The Financial Post Magazine
June 1998
pages 46-50

All our nickel-and-dime purchases add up to billions and billions of dollars, which is why the banks are interested in a smart card to handle them. A report on an experiment in progress in small-town Ontario ...

Mondo Mondex

by David Menzies.

Standing behind the counter of his Kernels franchise in Guelph, Ont.'s Stone Road Mall, Dan Brown takes as much pleasure praising Mondex as he does in selling bags of popcorn. "I'll tell you, this thing is something else", he says, holding a gold-and-ebony-hued Mondex card. "You know, I've always said how great it would be if Mondex was everywhere."

Mondex Canada CEO Joanne De Laurentiis: "The Mondex card is designed to serve a market that isn't being served by other forms of electronic payment. A full 20% of everything we spend is on purchases under $20. That's a huge, huge market."

Mondex, self-billed as "Simply More than Money", is the electronic-cash system owned by Mondex International Ltd., a U.K.-based conglomerate 51% controlled by MasterCard International Inc. The Canadian franchisee, Toronto-based Mondex Canada (a group consisting of Canada's Big Six banks and four other financial institutions), first introduced the smart card to Guelph, about 100 km west of Toronto, on a limited basis in September, 1996. By February, 1997, the card was rolled out citywide. Yet in a world already adroitly serviced by cash, cheques, credit cards, charge cards, and debit cards, why test another payment format? And what's motivating the banks' involvement, given the average Mondex transaction is about $6.50? Simply put, all those nickel-and-dime purchases we rack up on a day-to-day basis - a litre of milk, a cup of coffee, bus fare - are, taken collectively, anything but petty cash. Indeed, Visa Canada Association, currently testing a smart card of its own in Barrie, Ont., estimates that purchases of less than $10 in Canada add up to an un-paltry $75 billion per year. Says Joanne De Laurentiis, president and CEO of Mondex Canada: "The Mondex card is designed to serve a market that isn't being served by other forms of electronic payment. Mondex is complementary to both debit and credit. A full 20% of everything we spend is on purchases under $20. That's a huge under market and right now, it is largely only being served by paper money and coins".

For consumers - and merchants - the big value of the Mondex card is the convenience factor. Money can be transferred on to the card from a telephone if need be, and carrying the card means never having to worry about exact change. As for the multinationals backing Mondex, the payoff, should this smart-card system ever become as popular as debit and credit cards, would be enormous in the form of service charges. Which is why everyone from the financial institutions backing Mondex Canada to companies manufacturing Mondex-compatible technologies - including the likes of Bell Canada, Hitachi Ltd., NCR Corp., Fujitsu Ltd., and Siemens AG - would be happy to see everyone in Guelph (and eventually everywhere else) embrace the smart card the way Kernel's franchisee Dan Brown has.

Brown fully endorses the idea of conducting business in a cashless marketplace. Kernels is a cash business, he explains, though hard cash is both labour and cash intensive. He estimates that he spends about four hours a week counting cash, taking care of cash-related paperwork, and standing in line at his bank so that he can pick up his daily float of nickels, dimes, and quarters. There are other, more serious irritants. Despite the best money-management techniques, shrinkage can (and does) occur. Having cash on hand is the sole motivator for armed robbery. And then there's the problem of counterfeit currency - Brown still winces when he got stuck with $400 worth of bogus $10 and $20 bills at his Kitchener, Ont. Kernels franchise last December. But e-cash via the Mondex system, that's a different story.

Retailer Dan Brown is one of the staunchest supporters of Mondex: "I think when more people get used to it and understand it ... you're going to see a stampede toward it."

Suppose a customer carrying a Mondex card comes in to buy a medium-size bag of caramel corn. After placing the order, the customer hands Brown the card, which is the size and shape of a typical credit card. But instead of a black magnetic stripe, the Mondex card contains a thumbnail-sized chip that allows users to download "cash" from a bank account via an ATM, telephone, or even another Mondex card. Brown inserts the card into his Mondex retailer terminal, a compact electronic till that "stores" his customers' electronic cash. The chip on the merchant's card inside his terminal immediately initiates an digitized chitchat with the chip embedded in the smart card and completes the transaction in seconds. A debit- or credit-card transaction takes 15 to 20 seconds or even longer if the telephone lines are busy. "This [Mondex system] is so fast, so efficient", Brown enthuses. "I think when more people get used to it and understand it and see how well it works, you're going to see a stampede toward it."

The gleaming Mondex Information Centre on Wyndham Street in Guelph is an e-commerce missionary outpost, its staff every ready to convert those who doubt the power (and convenience) of Mondex. The centre is full of the kind of futuristic telephones, vending machines, Mondex-compatible ATMs, and other such gizmos that will one day be commonplace in a Mondex International world - assuming all goes according to plan, that is. Since the inception of its smart-card system eight years ago, Mondex Internation has made a huge (but unspecified) investment in the world-wide development and marketing of its e-cash system. Currently, the card is testing at more than 23 sites around the world, and, last November, the company launched the first fill-scale Mondex system in Hong Kong.

In Guelph, Mondex Canada's De Laurentiis hails the ongoing experiment a "tremendous success". Almost 600 merchants - from fast-food outlests to movie theatres to convenience stores - are now equipped to handle the card, while more than 12,000 residents carry one of their own. You can ride the city's buses and cabs with Mondex. Guelph's 636 parking meters accept Mondex, as do more than 250 pay phones. There are even some pop machines that have been converted to accept Mondex cards as easily as quarters and loonies. Since February, 1997, more than $2 million worth of electronic cash has been downloaded onto the cards, an amount De Laurentiis considers "very impressive", given the relative newness of the technology.

In downtown Guelph, "Simply More Than Money" billboards and posters are ubiquitous, and the trial has generated a great deal of international interest. In the past two years, says Gary Nadalin, general manager of the Chamber of Commerce, about 8,000 visitors from as far afield as South America and Asia have visited Guelph just to see the Mondex card in action. "The profile Mondex has brought to this city has been a major benefit", says David Creech, Guelph's city administrator. "Every six months I receive a two-inch-thick file folder of news clippings from around the world that mention Guelph only because of Mondex."

It cost more than $150,000 to convert Guelph's 600-plus parking meters to accept the Mondex smart card.

Yet, despite local enthusiasm and international interest, others have concerns about the great e-cash experiment. Guelph city councillor Karen Farbridge, for example, was the only councillor to vote against the 1995 deal that paved the way for Guelph to welcome Mondex, and she's still not a fan. A major point of contention for Farbridge is the amount of taxpayers' money that has gone toward accommodating Mondex initiatives. One example: the city anted up more than $150,000 to convert its parking meters to accept the card. Even more grating, Farbridge says, has been the amount of city-hall staff time spent on Mondex-related issues. "Our deal with Mondex was always billed as a partnership", she says. "But given the nature of the project, I don't know if Guelph is truly an equal partner. I know we're not going to be sharing in any of the future profits made by Mondex or the banks, that's for certain." Farbridge says she's hard-pressed to see any upside for the city. "I know Guelph has received a lot of publicity thanks to Mondex, but so what?"

City administrator Creech, however, argues that such criticisms are wrong-headed. Like Kernels' Dan Brown, Creech knows that handling cash is a costly and often bothersome endeavour. The city of Guelph has a full-time employee, for instance, whose job it is to count the coins from the city's parking meters and bus-fare boxes. "When you handle a lot of cash, there's also a fairly stiff insurance premium for the amount of cash on board, and there's always the theft risk. If we didn't need to deal with cash any more, we wouldn't need extra insurance and we wouldn't have some of the security risks."

Computer professor David Jones believes the real issue with Mondex "is the degree of openness on what's being done with all the information collected by the banks"

But beyond the local politics and the dollars-and-cents issues behind Guelph's Mondex trial are broader concerns relating to matters of confidentiality and security in the use of smart cards like Mondex. David Jones, a computer science professor at Hamilton's McMaster University and president of the cyber-rights group Electronic Frontier Canada, believes "the real issue" regarding Mondex "is the degree of openness on what's being done with all the information that's being collected by the banks". The problem is that the promotion for these cards suggests they are just like having cash and there are not transaction records, though that is not true. "Maybe some people don't care if their transactions are being tracked, but my concern is that people should at least be made aware that this is [happening]."

Simon Davies of Privacy International filed a complaint against Mondex for falsely advertising the service as anonymous.

In the early going, Mondex International maintained that its system was based on complete anonymity, though this turned out to be an embarrassing marketing miscue. The first Mondex pilot was launched in Swindon, England, in July, 1995. In September of that year, Simon Davies, director of U.K.'s Privacy International, a human-rights advocacy group based in London that deals with privacy, surveillance, and data-protection issues, determined that, contrary to public reassurances, the system was not anonymous and banks were able to determine identities of Mondex card users. Davies filed a complaint against Mondex for falsely advertising the service as anonymous, and the Environmental Health and Trading Standards Department in South London responded in June, 1996. "It appears the customer is identified to the trader ... and ultimately the bank, by the 300 previous transactions [on the trader's card]", the office concluded. "Each of these [transactions] will soon be superseded by further transactions and drop off the end of the list. These can be monitored by the bank and could be used for marketing purposes. This is the audit trail and ultimately could be sold to business users for third-party marketing."

"it's a significant risk, if any of these groups discover that Mondex transaction data is being collected from merchant logs"
-leaked CIBC memo

To show how sensitive the issue of privacy is to both the service providers and consumers, Jones also cites an internal CIBC memo that was leaked and posted on the Internet. The memo warns of a public-relations fiasco should consumers perceive that Mondex Canada and the banks are collecting data for marketing purposes. "By messing with the perception [that Mondex offers a high degree of privacy], we are jeopardizing our core proposition and diluting the power of our message", the memo states. "People will start to ask: are we really that private if we are collecting data for marketing purposes? What are we collecting and why? If Mondex Canada collects data for marketing purposes, it will be the only territory to do this - this is not something we want to be a pioneer on ... Given the current situation in Guelph with Mondex naysayers, it's a significant risk that if any of these groups discover that Mondex transaction data is being collected from merchant logs, they would use and create every opportunity possible to stir negative headlines with 'Big Brother' accusations." The memo goes on to provide a script for CIBC employees to follow if they are questioned about Mondex and privacy. The stock answer is that "Mondex respects individuals' privacy." Only "if pushed", notes the memo, should CIBC employees concede that "Mondex does not try to offer total anonymity" and "any information that is collected ... will be strictly for risk-management purposes." Royal Bank spokesman Brian Smith is adamant that any information collected by the bank in regard to Mondex transactions "will be used for risk-management purposes only ... Our policy is that we don't provide financial information about our customers to anyone outside the bank, period."

In fact, Mondex now argues that complete anonymity isn't necessarily a good thing for consumers. "When you load your card from your bank account, you don't really want it [the transaction] to be anonymous", says De Laurentiis. "I know that I certainly want my bank to know it's me taking $50 from my own account and not somebody else."

Which raises the less Orwellian issue of security. Here again, the issues are not clear cut for consumers, with proponents of smart cards like Mondex offering assurances that criticisms and charges of system weaknesses are overblown, while critics argue that the assurances are not watertight. Recently, Mondex International has faced a number of charges relating to security issues. Last May, an article on New Zealand's Computerworld Newswire reported that a card security consultant hired by one of the banks involved in the Mondex rollout in New Zealand had serious reservations about the system there. A key problem cited in the article is the system's "complete absence of fraud detection other than a very crude comparison of how much money has been spent". The consultant estimated that it would take one month and an investment of US$200,000 to break the chip used by Mondex.

Computerworld also cited two reports by a Cambridge University cryptography specialist, who reported on the many potential avenues of attack on special security processors and smart cards. He concluded that systems such as Mondex were vulnerable because they embody all the conditions necessary to retrieve the encryption-key data.

E-cash could be replicated by hackers, and it would be virtually impossible to trace the source of counterfeit e-currency.

Another red flag came by way of Britain's National Criminal Intelligence Service. A story appearing in The Guardian newspaper last year reported that the NCIS's organized-crime unit was concerned that smart-card e-cash could be replicated or tampered with by hacking groups and software pirates, and that it would be "virtually impossible" to trace the source of counterfeit e-currency. A source also estimated that 500 companies already have the necessary facilities to counterfeit the chip used in smart cards.

It's hard for consumers to make sense of all the charges and counter-charges to assess risk. And since this is an evolving technology, no one should assume that the details of a system in use today will be current tomorrow. Indeed, Marlene Boyaner, vice-president, smart cards, for CIBC, notes that the technology cited in the New Zealand reports is no longer in the field. "We [Mondex] would never say that [security breaches] would never happen - that would be irresponsible. But we have built-in risk-management systems that allow us to detect and contain breaches to the system. And we will continue to develop our chip security systems. It is an ongoing process."

De Laurentiis, too, plays down concerns about hackers compromising the system. "At the Mondex International level, the Mondex card chip is subjected to a continuous barrage of tests, and our partners have done their due diligence." When it comes to fraud, "We don't make any claims that Mondex is infallible - but the key is that we have systems in place and procedures in place to manage it."

None of which impresses McMaster University's Jones, who notes that if Mondex ever rolls out internationally, the volume of transactions "would amount to billions of dollars per day. That would make it worthwhile for a criminal organization to hire some top cryptography experts and hack into the system."

In fact, Jones believes that the negative reports regarding Mondex security are the reason why the smart card is still in trial mode. "It seems that the banks are always pushing back their rollout dates", he says. "Objectively, I think we can observe that Mondex technology is not ready for prime time. If it was so wonderful and bulletproof and made such great business sense, certainly the banks would've rolled it out by now. But obviously the comfort level for the banks isn't there."

"What's interesting is that there's a separation between who's responsible for the security of the cards and who's financially liable", he adds. "The security of the system is left in the hands of Mondex, but should the system fail, it's the Canadian banks that are left holding the bag."

That being the case, why have so many banks and trust companies bought into Mondex? Jones speculates that they're simply afraid of being left out should Mondex ever take off. "Buying into Mondex is really an insurance policy. Smart cards are going to play some sort of role in the future, whether it's Mondex or something like VISA Cash [see sidebar]. Since all the banks are along for the ride, if Mondex takes off, they all make money. Should Mondex flop, they would all be equally set back."

De Laurentiis counters that the cautious rollout of Mondex has a lot more to do with sound business strategy than the comfort levels of the banks. Because the implementations of the Mondex system Canada-wide would mean an investment in the hundreds of millions of dollars, "We really want to make sure we do this right", she says.

By way of comparison, she points to the introduction of debit cards in Canada. "Debit took years before catching on with any degree of significance", she says. "Nearly a decade ago, when debit cards were first rolled out, the reaction from merchants was, 'Why do I need debit? I already take credit, cheques, cash.' Consumers were skeptical as well. These days, if you asked your typical grocery store, 'Can you live without debit?' they'd tell you, 'Are you crazy?'"

Mondex, De Laurentiis believes, will experience a similar learning curve once it's launched nationally.

Back at Kernels, Dan Brown has no worries about the system and looks forward to the day when he can routinely ask his customers, "Will that be cash or Mondex?" Because Mondex is till in its trial mode in Guelph, a full schedule of fees for cardholders and merchants has yet to be established. Even so, Brown remains upbeat that once they are in place, they will be in line with the costs associated with credit and debit cards. "I'd have no problem with that", he says. And as far as the controversy around security and privacy issues, Brown believes Mondex is being sincere when it assures him that the system is secure and the banks are not collecting any transaction data for marketing purposes. "I really believe in it [Mondex] so much", he says. "I mean, it would take something catastrophic to make me drop it."


How does Mondex work
and how much will it cost to use it?

Mondex e-cash operates on the basis of a microcomputer chip embedded within a plastic card. The chip stores electronic cash value, deducts amounts spent, and can be reloaded with more e-cash at Mondex-compatible loading devices (for example, an ATM or specialized telephone such as the Nortel Vista 360).

The Mondex system allows for the transfer of electronic cash directly from one chip to another with no central processing or authorization process, making transactions virtually instantaneous. This chip-to-chip system makes a whole range of payment applications possible, such as person-to-person or over the telephone. Mondex can also be used for feeding parking meters and vending machines (assuming those machines have been modified to accept the smart card).

Tey two key questions remain: when will the Mondex system be readily accessible on a global (or even national) basis? And what will be the costs borne by both consumers and merchants for using the Mondex card?

Mondex Canada president and CEO Joanne De Laurentiis says a national rollout of Mondex is still years down the road, although she won't speculate on how many. "Everything is still in the testing stage", she says, noting that Sherbrooke, Que., will be the next city to begin a community-wide implementation of Mondex.

De Laurentiis also notes that it's premature to speculate on what kind of service charges the banks will apply to merchants and consumers for processing Mondex transactions.

For an idea of what we might be paying if and when the Mondex card does receive the green light, consider Hong Kong.

According to Mondex International, Hong Kong became "the first territory in the world" to embrace "a full-scale Mondex electronic cash rollout" last November. By the end of the year, HongKong-Bank and Hang Seng Bank had registered more than 100,000 cardholders, who were required to pay the banks an annual charge of US$13 to use the card. As well, more than 6,000 Hong Kong merchants currently accept Mondex. They pay a merchant fee of 0.5% on all Mondex transactions.


Will that be cash or VISA Cash?

Mondex isn't the only smart card being test-marketed in Canada these days. MasterCard's chief rival, VISA, is also testing a smart card of its own in Barrie, Ont. (population: 113,000).

Rick Pyves, senior VP of marketing for Toronto-based Visa Canada Association, says the VISA cash trial in Barrie is one of 55 tests being conducted in 17 countries.

In Barrie, about 500 merchants now accept VISA Cash and there are approximately 21,000 cardholders. As of April, more than $300,000 worth of e-cash had been downloaded onto VISA Cash cards.

Pyves says VISA Cash is being targeted at "the $75 billion a year spent in Canada on transactions that are $10 or less". However, like Mondex, Pyves says he doesn't know when VISA Cash will be as commonplace as VISA credit cards. "We're talking more than 5 years down the road, for sure." Nor does he know what fees will be applied to consumers and merchants using VISA Cash.

Still, Pyves remains optimistic the VISA smart card will one day find mass consumer acceptance. Canadians, he says, "love" to pay by plastic, noting that credit and debit cards represent 30% of total spending (a figure that has grown by about 5% in the past 18 months alone). VISA Cash, says Pyves, would be ideal for capturing those billions of dollars worth of small transactions that credit and debit cards were never designed to handle.

Copyright © 1998 by The Financial Post Magazine. All Rights Reserved. Reprinted with permission.