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+++ S P E C I A L R E P O R T +++
"Brave New Money:
E-commerce is being hampered by an outdated payment system.”
by George Matyjewicz
October 20, 2000

Your money’s no good here! According to all the predictions, your brick-and-mortar stores should have been replaced with online stores by now. The latest study from ActivMedia Research states that e-commerce activity is expected to reach $132 billion worldwide by the end of 2000. This figure is twice the amount reported for 1999, when online commerce was worth $58 billion. Yet it could be much higher if not hampered by security issues and an antiquated payment system, which prevents a true global e-commerce operation.

In a survey commissioned by the Information Technology Association of America and Educational Data Systems, more than three out of five American consumers say that security concerns make them less likely to do business online and believe that consumers are not being adequately protected against “cybercrime.”

According to Elwyn Jenkins, a world-renowned authority on online currency, “the promise of e-commerce is not yet fully realized.” He explained: “The Internet was to have been the place where all people from across the world could meet and, regardless of borders, commerce could be conducted. We are far from this, in reality. E-commerce is largely limited to the U.S.A., Great Britain, and Europe, with most e-commerce sites dedicated to doing business within the U.S.A.”

“E-commerce is being hampered by security issues and an inefficient and outdated payment system,” said Jenkins. “Card-based payment was a concept that was designed for face-to-face commerce, where a consumer’s credit card was used to imprint on a receipt to represent the presence of the consumer in a store. However, e-commerce does not work like this. The customer is never present at a store. The merchant does not handle the card. Online authorization mechanisms are not in reality ‘real time’ in most cases.”

Apparently, most banks believe Jenkins’ findings, because they charge higher fees for merchant accounts for Web retailers, if they offer them at all (Web retailers pay 2.5 percent plus 30 cents per transaction, vs. 1.5 percent plus 30 cents per transaction for brick and mortar retailers. Some Web e-tailers have reported paying 5 percent.). The banks may have good case: The use of stolen cards represented 1.2 percent of Internet sales in the U.S. last year and 2 percent of Internet sales in the U.K.

The World Wide Web demands worldwide money. Five years ago, a new method of payment emerged: private digital currency (PDC). The first two attempts at PDC iterations failed; PDC is now in its third incarnation. However, we should remember that the debit card also failed during its first two attempts. Today, debit cards are as common in retail stores as credit cards are. PDC works well on the Internet, but don't be surprised if it shows up at your store in the near future.

The term “PDC” encompasses several different brands of electronic money, which can be obtained at various Web sites. Essentially, PDC allows consumers to pay for goods or services without the merchant having to set up an account for credit card payments. Some forms of PDC, such as PayPal, are simply online bank accounts, which allow consumers to email money to other consumers. On the other hand, E-gold, which has been carving out a niche of its own, is a digital currency that is “gold itself, circulated electronically.” As such, e-gold is an ideal currency for worldwide e-commerce trade. 

Others, like Beenz and Flooz, use PDCs as marketing tools, which can be spent at merchant sites regardless of where in the world they are located. With Beenz, a visitor “works” for them by visiting sites, for which the visitor is paid with “beenz” which can be used at any merchant who accepts these beenz, i.e., spiegel.com, eddiebauer.com, Dell Computer, and others. You cannot purchase beenz, rather you “earn” them for “working.”

Flooz is the online gift currency you send by e-mail. Your recipient spends Flooz, just like money, at the online store of their choice. You purchase “flooz,” send them to the recipient (by e-mail or you may print and deliver them) which are redeemed at over sixty merchants in seventeen categories, i.e., apparel, pets, food & drinks, babies & kids, etc. Merchants like ashford.com, art.com, barnes&noble.com, TowerRecords.com, ToysRUs.com and others.

Neither Flooz or Beenz allow you to spend offline.

The first PDC was Digicash. It allowed customers to download “cash” to their own computers. However, Digicash proved cumbersome to use. It was also untraceable, so, while it might have worked on a consumer-to-consumer basis, it wasn't practical for use in a business environment, where the business owner/manager needs to be able to trace transactions for reporting purposes, using checks. 

PDCs will work in the business world if the parties involved can determine the rules of exchange. The retailer could specify that the merchandise will be inspected by the consumer before the retailer is paid. Once the consumer has examined the merchandise and found it acceptable, he or she would then notify the PDC operator, and the PDC operator would see that the merchant was paid. If the merchandise was deemed unacceptable, the money would not be refunded to the customer until the merchandise was returned. This is the same protection that is afforded to companies when they use letters of credit for foreign purchases. While credit cards assure the merchant that the consumer can pay, they really protect the consumer, which is a real problem when one is selling “electronic intellectual property” (software or documents written and downloaded to a consumer’s machine) or selling to someone in another country.

It should be noted that all PDCs hold the currency until the transaction is settled. Invested wisely, these PDCs earn interest on the currency.
Two companies have emerged that together could create the next global monetary system. Gold and Silver Reserve (G&SR), based in Melbourne, Florida, has created a little-known currency called e-gold to enhance e-commerce transactions. E-gold is backed 100 percent by gold bullion stored in the Bank of Nova Scotia in Toronto, Ontario. E-gold’s value is determined by the weight of the metal, not by the value of the U.S. dollar or any other national currency. Weight units have a precise, internationally recognized definition. This means that a Canadian retailer can pay a German supplier or a Japanese consumer can pay an Australian retailer the correct weight of e-gold as easily as if the price had been quoted in his or her own national currency. All prices are quoted in currency, and the conversion is done seamlessly in the G&SRs back office where today’s gold rate is maintained. 

Another company, Atlanta,GA-based Standard Reserve, a partnership between G&SR and others, unveiled a new currency called gold grams. Gold grams are specifically designed to enable global e-commerce. Initially, Standard Reserve will use global agents in nine countries to provide exchange and local payment services. G&SR will hold the gold grams, which is physical gold traded electronically. Holders of gold grams will be able to purchase goods and services globally. When making purchases from merchants that do not take gold grams, holders can use a Standard Reserve debit card to draw upon their holdings of gold grams, just as one might use a Visa or MasterCard debit card. The Standard Reserve debit card can be used in ATMs, brick-and-mortar stores, and any other location where Visa and MasterCard are accepted.

E-Gold has been in existence for three years. Standard Reserve is taking this one step further by offering debit cards, which means consumers can transact business on- or off-line at any merchant who accepts debit cards. Large corporations can use gold grams to pay employees in foreign countries, which can then be withdrawn at their local ATM. Folks working in a foreign country can send money home instantly, simply by giving their family members a debit card. Right now money transfers using Western Union or wire transfers can take five days. The debit cards are in pilot testing now and are scheduled for rollout the first quarter of 2001. 

Simply put, gold grams (and e-gold online) is a new monetary system based on the gold standard. Many Americans do not realize that the U.S. dollar is not backed by anything other than the strength of the U.S. government. Years ago, people were (in theory, at least) able to obtain $1 worth of gold for every dollar they owned. While that is no longer the standard for the U.S. dollar, it is the standard for Standard Reserve and e-gold. Safety, security, efficiency, and speed — worldwide money for the World Wide Web!

So don't be surprised if one day this new method of payment appears at your brick-and-mortar store.


George Matyjewicz of GAP Enterprises Ltd., a management and marketing “solutioning” firm, can be e-mailed at georgem(at)gapent.com. E-Tailer’s Digest is a moderated Internet retail discussion forum, located at http://www.gapent.com/etailer/.

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