The Hamilton Spectator
Wednesday, October 1, 1997
pages A1,A4

Canada poised on brink of the cashless society

Guelph test proves consumers like convenience of electronic cash

by Barbara Brown, bbrown@ham.southam.ca

Don Gregg, shown here at the Mondex office in Guelph, will now set up the system in Australia.

A customer uses her Mondex card at the Capistrano coffee shop in Guelph.

Fare boxes on Guelph's buses have been converted to accept Mondex cards.
Photos: Cathie Coward, The Spectator

There's no mistaking the allure of cold, hard cash.

Step up to the wall, press some buttons, and wait for the familiar singsong electronic hum. Now smile for the camera and watch as the machine spits out a tiny pile of crisp, new bills.

You scoop them up and tuck the notes neatly into your wallet, replenished once again.

When it comes to these kinds of electronic banking transactions, we stand tall on the world's stage. Canadians are the second-largest per capita users of plastic cards in the world, including more than 30 million credit cards in circulation. Interac reported last year that Canadians racked up nearly as many debit-card transactions as Americans. And that's in absolute terms.

And now a multinational corporation based in London, England, is betting a huge stake that we Canucks are ready to embrace the cashless society.

Mondex International Ltd. launched the first North American trial of its electronic cash system eight months ago in Guelph. The system involves a lump sum of money transferred from your bank account to an electronic card, which is then used like cash for everyday expenses such as a cup of coffee or a bus ride. Debit cards, by contrast, withdraw funds directly from a bank account at point of purchase to cover a specific expense.

Royal Bank and Canadian Imperial Bank of Commerce, the first two of 10 major Canadian banks to jump aboard the Mondex express, joined in a partnership with Bell Canada to test the viability of its electronic-payment system and smart-card technology.

Since its debut, the number of Mondex cardholders in Guelph has grown to 7,500 with about $1 million of electronic value issued. Mondex cards are now accepted by 560 retailers and restaurants -- 90 per cent of local merchants.

Lewis Abbott, 62, a retired University of Guelph professor, was issued his Mondex card last spring and likes the convenience of loading his card with electronic cash and always having the exact amount for any purchase.

"I tend to use it for smaller transactions, like if I go to the supermarket and buy $10 worth of goods, or if I go to a merchant that sells potpourri, I might run up $12. Usually, it's under $20.

"To me, it's just like cash but without the bother of carrying around a lot of change", said Abbott.

Mondex Canada gained critical mass recently with the announcement that the Bank of Montreal, Canada Trust, and Toronto Dominion Bank, sponsors of a competing prepaid-debit card pilot in Kingston, were switching from Exact to Mondex.

In addition to Mondex and Exact, a third electronic-money option, Visa Cash, will be rolled out today in Barrie by the Bank of Nova Scotia.

"In Canada, Mondex has succeeded in getting all the major banks involved. Together they claim about 90 to 95 per cent of all banking transactions in the country", said Christie Christelis, editor of Canadian Card News, a monthly newsletter for the banking sector.

"By whatever marker you want to use, they have brought just about every bank that's important into the Mondex fold. So, that's a very big distinction between Mondex here and Mondex anywhere else on the planet", said Christelis.

Mastercard Ownership

Mondex International is an independent global payments company owned 51 per cent by Mastercard International and 49 per cent by 27 companies in North America, Europe, southeast Asia, Australia, and New Zealand.

"The Canadian franchise sold for more than $20 million. That's in the public domain if someone goes looking for it", said Don Gregg, chief executive officer of Mondex Australia.

Until five months ago, Gregg was an executive at CIBC's Toronto headquarters. He was orchestrating the bank's participation in the Guelph pilot project at the same time Mastercard was acquiring a majority share of Mondex International.

He said Mondex was thrilled to have Mastercard, with its 23,000 affiliated financial institutions around the world, take such a significant interest in Mondex.

"Previously, Mastercard had its own product called Mastercash, but it recognized that Mondex's was better and said, 'Geez, let's buy into that', and so they ditched their product."

The first Mondex pilot was in Swindon, England, in 1995 and involved just three British banks. Later trials sprang up at two Hong Kong shopping malls, at Exeter and York universities in Britain, the city-wide pilot in Guelph, and smaller site-specific trials in San Francisco and the United Kingdom.

E-cash is intended for now to be used for small purchases, such as buying a cup of coffee, paying for parking, taking the subway, or going to the movies.

"For most customers, the limit is set at $500 right now, which is enough for most people's needs. Not very many people carry around more than $500 in cash", said Gregg.

