Washington Post: Monday, September 16, 1996 Players With Paperless Money By Michelle Singletary Banking via personal computer is expected to increase 600 percent in the next two years, according to a 1996 technology report by the American Bankers Association and the Ernst & Young accounting firm. Telephone banking is predicted to grow 50 percent over the next two years and some experts estimate that 30 percent of U.S. households will be banking electronically by 2000. Little known to most consumers, the Washington area is home to a small but burgeoning subset of the electronic banking industry. The companies in this emerging market, many of them clustered in Northern Virginia, are helping to build the technological infrastructure that is rapidly changing how, when and where consumers bank. Companies such as US Order, Online Resources & Communications Corp., Transaction Network Services (TNS), Visa Interactive and CyberCash Inc., all based in Northern Virginia, are members of a group of start-up technology companies that are helping facilitate the delivery of electronic and phone banking services. "The D.C. area has a nice cross section of aggressive and innovative home banking players," said Phoebe Simpson, an analyst with New York-based Jupiter Communications Co., a market research firm for the on-line industry. Banking and technology experts agree that these Northern Virginia companies have become integral partners with banks in building the infrastructure that will support electronic commerce. They are selling the software, hardware, processing services, communication linkups and back-office support systems that enable financial institutions to interact with their customers outside of bank branches. While bank offices are not in danger of disappearing, bankers are increasingly looking for lower-cost delivery channels. Most are turning to outside electronic commerce companies to help them set up their own on-line or phone banking systems. "What we have now is banking without boundaries. Banks now need to cooperate and collaborate with a whole new source of channel operators," said Richard Crone, vice president and general manager of CyberCash. "Our charter is to empower customers to do their banking anywhere, any time or with anything." One reason many of these companies have set up shop here, said company executives and banking consultants, is to be near such technology firms as Washington-based MCI Communications Corp., Dulles-based America Online Inc. and PSINet Inc., an Internet access company based in Herndon. "We are the de facto Silicon Valley for on-line information companies," said John J. McDonnell Jr., president and CEO of TNS of Reston. The company has developed a low-cost system for facilitating high-speed, point-of-sale transactions, such as those made with credit or debit cards. Many company executives said they decided to launch their firms in Northern Virginia because of its proximity to banking regulators and lawmakers, who are trying to determine how electronic banking technology will affect consumers and what laws might be needed to protect customers. "This industry is important and will have a lot of regulatory need," said David Weisman, director of money and technology strategies for Forrester Research Inc., a consulting firm in Cambridge, Mass. But chief among the reasons for the growing number of electronic banking companies is the Washington area's highly skilled labor force, Weisman said. The labor pool in the area is overflowing with engineers and others with telecommunications and software experience, said Matthew P. Lawlor, chairman and CEO of Online Resources in McLean. For the most part, the on-line technology companies in this region don't compete with one another, experts said. Instead, each has positioned itself to fill certain niches in the electronic banking industry. In fact, many of the companies are linked financially or have developed partnerships. For example, TNS got its start-up capital of $ 1.5 million from William N. Melton, CyberCash's co-founder. US Order sold its core on-line banking operations to Visa Interactive, and 50 of its employees went to work for the newly formed company. Now the two companies market each other's services. "This is a monstrous market and no single organization is going to dominate," said William Gorog, chief operating officer of US Order. Gorog said CyberCash's concentration on developing secure payment systems for electronic commerce on the Internet is good for US Order's business. CyberCash, based in Herndon, currently uses encryption technology for secure transmission of credit-card data. Online Resources has decided to go after small and medium-size banks to sell its home banking services. Online's services include home banking via computer, bill-paying software, screen-based telephones and interactive voice response systems for touch-tone telephones. "A company like Online Resources allows a small bank like us to get into this technology at