Mondex Lays Its (Smart) Cards on the Table

As Mr. Spock might say: "It's cash Jim, but not as we know it."

by Noriko Takezaki

Electronic commerce has been a recent topic of worldwide attention as a new-generation financial system using the state-of-the-art information technologies. US and European companies have been actively developing and experimenting with a variety of electronic payment schemes, with ebullient media reports depicting the advent of digital cash as akin to acquiring the Midas touch.

In Japan, however, financial institutions have been content to strictly follow the government's conservative ministerial "guidance." This made electronic payment systems seem just an empty dream for Japanese consumers -- that is, until Mondex (an electronic cash project that originated in the UK) came calling on Japanese manufacturers to open up the closed door.

Plastic money

Mondex is an electronic cash system that utilizes a "smart card" -- a credit card-like piece of plastic with a microcomputer chip embedded in it. Once funds have been electronically transferred onto your Mondex card, you can use the card to make purchases, up to the total cash value held on the card. You can even make payments via a Mondex-compatible telephone, or use a Mondex "wallet" to transfer value from bank to card.

Mondex's first full-scale service trial, which started in July 1995 in Swindon, England, will last up to two years. Before it is done, it will involve over 40,000 persons and 1,000 retailers. The pilot, operated by Mondex UK, is a joint venture of National Westminster Bank (NatWest) and Midland Bank in cooperation with British Telecom.

The road to Japan

The encounter between the British operation and Japanese manufacturers dates as far back as 1991. It was then that NatWest, originator of the initial Mondex concept, first approached Japan as part of the worldwide market research for its electronic cash project. At that time, NatWest talked with almost all the leading Japanese electronics firms to gauge their interest in supplying products for the project.

After obtaining product proposals and quotations from the companies that showed interest, NatWest selected four Japanese manufacturers: Hitachi to supply the microprocessor to be used for the Mondex card, Oki and Matsushita Electric/Battery for the electronic wallets, and Dainippon Printing for IC card production.

Among this quartet, Hitachi has been the most active player for the project. At first, Hitachi agreed only to supply the microprocessor, its H8/310 series, for the Mondex card. Eventually, though, the company decided to become more heavily involved. Hitachi now plans to offer other Mondex application products, such as an electronic wallet with modem interface, a PCMCIA card reader/writer with built-in modem, and even accounting software for the Mondex system.

Further, Hitachi plans to participate in the Mondex trial in Hong Kong, which is slated to get underway this year. The company will provide its expertise in banking system configuration to the Hongkong and Shanghai Banking Corporation, which has acquired rights to franchise Mondex in several Asian countries and areas, including Hong Kong, China, Indonesia, Macao, the Philippines, Singapore, Sri Lanka, Taiwan, and Thailand. And, for the purpose of developing deeper involvement with Mondex electronic cash, Hitachi formed a New Financial Systems, Services, and Products Division, in February of this year.

"When we were first approached by NatWest for the project, we were, frankly, just puzzled," admits Kotaro Yamashita, managing director of Hitachi's new division, recalling the time when the bank asked Hitachi to supply microprocessors for NatWest's second internal trial (dubbed Byte 2). "We had never heard of this kind of project, and we couldn't believe that such a totally-new-concept financial system could be realized in the near future. We decided to go for it for its future potential, although it might bring us some risks." Since then, Hitachi has been the exclusive supplier of the chips to Mondex, replacing the French company that had provided them for the first internal Mondex trial, Byte 1. NatWest selected Hitachi because "our product performance was superior to the French one in terms of processing speed, security, and reliability," boasts Yamashita.

As was the case with Hitachi, the concept of electronic cash and smart cards was initially too new for the rest of Japan's manufacturers. But acceptance, and even enthusiasm, came with time. Oki, which eventually proposed several product ideas to NatWest for the project, went through lengthy and fierce in-house discussions about whether it should become involved with such a risky venture, recalls Yuichi Hiramatsu, Oki's chief engineer in charge of the Mondex project. "We faced strong internal opposition, particularly from those in higher positions. The younger engineers, though, were very excited about the new potential."

A change of heart

What, then, made the Japanese manufacturing firms decide to become involved with the electronic cash project? That answer, actually, is "real" cash.

To the companies that seemed to the UK side to be promising, but which were hesitant to get involved with the project, Mondex offered financial incentives for development of the products to be supplied. For Oki, such help was "more than half of the actual development cost," according to Hiramatsu. "Otherwise, it would have been difficult for us to take part in the Mondex project."

