It was a well-laid ambush. Stealthily, without the competition getting a whiff of what was afoot, Visa ICC has prepared an electronic wallet which, unlike that of Mondex, has a good chance of succeeding in Israel. Yesterday morning, Visa ICC announced the start of a trial run in Givatayim, to test the use of the new credit card, whose secret code number, instead of being imprinted on a magnetic strip, is embedded in an electronic chip on the card.
This should not come a a surprise. Visa ICC announced, several months ago, that it intended converting all its credit cards from magnetic strip to electronic chip, making them smart cards in every sense of the word. Isracard announced a similar intention, but its technology is still at the tender stage. The reverse side of a Visa ICC card shows the emblem of Visa Cash, Visa International’s e-wallet.
The big surprise is that the chip carrying the Visa ICC card code also serves as an e-wallet. And these are only the first two applications planned for Visa’s smart card.
Two parallel projects got underway in Israel in 1998. One was the issue of the Mondex e-wallet, which commenced as a localised experiment in Rehovot and Ness-Ziona a few months ago. The other was Visa ICC’s announcement of its intention to switch to a chip embedded credit card, and the start of the trial run this week in Givatayim. A third project, announced but not yet begun, is a joint Bezeq-Bank Leumi e-wallet, for which the Visa Cash technology was selected, on the basis of a tender. Bank Leumi intended to use the Visa ICC cards platform, in which it owns a stake. Mondex Israel is owned by Discount Investments and fuel company Paz, and is the holder of the rights in the Mondex Israel e-wallet. The principal shareholder of Mondex International is credit card company MasterCard, Visa International’s major competitor.
According to Mondex Israel general manager Itzik Levy, 6,000 e-wallets have been issued so far, in Rehovot and Ness Ziona, and some three hundred businesses have equipped themselves with the relevant terminals. Two hundred of them are active. Levy refuses to give details of the e-wallet’s monthly and daily turnover, or the number of transactions concluded through it. The smart cards market talks of less than one transaction per month rung up by any business that purchased a Mondex terminal. Levy says the trial run proved successful.
A senior Discount Investments source would do no more than confirm that e-wallet use in Rehovot and Ness Ziona is lower than expected. But Mondex is not alone. Internationally, most attempts to launch e-wallets have proved a technological success, but a commercial flop.
Mondex Kept Low Profile
What is happening to the vision of e-money replacing coins and bills in people’s wallets? Certain conditions must evidently prevail if that vision is to take concrete form. It would, after all, amount to a cultural change comparable to the credit cards revolution. When speaking, last year, of penetrating Mondex into Israel, Itzik Levy
outlined a marketing plan designed to educate the public, to show that e-money is there even if it cannot be seen, and is more convenient and safer to use. Mondex Israel, however, balked at the major gamble of trying to penetrate its e-wallet nationally.
Anyone seeking to make a cultural change must undertake a massive, highly creative marketing and advertising campaign, using all available means. In this sense, an e-wallet is not in the same category as a chain of restaurants. Acceptance of e-cash is more difficult to achieve, and such a campaign does not address the same target public as mass marketing campaigns. The professionals should have realised the localised penetration is almost impossible. It didn’t work in Manhattan, or in other cities world-wide, or, evidently, in Rehovot.
Localised e-card penetration may work in a closed environment such as universities or small population centres, where the e-wallet is combined with a resident's card having additional functions. In Israel, the biggest success so far in the use of e-wallets has been in the kibbutzim. This success belonged to bodies other than Mondex.
Visa ICC has certainly upset everybody’s careful calculations in this matter. Israel may be setting a world precedent here, as it did when it produced a combined credit and ATM card. (A credit card also incorporating an e-wallet will be given a trial run in 1999 in the Scarborough suburb of Toronto, Canada). Visa ICC’s main advantage over Mondex is that it will not need to persuade customers to purchase the e-wallet. As soon as their magnetic strip credit card is replaced by a chip embedded card, they will be in possession of an e-wallet. All that remains is to create the proper usage infrastructure, as regards clearance and transaction processing, as regards equipping businesses, and as regards loading money onto the card.
