Associated Press 11/19/96 STOLEN COMPUTER HAS INFORMATION ON 314,000 ACCOUNTS Credit card holders often worry that some computer hacker will find his or her way into their charge accounts. One thief took the low-tech route and simply took an entire computer, its memory holding information on hundreds of thousands of some of the best-known cards. The personal computer was stolen earlier this month from a Visa International office that processes charges on a number of different credit card brands, Visa said Monday. Its memory included information on about 314,000 credit card accounts, including Visa, MasterCard, American Express, Discover and Diners Club, said Visa spokesman David Melancon. Some issuers, like Citibank, which had about 33,000 accounts affected, began calling customers about the theft early last week. Citibank canceled the cards in question and issued new ones, said spokeswoman Maria Mendler. The personal computer was discovered missing from Visa's data processing center at its main office in Foster City, Calif., on the evening of Nov. 8. American Banker, 11/19/96 MASTERCARD WILL BUY 51% OF SMART CARD FIRM MONDEX MasterCard International said Monday it would buy 51% of Mondex International and promised significant investments to create a global electronic cash system. The pending deal -- one of the card industry's worst kept secrets -- puts MasterCard in the forefront of the smart card race. Observers had criticized MasterCard Cash, a smart card system that was deemed less than successful in its Australian debut. With Visa Cash in several pilots around the globe and American Express announcing a licensing agreement last week for the Proton smart card technology owned by 60 Belgian banks, many industry observers said the dash for dominance would now begin in earnest. Mondex, developed by National Westminster Bank of London and owned by 17 banks worldwide, is to retain its board, staff, and organizational structure, acting as an independent subsidiary. Financial Times: Monday, November 18, 1996 Electronic Money Threat to Banks By George Graham Central banks could lose billions of dollars of revenue if consumers start to jettison the traditional banknote in favour of electronic money, economists from the Bank for International Settlements have warned. A report issued today by the BIS, the central bankers' central bank, says innovations such as "electronic purses" loaded on to a smart card or "digital cash" used for making payments over the Internet could erode central banks' income from issuing banknotes. Note issue is a significant source of revenue for many central banks because the private sector must in effect make interest-free deposits to obtain the notes. The BIS cites studies estimating the loss of this "seigniorage" at more than $17bn (#10.3bn) for its 11 member countries if prepaid cards were to eliminate all banknotes below $25 in value, although not all seigniorage comes to central banks. Central banks could "consider issuing e-money value themselves" as a way of offsetting the lost income, the BIS says. Alternatively, it suggests, they could increase mandatory reserve requirements, although this would run counter to the trend towards lower minimum reserves. The BIS report appeared as MasterCard, one of the world's two leading payment card consortia, prepared to expand its efforts to develop a widely accepted electronic purse by taking control of Mondex, a UK-developed smart card. MasterCard will announce today it is taking a 51 per cent stake in Mondex, which is currently on trial in Swindon and Hong Kong. Widespread substitution of e-money for cash could make it more difficult for central banks -- by reducing their ability to control the money supply -- to affect interest rates. But the BIS says this is unlikely to happen. The BIS report warns that if central banks chose to issue their own e-money, they "could limit competition or reduce incentives to innovate". While no restrictions are usually imposed on the issue of single-purpose prepaid smart cards, such as telephone cards, multipurpose electronic purses, which can be used as money in a variety of places, raise different questions. Some central bankers view them as comparable to deposit accounts, which in most countries can be managed only by authorised banks. Others see them as equivalent to travellers' cheques, on which few restrictions are imposed. The BIS report warns that any decision will involve a trade-off: "If issuance of e-money is limited to banks, the regulatory framework already in place can be extended to cover the new products, but competition and innovation might be more limited." Washington Post: Sunday, November 17, 1996 Smart Cards Deal Simpler Life for Cash-Phobes By Jane Bryant Quinn The next piece of plastic the banks think you ought to keep in your wallet is a smart card. These cards come in several varieties, and most aren't yet ready for mass distribution. But pilot projects are forging ahead--in Atlanta, in New York City early next year, in Canada and in several other countries. There's no obvious consumer need for smart cards today. But the bankers believe that you're going to love them anyway. You may even be mailed one and urged to try it. Smart card promoters make the assumption that you hate to carry cash. You hate fishing for bills and coins to buy a newspaper or a soda. You'd put down plastic, instead. This plastic card has money on it, embedded in a computer chip. A $20 card, for example, will give you $20 in spending power. If you buy a 75-cent newspaper, the seller will put your card in a special terminal and drain off 75 cents. No identification or signature is required. You now have a