The ratio of Mondex's help to Hitachi has not been revealed, but Kuninori Shoboji, Hitachi's deputy general manager in charge of the Mondex project, acknowledges that the company received "some amount of money" for IC development as part of its product development agreement with Mondex. He adds, however, that Hitachi has not received any funding for its development of new Mondex application products.

Why, then, did Hitachi decide to join the application development competition if it did not receive financial help for it from Mondex? Hitachi's Yamashita says the reason for the company's strategic change was a realization of how much influence the Mondex project will have on society. "Electronic cash will affect one-third of all economic activities. And Mondex is not just a local project for such a new system, but will be developed worldwide. For this project, Hitachi will continuously propose various core ideas and products, even tying up with other companies whenever necessary."

But there was, perhaps, another, more decisive factor for Hitachi's strategic about-face. Hitachi's senior executive managing director, Asahiko Isobe, nominated to command the company's new corps, was headhunted from the Bank of Japan ten years ago after having served as Central Bank Examiner. He also had experience as the bank's chief representative in its European business, for which he was stationed in London for three years, and was an official with the International Monetary Fund. He still wields considerable influence in financial circles not only in Japan but also worldwide. With the strong support of Isobe, Hitachi worked as a mediator for negotiations between Mondex and Japanese financial circles regarding the future potential of introducing Mondex to Japan. Hitachi seemed to gain a positive impression regarding the future Mondex deployment in Japan out of those negotiations.

"Mondex is not a denial of the existing financial system, but rather a guide to a new financial system," says Isobe. "We believe that electronic cash will ultimately save time and efforts for financial institutions in their business dealings. The financial industry should be well aware of such a worldwide trend."

Mondex Japan

For the deployment of Mondex in the Japanese market, the launch of Mondex Japan -- a Japanese body to organize the local Mondex trial -- is a crucial issue for both the Japanese manufacturers and Mondex International. Unless Mondex Japan is formed, the manufacturers' efforts for product development will not bring them much profit, and the Mondex side cannot collect Japanese money for establishment of Mondex International, the top-level entity to supervise the worldwide development of the Mondex scheme. According to the Mondex side, Mondex International will license each local consortium promoting Mondex to allow it to use the Mondex intellectual property rights and brand name to exploit the service through a series of franchise agreements.

"Mondex is in discussion with a number of institutions in Japan as to the Mondex Japan franchise," said Robin O'Kelly, PR manager of Mondex, in mid-March. "There is no reason why Mondex should not prove to be very successful in Japan, and it is our belief that Mondex will be the future of electronic money the world over."

However, Japanese financial institutions, who have been placed under the strict observation of the Ministry of Finance and have been suffering from an unprecedented burden of debts arising from the failure of their affiliated jusen housing loan companies, had not been persuaded easily, and negotiations have dragged. To press them for an early decision, Hitachi held an urgent exhibition in early March for its Mondex products. Although the exhibition was in the form of Hitachi's usual product display, the real objective was to demonstrate to Japanese financial institutions and other concerned entities what Mondex could be like in Japan. "We invited banks, securities companies, insurance companies, and distribution companies, and all of them seemed to be very impressed," notes Hitachi's Isobe.

Owing to such efforts, Mondex Japan is likely to be launched soon with initial participation by several banks, manufacturers, and distributors. The chief aim is to increase market awareness for electronic cash systems in Japan, but they also hope that such increased market awareness can persuade the Ministry of Finance to modify impeding regulations, such as those concerning foreign exchange, banking systems, and prepaid cards.

"Mondex shouldn't be something being conducted somewhere else," says Hitachi's Yamashita. "We Japanese should experience it for ourselves, in this country in our own environment. Once the project is realized here, other factors -- including a legal framework -- will follow the reality quickly."

Sidebar

The cause of digital cash in Japan recently got a boost from an unexpected source: a Ministry of Finance-affiliated IT promotion organization. Coinciding with a recent industry meeting about the formation of Mondex Japan came the report on a five-month study of electronic banking by the Center for Financial Industry Information Systems (FISC). The FISC report stressed the need for early realization of electronic money in Japan. FISC also announced that it will continue working on this topic throughout fiscal 1996, including conducting investigations of the effectiveness of electronic money as a means of electronic banking.

For more information about Mondex, point your Web browser to http://www.mondex.com/mondex/home.htm.