The Givatayim trial run sets out with eighteen businesses fitted out with the necessary equipment and another thirty three due to be fitted out this week. Several dozen e-wallet-friendly businesses will be added each week. Yesterday, Visa ICC started notifying customers in Givatayim of the new smart card awaiting them, free of charge, at the bank, instead of their old card. They will not be obliged to change cards. But why not use a more secure card? They may, incidentally, discover that they are carrying an e-wallet that they cannot yet use. The new card is already held by Visa ICC employees at the head office in Givatayim.
Visa ICC itself is meanwhile footing the bill for equipping businesses to deal with its e-wallet, at a cost of $200-300 each. Mostly, all that needs to be done is to add a small terminal to existing equipment, connected by cable to the cash register, which has a card slot, keys for entering the secret code, and a small display screen. The keys have a surround making it difficult to see what number is being entered. The customer inserts his card, keys in his code and the person at the cash register can then conclude the transaction. The terminal also has a magnetic strip slot for cards without a chip. The magnetic strip on smart cards will no longer serve for confirming transactions, but will be used mainly for withdrawing regular cash from ATMs.
The equipment serving for the trial run is manufactured by Lipman of Israel and Veriphone of the US, marketed by Caspit. The chip is manufactured by Motorola and the cards by Schlumberger of France, represented in Israel by Syscard. As in France and Britain, the secret code is not encrypted but is embedded in a chip in an area inaccessible to would-be readers. This is sufficient for a smart card for debiting purposes, but not secure enough for an e-wallet carrying cash money. And that is one of the problems of the Visa ICC card.
The Givatayim test is due to last several months and will be extended to the whole of Israel. Visa ICC have still not decided whether to proceed to a massive countrywide penetration of cards or whether to replace cards routinely, as the old ones expire two years after issue. Nor have they decided whether to finance the installation of their equipment in businesses in all parts of Israel. Visa ICC are aware that one of the reasons for the limited success encountered by Mondex in Rehovot and Ness Ziona was that traders were charged for the equipment. Nation-wide supply of equipment involves an expense of millions of dollars.
E-wallet penetration is expected to take place in the third quarter of 1999. The timetable depends on two factors: the rate of smart card penetration on a national level, and how fast Visa ATMs can be converted for e-wallet loading. In terms of marketing, this method has tremendous advantages:
- An infrastructure of 1.3 million customers who, within two years at most, will have Visa-Cash electronic wallets;
- Distribution and operating costs are fairly minimal, compared to those of a new card like that of Mondex.
The most massive expense will be on marketing, where the success or failure of the project will be measured. The Visa ICC e-wallet may be the first in the world to succeed nation-wide.
For Visa ICC, an e-wallet is not enough. On the same platform and the same chip, they envisage running closed environment customer clubs, like "Buy and Bonus" or "Super Card" and many others. When making a purchase, the customer will not need to present both a credit card and a club card. All the information will be on the one chip. The cash register will record the information, issue the appropriate number of points and possibly also compute the discount due to the customer after accumulating a certain number of points. The same chip can contain other kinds of information, medical, for example.
Yet not all e-wallet problems have been solved. "The Economist" of Britain, in a recent article on the failure of the e-wallet, lists a number of ethical problems. Ownership, for example. The card and its chip belong to the bank. To whom does the information contained in the chip belong? Can the bank use that information for its own purposes, such as deciding whether or not to advance the holder a loan on the basis of medical information? The information, after all, has to be kept somewhere for feeding into a new card in case the old one is lost or stolen. And where, if not at the bank?
And what about Mondex Israel? The fact that MasterCard is the principal shareholder in Mondex International may point to a possible team-up by Isracard (the Israeli version of MasterCard) and Mondex so as to compete with Visa ICC and Visa Cash. And perhaps the technical success of the Mondex-Visa Cash joint effort in the Manhattan test may means that the two cards and the two credit giants will also collaborate in Israel. The Restraint of Trade Commissioner would probably not like the idea.
There exists another major e-wallet known as Proton World, represented in Israel by Comsec, in which both Visa International and American Express now have holdings, and which is currently adapted, in practise, to Visa Cash. Will this be the technology of American Express credit cards in Israel, and possibly also of Visa Alpha? Because once Visa ICC sets its course, all the competing credit cards will head in the same direction.
Published by Israel's Business Arena December 15, 1998