Digipass Starts to Make a Mark

[R.A. Hettinga]

<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.

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"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.


-- 
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R. A. Hettinga <mailto: rah at 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,
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experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'