Mondex in Japan: Still in the Running?

Recent market developments, including MasterCard's decision to take control of Mondex, means that runners on the electronic commerce track face a different kind of race.

by Noriko Takezaki

Until about a half-year ago, when people in the Japanese computer and financial industry talked about electronic money, the topic most often was Mondex. Some even viewed Mondex as a glittering symbol of their great expectations for future success: global leadership in electronic commerce. But the Mondex limousine, now driven by the world's "master," has lost much of its luster, and seems to many Japanese a less enticing vehicle than before.

In late November, MasterCard International of the US announced that it had agreed with Mondex International to acquire 51% of the latter's shares (which total UK£100 million). With this announcement, the golden opportunity for corporate Japan to join the Mondex family virtually disappeared -- in spite of a long-delayed plan to launch Mondex Japan as part of the Mondex International group, like Mondex UK, Mondex Canada, and Mondex Hong Kong, which are already in operation.

An opportunity missed

"Japan missed its chance to take a lead in the world," says Yuichi Hiramatsu, Chief Engineer of Oki Electric Industry, who has led Oki's Mondex project. "Although the acquisition of Mondex International's shares by MasterCard is good news for us -- since the Mondex system will become more persuasive when backed by the world-famous MasterCard -- we cannot be simply pleased with it. It means the loss of Japan's possibility to lead the world."

In addition to Oki, Hitachi, Matsushita Electric/Matsushita Battery, and Dai Nippon Printing have been actively involved in Mondex system development from the outset. These companies have helped develop microprocessors, electronic wallets, and balance checkers, and have produced IC cards for Mondex. (For more on this, see "Mondex Lays Its (Smart) Cards on the Table" in our June 1996 issue, page 29.--Ed.) Among the Japanese players, Hitachi in particular has devoted much effort to the development of Mondex products, even helping to promote the launch of Mondex Japan. The others have committed themselves only to supplying Mondex products.

For the launch of Mondex Japan, originally scheduled for spring 1996, Hitachi helped Mondex International to approach several major Japanese banks for investments. In this endeavor, Mondex was able to make full use of the personal connections of Hitachi senior executive managing director Asahiko Isobe, who was headhunted from the Bank of Japan a decade ago. Only three banks, however -- the Industrial Bank of Japan (a main bank of Hitachi), Sakura Bank, and Asahi Bank -- agreed to invest, for about JPY1.8 billion in total. This was only about half the amount sought by Mondex International and, with the shortage of hoped-for investments, the launch was postponed, again and again. The formation of Mondex Japan has yet to be realized.

Who's to blame?

"Japanese financial institutions are currently suffering from massive bad loans, and it is difficult to get consensus [on an electronic payment system] among them. These two factors have made the launch of Mondex Japan difficult," admits Michael Keegan, CEO of Mondex International.

The financial institutions' suffering -- arising from the failure of many affiliated jusen housing loan companies -- is one factor. Some are quick to charge, though, that Japan's Ministry of Finance (MoF) must bear part of the blame. The MoF, they say, should have set guidelines for financial institutions to prepare them for the introduction of electronic money systems. Since Japan's financial institutions have long been under the strict observation of the MoF, banks understandably felt that making a positive decision on the employment of a new system was too risky unless reassured by "guidance" from the MoF.

Industry people lay some of the blame on Mondex International as well. Despite not being a well-known name, Mondex International acted arrogantly and was too pushy in trying to win the support of Japanese financial institutions. First of all, Mondex International insisted that only banks would be permitted to participate in the Mondex scheme, rejecting the inclusion of other financial institutions, like Japanese credit union corporations. Further, Mondex International placed too much reliance on Hitachi's (or Mr. Isobe's) influence with the Japanese financial industry, and failed to make sufficient efforts to persuade the industry based on its own merit.

Good news or bad?

On the question of MasterCard's acquisition of Mondex ownership, Hitachi, still maintaining a high profile, has announced that it welcomes the move. Hitachi even responded to some press inquiries into the matter before an official announcement had been made by either MasterCard or Mondex International. "It is expected that the Mondex system will be disseminated quickly throughout the world, and we expect that [this event] will accelerate the introduction of the Mondex system in Japan..." proclaimed a press release issued under the name of Hitachi's Isobe.

