The beauty of being Belgian

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The Economist, April 26, 1997, pp. 17-18.

The beauty of being Belgian

Is skin-deep. Though competition has held back the growth of electronic money elsewhere, collusion may not be a better answer

Suppose you had a telephone -- but because of the way it was designed, you could not call your neighbour. Precisely that sort of problem plagues many high-tech companies today. Their research labs routinely turn out products that can rightly be described as revolutionary, yet consumers are in no hurry to buy. With good reason: today's nifty new gizmo may have little value tomorrow unless it achieves wide acceptance in the marketplace. No matter the merits of that new computer, no one will want it without a wide choice of software -- but it is not worth writing the software unless there are lots of computer owners to sell it to. While being the first on your block to buy a dramatically different car may be cool, being the first to buy a dramatically different fax machine is merely foolish; whatever its technical merits, the device is of little value unless it has other fax machines to connect to.

This, in a nutshell, is why the cashless society has been slow in coming. For years now, futurists have been predicting that tatty banknotes and annoying coins would be supplanted by electronic pulses. Creative minds have invented a variety of plastic cards which, thanks to the magic of microelectronics, can draw value out of a cash machine or a telephone, store it on a chip and use it to buy a newspaper or feed a parking meter. Yet none of these technologies has passed the fledgling stage. Competition among different systems has retarded the growth of all of them. Few consumers will bother with a card unless many merchants accept it. Merchants will not want to take a card unless many consumers use it. With several forms of electronic money under test, everyone is content to wait and see which product wins in the marketplace -- but if they do, the marketplace will be slow to develop.

Belgium, not known as a hotbed of technological innovation, seems to have solved this conundrum. Proton, a cash-card developed by a consortium of banks, has become the world's largest electronic-purse scheme (see page 72). Nearly a million Belgians can now make even the smallest purchases simply by inserting their Proton cards into a reader at the newsagent's or the grocer's. At the end of the day, merchants can download their card readers into their bank's computer and have the proceeds credited to their accounts, reducing the need to secure cash, count it and carry it to the bank.

Proton's rapid acceptance is not just the outcome of market forces. It is due to an unusual sort of industrial policy. Almost every bank in Belgium is behind the card, a convergence of support made possible by the fact that Belgium is a relatively small country where collaboration among competitors is a favoured way of doing business. And governments at various levels are encouraging Proton rather than, say, smart cards issued by competing purveyors. In many countries, such a sweeping agreement to use one particular technology and not another would draw attention from courts and trustbusters. Not in Belgium.

But Proton's fast growth does not mean that the Belgians have found a winning formula. For industrial policy has a downside: it can stifle change and retard further innovation. The evidence can be seen across the border, in France. A decade ago, the French government subsidised the purchase of Minitel computer terminals by millions of families. Minitel was heralded around the world as a revolutionary achievement, and the French government's farsightedness was widely praised. But those inflexible Minitel terminals are still in use a decade later, while the rest of the world has embraced the advantages of networking on the Internet. France, once a leader, now lags behind.

There is a lesson in that. Industry-wide co-operation and government policy are undoubtedly effective when it comes to speeding the acceptance of a new technology. But the technology they enshrine is not necessarily the best available, particularly when they are at pains to favour a domestic product over foreign ones. The very fact that one technology gets the official nod may stifle the development of superior alternatives that could threaten the position of the favoured scheme. Proton may be on the leading edge of technological development for electronic money today. But without the uncomfortable pressure of competitive forces to keep it on that technological frontier, Belgians may be less pleased with their electronic purses tomorrow.

pp. 72, 77.

Electronic money Chipper, for now

There is nothing particularly unusual about Place Dumon, a cobbled square in suburban Brussels ringed by quaint shops. Until, that is, you notice how the locals purchase their wares. For they are paying for parking spaces, picking up newspapers at the Gavilan newsagent, strolling to the Antoine bakery for a doughnut, and even buying babies' outfits at the Minou boutique, all without reaching for a single note or coin.