card with $19.25 left on it. After spending $1 on a soda, the value of your card goes down to $18.25. If you forget the amount, you can check it with a little portable card reader. Some readers also might list the last five things you've bought. Don't confuse a smart card with a debit card. When you pay by debit card, money is moved automatically from your bank account into the merchant's bank account. With a smart card, however, you first move money from your bank account onto the card's computer chip. When you buy something, the money moves from your card to the merchant's terminal and then, electronically, to the merchant's bank. If every merchant, street vendor, taxi driver and bus accepted smart cards, you wouldn't have to carry cash. To some, that would be a huge convenience; to others, it's a shrug. As long as some merchants took smart cards and others didn't, however, you'd have to carry both. Smart cards come in three varieties, some of them more flexible than others: - A prepaid, disposable single-purpose card. Telephone cards are a good example. You pay $10 or $20 for a card, dial a toll-free number, give the number of your card and then make your telephone call. Minute by minute, the cost of the call is deducted from the value of the card. When you've drained all the money out of the card, you throw it out. - A prepaid, disposable bank card. You buy the card at a bank and can use it at any store that has a terminal. - A reloadable card. When your money runs out, you can take it to the bank, an ATM or a special kiosk and load it up again. Visa, MasterCard, Citibank and the Chase Manhattan bank will jointly test a reloadable card in a section of New York City next year. A reloadable card could also serve as your credit card, debit card or ATM card. What's in it for the bank? Eventually (although not at first), the bank probably would charge you for the card. There might be a fee when you accessed the ATM to load it up. The merchant also would pay a fee, in return for getting what is presumably a more secure transaction. What's in it for consumers? A very little bit of convenience. Putting down a card is a tad quicker than fishing out cash. You always have the equivalent of exact change. You wouldn't have to count your change (but you'd have to use the card reader to be sure the merchant's terminal deducted the right amount). You may or may not pay more for the card than it costs to get cash from an ATM. For a while, the smart cards probably won't have any more than $100 on them, and the limit might be lower than that. So they're strictly for walking-around money. You'd still need your credit card, debit card or checkbook for more serious shopping. If the card malfunctions--say, it registers $14 when you're sure you were carrying $36--the bank can check the balance on the computer chip, says Ron Braco, a senior vice president at Chase Manhattan. But if you lose the card, it's just like losing cash. You're out the money. Promoters of smart cards blue-sky a lot of national and international uses that aren't yet anywhere in sight. I'll probably wait for them. Banks have a sales job to do on people like me who don't find it a nuisance to carry cash. U.S. Banker: November 18, 1996 Scott Cook Considers His Next Move By Joseph Radigan Today's home banking market would be very different -- and a lot smaller -- without Scott Cook's Intuit. But a stab at processing payments fizzled out, and some banks still suspect the company wants to steal their customers. The message boards at America Online's Motley Fool investment center may be one of the quirkiest sources for stock tips, but then individual investors have always been magnets -- or suckers for unconventional advice. Anyone who logs on to AOL can find a breadth of opinions on a vast number of publicly traded companies and funds. But in this forum -- where sage financial advice often takes a back seat to the cyberspace equivalent of a food fight, there are no favorites -- not even Intuit Inc., the company that since its formation 13 years ago has quietly, steadily nursed its innovative home banking program, Quicken, from a cult classic into a consumer software powerhouse. While this was taking place, bank after bank was throwing up its hands in frustration over its inability to convince more than a handful of customers to do their banking by personal computer. Clearly, Intuit founder and chairman Scott Cook, a former marketing guy from Procter & Gamble Co., understood something about consumers' banking habits that bankers themselves just didn't get. But lately that hasn't bought the company any favors with some of Motley Fool's regular visitors. On September 12th, just days before the company reported its results for the fiscal year, one posting exemplified the sentiments of a small group of AOL subscribers that had soured on Intuit's prospects: "The party is over, kids. There was never a chance that a $ 300-million company was going to control a multi-trillion-dollar business. To buy into that was nuts to begin with. Those who did, most at more than $ 65 a share, are getting a new lesson in large-bank thinking today." To see Intuit trashed in an on-line foram is especially ironic. After all, it was one of Wall Street's hot software stocks just as the high-tech sector began soaring to undreamed of heights two years ago, and, thanks to a marketing relationship with AOL, Quicken and its no-frills stablemate, BankNow, are the banking options of choice for the on-line service's subscribers. Plus, Quicken has become the preferred financial management software among the computer-literate, and that was what persuaded nearly three dozen banks to sign marketing