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Washington Post: Monday, September 16, 1996

Players With Paperless Money

By Michelle Singletary

Banking via personal computer is expected to increase 600 percent in the
next two years, according to a 1996 technology report by the American
Bankers Association and the Ernst & Young accounting firm. Telephone
banking is predicted to grow 50 percent over the next two years and some
experts estimate that 30 percent of U.S. households will be banking
electronically by 2000.

Little known to most consumers, the Washington area is home to a small
but burgeoning subset of the electronic banking industry. The companies
in this emerging market, many of them clustered in Northern Virginia,
are helping to build the technological infrastructure that is rapidly
changing how, when and where consumers bank.

Companies such as US Order, Online Resources & Communications Corp.,
Transaction Network Services (TNS), Visa Interactive and CyberCash Inc.,
all based in Northern Virginia, are members of a group of start-up
technology companies that are helping facilitate the delivery of
electronic and phone banking services.

"The D.C. area has a nice cross section of aggressive and innovative
home banking players," said Phoebe Simpson, an analyst with New
York-based Jupiter Communications Co., a market research firm for the
on-line industry.

Banking and technology experts agree that these Northern Virginia
companies have become integral partners with banks in building the
infrastructure that will support electronic commerce.

They are selling the software, hardware, processing services,
communication linkups and back-office support systems that enable
financial institutions to interact with their customers outside of bank
branches.

While bank offices are not in danger of disappearing, bankers are
increasingly looking for lower-cost delivery channels. Most are turning
to outside electronic commerce companies to help them set up their own
on-line or phone banking systems.

"What we have now is banking without boundaries. Banks now need to
cooperate and collaborate with a whole new source of channel operators,"
said Richard Crone, vice president and general manager of CyberCash.
"Our charter is to empower customers to do their banking anywhere, any
time or with anything."

One reason many of these companies have set up shop here, said company
executives and banking consultants, is to be near such technology firms
as Washington-based MCI Communications Corp., Dulles-based America
Online Inc. and PSINet Inc., an Internet access company based in
Herndon.

"We are the de facto Silicon Valley for on-line information companies,"
said John J. McDonnell Jr., president and CEO of TNS of Reston. The
company has developed a low-cost system for facilitating high-speed,
point-of-sale transactions, such as those made with credit or debit
cards.

Many company executives said they decided to launch their firms in
Northern Virginia because of its proximity to banking regulators and
lawmakers, who are trying to determine how electronic banking technology
will affect consumers and what laws might be needed to protect
customers.

"This industry is important and will have a lot of regulatory need,"
said David Weisman, director of money and technology strategies for
Forrester Research Inc., a consulting firm in Cambridge, Mass.

But chief among the reasons for the growing number of electronic banking
companies is the Washington area's highly skilled labor force, Weisman
said.

The labor pool in the area is overflowing with engineers and others with
telecommunications and software experience, said Matthew P. Lawlor,
chairman and CEO of Online Resources in McLean.

For the most part, the on-line technology companies in this region don't
compete with one another, experts said. Instead, each has positioned
itself to fill certain niches in the electronic banking industry. In
fact, many of the companies are linked financially or have developed
partnerships.

For example, TNS got its start-up capital of $ 1.5 million from William
N. Melton, CyberCash's co-founder. US Order sold its core on-line
banking operations to Visa Interactive, and 50 of its employees went to
work for the newly formed company. Now the two companies market each
other's services.

"This is a monstrous market and no single organization is going to
dominate," said William Gorog, chief operating officer of US Order.

Gorog said CyberCash's concentration on developing secure payment
systems for electronic commerce on the Internet is good for US Order's
business. CyberCash, based in Herndon, currently uses encryption
technology for secure transmission of credit-card data.

Online Resources has decided to go after small and medium-size banks to
sell its home banking services. Online's services include home banking
via computer, bill-paying software, screen-based telephones and
interactive voice response systems for touch-tone telephones.

"A company like Online Resources allows a small bank like us to get into
this technology at a much more reasonable rate," said Frank Bentz, vice
president of communications for Sandy Spring National Bank, an Ol
ney-based banking institution with assets of $ 920 million.

