MasterCard International's decision to buy out the 18 shareholders that held a minority stake in Mondex International reflected its deep dissatisfaction with Mondex's direction.

The major concerns were the smart card company's choice of customers and of R&D projects. MasterCard, which announced the move last week, said it was displeased that Mondex, which primarily markets a stored value application, tried to sell its products outside the payments industry. London-based Mondex was courting interactive television companies and other firms instead of what MasterCard considered to be its core constituency, banks.

Mondex would work with the nonbanks first, "then figure out who they wanted to go to afterward, whether they wanted to include the banks or not," said Christina Costa, a MasterCard spokeswoman.

As part of the shakeup, Mondex chief executive officer Michael Keegan will leave the company this summer, and his deputy, Richard Fletcher, will take the top seat.

Art Kranzley, MasterCard's senior vice president of e-business, said Mondex has been developing a transponder device for mobile payments. That project, he said, diverted attention and resources from Mondex's primary mission as a smart card company. The product would have let people pay at gas pumps, highway tolls, and other places by waving a hardware token in front of a reader.

"I'm not saying we won't go there eventually, but there was a lot of money being spent, and it would have required other partners and other investments," Mr. Kranzley said. "That isn't consistent with where MasterCard wants to spend its money."

While Mondex, which was founded in 1990 by two payment card executives from London's National Westminster Bank, has enjoyed some success distributing its products in Asian countries, its track record in the United States has been lackluster. Wells Fargo & Co. and J.P. Morgan Chase & Co. were among the banks that ran pilots of the Mondex electronic cash card, and both of them discontinued the projects.

In the United States, smart card development has in some ways leapfrogged Mondex. American Express and then Visa introduced multiapplication smart card products that do not contain electronic purse features - which U.S. consumers have rejected - but do authenticate and secure Internet transactions. Mondex's technology can do the same thing, but that is not the path that the company had been pursuing.

MasterCard, which is based in Purchase, N.Y., owns 58% of Mondex but decided it still did not hold enough sway over the European company's operations. Its deal for the remainder of Mondex has been agreed upon in principle but still requires a shareholder vote.

After the deal closes, Mondex will function more as a technology arm of MasterCard. It will continue providing service to the Multos consortium, an open industry forum that manages the Multos smart card platform, which is MasterCard's preferred operating system for multi-application smart cards. Mondex will also continue managing Mondex electronic cash and the Mondex certification authority and security infrastructure, in addition to providing ongoing support and services to the Mondex franchisees and licensees.

Through Mondex, MasterCard had introduced 31 million chip cards by yearend 2000. MasterCard expects to have 10 million chip cards issued in Asia/Pacific by 2003. This year, Mondex Philippines placed the largest single purchase of Multos-based chip cards - 500,000 - and Korea's Kookmin Card Co. introduced the first smart cards to have both the Mondex electronic cash and M/Chip (credit/debit) functions. The Multos system permits more than one application to be loaded on to the card's chip, but keeps the applications separate from each other.

"It's what consumers want - 'Give me one card,' " Mr. Kranzley said. He said multiple applications would not confuse consumers "because at the terminal people would say, 'Give me debit,' or whatever they want to do." Multos also encrypts transactions to protect against fraud.

Mr. Kranzley said MasterCard will market Mondex products worldwide, particularly in Asia and Europe, but that a large rollout in the United States is unlikely to happen soon. MasterCard may try to promote Mondex here for "closed-loop systems, like a college or corporate campus," he said.

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