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Neither Mondex nor competing e-purse cards have taken off, and Mondex International executives now see bigger short-term opportunities in such electronic channels as interactive television, mobile commerce, and lotteries. At the same time, Mondex is using the expertise developed over the past decade, including its development of the Multos chip card operating system, to help member banks of parent company MasterCard International make the transition from magnetic-stripe cards to smart cards. Both facets of the Mondex strategy offer potentially big opportunities.
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Setbacks for Multos come on top of disappointing results for Mondex electronic purse cards. But Mondex has a plan.
Forget the traditional view of Mondex as an electronic purse smart card that consumers use to pay for small ases at shops. Neither Mondex nor competing e-purse cards have taken off, and Mondex International executives now see bigger short-- term opportunities in such electronic channels as interactive television, mobile commerce and lotteries.
At the same time, Mondex is using the expertise developed over the past decade, including its development of the Multos chip card operating system, to help member banks of parent company MasterCard International make the transition from magneticstripe cards to smart cards.
Both facets of the Mondex strategy offer potentially big opportunities. Providing remote services to consumers is a boom industry. If Mondex can show it has a better way to collect money securely from consumers, the world might well beat a path to its London headquarters.
Meanwhile, a growing number of financial institutions, telephone companies, universities, government agencies and others are dabbling in multiapplication smart cards, creating a demand for expertise that Mondex could fill. One of Mondex's leading competitors, Brussels-based Proton World International, has shifted its focus from the Proton electronic purse to its multiapplication smart card platform.
However, Mondex also faces formidable obstacles. The Mondex technology, which replaces monetary value with an electronic equivalent that is as anonymous as a bill or coin, requires more sophisticated security than a technology like Proton that keeps track of each transaction. Doubts remain that central bankers would allow widespread use of Mondex e-cash, as well as about the complexity of Mondex.
Says one executive at a North American bank that has invested in Mondex, "It's totally not viable. The technology is antiquated, the security is overdesigned, the cost is astronomical. There's just no future in it."
Consultant Duncan Brown of London-based Ovum Ltd. is pessimistic, as well. He argues that audited epurse cards like Proton and Visa Cash will become the standard, and that Mondex has missed its Internet opening. "They've been talking about an Internet strategy for three years and basically did nothing," Brown says. Now there are many software-based products, such as beenz and flooz, for making small purchases on the Web. "These things are infinitely easier to implement than Mondex. It's the wrong solution now."
A Strategy For Multos
Nor has the second part of the strategy gotten off to a flying start, observers say. As part of its effort to make Mondex International, or MXI as insiders call it, a provider of more than just Mondex e-cash, Mondex last year rejected proposals to spin of Multos, insiders say.
While Mondex developed and owns the Multos smart card operating system, a consortium known as MAOSCO oversees its development Some MAOSCO executives pushed for separating Multos from Mondex, selling the operating system to a major smart card vendor or raising money from venture capitalists.
That would have provided the big bucks Multos needs to take on its major competitors: Palo Alto, Calif.based Sun Microsystems Inc., which pushes Java Card, and Redmond, Wash.-based Microsoft Corp. with its Windows for Smart Cards. "We achieved huge success," says one former MAOSCO executive. "To invest a few millions and stand shoulder to shoulder with Sun and Microsoft is quite a respectable achievement There were a number of financial models that could have been applied to take Multos to be the winning product."
Instead, Mondex decided early last year to keep Multos and Mondex tightly linked, and to seek a sizable infusion of new cash for Mondex. Sources say Mondex approached many potential investors, from venture capitalists to smart card companies, seeking $100 million in new capital. That effort yielded no takers, and more recently Mondex executives have been looking for investors willing to put up $10 million to $20 million. To cut its costs, Mondex also laid off about a dozen of its staff of nearly 200 in December, source say.
Richard Fletcher, deputy CEO of Mondex International, says Mondex executives generally do not discuss the company's finances. However, he says, "We are clearly looking to compete with some very serious technology interests, which requires a lot of cash. It's normal procedure to be always looking for new ways to augment the cash at our disposal" As for layoffs, he says, "Like every high-- tech business, we have turnover."
Meanwhile, the decision to put the development of Multos under the direction of Mondex CEO Michael Keegan and Fletcher led to the departure of leading MAOSCO executives, notably CEO Nick Habgood and senior marketing executive Hugh Kingdon, sources say.