Visa Interactive of Herndon, which offers some of the same services as
Online Resources, has signed up some of the nation's largest financial
institutions including Banc One Corp. of Ohio, Barnett Banks Inc. of
Jacksonville, Fla., and the Pentagon Federal Credit Union, the
second-largest credit union in the Washington area.

"These companies are the pioneers in this industry," said James Wells,
managing director for electronic commerce at Washington-based Furash &
Co., a financial services consulting firm. "By and large, the technology
and innovation that is facilitating electronic commerce is not coming
out of the banks."

Although experts said the electronic commerce companies in Northern
Virginia are still relatively small, they are creating a significant
base of high-paying technical jobs. Software developers at TNS earn $
50,000 to $ 85,000 annually, according to McDonnell.

"This is not minimum-wage work," McDonnell said. "We have not spawned a
lot of jobs but you have to look at the trickle-down effect. We pay big
salaries so our employees can buy big cars."

In just two years, CyberCash has quadrupled its employment to 160, half
of whom work in the area. TNS has 110 employees, up from 45 just two
years ago. Online Resources, which had 50 employees at the end of last
year, now has 80. In the next several months, the company expects have
100 employees.

"I think that the idea of creating brand-new companies and employing a
hundred-plus people, especially at high-end salaries like what engineers
make, will have a definite impact on the area," said Magdelena Yesil,
one of the founders of CyberCash who recently left the company to start
another technology firm.

"People are beginning to see Virginia as an area similar to Silicon
Valley, an area for launching technology companies. There is a sense of
excitement." Transaction Network Services

Like many entrepreneurs, John J. McDonnell Jr. was working for another
company when he came up with the idea for TNS.

McDonnell had been president and CEO of Digital Radio Network Inc., a
Tysons Corner firm that used radio waves to carry point-of-sale
transactions. McDonnell discovered that a fast-dial service could be
created to carry the signal using the 950 dial-up access offered by
local telephone carriers.

McDonnell said he took this idea to Digital Radio's directors, but they
weren't interested. So, he asked if he could trade in his stake in
Digital Radio -- 4 percent of its stock -- in exchange for the right to
start up a company using the idea for the transaction-oriented system.
He left Digital Radio in 1989.

In less than five years, TNS has become one of the biggest players in
this electronic banking niche. TNS processes about 2.2 billion
point-of-sale transactions a year and has captured about 30 percent of
the market.

The company was profitable after its first year, McDonnell said. For its
most recent quarter, ended June 30, TNS reported net income of $ 1.5
million (12 cents a share), a 36 percent increase from income of $ 1.1
million (10 cents) for the same period a year earlier. The company had a
year-over-year increase of 66 percent in transaction volume from its
point-of-sale division.

On June 3, 1991, the first day of of its operation, TNS carried 43
transactions from two Sizzler steakhouses in Arlington, McDonnell said.
At 3 cents a transaction, the company generated $ 1.29 in revenue that
day. On June 3, 1996, the company handled 5.6 million transactions at an
average cost of 2 cents -- taking in $ 118,000 for the day.

"I am a happy man," McDonnell said.

Online Resources & Communications Corp. Matthew P. Lawlor views Online
Resources as a one-stop shop for banks that want to provide electronic
banking options for their customers.

"My vision is that there will not be a single device that will be the
winner in on-line banking," Lawlor said.

Instead of guessing which new electronic banking technology consumers
will embrace, the chairman and chief executive of Online Resources has
decided to offer a full range of services to banks.

Lawlor sees a future in which consumers will want to link up to their
bank via touch-tone phone, personal computer, a specially designed
screen-based telephone, television set or other devices that have not
yet been designed.

"In essence, the technology is moving so fast, half of what we do is
keeping up with it," Lawlor said.

Lawlor said he has positioned Online Resources to provide small and
medium-size financial institutions with any of the applications and
support systems they need to market interactive bank services.

In a year, privately held Online Resources has gone from a client list
of seven financial institutions to 42 today, including Washington-based
Riggs Bank, First Virginia Banks of Falls Church and Baltimore-based
Harbor Bank.

