<http://online.wsj.com/article_print/0,,SB110348908376704197,00.html> The Wall Street Journal December 20, 2004 Digipass Starts to Make a Mark Vasco Enhances Online Security As Web Banks Gain Popularity By STEVE DE BONVOISIN DOW JONES NEWSWIRES December 20, 2004 BRUSSELS -- Life-insurance salesman Renaud Bruneels, 34 years old, says he doesn't have time to take care of "life's little administrative issues" by visiting a bank during regular business hours. The Belgian has solved the problem by becoming one of 12 million users world-wide of Vasco Data Security International Inc.'s Digipass. The pocket-size gadget, which looks like a calculator, lets him use a single password to pay everything from garbage fees to phone bills over the Internet. INSIDE TECH 1 See complete coverage2 of Europe's technology sector, from cellphones to software. "It gives me the level of security I need to ... do all my banking transactions," Mr. Bruneels says. Vasco, which is based in Brussels and Chicago, is riding an uptick in online banking -- particularly in Europe, which has moved ahead of the U.S.; the company believes that the U.S. market will take off within the next two years, as banks roll out the service to retail customers. Digipass can be used to access anything online, from bank accounts to secure servers to a corporate intranet. Given a username and password, it issues a one-time code to be used for purchases or transactions on the Web. Because the code only works once, hackers who infiltrate a computer can't use it again. The added level of security sets the Digipass system apart from other online transactions via mobile handsets or laptop computers. Vasco was founded in 1997 by Digipass inventor Jan Valcke, a Belgian, and Ken Hunt, an American who ran an online-authentication software company. But after the Internet bubble burst in 2000, customers hesitated to invest in Internet banking security. Digipass "came out a little too early ... when the big focus was on viruses and not on identity theft," said Edward Ching, technology analyst at Rodman & Renshaw in New York. The stock fell from a high of $25 ($18.81) in February 2000 to under $1 in early 2003, forcing Vasco to delist from Nasdaq's National Market and move on to the SmallCap Market. In 2002, Mr. Hunt took over as chief executive. Vasco switched to "just in time" production, and spent hundreds of thousands of dollars training resellers to tackle the corporate-access market. In November, the company posted its third consecutive quarterly sales increase. Vasco forecasts 2004 sales will rise between 23% and 25% from $22.87 million in 2003, and on Thursday Vasco said it expects 2005 sales to grow 35% to 45% with gross margins in the range of 60% to 65%. On Friday, Vasco shares fell eight cents to $6.40 in 4 p.m. Nasdaq Stock Market trading. Vasco still faces stiff competition. It has only about $10 million in cash, putting it at a disadvantage against U.S. rival RSA Security Inc., when chasing big contracts. In September, RSA signed a landmark deal with Time Warner Inc.'s America Online service to provide authentication for users signing into their online e-mail accounts. "We don't have the brand recognition we deserve," says Mr. Hunt, who admits Vasco wasn't even invited to bid on the Time Warner contract. As a result, the company has increased its presence in trade shows together with partners such as Novell Inc. and Lucent Technologies Inc., and is bringing prospective and current clients together in workshops to help them solve operational problems. More than 100 million households world-wide now bank online, and that number is expected to triple to 300 million or more households by the end of the decade. Europe has taken the lead. About 37% of all Internet users on the Continent bank online, as opposed to 17% in the U.S., according to reports from research firms Gartner and Forrester Research. The number of Europeans carrying out financial transactions on the Net is expected to rise to 130 million by 2007, compared with 67 million Americans. Banks are Digipass's main customers. "Digipass is the most secure system available and the one which offers the greatest mobility," said Liliane Tackaert, spokeswoman for Belgo-Dutch banking giant Fortis NV. About 775,000 of the bank's clients in Belgium and Luxembourg use the service. Rabobank, of the Netherlands, Europe's biggest online bank in terms of online customers, has more than two million Digipasses in use. Vasco hopes it will become a lead supplier for the new European EMV payment card next year. Developed jointly by Europay International, MasterCard Inc. and Visa International, the card requires a PIN number in addition to a usual signature when buying goods in a shop, as well as a one-time code -- such as the one generated by Digipass -- to buy goods online or over the phone. In addition to Vasco, Xiring, of Suresnes, France, and U.S.-based ActivCard Corp., Fremont, California, are in the running. Outside Europe, Digipass is pushing into new markets, signing up banks in countries ranging from Singapore to Argentina. Sales in the U.S. -- a potentially huge market -- accounted for just 16% of group turnover in the third quarter. Phishing and other scams in the U.S. have made potential customers more suspicious about banking over the Internet, making some banks unwilling to invest in authentication products such as Digipass. Wachovia Corp., Charlotte, North Carolina, is Vasco's only large U.S. banking client and the use of Digipass is limited to corporate-banking users. Laurence Leinbach, head of Wachovia's online banking operations, said that until now, U.S. banks have invested in such security only for high-potential corporate customers. "There is a very different authentication philosophy between corporate banking and retail banking in the U.S.," added Mr. Leinbach. That could change. As identity fraud mounts, Mr. Leinbach predicts banks will take a closer look at authentication products. "Expect to see changes within the next 24 months in the majority of retail banks," he said. -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'