CyberCash KK - Just What the Doctor Ordered

Japan's fledgling electronic commerce industry will get a needed shot-in-the-arm with the arrival of CyberCash KK, a joint venture between Virginia-based CyberCash Inc., Softbank Corporation, and several other Japanese partners in the financial industries. CyberCash KK will provide localized versions of CyberCash's Internet commerce services and, most importantly, offer users the ability to make online payments in yen.

by Forest Linton

According to a spokesperson for CyberCash, the service will launch with about 20 Japanese merchants selling products online. Although CyberCash Inc. has already launched services in Canada and Europe, CyberCash KK is its first foray into an Asian market. In addition to CyberCash and Softbank, Japanese investors include Omron Corporation, Sakura Bank, Sumitomo Bank, Toyo Trust Bank, Tokyo-Mitsubishi Bank, Fuji Bank, Sanwa Bank, Industrial Bank of Japan, Daiwa Bank, Daiichi Kangyo Bank, and Orix Corporation.

CyberCash Inc., which was founded in August 1994 (practically an old-timer in this very young Internet industry), launched its service by offering a digital cash or electronic token service: the Internet equivalent of hard currency. Called CyberCoin, it allows the use of micro-transactions: the ability to buy and sell items for just a few cents or yen. CyberCash offers additional Internet payment products, including a credit card service that handles payments using major credit cards and a secure electronic check service that enables consumer-to-business and business-to-business fund transfers via checking accounts.

Last May, in an interview with CNET, CyberCash founder William Melton speculated on the company's future transaction streams. Once the market matures in two to three years, Melton said, 50% of CyberCash's revenues will likely come from "coin" transactions, 25% from check transactions, and roughly 15% from credit card transactions. He added that (in the US) an average of six checks are written for every credit card transaction.

CyberCash in Japan
CyberCash's CyberCoin and credit card services may fit well in the Japanese market. However, since Japan has never adopted the idea of check writing, I think that an Internet-based checking system has dubious potential. However, it is interesting to note that Japanese consumers could be more accustomed than Americans to transactions that don't require a physical exchange, like a check or a credit card. Instead of checks, Japanese commonly use bank transfers to pay their rent or utilities, send payments to each other, and even when shopping.

The typical Japanese consumer thus might feel more comfortable than his American counterpart with an electronic transaction like digital cash. And although Internet security has been a big issue in the past, I think that everyone is realizing that it is manageable. (Even the press no longer gets so excited over every browser security hole or bug that is discovered.)

CyberCash also has been working with Japanese financial institutions and technology companies in support of the Smart Commerce Japan SET (secure electronic transactions) project, led by Toshiba Corp. and Japan's Ministry of International Trade and Industry. CyberCash is supplying the SET electronic wallet and SET merchant software components. CyberCash wallet also will allow smart cards to be used in electronic commerce transactions.

I have often written on the potential of smart cards in Japan. Personally, I think that the Japanese consumer's wide use of debit cards, the large number of card and card reader manufacturers in Japan, and Japan's skill at building infrastructure will add up to Japan being a great market for smart cards. CyberCash would be wise to focus strongly on growing the smart card market here. My guess on the breakdown of transactions for CyberCash in a mature Internet market in Japan would be 40% electronic coins, 40% bank-based smart card transactions, and 15% from credit cards (with that changing to over 50% via smart cards relatively quickly).

A roller coaster ride
CyberCash Inc. has been on a bit of a roller coaster ride since its IPO (initial public stock offering) in mid-1995. The company, highly visible in the Internet commerce segment, has been hurt because consumers aren't shopping on the Net as quickly as predicted. In February 1997, in a move to stem its losses, CyberCash laid off about 15 of its 200 employees in a company restructuring. The layoffs cut some mid-level managers plus employees in telemarketing, software development, and operations.

Investors have watched CyberCash's stock price soar to a speculative high (over $60) around the time of its IPO, and then gradually sink (to the low teens) early this year. Although CyberCash has yet to show a profitable quarter, in August of this year it announced that it had raised $15 million in equity capital through a private stock offering. This news cheered investors, and CyberCash's stock has enjoyed a small rebound. At the same time, though, CyberCash also reported a net loss of $6.3 million for the second quarter of 1997.

It is very possible that the recent cash infusion, and the company's entry into what could be the world's largest e-commerce market, will be the medicine that CyberCash needs to bounce back into the limelight. As a principal investor, Softbank has already covered its bets in Japan. CyberCash KK is definitely a company worth watching.

If you have questions or comments about "The Digital Forest," you can contact Forest Linton at forest@gol.com

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