The reason is Proton, Belgium's experiment in virtual cash. Proton is one of several "electronic purses" being tested around the world. The e-purse, as geeks know it, is a chip-based, or "smart", card that stores digital money which, its fans hope, may one day replace crumpled notes and fiddly coins in small purchases. Since rolling out nationally a year ago, Proton has become the world's largest purse scheme, measured by cards circulating. In Belgium alone banks have issued 900,000 cards, and 14m cards with Proton's reloadable chip are in use worldwide (see table). But Proton's enviable position in this fast-growing market is under threat.

Proton's unique history has driven its success. It was founded by Banksys, a consortium of 60 banks that operates Belgium's electronic-payments network. This togetherness has helped Proton crack the chicken-and-egg problem that has slowed the spread of smart cards elsewhere. Customers will not want a card if few merchants accept it. Merchants have little reason to take the cards if few customers use them -- or if they will need several card readers to accommodate a variety of technologies. Having 60 banks agree on a single technology immediately created enough critical mass to attract both groups. Belgium's governments, central and local, have given an added push by, for example, adapting thousands of parking meters to take the new card.

The convenience of not having to fumble for coins has convinced Belgians that carrying a Proton card, which can be refilled at the nearest cash machine, is worth BFr200 ($5.70) a year. Some 10,000 merchants have paid Banksys up to BFr15,000 per terminal, then 0.7% of every sale, in the hope that Proton will lower their cash-handling costs, reduce theft and draw customers. Proton will be profitable with these prices, the banks reckon, although they do not expect to recover their investment for at least four years.

By then, Proton might look very different. The chip cards now include a debit-card function. Eventually, a single card may combine the e-purse with credit, debit and loyalty cards. Proton is also developing special telephones that would allow customers to reload their cards at home, as Mondex, a British-based rival, has already done. Armand Linkens, Proton's sales director, says that "building critical mass is about offering the consumer multiple benefits on one piece of plastic." It is also about crossing borders. Since 1994, Proton has sold its technology to nine other countries. It recently signed up American Express as a licensee and has set up a Malaysian joint venture to market its card in Asia.

A question of accountability

Proton's technology differs from that of its main rivals. Unlike Mondex, Proton is "centrally accounted", which means that every transaction is settled at Banksys's processing centre.

Proton touts this as a big advantage over real cash. If a banknote is lost, tough luck; if, however, a Proton card is misplaced or broken, the balance on it can be reimbursed because all debits are logged centrally. But as Mondex is quick to point out, central accounting has disadvantages too. Many customers may prefer to move digital cash around without their every transfer being logged. In addition, centralised schemes may prove more costly to operate, making small transactions, including the purchase of small bits of information and software over the Internet, uneconomic.

Proton also faces complaints about parochialism. Its chip can hold just one currency. Mondex and Visa Cash, a rival run by a huge bank consortium, can store value in up to five different currencies. Mr Linkens says more currencies will be added once there is enough demand from peripatetic customers, but that will require much technical fiddling, which will make cards costlier to produce.

Then there is inter-operability. If it is to become a global force, Proton must link its international members through an integrated payments system that allows, say, a Belgian customer to spend his e-cash in Switzerland. The deal with Amex will help. But most pundits think Proton will have to pair up with one of the two biggest payments networks, Visa and MasterCard, if it wants to achieve this. These two bank-owned groups are already busy buying up purse providers around the world. In November MasterCard took a controlling stake in Mondex. Visa has absorbed several e-cash technologies and is folding them into Visa Cash.

Might it also want to add Proton to its stable? No matter how impressive Proton's technology, ceding independence may be its only hope of plugging into a global network. Richard Poynder, chairman of the UK Smart Card Club, a trade group, believes that Proton's aggressive expansion has been driven by the fear of being "snuffed out like a candle in a storm" unless it can steal an early march on rivals. The stakes are high: Datamonitor, a research firm, forecasts that banks will issue 450m smart cards by 2001. But if the history of credit cards is a guide, no more than two or three of the smart-card schemes now being tested are likely to win global acceptance. Whether Proton will be among the survivors may not become clear for some years.