American Banker article on DigiCash bankruptcy

[Robert Hettinga <rah@shipwright.com>]

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Date: Tue, 10 Nov 1998 12:23:36 +0100 (MET)
From: Somebody
To: rah@shipwright.com
Subject: American Banker article on DigiCash bankruptcy

From: Somebody Else
To: Somebody
Date: Tue, 10 Nov 1998 05:41:36 -0500

<Somebody>,

This is the American Banker article on the subject:

Digital Frontiers
Tuesday, November 10, 1998

Electronic Commerce: Bankrupt Digicash to Seek Financing, New Allies
By Jeffrey Kutler & Carol Power
Digicash Inc., which invented a virtual cash concept for the Internet,
now must reinvent itself.

With the announcement last week that it filed for Chapter 11 bankruptcy
protection, Digicash has embarked on yet another phase of a corporate
saga that has won it acclaim and admiration in both the banking and
Internet communities -- but precious little business.

Shielded for the moment from creditor pressures, the Palo Alto, Calif.,
company will attempt to find the financing and forge the strategic
relationships it needs to widen the appeal of its eCash product, said
interim chief executive officer Scott Loftesness.

The company also has a significant "intellectual property portfolio," he
said, that could prove useful in other applications requiring privacy
and anonymity, such as electronic voting.

Mr. Loftesness indicated that Digicash has never exploited the full
potential of its patents to generate licensing income, which now might
help turn the operation around.

Bankruptcy is but the latest of many turns for an eight-year-old venture
created by David Chaum, a former University of California professor and
expert on data encryption who was among the first to see a need for a
cash-like payment mechanism on open networks. The design of eCash and
its anonymity principles attracted widespread attention in 1994 and 1995
as banks and other corporations began exploring the Internet's
commercial potential.

Through a series of consulting projects and demonstrations, Digicash
came close to assembling a network of banks to issue and manage the
virtual currency. But the licensee group -- including Deutsche Bank, Den
Norske Bank, Bank Austria, Advance Bank of Australia, and Mark Twain
Bank of St. Louis -- never got beyond pilot stages.

Things were looking up in 1997 when Digicash attracted venture capital
interest from, among others, David Marquardt of August Capital, who was
an early backer of Microsoft Corp.

Digicash also reconstituted its board with Massachusetts Institute of
Technology professor Nicholas Negroponte as chairman, and hired
"professional management" led by CEO Michael Nash, a former American
Express Co. and Visa International executive. Mr. Chaum remained as
chief technology officer.

The headquarters was moved from Mr. Chaum's base in Amsterdam to Silicon
Valley. Many in the banking technology world took positive note of the
fact that in June 1998, former Wells Fargo & Co. president William
Zuendt joined Mr. Negroponte, Mr. Marquardt, Mr. Chaum, Toon den Heijer
of Gilde Investment Funds, and others on the board.

This past August, Mr. Nash was succeeded by Mr. Loftesness, who also has
Visa in his background. The part of the operation that remained in
Amsterdam was closed, and the staff was cut significantly from its peak
of about 50.

Mr. Loftesness said last week that he intends to see the Chapter 11
process through. He described eCash as "important and inevitable" for
the maturity of electronic commerce.

Throughout its struggles to prove it was not too far ahead of its time,
Digicash has been followed closely by analysts and treated seriously by
competitors. Many were impressed by the technology's cash-like anonymity
and an accountability system that prevents any of the virtual coins from
being spent twice, yet without compromising personal privacy.

"There is a great lesson in it," said Richard Crone, vice president of
Cybercash Inc. and general manager of PayNow, its version of an
electronic check. "You must match the payment type to the application
that is being sold."

He called Digicash "a payment type in search of an application, rather
than an application in search of a payment."

So far in Internet consumer payments, particularly in the United States,
credit cards have won the day. "We've done such a good job deploying
credit cards and reassuring consumers that the security is present," Mr.
Crone said, that there is no compelling need for eCash. (Cybercash's
cybercoin product ran up against the same reality, but the Reston, Va.,
company is active in several payment modes, including credit cards.)

Cybercash's inroads in markets outside the United States with lower
credit card penetration -- Germany, Japan, the United Kingdom -- were
due to financial institution partners, Mr. Crone said. "Digicash did not
have the support we did."

David Stewart, vice president of Global Concepts Inc., Norcross, Ga.,
criticized Digicash for not bridging the physical and virtual worlds. He
said as currently configured, eCash compares unfavorably with MasterCard
International's Mondex venture, the Belgium-based Proton system, or
Avant of Finland, which are smart cards with an Internet transmission
component.

Because eCash "needed on-line validation of tokens spent, clearing of
the transactions required authorization like a credit card," Mr. Stewart
said.

Another strike against eCash, he said, was the lack of major financial
institution support in the United States, where there are constituencies
for Mondex, Visa International's Visa Cash, and Proton, which is
part-owned by Visa and American Express Co.

"Digicash needs to come up with an off-line electronic cash scheme and
have the backing of a serious player in the payments world," Mr. Stewart
said.

The one U.S. participant, Mark Twain Bank, was acquired by Mercantile
Bancorp. of St. Louis 20 months ago. Larry Kirschner, Mercantile Bank
senior vice president of foreign exchange, said eCash "was not
profitable from the moment we inherited it.

"We tried to figure out how to make it profitable and for it to appeal
to our corporate and retail customers, to very little success," he said.
The bank ended its three-year experiment in September.

It had 5,000 eCash customers, about 20% of them in Mercantile's
eight-state Midwest territory and the rest on the two coasts. They held
"significantly less" than $100,000 in eCash accounts, Mr. Kirschner
said.

"We didn't see a strategic fit for eCash," he said. "The revenue stream
was not there, the demand was not there, and quite frankly, it wasn't
going to be there."

The banker said eCash suffered because the public "did not have any
insecurity and did use their credit cards on the Internet."

But Mr. Loftesness said Digicash's board and backers have not lost faith
that "eCash is inevitable. The length of time and the amount of
financing to get there remain the key open questions."

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-----------------
Robert A. Hettinga <mailto: rah@philodox.com>
Philodox Financial Technology Evangelism <http://www.philodox.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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-----------------
Robert A. Hettinga <mailto: rah@philodox.com>
Philodox Financial Technology Evangelism <http://www.philodox.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'