a much more reasonable rate," said Frank Bentz, vice president of communications for Sandy Spring National Bank, an Ol ney-based banking institution with assets of $ 920 million. Visa Interactive of Herndon, which offers some of the same services as Online Resources, has signed up some of the nation's largest financial institutions including Banc One Corp. of Ohio, Barnett Banks Inc. of Jacksonville, Fla., and the Pentagon Federal Credit Union, the second-largest credit union in the Washington area. "These companies are the pioneers in this industry," said James Wells, managing director for electronic commerce at Washington-based Furash & Co., a financial services consulting firm. "By and large, the technology and innovation that is facilitating electronic commerce is not coming out of the banks." Although experts said the electronic commerce companies in Northern Virginia are still relatively small, they are creating a significant base of high-paying technical jobs. Software developers at TNS earn $ 50,000 to $ 85,000 annually, according to McDonnell. "This is not minimum-wage work," McDonnell said. "We have not spawned a lot of jobs but you have to look at the trickle-down effect. We pay big salaries so our employees can buy big cars." In just two years, CyberCash has quadrupled its employment to 160, half of whom work in the area. TNS has 110 employees, up from 45 just two years ago. Online Resources, which had 50 employees at the end of last year, now has 80. In the next several months, the company expects have 100 employees. "I think that the idea of creating brand-new companies and employing a hundred-plus people, especially at high-end salaries like what engineers make, will have a definite impact on the area," said Magdelena Yesil, one of the founders of CyberCash who recently left the company to start another technology firm. "People are beginning to see Virginia as an area similar to Silicon Valley, an area for launching technology companies. There is a sense of excitement." Transaction Network Services Like many entrepreneurs, John J. McDonnell Jr. was working for another company when he came up with the idea for TNS. McDonnell had been president and CEO of Digital Radio Network Inc., a Tysons Corner firm that used radio waves to carry point-of-sale transactions. McDonnell discovered that a fast-dial service could be created to carry the signal using the 950 dial-up access offered by local telephone carriers. McDonnell said he took this idea to Digital Radio's directors, but they weren't interested. So, he asked if he could trade in his stake in Digital Radio -- 4 percent of its stock -- in exchange for the right to start up a company using the idea for the transaction-oriented system. He left Digital Radio in 1989. In less than five years, TNS has become one of the biggest players in this electronic banking niche. TNS processes about 2.2 billion point-of-sale transactions a year and has captured about 30 percent of the market. The company was profitable after its first year, McDonnell said. For its most recent quarter, ended June 30, TNS reported net income of $ 1.5 million (12 cents a share), a 36 percent increase from income of $ 1.1 million (10 cents) for the same period a year earlier. The company had a year-over-year increase of 66 percent in transaction volume from its point-of-sale division. On June 3, 1991, the first day of of its operation, TNS carried 43 transactions from two Sizzler steakhouses in Arlington, McDonnell said. At 3 cents a transaction, the company generated $ 1.29 in revenue that day. On June 3, 1996, the company handled 5.6 million transactions at an average cost of 2 cents -- taking in $ 118,000 for the day. "I am a happy man," McDonnell said. Online Resources & Communications Corp. Matthew P. Lawlor views Online Resources as a one-stop shop for banks that want to provide electronic banking options for their customers. "My vision is that there will not be a single device that will be the winner in on-line banking," Lawlor said. Instead of guessing which new electronic banking technology consumers will embrace, the chairman and chief executive of Online Resources has decided to offer a full range of services to banks. Lawlor sees a future in which consumers will want to link up to their bank via touch-tone phone, personal computer, a specially designed screen-based telephone, television set or other devices that have not yet been designed. "In essence, the technology is moving so fast, half of what we do is keeping up with it," Lawlor said. Lawlor said he has positioned Online Resources to provide small and medium-size financial institutions with any of the applications and support systems they need to market interactive bank services. In a year, privately held Online Resources has gone from a client list of seven financial institutions to 42 today, including Washington-based Riggs Bank, First Virginia Banks of Falls Church and Baltimore-based Harbor Bank. "In the very beginning, we