Credit cards crushing virtual cash

Summary:The struggles of First Virtual Holdings Inc., an e-commerce technology company, to make its payroll have left many wondering: What ever happened to virtual cash?

The struggles of First Virtual Holdings Inc., an e-commerce technology company, to make its payroll have left many wondering: What ever happened to virtual cash?

But First Virtual's problems don't necessarily reflect on the potential of innovative methods for making payments over the Internet, according to industry observers.

"It says more about (First Virtual's) business model than it does about virtual cash," said analyst Cliff Condon of Forrester Research Inc.
As for forms of electronic payment other than credit cards, there's room for plenty of choices, Condon believes. "Some people just don't like credit; they prefer to buy as they go. There's room for that."

If you're wondering what the fuss is all about, turn the clock back to 1994, when First Virtual premiered its Internet Payment System, one of the first attempts to facilitate secure online transactions.

A new currency
Internet Payment System, along with tools from CyberCash, Digital Equipment Corp.. and DigiCash, broke new ground by proposing a new kind of currency -- virtual currency.

Instead of drawing directly on a bank account, the user could, for example, transfer money to an electronic "wallet" (in CyberCash's system) and dole out anything from a few cents to a few dollars with a minimum of fuss.

Virtual cash was supposed to revolutionize the way consumers bought content online: Instead of free content supported by advertising, companies could sell magazine articles, for example, for a few cents a page.

First Virtual rode the wave of techno-optimism to a successful initial public offering of common stock in December of 1996, generating $18 million at $9 per share.

But that stock has been trading at under a dollar recently, and First Virtual pulled the plug on Internet Payment System earlier this year.

'Bleak' picture for micropayments
"People are using credit cards for smaller and smaller purchases on the Web," explained Chris Gwynn, an analyst with The Yankee Group. "This big reluctance to use a credit card for small purchases is not real."

The big picture for micropayments? "It looks pretty bleak," Gwynn said.

While consumer e-commerce continues to grow by leaps and bounds, shoppers have taken to buying books, CDs, clothes, vacations and even cars and houses over the Net without seeming to miss the theoretically greater security and privacy provided by virtual cash.

In response, e-cash's original proponents have modified their approach, seeking to make their products more appealing to those accustomed to the credit- or debit-card model.

CyberCash, for example, has turned its cyber wallet into a Java applet that will run on merchants' Web sites, much as credit card transaction processing systems run on cyberstores today.

First Virtual's Virtual PIN payment system, observers say, was just too hard to use, requiring the user to verify each payment by e-mail.

A burden for consumers?
"It put way too much burden on the consumer," said Forrester's Condon. "Any time you ask the consumer to do something, it's going to slow down the whole process." Wednesday, First Virtual announced it had signed a non-binding letter of intent to sell off a controlling stake in the company to a group of investors, including Softbank Holdings Inc., to generate enough funds to keep its doors open beyond the end of April. (Softbank is the parent company of ZDNet publisher Ziff-Davis Inc.)

In the meantime, First Virtual has left the virtual cash market altogether, instead hoping to find a market with a new e-mail-based transaction system -- a kind of super-spam.

"Four of our five founders came out of messaging," said First Virtual President Keith Kendrick. "By moving into the messaging industry, we're in a better position to explore our core competencies."

Observers see some potential in the "interactive messaging platform," which will allow users to buy a product online without ever leaving their e-mail in-box.

"That might be kind of cool," said Gwynn. "(Merchants) are trying to find any way they can to generate revenue ... and an e-mail system might be very attractive."

Reuters contributed to this report.

Topics: Start-Ups, Banking, E-Commerce, Privacy, Software

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