relationships with the company in the last 18 months. But the last 12 months have been rough on Intuit's stock. The price peaked at $ 89.25 in November 1995, and since the beginning of the year, it's been caught in a steady downward spiral. By mid-September, when the company released the earnings for its July fiscal year, the stock was wallowing around at barely $ 30 a share. The price rebounded slightly on the news that Intuit was selling its money-draining payment-processing unit, but that momentum evaporated quickly. "The Street was clearly dropping the stock over the last six months," says Genni Combes, a securities analyst for Hambrecht & Quist. "The back-end processing was a big drain, and Quicken sales slowed." Cook still speaks regularly at trade shows, but his one-on-one contacts with the press are not as frequent as they once were. In a recent telephone interview with U.S Banker, he said the stock's price gyrations had more to do with factors beyond his company's control than with the firm's performance. A year ago, the stock market was caught up in its Internet hysteria, and this spring, when Intuit's price started sliding, it was primarily because investors were finally evaluating on-line stocks with a healthy dose of much-needed logic. Whatever the actual cause of Intuit's share decline, the company still has plenty of fans. Most people posting messages on AOL are still bullish on its prospects, as are most of the professional analysts that follow the company for the big brokerage firms. "Their cash flow is tremendous," says David Farina, an analyst with William Blair & Co. in Chicago. Indeed, although Intuit confirmed some of the worst fears of its detractors by losing $ 20 million on $ 552 million in sales during its July 1996 fiscal year, the company did generate a cash flow of $ 44 million. An important source of that cash flow is the nearly 10 million customers of Quicken, some of whom are almost fanatical in their enthusiasm for the product. As recently as four years ago, Quicken was the whole franchise, and while its market is still growing, it is now only 20% of the company's sales. Much of the firm's recent growth has come from its diversification into new markets. One is tax software. In acquiring the publisher of TurboTax, the company has a product that now accounts for 30% of revenue. Another important segment is small business accounting, where the QuickBooks program contributes another 20%. These products will become even more important to Intuit because the firm's strategy is to build upon Quicken's customer base by selling its regular users other programs like TurboTax. But in the wake of the announcement that the company was selling its processing unit, Intuit Services Corp., or ISC (the sale is expected to close in December), the Menlo Park, CA, software publisher finds itself at what may be one of the most important junctures in its history. In the last year, Microsoft Money picked up market share against Quicken. Cook says Quicken has recovered some of the ground it lost, but rarely does anyone best Bill Gates in a head-to-head shootout. Several of the three dozen banks that distribute Quicken have at best a lukewarm commitment to promoting the software, and some would rather pursue on-line banking strategies that circumvent Intuit. The on-line world, including that segment of the population that banks with Quicken, is rushing headlong toward the Internet, where only a few companies have established brand names. Moreover, the companies that are succeeding on the Internet tend not to be established technology firms like Microsoft or IBM Corp., but small start-ups devoted solely to doing business on-line. Operating costs are rising faster than revenue. Expenses are not out of control, but marketing in the on-line world challenges even the most skilled players, and that is forcing more software companies to steadily spend more on marketing and software development. Intuit is no exception. Revenues rose a healthy 32% last year to $ 552 million, but that rise was outpaced by the nearly 40% jump in expenses for customer service, marketing and research and development. And according to analysts like Hambrecht's Combes, R&D will continue taking a big bite out of the company's budget. "It takes tremendous tools to design products for the Internet, and you have to spend money on employees," says Combes. "Those costs have been grossly underestimated" throughout the software industry. No Show Stoppers None of the challenges confronting Intuit is a show-stopper -- and some opinionated AOL subscribers notwithstanding, the party is definitely not over but 1996 had more potholes than anyone could have predicted. The more than $ 30 million spent on repairing ISC's operations was a big drain on management. Another problem has been the indifference, if not downright hostility, displayed by some banks toward promoting Quicken. Cook now says that in the wake of the ISC sale, that attitude is changing. Yet there are still banks that consider the company a threat. "The jury is still out on whether the consumer puts more value on the software or the bank," says Tom Kunz, vice president for electronic banking at PNC Bank Corp. It's probably impossible for a final verdict to ever be reached on this issue, but because it's still undecided, some banks have ventured into electronic banking very gingerly. This unknown was at the heart of many banks' suspicion of Microsoft's motives when it tried to buy Intuit, and it is still lurking as a possible scenario should cable TV firms and regional Bells enter the home banking market. Should banks surrender that brand-name identification with their