focused on the big guys but many of these big banks have their own technology people," he said. "Many of the small and mid-size banks need our skills." CyberCash Inc. CyberCash executives are quite clear on their company's role in electronic banking: It is a contractor building the "infostructure" that will allow banks to link up to their customers in cyberspace. "If you asked a banker 10 years ago what business he was in, he would say loans, deposits and transactions," said Richard Crone of CyberCash. "That's like saying Amtrak is in the railroad business, when they are in the transportation business. Banks today are in the information business," he said. "The value they have, for example, is informing someone that their loan has been prequalified." Crone thinks the personal computer is the bank branch of the future, through which hundreds of thousands of customers will want to conduct their banking and bill-paying business. "Consumers are going to be looking for the electronic connections that will let them reach out to the banks any time and anywhere," he said. To help move that process along, CyberCash has developed and will soon begin to test software that would allow credit card firms, utility companies and other businesses to securely receive their bills over the Internet. CyberCash is banking that consumers will want to review their bills this way and that with a double-click of a mouse will access an account and pay their creditors electronically. "We want to provide the ability to fund value in an electronic wallet," Crone said. Visa Interactive In 1994, Visa Interactive, a subsidiary of Visa International, entered the on-line industry by purchasing the electronic banking and bill-paying operations of US Order. Now, experts are predicting that Herndon-based Visa Interactive, with its credit-card ties to thousands of financial institutions, could catapult ahead of competitors such as Online Resources. The company has signed up more than 90 financial institutions for its remote banking services. Visa's goal, like those of other remote banking firms, is to build a network of services that preserve financial institutions' identities and customer relationships, much like its parent does with its credit-card services. "I think you will see, two years down the road, that Visa Interactive will have a rich offering of services and they will be among the major players in terms of revenue," said Simpson of Jupiter Communications. US Order Although Herndon-based US Order sold a core part of its home banking services to Visa International two years ago, it is still a key player in the electronic commerce industry. "We are right in the middle of the electronic banking business," said John C. Backus, US Order's president and chief operating officer. Among its services are bank-branded customer service, centers that handle calls for phone banking, touch-tone telephone voice recognition hardware and software systems for home banking. It also sells PC-based remote banking technology and screen-based telephones, which at a retail cost of $ 299 can dial into a consumer's bank, provide stock quotes, sports scores, news and weather information or a nationwide directory assistance service. "We enable the banks to open up the whole range of electronic commerce," said Gorog, US Order's CEO. Gorog said he's excited that his company and other Northern Virginia firms are part of an industry redefining consumer banking. "The opportunity to change the banking business is exhilarating," Gorog said. "It's so exciting that we are changing people's banking habits." Time: September 23, 1996 Cashless, Not Bankless By Adam Zagorin After watching everyone from Microsoft to Meca Software gobble up online-banking customers, banks have become eager to prove that they're not headed for extinction. Last week IBM and a group of 15 U.S. and Canadian banking behemoths, including Bank of America, Banc One and Mellon Bank, unveiled a venture that aims to provide a full range of financial services to the banks' 60 million customers at the touch of a telephone button or the click of a mouse. Called Integrion, the partnership will phase in such activities as bill paying, electronic lending and stock and bond trading beginning next year. "If we are dinosaurs," says Robert Gillespie, the chief executive of Cleveland-based KeyCorp, "then we're putting competitors on notice that a new breed has evolved with a voracious appetite for expanded market share." Perhaps so, but the new predators have some catching up to do. Fewer than 300 U.S. banks have set up Internet sites. Most analysts give the holdouts four years to either get wired or get left far behind. Consumers can already pay bills and check balances through computer networks like America Online and CompuServe. Microsoft, too, has been signing up banks to provide electronic financial services. Integrion plans to battle the software giant by linking consumers to accounts through the Internet, and with financial