Some Hitachi managers, though, are bracing for a worst case scenario: that the Mondex system may not be adopted in the Japanese market. "We even think that the Japanese market could be the last one to enter," suggests Kazuhiro Kawashima, Hitachi's manager in charge of the Mondex project. "We are already busy with our Mondex-related business overseas, such as in Hong Kong and New Zealand. Since the Mondex system is an international payment system, we don't have to stick to the Japanese market."

The MasterCard acquisition of a majority of Mondex shares is a great concern for Hitachi. Indeed, the future of Hitachi's Mondex business depends on whether MasterCard uses the Mondex smart card system as it is, or alters the system and the technology. The former would be good news for Hitachi, since with world-renowned MasterCard supporting the Mondex technology, market introduction of the system would probably be accelerated. And adoption and widespread use of the Mondex system in other countries would stimulate Japan's conservative financial institutions, encouraging them to adopt the system themselves.

If the latter scenario occurs, however, Hitachi would be hurt deeply. It would mean that Hitachi's long-term commitment to the development of the Mondex system, particularly the development of microprocessors, has been largely in vain. Hitachi supplies the H8/310 microprocessor embedded in the Mondex smart card now in use, and has been developing a new microprocessor for the upgraded Mondex smart card system. In addition to the microprocessors, Hitachi has been working on other Mondex application products, such as an electronic wallet with modem interface, a PCMCIA card reader/writer with built-in modem, and accounting software.

"At the least, we expect that we will be asked to integrate SET specifications into our chip," says Hitachi's Kawashima. "If the required changes are limited to software modification, it won't be a problem. But, if they extend to hardware changes, it will be a big headache for us."

An evolving market

Mondex CEO Keegan says that Mondex International is still seeking participation and investment by Japanese banks. However, the market has quickly evolved in the past year, and for Japanese banks and other companies, Mondex is now just one of their possible choices.

In fact, the current focus of interest has shifted to other electronic money systems, such as Germany's Geldkarte (a trial, started in March 1996, that involves nearly all German financial institutions) and Belgium's Proton (being promoted by an ATM network company, Banksys, and with which American Express has a contract). For their study of new electronic money systems, many Japanese -- including representatives from manufacturing companies, financial institutions, and credit card companies -- now make field trips to the Continent in specially organized group tours.

Even former Mondex suitors have a roving eye. "We don't want to commit double suicide with Mondex," says Oki's Hiramatsu, who plans to join a study tour to the Continent. "Mondex is now becoming 'one of them' for us. We have to study other systems, too, to grasp the real situation regarding electronic money, and to figure out which systems look to become the de facto standards in the future market."

Meanwhile, for MasterCard, its involvement with Mondex brings a good opportunity for expanding its market share in Japan. One of the new leverages is that they now are connected to Hitachi through Mondex International. "Hitachi's commitment to Mondex is attractive, since Hitachi is a dominant manufacturer in the financial computing market in Japan," notes Steve Mott, senior vice president of MasterCard International. "We are planning some projects in Japan with the financial sector, in addition to the electronic commerce projects of MITI [the Ministry of International Trade and Industry]."

MasterCard has been participating in two MITI-led projects for the development of electronic payment systems and related security technology. The payment system project is in conjunction with such companies as DC Card and Laox (a prominent retail computer chain), and the security technology project has as participants UC Card, Netscape Communications, Hitachi, Fujitsu, and others.

Time will tell

"We have been taking very cautious steps in penetrating the Japanese market, spending sufficient time and efforts," says Mott. "We think that dissemination of a new system will take time, since even ATM (Automated Teller Machines), though now very popular in Japan, took so much time to be disseminated."

The realization and widespread dissemination of electronic payments will still need several years (at least), since nobody is yet sure which electronic money system (or systems) will become the de facto standard in the world market. To prepare for the coming trend of electronic payments, what the Japanese are doing -- as they have done so often in the past -- is not to jump into the risky key part of the new business, but to stand back and meticulously observe the market situation in other countries.

Most Japanese corporations seem to think that, once electronic payment is fully developed, they will then be able to dash out and close in on the top runners at full speed. And they are confident that they can catch up with, and pass, the top runner quickly. Only Hitachi has broken with this traditional, conservative Japanese way of competing and chosen to join the race from the beginning. Whether this turns out to have been a successful strategy, one that can give Hitachi a leg up on the other Japanese runners, will depend on how MasterCard utilizes the Mondex scheme for its electronic payment system.