customers in some on-line markets, the fear is that the loss will snowball and lead toward depository institutions becoming mere payment-shuffling middlemen. The desire to retain customers' loyalty has been behind some bankinspired on-line ventures, such as the Internet bank, Security First Network Bank; the five-bank partnership that purchased Meca Software Inc. from H&R Block Inc. and the announcement in September by 16 banks that they would process home banking payments in a joint venture with IBM Corp. With Quicken, banks can promote their logos and brand names, but only after a customer has intentionally purchased the package from a local software store or bought a new computer with a copy of Quicken pre-installed. Soon after a customer starts using the program, she can establish an on-line connection between the bank and her home computer, provided her bank has a marketing agreement with Intuit. In the last 18 months, some three dozen banks and thrifts have done so. Another 12,000 or so haven't. The objection bankers like PNC's Kunz have had is that even after the on-line connection between the bank and the consumer is in place, the consumer's electronic sessions still begin with them looking at a Quicken logo. That has always raised the unwelcome prospect that customers would show more brand-name loyalty to the software than to the bank, and so even some of the banks that have marketing contracts with Intuit are only promoting Quicken half-heartedly. PNC, for example, makes the software available only to customers who specifically ask for it, and Mike King, director of alternative banking for Michigan National Bank in Farmington Hills, MI, says his institution, despite its signing of a processing agreement last year, "didn't aggressively promote either" Quicken or Money. "You go into some banks and you have to practically put a gun to their head" to get a copy of Quicken, says Meca's president Paul Harrison. The reason for that reluctance is that the banks that market Quicken are "clearly cutting themselves off from any cross-sell opportunity. You open the Intuit box, and you have to fill out the form, and the other side of that is an application for an Intuit credit card," issued by the Travelers Group's bank unit. Harrison is a direct competitor to Intuit, so it doesn't hurt him one bit to point out any disagreements between Intuit and the banks. But his point is also borne out at the Internet site for the Quicken Financial Network, where all of the banks and brokerage firms that process payments through ISC are listed, although the listings are presented in a manner that doesn't distinguish any one bank from the others. Here too, along with lines for Chase Manhattan, Citibank and Wells Fargo, there's a line for the Quicken Credit Card from Travelers Bank and a second line for Travelers Bank. This credit card isn't all that significant, believes Jim Grant, a senior vice president for First Chicago NBD Corp. There are so many card offers from so many issuers, and Intuit's is just one more. A technology company could hijack customers' loyalty, Grant allows, "but I just haven't seen any of it." He's felt for some time that the fears about Intuit's motives border on paranoia. In the last two years, this issue of branding and positioning seemed to have become as much of a sore point for Cook as it has for the bankers who accused him of hogging the market. Whenever he demonstrated Quicken at a press briefing or a trade show, he was quick to point out the bank's logo on the computer screen. Cook readily acknowledges that Intuit is still trying to hang on to some brand name recognition, but he said that it's something of a false issue to argue that the Quicken logo should permanently evaporate once a customer has selected a given on-line banking option. After all, brand names are routinely shared in more familiar markets. "When customers walk into McDonald's, they know they're ordering Coca-Cola," Cook says. What's so bad about applying the same logic to on-line marketing? Cook also pointed out that if banks are hesitant to have direct marketing relationships with Quicken because there are three dozen other banks whose names appear on the software program's menu, then those reluctant banks are really going to be in for a rude awakening when Internet banking soars off the charts. Some 500 banks had Web pages by this fall, and if the market forecasts are accurate, that number could increase five- or ten-fold in the next few years. He feels it's unfair to singled out Quicken for committing on-line disintermediation. Some bankers may never be reconciled to Cook's presence in their business. As long as somebody else is selling software to their customers, that person, whether it's Gates, Cook or someone else, they are going to be looked upon as interlopers who are trying to hog "ownership" of the customer relationship. A Matter of Ownership When NationsBank chief executive Hugh McColl addressed a retail banking conference last December, he said, "I get calls every week from representatives of technology companies. They all swear they don't intend to become banks. But they won't have to. With control of the medium, they ultimately gain the chance to own our customer relationships." But Cook responds, "Owning the customer? I don't know what that means. We found out with our ISC strategy, that when you don't allow the customer -- in this case our bank customer -- to have a choice, they're unhappy. What you want is to have the customer seek you out and want to do business with you." Although Cook seems a little bit wiser now, his prior insistence on banks processing home banking payments through ISC if they