software like Intuit's Quicken. The partners will also set up interactive kiosks that act like bank branches for home banking away from home. "With this new venture," says IBM chairman Louis Gerstner, "electronic commerce will take its biggest step forward to date." The ambitious project will join a host of so-called E-money experiments that are popping up around the globe. The goal is to replace cash and checks with electronic transactions that cost just pennies to process. Citibank, a leader in this push for a cashless society, is developing what it calls an Electronic Monetary System that will permit consumers and companies to make payments electronically anywhere in the world. Visa, fresh off a test of 300,000 smart cards--plastic embedded with a cache of electronic cash--at the Atlanta Olympics, will soon launch similar projects in 14 other countries, including Canada, Australia and in Hong Kong. E-money devotees like Valerie Baptiste, a San Francisco secretary, think cash is passe. Baptiste pays for her morning bagel and decaf with a smart card designed by Britain's Mondex and being tested in the U.S. with partners that include Wells Fargo and AT&T. As other customers fumble with change, Baptiste hands her card to a cashier who takes less than five seconds to punch it into a machine that deducts $ 2.15 from the stored-up funds. "This is the beginning of the end of cash," Baptiste says. Unless banks charge swiftly into the E-money era, it could be the end of many of them too. Associated Press: Tuesday, September 17, 1996 Merchants Like Smart Cards to Keep Tabs on Customers By PATRICIA LAMIELL Merchants are attracted to "smart cards" as a way to gather information about their customers, according to a survey released Monday by a group promoting the plastic cash cards that are embedded with a computer chip. Results were released at the opening of the two-day convention of the group, the Smart Card Forum, which also is trying to to convince the public that smart cards are protected and confidential. Customers can use smart cards like debit cards or automatic teller cards, to pay for anything from gas to groceries. Because the card also has a computer chip, it can keep track of what consumers buy and when, and how much they spend. "A smart card can store data about customers, such as product preferences, spending history, and important information that can help provide improved personalized customers service," said Cliff Wilke, vice president for business development at Mobil Oil Credit Corp. Polls done by the Harris organization and the forum have shown that consumers are receptive to using smart cards but concerned about storing personal data on them. In a 1995 forum study, 70 percent asked what safeguards exist to prevent unauthorized access to their personal, financial and medical information. Merchants surveyed by the Smart Card Forum said the cards made transactions quicker and cheaper for them. They also said the cards made it easy to gather information on customers for use in marketing and promotional programs, and for loyalty programs like frequent flier miles. Most merchants surveyed said they believed consumers spend more when they pay with a credit or debit card than when they pay with cash. The study found other benefits to merchants such as theft prevention. The study also indicated that the cards don't have to be used that much to make them cost-effective for the merchant. "Grocery stores, convenience stores, movie theaters and gasoline retailers indicated that a mere 2 to 10 percent - an extremely low threshold of consumer demand - is required for them to realize the benefits of smart cards," the group said. While the survey results released by the forum highlighted selling points for the cards, recent tests have revealed obstacles to be overcome to win merchant and consumer acceptance. Consumers were frustrated when they found some merchants listed in smart card directories either had not installed equipment for using the cards or stopped using the equipment because of malfunctions, according to an independent study of the Visa Cash Card tests at the Olympics in Atlanta. But that study, released earlier this month by Brittain Associates Inc., also reported that most smart card users said they found the card attractive and would use it in the future if the number of merchants accepting it increased dramatically. The Smart Card Forum interviewed 65 major merchants in 11 categories, such as grocery, gas, convenience stores, drug stores, restaurants and theaters. Established in 1993, the forum has more than 225 corporate and government members including Chase Manhattan Corp., Citibank, MCI Communications Inc., MasterCard, Visa, International Business Machines Corp., Microsoft Corp., Mobil and Delta Air Lines Inc. Federal agency members include the Postal Service, the Federal Reserve, and the treasury and defense departments. --- Dr.Dimitri Vulis KOTM Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps