Electronic commerce and the future of money: technology and you.

As more methods of electronic commerce are developed, will we see the demise of cold hard cash?

ARE YOU READY TO LIVE IN A WORLD WHERE the sense of security proffered by handling greenbacks, francs and yen is replaced by blind faith in the accurate transfer of intangible electrons to and from your account? Actually, if you have a credit, debit or ATM card, you're headed in that direction. Combine any of those cards with direct deposit of funds into your bank account, and electronic commerce is already a big part of your life.

Electronic commerce, a catch-all phrase for the various cashless ways we make transactions, is becoming more prevalent. Businesses have been using methods such as electronic data interchange (EDI) and electronic funds transfer (EFT) to eliminate the costly two-way transfer of physical contracts and payments for many years. And in many cases the actual transfer of cash from one hand to another is more symbolic than meaningful, since the cash usually ends up in a bank account somewhere down the line.

Handling cash costs money for both businesses and financial institutions, and many are eager to get rid of the expense. "Three to six percent of every transaction is absorbed by the costs associated with handling cash," affirms Edgar Brown, senior vice president of the customer direct access division for First Union Bank in Charlotte, North Carolina.

Consumers will soon have a myriad of electronic payment systems available to them. Smart cards, electronic checks, CyberCash, Visa Cash and a host of other products are either already available or will be introduced shortly. Thomas P. Vartanian, a Washington, D.C.-based attorney who specializes in electronic commerce issues, groups the competing formats for electronic commerce into four categories:

* Credit cards: Traditional Visa or MasterCard, ATM and debit/check cards.

* Electronic checks: Automated clearing houses such as Checkfree that remit payments on a scheduled basis. Services will send or receive payments with the authorization of the business or consumer.

* Notational electronic money (CyberCash): These payment systems don't actually transfer money to the consumer, but set up an account with a financial institution and merchants to transfer value from bank to merchant.

* Token-based electronic money (Mondex, Visa Cash, Digicash): In this case, the monetary value is actually token-or software-based and is moved onto a PC or smart card. This is the equivalent of carrying actual dollars in your pocket.

Financial institutions are also employing other cost-saving measures. Electronic banking is another way to eliminate many of the fees associated with handling currency. For consumers these new payment systems will mean greater convenience and the ability to better track expenditures.

But before choosing any of these forms of electronic commerce, get a clear understanding of what the product is, and what it does. Be sure to get disclosures from the company issuing your electronic cash, including who is responsible for the value of the product in case of loss or theft. Find out your rights as a consumer with respect to privacy and the information that is being collected about how and where you are using this form of payment.

Bob and Helene Durham of Valley Cottage, New York, have been using electronic banking since 1989. Although commonly known as PC banking, electronic banking is available to users of both Macintosh and IBM-compatible computer platforms. The Durhams began PC banking after Bob, a 45-year-old graphic artist, inquired about the service at a Citibank branch.

With the software and the modem, both courtesy of Citibank, the Durhams were soon able to start banking at home. "Because of our schedules we don't have much available time to go to the bank each week or mail checks," explains Bob. The software works in conjunction with Direct Access, the service that makes the connection to the couple's joint Citibank account. The service is free, and incidental fees, such as electricity and the cost of the local telephone connection, are offset by the Durhams' greatly reduced need for checks and stamps.

Used in conjunction with direct deposit of their weekly paychecks, PC banking has "completely changed the way we manage our finances," says Helene, a 44-year-old clinical nurse specialist. It gives them a bird's eye view of all of their Citibank accounts, including credit cards, savings, checking and even their investment portfolio. A little intimidated by the technology at first, Helene had no problems with the program after her husband showed her the ropes. "Once I got into it, I sort of monopolized the household money management."

The Durhams pay most of their bills using the bill payment option included in the service. Recurring bills can be automatically paid each month and payments can be remitted when they are on vacation. Bob likes the program's ability to give him a running view of all expenditures for the last three months any time he's ready. "The only thing I can't do at home," he quips, "is get cash from the computer."

MAKING CARDS EVEN SMARTER

If financial institutions have their way, the Durhams may not have to wait much longer to get cash from the computer--electronic cash of course, but the result is the same. Smart card technology has been around for several years and has seen widespread testing in Europe and Asia. It consists of a credit card-like plastic card with an embedded microprocessor chip. The chip can store monetary value as well as other information, such as a record of transactions and even an investment portfolio.

One device known as the Mondex smart card system (of which MasterCard recently bought a 51% controlling interest) features an electronic wallet used to transfer value onto the smart card. Visa debuted its own smart card system in the U.S. at the 1996 Summer Olympics. About 3,000-5,000 smart card terminals were installed in stores throughout the Atlanta area. The cards, which store values of $20, $50 or $100, were issued to consumers by First Union Bank, Nations-Bank and Wachovia Bank.

According to First Union's Edgar Brown, who is responsible for all debit card, remote banking and smart card products, 80% of the people who used the smart card liked it. Their biggest issue was the lack of places chat were equipped with terminals to accept the smart card. First Union will continue its testing of the smart card system in Atlanta throughout 1997, making the cards reloadable at ATM machines and equipping more merchants with terminals.

Although the terminal costs merchants about $600 each, the money would be recouped over the long term by both the bank and the merchant. "It costs about $1.07 per transaction with a bank teller, 27 cents per credit card transaction and 1 cent per smart card or Internet transaction," states Vartanian. It's no secret why the banking industry is trying to move to a cheaper, faster way of providing their services.