He expects consumers will continue using their credit cards for big-ticket items, such as furniture, and debit cards for intermediate purchases, such as an order of groceries or new clothes.

Software designers and high-tech companies around the globe are in a race to develop Mondex products and new applications for smart card technology in time for the global rollout of Mondex's e-cash system, expected between mid-1998 and 1999.

At a recent Mondex International trade show in Guelph, technology companies were demonstrating point-of-sale terminals for retailers, vending machines, telephone software, security devices, and a smart-card reader that hooks up to a personal computer for shopping on the Internet.

Electronic Gaming Machines

"Electronic gaming machines are going to be big -- really big -- because casinos are popping up all over the place, especially in countries that are coming on (acquiring Mondex franchises) in South America, where gaming is huge", said Campbell Richardson of ITC Systems in Norcross, Ga.

But not everyone is going gently into a brave, new Mondex World.

David Jones, assistant professor of computer science at McMaster University's theme school on Science, Technology and Public Policy, warns consumers shouldn't blindly accept the convenience of a Mondex card or any other electronic-payment system without understanding the potential impact on their privacy.

"People value their ability to make some of their purchases using cash, with absolutely no record, electronic log, or audit trail of those transactions, as a way to safeguard their privacy."

Jones is also founder of Electronic Frontier Canada, a group concerned about privacy and freedom of speech on the Internet. "To be 100 per cent accurate, I'd have to say that a Mondex customer's transactions can be traced. The capability is there to create a virtually complete audit trail.

"The thing that concerns me most is the lack of openness about how the information is being collected and how it will be used. I think it's dangerous to mislead customers into thinking their transactions are private, when in fact, they're not."

Guelph Councillor Karen Farbridge is concerned as a citizen that no privacy laws exist outside of Quebec to protect consumers from having information about them collected in commercial databases and used for marketing without their consent.

"It's not just Mondex, it's the technology as a whole. Mondex is a bit of a trigger right now because it's yet another application and it's starting to get into even smaller details of our lives, as far as tracking is concerned."

Mondex representatives bristle at these criticisms.

They're quick to point out that unlike all other credit card, debit card, and e-cash products, Mondex transactions are not centrally cleared or predicated on a database reconciliation of card transactions.

Gregg stresses Mondex doesn't currently have the capacity to log every transaction, but acknowledges an incomplete audit trail of merchant and consumer transactions is available to the banks.

"If there was sampling that was going to be done, it would be done solely for risk-management purposes to detect fraud", he said.

"Mondex is designed to be a very inexpensive payment mechanism. It's designed to be cost-effective for consumers and merchants and part of that cost-effectiveness is not dealing with all these transactions."

Every transaction in the Mondex system takes place on a chip-to-chip basis. That means banks issuing Mondex cards keep on site a rack of their own internal smart cards, which is called a "chip farm".

So, if a number of customers call in to deposit or withdraw at the same time, the bank has a chip available to talk to each one of the customer's chips.

A Mondex customer's smart card records the last 10 transactions, but it's a scrolling log. That means with the next purchase, the 10th oldest transaction drops off the list.

In the early days of the Swindon trial, Mondex advertised its product as being as "anonymous as cash". It was forced to withdraw the statement after a complaint to the Bromley Trading Standards Board by Privacy International.

Audit Trail

Trading Standards officer Robert Gilham found there was an audit trail of the last 300 transactions available to the Mondex-member bank through the point-of-sale terminals used by merchants.

"This is the audit trail and it ultimately could be sold to business users for third-party marketing. I am assured this does not occur at present", Gilham said in June 1996.

Farbridge adds: "But that doesn't mean they don't have the technology to do it. Who's monitoring that to make sure the switchover doesn't happen and nobody knows about it?"

Linda Routledge of the Canadian Bankers Association said its 55 member banks have adopted a voluntary privacy code, which was just revised last year.

It states banks must disclose to customers when they intend to use or share personal information about clients for direct marketing purposes and it "gives the customer the life-long right to opt out of any of those uses."

Critics are also questioning the resistance of the Mondex microchip to tampering and its ability to deter money laundering or attacks on the economy by cybercash counterfeiters.

Britain's National Crime Intelligence Service warned earlier this year that any electronic payment system not fortified by state-of-the-technology security and cryptography could potentially trigger an international financial collapse.

"What we're flagging is the potential for a serious threat to the economy if security isn't taken seriously. If you have people issuing electronic money who aren't taking it seriously, then it is a danger to us all", said service spokesperson Ashwin Kumar.

"We were very careful to point out that we have actually worked with the people who produced Mondex so as to ensure that there are security features built into it."