Habgood, now an executive at a London-based venture capital firm, London Merchant Securities PLC, declines to comment on any differences with Mondex on strategy. "I left because I had a great offer to do something I thought was interesting," he says.
Whatever the reason for the departures, observers see them as a blow to Mondex. "It's all gone a bit wrong," says one industry executive. "By bringing MAOSCO back inside MXI to try and make MXI more valuable, some of the value in MAOSCO has been destroyed. That's not a great strategy."
But Fletcher says MAOSCO was created as a nonprofit secretariat to support the mostly for-profit companies, such as chipmakers Infineon and Hitachi, which make up the consortium. Turning such a secretariat into a for-profit company, Fletcher says, "is not a meaningful business proposition and is not on the table from an MXI perspective today."
Observers say Multos also suffered a setback when American Express Co. quietly withdrew from membership in the MAOSCO consortium last year and shifted most of its chip cards to Java Card.
A spokesperson says the chip-- based Blue credit cards AmEx issues in the United States already have been switched to Java Card, and that AmEx will make a similar transition with its smart cards in other countries. "We are still using Multos, but with the intent to move to Java Card," she says. Java Card offers greater options in terms of chip suppliers, development tools and programmers, the spokesperson says. "Java Card also broadens out ability to offer applications on a variety of platforms," she says, including personal computers, mobile phones and handheld devices.
The AmEx switch "is not a good signal to give the market," says Paris-- based smart card consultant Jerome Ajdenbaum. "If one of the most important supporters of Multos stops investing in Multos, it's really a very bad thing-not a disaster, but close-for Multos."
Based on discussions with AmEx executives, Ovum's Brown says, "They were happy with the technology but not with the operation of the consortium and the speed of development." Brown adds that the AmEx move "is indicative of what the market will also do. Unless Multos can shake off its association with Mondex and get some serious dollars behind it, things are not looking good."
Such assessments are nonsense, says Steve Everhard, commercial and marketing director at MAOSCO.
"There's been absolutely no change in our relationship with AmEx," he says. "What they said nine months ago is they didn't want the commitment of turning up to consortium council meetings." As for AmEx's use of Java Card, he says, "AmEx is pursuing a dual-platform issuing strategy, and this is probably a pattern we'll see for the rest of the industry."
"Nobody here is at all worried about the future," Everhard adds. "You'll see a significant issuance of Multos cards in the next 12 months." He says there were 5 million Multos cards circulating at the end of last year, but declines to elaborate on forthcoming projects.
As for Mondex International itself, it is "on a sound financial footing," Fletcher says. Much of Mondex's financial backing comes from MasterCard International, which bought a 51% stake in Mondex in 1997. MasterCard has invested $150 million in Mondex, according to a MasterCard lawyer's comment during a trial last year in a New York federal court. In that case, which is still pending, MasterCard and rival Visa International were accused of, among other things, colluding to impede the introduction of smart cards in the United States.
"I don't know the exact number, but we've invested a lot of money in Mondex," says Art Kranzley, MasterCard senior vice president for global e-business. He says MasterCard has received back some of its investment from the sale of regional Mondex franchises covering some 80 countries.
Insiders believe several of the franchises sold for between $5 million and $25 million, depending on the size of the market More recently, they say, Mondex has lowered the price on franchises, seeing to encourage greater deployment of Mondex cards. There are about 1 million Mondex cards in circulation, a number that Mike Young, head of e-commerce strategy at Mondex, says is likely to double over the course of this year.
But more important than the financial return or the Mondex epurse, Kranzley says, Mondex will be increasingly valuable as MasterCard members switch from magnetic-- stripe debit and credit cards to smart cards over the next several years.
"We'll have, outside of North America, virtually all our regions migrating to chip over the next several years, and we're going to leverage that capability and expertise we built at Mondex," he says. Among the services provided by Mondex are smart card application development, loading secret authentication keys onto smart cards, support for the Multos chip card operating system, and approval of chip card-accepting devices, Kranzley says.
"When you go to Multos, everything is packaged, it's an end-to-end complete system," Kranzley says. "It's a way to get into the marketplace quickly, and that's why a lot of our members are using it."
Keeping all the security responsibility within a single organization helped Multos achieve an E6 rating-which Mondex officials say is the highest rating for nonmilitary technology-under ITSEC, the Information Technology Security Evaluation Criteria backed by several governments. The security rating attests to Multos' resistance to attempts to extract data from the chip or to alter card applications.