"In the very beginning, we focused on the big guys but many of these big
banks have their own technology people," he said. "Many of the small and
mid-size banks need our skills."

CyberCash Inc.

CyberCash executives are quite clear on their company's role in
electronic banking: It is a contractor building the "infostructure" that
will allow banks to link up to their customers in cyberspace.

"If you asked a banker 10 years ago what business he was in, he would
say loans, deposits and transactions," said Richard Crone of CyberCash.

"That's like saying Amtrak is in the railroad business, when they are in
the transportation business. Banks today are in the information
business," he said. "The value they have, for example, is informing
someone that their loan has been prequalified."

Crone thinks the personal computer is the bank branch of the future,
through which hundreds of thousands of customers will want to conduct
their banking and bill-paying business.

"Consumers are going to be looking for the electronic connections that
will let them reach out to the banks any time and anywhere," he said.

To help move that process along, CyberCash has developed and will soon
begin to test software that would allow credit card firms, utility
companies and other businesses to securely receive their bills over the
Internet.

CyberCash is banking that consumers will want to review their bills this
way and that with a double-click of a mouse will access an account and
pay their creditors electronically.

"We want to provide the ability to fund value in an electronic wallet,"
Crone said.

Visa Interactive

In 1994, Visa Interactive, a subsidiary of Visa International, entered
the on-line industry by purchasing the electronic banking and
bill-paying operations of US Order.

Now, experts are predicting that Herndon-based Visa Interactive, with
its credit-card ties to thousands of financial institutions, could
catapult ahead of competitors such as Online Resources. The company has
signed up more than 90 financial institutions for its remote banking
services.

Visa's goal, like those of other remote banking firms, is to build a
network of services that preserve financial institutions' identities and
customer relationships, much like its parent does with its credit-card
services.

"I think you will see, two years down the road, that Visa Interactive
will have a rich offering of services and they will be among the major
players in terms of revenue," said Simpson of Jupiter Communications.

US Order

Although Herndon-based US Order sold a core part of its home banking
services to Visa International two years ago, it is still a key player
in the electronic commerce industry.

"We are right in the middle of the electronic banking business," said
John C. Backus, US Order's president and chief operating officer.

Among its services are bank-branded customer service, centers that
handle calls for phone banking, touch-tone telephone voice recognition
hardware and software systems for home banking. It also sells PC-based
remote banking technology and screen-based telephones, which at a retail
cost of $ 299 can dial into a consumer's bank, provide stock quotes,
sports scores, news and weather information or a nationwide directory
assistance service.

"We enable the banks to open up the whole range of electronic commerce,"
said Gorog, US Order's CEO.

Gorog said he's excited that his company and other Northern Virginia
firms are part of an industry redefining consumer banking.

"The opportunity to change the banking business is exhilarating," Gorog
said.

"It's so exciting that we are changing people's banking habits."



Time: September 23, 1996

Cashless, Not Bankless

By Adam Zagorin

After watching everyone from Microsoft to Meca Software gobble up
online-banking customers, banks have become eager to prove that they're
not headed for extinction.

Last week IBM and a group of 15 U.S. and Canadian banking behemoths,
including Bank of America, Banc One and Mellon Bank, unveiled a venture
that aims to provide a full range of financial services to the banks' 60
million customers at the touch of a telephone button or the click of a
mouse.

Called Integrion, the partnership will phase in such activities as bill
paying, electronic lending and stock and bond trading beginning next
year. "If we are dinosaurs," says Robert Gillespie, the chief executive
of Cleveland-based KeyCorp, "then we're putting competitors on notice
that a new breed has evolved with a voracious appetite for expanded
market share."

Perhaps so, but the new predators have some catching up to do. Fewer
than 300 U.S. banks have set up Internet sites. Most analysts give the
holdouts four years to either get wired or get left far behind.
Consumers can already pay bills and check balances through computer
networks like America Online and CompuServe. Microsoft, too, has been
signing up banks to provide electronic financial services. Integrion
plans to battle the software giant by linking consumers to accounts
through the Internet, and with financial software like Intuit's Quicken.
The partners will also set up interactive kiosks that act like bank
branches for home banking away from home. "With this new venture," says
IBM chairman Louis Gerstner, "electronic commerce will take its biggest
step forward to date."