Ross Anderson of the University of Cambridge Computer Laboratory is one of the world's foremost authorities on cryptography and the security of banking systems.

Anderson argues that no microchip is tamper-proof and says all electronic money systems are vulnerable to fraud without a reliable audit trail as a second line of defence.

The process by which a detailed description of a device, such as a smart card, is obtained in order to build a fully functioning replica is called reverse engineering.

Anderson said it takes a sophisticated chip hacker and some very high-tech, expensive equipment to make a pirate smart card which can then be loaded with counterfeit value.

But unconfirmed reports are already circulating on the Internet that the prototype chip used in the Swindon trial has already been broken.

"We have learned so many new chip hacking tricks over the last year, and so many bright fresh people have started looking at the problem that all bets are now off", said Anderson.

"The field should stabilize in a few years, by which time we will understand what can, and what can't, be achieved using tamper-resistance mechanisms", he added. "Until then, they seem a pretty poor foundation for a payment system."

Catherine Johnston, president of Advanced Card Technology Association of Canada, said doomsday predictions of electronic-cash fraud have to be taken in context.

"If you look at cash today, there's counterfeiting. If you look at credit cards, there's rampant counterfeiting. Credit card fraud last year worldwide topped $5 billion and the majority of that was counterfeiting."

If a legitimate Mondex card is lost or destroyed, the bank is the beneficiary of whatever value remained on the card.

Jones said Mondex value issued but never redeemed could end up making windfall profits for the banks if its electronic purse gains universal acceptance and involves billions of dollars worldwide.

No one is predicting the imminent demise of hard cash.

In fact, Christelis questions whether the masses will embrace the convenience of cybercash if it means yet another service charge and higher bank fees.

"The banks have not yet found a way to make money out of it, which is very important", he adds with a laugh. "The banks have got to get a return on their investment and they're either going to get that from the consumer or from the merchant."

No Transaction Fee

At the moment, consumers taking part in Mondex pilots pay no more to download cybercash onto their cards than they do to make a withdrawal at the bank. And, unlike debit cards, there's no transaction fee each time they make a purchase.

"In this climate, it's very unpopular for banks to try to charge anything because they're already regarded as gouging the public. One day maybe, they will charge the consumer when it becomes an indispensable part of the consumer's behaviour, but right now they can't."

Christelis said merchants, who already pay fees for the privilege of accepting major credit cards, will also resist further bank charges unless it can be shown that by introducing a stored-value card they can boost business and reduce the cost of handling and counting money.

Another potential revenue stream is the interest on the originator, which is the pool of currency held by the banks after money is withdrawn from an individual's bank account and the electronic value is downloaded onto the person's smart card. The money stays in the originator until it is redeemed at the bank by the vendor.

The pool of Canadian currency, which is small at the moment, is managed by the consortium of banks that owns the Canadian Mondex franchise.

But Gregg notes the originator is also "on the hook" for any counterfeit cybercash that does make its way into the system.

"Is it potentially a revenue stream? Yes. But, as I've said, the cost of running the risk management system far exceeds the anticipated value of the float for a number of years."

Mondex Primer

So, what exactly is a Mondex smart card?

It looks just like a standard plastic credit card but with one significant difference. Instead of a magnetic stripe on the back, it has embedded a small, gold computer chip with the ability to store information and perform calculations.

Customers can download money from their bank accounts onto their smart cards by inserting the card into an ATM. That electronic cash can then be spent at participating retailers and restaurants, or on public telephones and city buses.

Mondex's payment system is designed to operate as much like physical cash as possible.

For example, the value stored on a card can be transferred offline from one individual to another and isn't restricted to merchant or bank transactions.

But the real convenience of a Mondex smart card comes from its marriage to advanced telephone technology, such as Northern Telecom's Vista 360.

Bell Canada issued about 2,500 Mondex-compatible telephones for the Guelph pilot project.

The smart card is inserted into a telephone -- at home, the office, or even a pay phone -- enabling its integrated circuit to automatically dial the bank.

Callers then enter their personal identification number to unlock the card and gain access to their bank account.

The menu that pops up on the telephone screen in future will include a range of services, from direct banking to electronic shopping options, or a personal directory of friends and work-related numbers.

Mondex signed an agreement recently with Cellnet, the mobile phone network in the United Kingdom, to introduce a Mondex-compatible cellular phone.

It will allow customers to deposit, withdraw, or transfer e-cash to another phone by simply making a call.

In effect, putting a cashpoint machine in the customer's pocket.

Copyright © 1997 by The Hamilton Spectator. All Rights Reserved. Reprinted with permission.