'Smart Card-Specific'?
However, not all MasterCard members are Multos fans. Toni Merschen, director of chip card and access technologies at New York-- based banking giant Citigroup, considers the process of developing applications for Multos more "smart card-specific" than the development environments for the Java Card or Windows platforms.
Moreover, he objects to the Multos requirement that loading and deleting of Multos applications be done under the supervision of Mondex, which owns the only facility authorized to load secret keys that prevent tampering with applications on Multos cards.
Merschen prefers the Open Platform software promoted by Visa International that gives card issuers control over programs residing on Java or Windows-based smart cards. "With Open Platform I can build it myself. Period."
Kranzley says Mondex will offer issuers a more flexible system for application loading and deleting. That was expected to be on the agenda for a MAOSCO meeting set for this month.
And Multos supporters point out that issuers who choose to manage the security of their own cards, including the secret codes that prevent tampering, will have to build the kind of highly secure facility that Mondex has established in Warrington, outside of London.
"At least with Multos you've got a known cost," says John Elliott, principal architect at MobEcom Ltd., Edinburgh, Scotland, a software company developing Multos applications for mobile phones. "If you have to set up your own certificate authority, you have an unknown cost that's probably very large." Mondex charges about 4 US cents for each application loaded or deleted from a Multos card. That means an issuer offering three applications on 1 million cards would pay $120,000.
Device Approvals
Besides addressing concerns about loading applications onto Multos cards, Mondex also recently eased requirements for "type approval" of such devices as point-of-sale terminals and card readers that work with Mondex cards.
Some sources say vendors complaints about spending thousands of dollars getting approval for devices that generated few orders. Fletcher says approval cost no more than "a few thousand dollars," and that the decision to make approval optional reflects confidence that vendors can make Mondex-compliant devices.
Fletcher maintains that Mondex's ultimate goal remains "to replace cash in the everyday lives of people around the world: But, recognizing that introducing epurse cards in the physical world will be "a long hard slog," Fletcher says Mondex is focusing more attention on the Internet and other electronic channels.
But insiders say there has been a recent push to get Mondex cards deployed in any arena as Mondex tries to attract new investors. "We're attacking vertical markets to get on the scoreboard real quick," says one executive.
These markets include such self-- contained environments as convention centers and universities where Mondex has had some success.
Recent Rollouts
In Venezuela, Banco de Venezuela was set to introduce last month smart cards at two university campuses. The bank planned to issue chip cards to 8,000 students at the Universidad Simon Bolivar and to 15,000 students at the Universidad Cat6lica. Each of the 16-kilobyte Multos cards will carry student identification, building access and Mondex e-purse applications, says Arelys P6rez, general manager of Mondex Venezuela.
Meanwhile, in South Korea Kookmin bank has issued 20,000 Multos-based Mondex cards for use at COEX, a major convention center in Seoul. Mondex Korea also plans to launch this month a program for using Mondex to pay for purchases at Korean Internet portals. To boost use of the e-purse card, Mondex partners will distribute 200,000 free smart card readers for cardholders' PCs, says K. B. Kim, CEO of Mondex Korea.
But such announcements have not dispelled the prevailing skepticism about stored value chip cards in general, and Mondex in particular. That skepticism contrasts with the optimism that surrounded Mondex as recently as four years ago when MasterCard made its investment.
Some observers believe MasterCard bought into Mondex in response to a highly publicized test of Visa Cash e-purse smart cards at the Olympic Games in Atlanta in 1996. Kranzley says MasterCard wanted to develop smart card expertise and to attract professionals with smart card expertise.
Mondex must have looked like a good bet at the time. Developed at the United Kingdom's National Westminster Bank in 1990, by late 1996, when MasterCard announced plans to invest in Mondex, Mondex was riding high.
The company had attracted investment from such major UK banks as Midland Bank and Hong Kong & Shanghai Banking Corp., which bought the franchise for Mondex Asia/Pacific. Australia's major banks bought the Mondex franchise for that country, and the following year Canada's leading financial institutions would follow suit. Such major U.S. card issuers as Wells Fargo Bank and AT&T Universal, which was later bought by Citibank, also bought into Mondex.
But several developments slowed that momentum. Trials in the United Kingdom, Canada and the United States were disappointing. The Internet boom, which took off first in the United States, put smart cards on hold as U.S. bankers focused on online financial services. By 1999, concern over the potential for Y2K computer problems further slowed work on chip cards worldwide.
In addition, Mondex prompted concerns because of the way it mimics cash. Like cash, Mondex can be exchanged between individuals, who can transfer value from one card to another. Even when consumer nave ai merchant with Mondex, value goes from the consumer's card to the merchant's card, and the transaction typically is not tracked. Such competing e-purse systems as Proton and Visa Cash leave an audit trail as each transaction is recorded.
The lack of an audit trail raised concerns in the early 1990s in Europe, where central bankers expressed their opinion that prepaid telephone card transactions should be traceable to prevent money laundering and counterfeiting.
An Audio Option
While that opinion did not address Mondex, it influenced European bankers, says Belgian-based consultant Philip Andreae, a former executive at Europay International. "Mondex seemed not to fit the mold, so they said, 'Let's not do Mondex."'
Fletcher, however, contends that such concerns are raised by competitors, not by central banks. "Wherever a Mondex bank wanted to issue Mondex cash, there has never been a regulator who has stood in the way of that happening," he says. Besides, he notes, issuers can choose to track Mondex transactions when they are reported by merchants, and some banks have done that until they were convinced that the system was secure.
Nonetheless, sources say, concerns about security, coupled with investments banks had made in such audited e-purse schemes as Germany's Geldkarte and Belgium's Proton, convinced Europay not to invest in Mondex. One industry executive says Europay considered buying a 2.4% stake in Mondex in 1997 for $4 million, in effect valuing Mondex at $167 million at the time.
Instead, Europay backed out of the deal. Two years later, Europay, MasterCard's European affiliate, dealt a blow to Mondex when it joined MasterCard rival Visa in announcing support for a globally interoperable electronic purse protocol known as the Common Electronic Purse Specifications. Europay plans to test its CEPS-- compliant Clip purse this year.
Today, the momentum globally is with CEPS, says Ovum's Brown. "That by definition excludes Mondex in its current form."
There were other set-- backs, as the Mondex USA orga- I nization closed its office in 1999. Nationwide Mondex rollouts promised for 1998 in Australia and New Zealand never occurred.
Nonetheless, some issuers are moving forward with Mondex. In France, Paris-based Credit Mutuel has issued more than 100,000 Mondex cards in Strasbourg in a pilot that began in the fall of 1999. Credit Industriel et Commercial de Paris also has participated in the pilot, issuing a few thousand cards.
Some 1,700 merchants accept the Mondex cards, including some, such as car repair shops, not likely to see much activity with a stored value card intended to replace cash. "That was done on purpose," says Jean-Pierre Pradines, executive director for payment systems at Credit Mutuel. "We wanted to have no preconceived ideas."
Pradines says the average merchant receives 25 euros worth of Mondex payments each day. He considers that a good rate considering that some merchants-such as the car repair shop-rarely see a Mondex card.
The bank will analyze the Strasbourg test early this year, he says. Meanwhile, Mondex cards will continue to be issued and accepted in Strasbourg, and the bank plans to roll out Mondex in a second city, which Pradines declines to identify.
In Hong Kong, HSBC has issued a Multos-based smart card with Mondex and other applications on behalf of telephone company Cable & Wireless HKT, subsequently purchased by Pacific Century CyberWorks.
Sources say there are about 150,000 of the smart cards in circulation. Pacific Century declined comment. An HSBC spokesman would say only, "Mondex has not been making much progress in Hong Kong recently."
The cards have debit or credit features on a magnetic stripe and an international calling function and a digital certificate from the post office that cardholders can use to identify themselves on the Internet.
While the cards also carry the Mondex purse, observers say few consumers appear to be using Mondex at the 7,000 retailers that HSBC says accept Mondex. "Most retailers don't have a Mondex terminal, or, if they do, it's under the counter because they're fed up with it occupying space and not doing much," says Greg Pote, the Hong Kong-based chairman of the Asia Pacific Smart Card Association.
Mondex faces a challenge in Hong Kong from the 6 million Octopus cards issued by the Creative Star consortium of transit vendors. Creative Star last year won approval from banking regulators for the cards to be used for payment outside of transit, and 7-Eleven convenience stores accept Octopus cards as do some schools for student lunches.
