Requiem for a Bright Idea (1999)

DAVID CHAUM SAVORED HIS first taste of success two years ago. A brilliant scientist whose specialty is cryptology, he started DigiCash in 1989 to create an on-line currency as secure and private as cash in the physical world. By 1997 he had lured venture backing, snagged the celebrated guru Nicholas Negroponte as chairman and signed a St. Louis bank as his first client. If the cashless society was imminent, he would be among the chief beneficiaries.

Today DigiCash is dead, and Chaum recently sold off its patents. "It was hard to get enough merchants to accept it, so that you could get enough consumers to use it, or vice versa," he says.

A raft of startups pursued rival digital currencies that would power the Web and replace bills and coins. All met the same fate. "Everyone's exited stage left," says William Melton, chief of CyberCash, which abandoned "CyberCoin" in the U.S. this year; today it sells software for shopping sites. First Virtual Holdings almost went bankrupt before scrapping the effort and merging with a British e-mail outfit.

A brave new currency for a brave new world, with only one problem: No one wanted it--not banks, not merchants and, most important, not consumers. Electronic commerce is flourishing, but it turns out Visa and MasterCard--not digital cash--are the currency of choice.

Yet a handful of new Web firms and high-tech heavyweights are making a new push. Instead of reinventing the wheel and trying to displace the credit card, these shops target turf the credit-card firms have largely ignored: "micropayments" or transactions of less than $10.

By year-end Compaq will unveil MilliCent, an e-cash system for payments as small as a penny. IBM offers Micropayments in Europe, with a U.S. debut to come. Half a dozen rich newcomers are ready to launch new schemes, as well.

If they succeed, it may usher in a new revenue stream on the Web: pay-per-view. Up to now the Web has been a massive repository of information, most of it served up free to help stir ad revenue and on-line product sales. Micropayments could let Web sites sell content by the word, line or page, or even the day, hour and minute--a recipe for a nickel, driving directions for a dollar.

"If your average transaction value is 75 cents a month, Visa doesn't want to talk to you," says Russell Jones, general manager of Compaq's MilliCent. Not so, says James Degracia, Visa's vice president for e-commerce. "Visa is the digital cash," he says. It has 54% of on-line buys and can profitably process charges of just a penny, he says. His microrivals doubt it.

Some question whether the Web even needs a new system. "Do I see a need for a new currency? The answer would have to be no. No one's asking for it," says John Briggs, director of e-commerce for Yahoo.

The first round of digital-cash firms made a fatal miscalculation. They figured, wrongly it turns out, that consumers would be leery of using credit cards on the Web and would demand tight security and ironclad privacy. But people have historically been willing to make small sacrifices in privacy for convenience, hence the popularity of credit cards and catalogs despite the scourge of junk mail.

The first schemes also underestimated the difficulty of changing deeply ingrained habits. "U.S. consumers are deeply wedded to credit cards," says CyberCash's Melton. "It was too much to expect them not only to use this new thing--the Web--to buy things, but also to have to give up their credit cards to do it."

At Chaum's DigiCash, the underlying design grew out of his two decades of work in cryptology, the science of scrambling and unscrambling messages so they cannot be read by unintended eyes. It is the same technology used for electronic money transfers.

Chaum, who holds a doctorate in computer science from U.C. Berkeley, had been at the Center for Mathematics & Science in Amsterdam, a hotbed of cryptology research. There he invented a version of e-cash that routed encrypted e-mail messages from a user's bank to the merchant via a Byzantine trail of computers so its origins could never be traced. It was to be as simple as reaching into your pocket to buy a newspaper and walking away without threat of getting junk mail from the newsstand--or a follow-up query from the tax authorities.

Chaum's raison d'tre was electronic privacy, and his plans for DigiCash were ambitious. "Digital pseudonyms" would protect the identity of Netizens as they roamed the Web. Chaum became a hero to cyberlibertarians. He raised more than $10 million from such investors as early Microsoft funder David Marquardt.

The idea seemed to be catching on. CyberCash and First Virtual pushed rival approaches. Chaum testified to Congress on whether e-cash would replace greenbacks and kill central banks. Big banks began to take it seriously, and Chaum signed up Mercantile Bancorp. of St. Louis and Deutsche Bank for a tryout.

But most trials fizzled. Mercantile Bank pulled the plug on DigiCash a year ago after a three-year trial that signed up a scant 5,000 customers whose combined accounts totaled just $100,000.

Merchants and banks were lukewarm; they covet the customer data they collect for targeted marketing. Consumers were unmoved. "As the Web grew, the average level of sophistication of users dropped. It was hard to explain the importance of privacy to them," Chaum says.

DigiCash filed for Chapter 11 in November 1998. First Virtual Holdings had quit the business in August 1998, merging with Email Publishing and renaming itself MessageMedia in December. Awash in losses, CyberCash dropped its "CyberCoin" in the U.S. early this year.

That should have spelled the end of electronic cash. Not so. This time around, the new e-cash purveyors plan to piggyback on monthly billers such as credit-card issuers, utilities and Internet service providers, handling their customers' Web transactions for a cut of the sale.

The point is to leverage the relationships consumers already have, rather than try to get people to use some strange new Internet money, says Geoffrey Watson, marketing director of IPin. Its micropayment system will aggregate tiny charges in a customer's monthly Internet bill.

Some content providers are keen on it. IPin has signed 60 merchants, among them Virgin Radio, the BBC, AT&T's A2B Music and E Music.com. Seattle-based Qpass, which charges purchases to credit-card bills, works with The Wall Street Journal Interactive, Morningstar and PRNewswire. OneClickCharge, a New York payment service, offers prepaid accounts drawn on credit cards; Web sites for Zacks Investment Research and Institutional Investor use it to charge for reports and research.

On-line media sites are naturals for micropayments. Few of the 10 million Web sites in existence turn a profit. Many depend on advertising for support, but few command premium prices. "Unless you're CNN, you're not going to have the kind of traffic that will entice AT&T to buy a banner ad," says Jones of Compaq. Pay-per-view would pose an entirely new revenue line.

Unclear, however, is whether this micropayment posse can avoid the fate met by DigiCash and other predecessors: getting stomped by Visa. Its 54% share of on-line charges gives it a powerful edge.

DigiCash's Chaum recently decided he would like another crack at electronic cash. He refuses to offer details other than to say it will offer better "blind signatures" to verify payments without revealing customer identity, and will benefit from credit cards rather than try to wipe them out.

"Before, I was asking the world to change the way it did things so that there would be perfect privacy," he says. "The privacy this time won't be perfect, and we're going to take advantage of the fact that a huge number of people use credit cards. Think of it as a prophylactic for the credit card."

from Hacker News https://ift.tt/2RaAjBz