wanted to distribute Quicken only made it more difficult for him to overcome banks' suspicions about the company's motives. "We know we need to play in Intuit's world," says PNC's Kurz. But "there's a difference between saying 'Connect to me, and I'll provide you this service', and saying, 'If you want to connect to me, you have to go through my processor.'" Throughout Intuit's history, someone who bought a copy of Quicken could keep their checking account at any bank, and that's still true. In most cases, Quicken's customers print out specially formatted paper checks, which can be ordered through a depositor's bank or directly from the firms that provide printed check stock. In 1990, Intuit formed a relationship with Checkfree Corp. to sidestep the printing of paper checks and make payments electronically. But less than 10% of its customers chose this option. Then in April 1994, Intuit entered the processing business itself when it purchased National Payments Clearinghouse for $ 7.6 million. Intuit wanted to use NPC for the background wiring for all of its on-line banking and investing services, and it was last year that NPC was rechristened Intuit Services Corp. But the plans never panned out. Intuit couldn't build the necessary computer systems quickly enough -- or well enough -- and more than $ 30 million in R&D costs went down the drain before Cook and his management team finally concluded they were wasting their time. Things hit bottom earlier this year, when some late and improperly filed payments caused a flurry of stories in the consumer press. Intuit finally announced the sale of the operation to Checkfree in September, for $ 227 million in stock. The biggest reason the ISC unit was sold, Cook freely acknowledges, was bankers' unhappiness about having to go through ISC. Most banks prefer to select a processor independent of their retail software. Converting home banking payments from paper to electronic form has been a tough nut to crack for every entrant in the market, not just Intuit. But Checkfree has had far more luck at it than anyone else. The company now processes bills for 800,000 consumers, and it will pick up another 300,000 with ISC. About 40% of Checkfree's payments are completed electronically, but chairman Peter Kight says the conversion process is time-consuming. More than 40 employees from the Atlanta company are devoted to marketing electronic payments to merchants and helping them adapt their computer systems. Still, as recently as a year ago, things looked bright for Intuit's ISC strategy. Individual Quicken customers could still opt to have their payments processed through Checkfree, but without a link between their bank and ISC, these consumers didn't have electronic access to their bank statements and couldn't use Quicken to transfer balances among accounts. Since banks had to join forces with ISC if they wanted to offer a complete service through Quicken, it appeared that Intuit could bend them to its will. But it wasn't meant to be. With the sale of ISC, Intuit seems to have made a brilliant tactical retreat. It has hardly given up promoting its own brands, but it has finally satisfied banks that they're not going to be forced into doing business with a firm that's intent on stealing their customer lists. "The whole fear of Bill Gates or Scott Cook becoming a bank just went away," says Frank Han, vice president for strategic planning for the $ 28-billion-asset Union Bank of California. The sale coincided with the launch of a strategy called Open Exchange, which is blueprint for connecting Quicken's users and banks to the Internet. In a way, it's a response to a similar strategy Microsoft announced last March, called Open Financial Connectivity, and IBM's Integrion home banking venture. At the very least, the sale of ISC and the proposal of Open Exchange indicate a new pragmatism on Cook's part. Not long ago, some banks were so eager for a link to Quicken that they would accept almost any product distribution terms. But now does not seem to be a time when a hardball strategy can work in home banking. Software companies like Intuit need the banks, the banks need the processing companies like Checkfree, and everyone depends on everybody else's cooperation. Moreover, should any of the players move in on one of the other's turf, they may wind up losing more than they gain. Intuit's experience with ISC is proof of that. "This is a very complex market," says Checkfree's Kight. "Everybody needs to focus." For software companies like Intuit, that focus is now on gathering up as many customers as possible, even if it means giving the software away. Publishers like Intuit have discovered they can sell much more software by distributing packages directly to PC manufacturers, who then ship the software programs with every computer they sell. Unfortunately for the publishers, the wholesale revenue from this strategy is barely a fraction of that on copies sold through traditional retail outlets. But once these consumers have a copy of Quicken, Intuit believes it can sell them its other software. It's all part of a trend in high-tech markets that Citicorp's chief technology officer Colin Crook has called "non-linearity:" forsake the up-front revenue on your products now with the anticipation that customers will like what they see and pay extra for more valuable products down the road. Crook says banks are going to have to understand this approach and employ it themselves if they are to succeed in the on-line world. Intuit is staking its future on just this sort of non-linear approach. If Cook succeeds, he may yet find his detractors on the Motley Fool message boards eating their words.