A Japanese Rival
Mondex, and other e-purse hopefuls, also will face a powerful rival in Japan from the newly announced Edy e-purse card launched in December by 11 major Japanese companies, including three big banks and two major mobile phone operators.
Multos has made some headway in Japan, as retailer Mycal is in the process of converting its 5 million proprietary credit and loyalty point cards to Multos-based smart cards. However, those cards do not carry the Mondex e-purse.
Elsewhere in Asia, a Mondex Philippines franchise was established late last year, with plans to issue at least 800,000 chip cards for use at 15,000 retailers.
But Mondex suffered a setback in the university arena last year when the University of Edinburgh discontinued its use of Mondex after two years and the issuance of 20,000 cards. The university had expected Mondex to catch on globally, which would have lowered the cost of cards and readers, according to Bill Lee, who headed up the project for the university. South Korea's Hanyang University also put off plans to issue an ID card with a Mondex purse.
With the slow takeup of stored value in retail shops, Mondex is focusing on facilitating remote payments. One example is in Norway, where the national lottery operator, Norsk Tipping AS, plans to begin a test this spring with up to 2,000 Multos-based smart cards carrying the Mondex purse and an electronic ID. The cards will allow players to place bets, and receive winnings, at kiosks, through mobile phones and from their home PCs.
The ID function will allow the lottery operator to assure regulators that only adults are betting. Internet gambling is not allowed in Norway, and regulators are expected to impose restrictions if they permit Web-based betting, says Tollef Imsdalen, vice president of planning and development at Norsk Tipping.
Norsk Tipping has 2.1 million registered lottery players, and Imsdalen says the six-month pilot this year will show whether those players are interested in betting remotely, and whether they would pay for the privilege by buying smart card readers for their PCs.
He says Norsk Tipping chose Mondex because the lottery operator needed a multiapplication smart card and Multos was the only available multifunction operating system-apart from proprietary systems that lock issuers into a single vendor-when the lottery operator began considering smart cards a few years ago. As for the Java Card and Windows-based cards now available, Imsdalen says, "We still consider them to be in very early stages. They may be an alternative later."
Other recent deals illustrate Mondex's push into new arenas. London-based FutureTV has announced plans to develop software allowing TV viewers to pay for products and pay-per-view programs with Mondex. Chris Travers, CEO for the Americas at FutureTV, says there could be tests this year in such closed environments as apartment buildings, casinos and hotels.
Linking Up With Utilities
Mondex also announced in December a deal with Montrealbased Olameter, which is developing gateway boxes into buildings that will monitor gas and electricity use. The company aims to use those boxes to provide a range of services, such as Internet access, and will offer Mondex cards as a way to pay, says Vincent Gagne, director of business development at Olameter. Olameter hopes to launch its first test by midyear.
Meanwhile, SmartPrepay, a company based outside of London, has began allowing the 100,000 UK university students who already carry Mondex cards the ability to buy prepaid mobile phone time via the Internet. Cardholders insert their Mondex cards into a card reader attached to a PC, enter their phone details at etopup.com and choose the amount they wish to buy, says Dan Isaaman, technical director of SmartPrepay.
He says his company is beginning a test with mobile phone operator Vodafone to see if customers who do not have Mondex cards today would use the service. Isaaman says an epurse is a perfect way to prepay for phone service over the Internet, where cash is not an option. And he says Mondex is preferable to audited systems because, since there is no need to track each transaction, the service is less costly for the operator.
Some observers say Mondex is on the right track in pursuing electronic channels.
"Mondex remains an excellent technological package, in particular the abilities to do card-to-card transfers across electronic channels, such as the Internet," says David Birch, director of Consult Hyperion, a UK consulting firm that has worked for Mondex. Multos, too, is a good technology, he says. "It's not the technology that's held them back. It must be something to do with either the management or the strategy."
But Fletcher argues that Mondex is succeeding. "Last year we had a really great year in terms of the number of Mondex cards actually issued out to banking customers, and with the whole digital space starting to mature there's an awful lot to play for over the next period."
With that optimism, innovative forays into remote payments and MasterCard's support, Mondex is likely to survive for now. Long-term survival will require translating optimistic projections into successful deployments.
Copyright American Banker-Bond Buyer, a Division of Thomson Publishing Corporation Feb 2001