Banks see the smart card as more than a way to streamline payments and facilitate greater consumer access to their accounts. Smart cards would allow banks to consolidate more financial services for the customer, thus creating more revenue. Says Brown: "We see our product as becoming a `relationship card' that consolidates cash, credit and debit transactions in one place for the convenience of the customer."

CASHING IN ON THE INTERNET

Businesses that have rushed to set up shop on the Internet have not yet been able to reap the financial rewards that they'd hoped for. Because of security concerns, many surfers are reluctant to have their credit card numbers floating around in cyberspace. CyberCash (www.cybercash.com) is hoping to provide the sense of security that consumers are now seeking.

The CyberCash system consists of an electronic wallet that can be loaded onto the consumer's PC and used to conduct transactions with merchants that have registered with CyberCash. "The merchants, in turn, use our secure gateway to make a secure connection with their bank to transfer the funds," explains Richard Crone, vice president and general manager of CyberCash in Reston, Virginia. Consumers have the choice of securing electronic payments using electronic "cybercoin," for purchases as low as 25 cents, and electronic checks and credit cards for larger purchases.

The ability to make micropayments for proprietary information (i.e., 25 cents for each page of a magazine read online), graphics and games is expected to drive much of the rise in commercial activity on the Net for consumers and business people. CyberCash, in conjunction with its business partners, has recently introduced a service called Pay Now that allows consumers to pay bills with electronic checks. Kansas City Power and Light has allied with CyberCash to allow its customers to view and pay their bills via the Internet.

CyberCash is just one of the systems that financial institutions and entrepreneurs are developing to take advantage of the boom in usage of the Internet and the expected rise in online shopping. Some have even managed to put a new twist on the institutions many of us have come to know and loathe.

A NEW BREED OF BANK

While the Internet has spawned many new forms of business, the most significant may be the world's first Internet-based bank--Security First Network Bank (www.sfnb.com). According to bank president, Eric Hartz, SFNB is insured by the FDIC for up to $100,000 per account, and has grown to 10,000 accounts since it opened its "doors" in 1995.

"Our goal is to provide a full financial picture for our customers including banking services, credit cards and lending products," explains Hartz.

Aside from its virtual location, SFNB is basically no different from any other bank. (Actually the bank does have one physical branch--its headquarters in Atlanta.) But being accessible via the Internet is a major advantage over traditional bricks and mortar banks. "Our customers can access and manipulate their accounts any time and any place via whatever device they use to access the Internet," explains Hartz, whose bank boasts customers on every continent. "There's no software to download to use our service."

Consumers who use solutions such as PC banking or financial management products like Microsoft Money or Quicken are usually tied to the computer on which they've installed the program. Because there is no software, users in different locations, say a husband and wife, can share accounts easily. With virtually no walk-up branches, SFNB has eliminated much of the overhead involved in the banking industry.

"One of the reasons we can offer the highest CD rates in the country," explains Hartz, "is because we don't have a number of physical locations to support."

HURDLES TO WIDESPREAD IMPLEMENTATION

Security has been a major concern for consumers, merchants and financial institutions. The nagging issue of how safely these valuable electrons can be transported has slowed the widespread implementation of much of this technology. One of the main hindrances has been the slow adoption of secure electronic transaction (SET) standards. A committee composed of several international financial and computer companies, including Visa and MasterCard, finally agreed to the standards in February. They are now being tested in Asia.

As government regulation lags behind the expanding world of electronic commerce, many banks, businesses and potential customers are wary of becoming victims of fraud. Another issue important to widespread electronic commerce, especially for Internet-based commerce, is the need to verify the parties on either end of the electronic transaction. Increasing use of digital certificates that verify the identity of the sender and recipient has made these transactions possible. These certificates are similar to physical signatures that serve as proof of the document's authenticity. But in this case, the signatures are digital, and the information is largely financial. Most purveyors of electronic commerce, including CyberCash and SFNB, use digital certificates.

Digital certificates also insure that the sensitive information contained in the transmission has not been tampered with en route to its destination. The use of digital certificates along with sophisticated encryption technology, which makes the information unintelligible until received by the proper entity, have allowed companies to provide secure electronic transactions in advance of SET.

CONSUMER ACCEPTANCE

The most significant obstacle to moving from a paper-based financial system to an electronic-based one is consumers' willingness to change their habits regarding money. Availability of smart cards and the like doesn't preclude consumer acceptance or use, says Vartanian. "Consumers have an emotional relationship with money, as well as patterns to how they save, exchange and spend it that will be difficult to change."

There's a ready market for electronic commerce for those, like the Durhams who love the convenience and ease of dealing with hot, invisible electrons, rather than cold, hard cash. And more companies are tossing their hats into the electronic commerce arena daily.

Someday perhaps sooner rather than later--"the check is in the e-mail" will become a part of our lexicon, and "show me the money" just won't ring as true.

RESOURCES FOR ELECTRONIC COMMERCE

* 21st Century Banking Alert Page www.ffhsj.com/bancmail/bancpage.html

* Electronic Commerce Database www.bcpl.lib.md.us/~banach/TECR

* Smart cards, credit cards and payment systems www.dice.ucl.ac.be/~dhem/card.html

* Financial Services Technology Consortium www.fstc.org

* Online Banking and Financial Directory www.orcc.com/banking.htm

* Banking on the WWW www.wiso.gwdg.de/ifbg/banking.html

* Net Banker www.netbanker.com

* The EC/EDI and CALS Resource Locator www.fedworld.gov/edicals/locator.html

* Commerce Net www.commerce.net

* Electronic Commerce World Institute www.ecworld.org