The ambitious project will join a host of so-called E-money experiments
that are popping up around the globe. The goal is to replace cash and
checks with electronic transactions that cost just pennies to process.
Citibank, a leader in this push for a cashless society, is developing
what it calls an Electronic Monetary System that will permit consumers
and companies to make payments electronically anywhere in the world.
Visa, fresh off a test of 300,000 smart cards--plastic embedded with a
cache of electronic cash--at the Atlanta Olympics, will soon launch
similar projects in 14 other countries, including Canada, Australia and
in Hong Kong.

E-money devotees like Valerie Baptiste, a San Francisco secretary, think
cash is passe. Baptiste pays for her morning bagel and decaf with a
smart card designed by Britain's Mondex and being tested in the U.S.
with partners that include Wells Fargo and AT&T. As other customers
fumble with change, Baptiste hands her card to a cashier who takes less
than five seconds to punch it into a machine that deducts $ 2.15 from
the stored-up funds. "This is the beginning of the end of cash,"
Baptiste says. Unless banks charge swiftly into the E-money era, it
could be the end of many of them too.



Associated Press: Tuesday, September 17, 1996

Merchants Like Smart Cards to Keep Tabs on Customers

By PATRICIA LAMIELL

Merchants are attracted to "smart cards" as a way to gather information
about their customers, according to a survey released Monday by a group
promoting the plastic cash cards that are embedded with a computer chip.

Results were released at the opening of the two-day convention of the
group, the Smart Card Forum, which also is trying to to convince the
public that smart cards are protected and confidential.

Customers can use smart cards like debit cards or automatic teller
cards, to pay for anything from gas to groceries. Because the card also
has a computer chip, it can keep track of what consumers buy and when,
and how much they spend.

"A smart card can store data about customers, such as product
preferences, spending history, and important information that can help
provide improved personalized customers service," said Cliff Wilke, vice
president for business development at Mobil Oil Credit Corp.

Polls done by the Harris organization and the forum have shown that
consumers are receptive to using smart cards but concerned about storing
personal data on them. In a 1995 forum study, 70 percent asked what
safeguards exist to prevent unauthorized access to their personal,
financial and medical information.

Merchants surveyed by the Smart Card Forum said the cards made
transactions quicker and cheaper for them. They also said the cards made
it easy to gather information on customers for use in marketing and
promotional programs, and for loyalty programs like frequent flier
miles.

Most merchants surveyed said they believed consumers spend more when
they pay with a credit or debit card than when they pay with cash. The
study found other benefits to merchants such as theft prevention.

The study also indicated that the cards don't have to be used that much
to make them cost-effective for the merchant.

"Grocery stores, convenience stores, movie theaters and gasoline
retailers indicated that a mere 2 to 10 percent - an extremely low
threshold of consumer demand - is required for them to realize the
benefits of smart cards," the group said.

While the survey results released by the forum highlighted selling
points for the cards, recent tests have revealed obstacles to be
overcome to win merchant and consumer acceptance.

Consumers were frustrated when they found some merchants listed in smart
card directories either had not installed equipment for using the cards
or stopped using the equipment because of malfunctions, according to an
independent study of the Visa Cash Card tests at the Olympics in
Atlanta.

But that study, released earlier this month by Brittain Associates Inc.,
also reported that most smart card users said they found the card
attractive and would use it in the future if the number of merchants
accepting it increased dramatically.

The Smart Card Forum interviewed 65 major merchants in 11 categories,
such as grocery, gas, convenience stores, drug stores, restaurants and
theaters.

Established in 1993, the forum has more than 225 corporate and
government members including Chase Manhattan Corp., Citibank, MCI
Communications Inc., MasterCard, Visa, International Business Machines
Corp., Microsoft Corp., Mobil and Delta Air Lines Inc. Federal agency
members include the Postal Service, the Federal Reserve, and the
treasury and defense departments.



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