-transit operators, vending machines, and any other locations that might lend themselves to an electronic purse concept. Internet transactions initiated from homes in the micropayment class, typically ranging from $20 or $10 down to pennies, might be incidental to such projects, as was the case in the joint Mondex-Visa Cash trial on New York's Upper West Side that was terminated early this year after an underwhelming consumer and merchant reaction.

Attempts are still being made to get e-purse right. French banks, renowned for their early adoption of chips for security purposes on all of their 35 million debit and credit cards, have pilots under way - a Mondex test in Strasbourg and another called Moneo in Tours. A third, Modeus, is coming in the Paris region.

Speaking at Cartes '99, then five weeks into the Moneo project, Pierre Fersztand, director general of the operating company SEME, said, "E-purse will succeed in the real world before the Internet, and [Moneo] is e-purse in the real world."

He said it was already a "fantastic success technically," and "cardholder demand is there."

Mr. Keegan's nonconforming response is true to a basic Mondex principle: that the cost of a micropayment must be minimized. "In the physical world, e-cash is a very tough business case for banks," he said. "It is expensive to change the infrastructure, and that can defeat the economics of issuance."

Much of his competition has rallied around the Common Electronic Purse Specifications, a Visa initiative that includes an auditability requirement for transactions. Mr. Keegan adamantly opposes CEPS as too expensive; it does not accommodate the card-to-card transfers that Mondex designed to approach the cost and efficiency of one person's handing of currency to another.

Jon Prideaux, executive vice president in Visa International's European Union region, said "we are pretty much where we expected to be" with CEPS. The vast majority of world electronic purse programs have voted for it. Mr. Prideaux did not minimize the complexity of holding a vast coalition together and reissuing hundreds of millions of smart cards, but he said Europe should be fully compliant by the date in 2002 that euro coins and currency are in circulation.

The failure of Mondex and its Multos operating system to join the CEPS parade keeps alive a technical debate that Mr. Prideaux said would be akin to arguing that "my magnetic stripe is better than yours" - a reference to the existing and uncontroversial card-encoding standard.

He contended that given consumers' concerns about on-line security and merchant legitimacy, "we think the accounted model works well" for Visa Cash on the Internet. He saw no need for the "slavish duplication of cash" in the Mondex product description.

This leaves Mondex's CEO in a maverick or outsider position, but having "points of differentiation" does not bother him, and he is confident he will be vindicated.

"We did it wrong" in trying "traditional distribution through the banking system" and selling direct to the consumer, Mr. Keegan said in an interview in London last week. "I hope my competitors keep doing it that way, because we are on the right page now. The economics don't work anyway."

He said Mondex's "endgame is still electronic cash," but the process will go not via "High Street" retailing districts but rather through service providers' "deciding what consumers will work for the proposition. Then the banks will come in to support it."

Mr. Keegan is especially keen on the 12-to-24 age group, avid adopters of technology who will be drawn to MP3 music and on-line competitive games. "Mondex makes so much economic sense in that channel," he said.

"We were two technology generations ahead of the market when we started this," said Mr. Keegan, who worked on Mondex since the early 1990s when it was under development within National Westminster Bank, and who has been CEO since 1996. "Now we are one generation ahead, and a short step from where we need to be."

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