THE MAGAZINE      October 2002
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Cold, Hard Cash: The Online Payment Puzzle


Cash. Go into any store. Grab anything worth less than 20 bucks. Go to the checkout, pull out your wallet, and peel off a $20 bill. Collect your change and leave. It’s just so easy.

Cash is a remarkably simple way to do the inherently complicated job of buying stuff. It’s portable; you can give it away; children can use it; you can divide it; it’s ubiquitous; it costs nothing to use; it’s backed by the government, fairly durable, reasonably secure and effectively anonymous. Everybody recognizes and accepts it for what it is: cash.

Digital Cash/E-Cash Yet all this cash hanging around in wallets and being touched by people just seems so, well, dated. Whatever happened to the cashless society forecast by those same magazines that promised each of us a personal helicopter? The vast majority of the world’s currency is already nothing more than ephemeral electrons cruising effortlessly around banks and clearance systems—so what’s up with cash?

It turns out that a digital version of cash is hard to invent. There are infrastructure, security and usability problems that have crushed all attempts at supplanting dollar bills and coins.

Take anonymity, for instance. For most purposes cash is anonymous, but it can be marked, traced and followed if necessary. A perfectly anonymous version of e-cash is conceivable. But governments aren’t at all keen on perfect anonymity. That would, they fear, lead to all kinds of exotic new crimes and mess with things like, oh, taxes and such. Interfering with taxes is a Bad Thing as far as governments are concerned. So don’t hold out too much hope for anonymous digital money.

Then, of course, there are all the other attributes of cash—portability, universal acceptance, transferability and the like—that are hard to reproduce in a full-fledged electronic package. A number of high-profile attempts at using "smart cards" as a cash replacement have ended in grief. No one was interested, really.

The fact is, cash is far from dead and will likely be in our pockets for a while yet.

But there is a demand, spawned by the Internet, for new forms of digital money that take on aspects of cash. Many have failed miserably; some show promise.

Flooz and Beenz Let’s start with the failed-miserably class of new money types. As online retailing gained traction in the mid- to late 90s, people began to look for alternatives to using credit cards for online payments. Online shoppers were generally wary of using credit cards, and credit cards cost merchants money—10 to 20 cents per transaction plus 2 to 3 percent of the purchase price. Where margins are thin, as they are with online retailers, credit card transaction costs loom large.

So entrepreneurs, backed by buckets of venture capital money and supported by the ever-expanding speculative Internet bubble, came up with a flurry of online currencies with odd names like Beenz and Flooz. Beenz, even though it billed itself as the Internet’s first universal currency, was little more than an online version of S&H Green Stamps. People earned Beenz by visiting participating Web sites. Beenz could then be exchanged for goods at those or other sites. Flooz took a different tack. You bought Flooz "certificates" with real money (checks or credit cards) and then spent the certificates online. After torching more than $150 million, both Beenz and Flooz shut down in August 2001, victims of widespread fraud, consumer indifference and the collapse of the Internet feeding frenzy.

PayPal A more promising angle was to solve the payment puzzle of a particular Internet business that desperately needed a reliable, cheap online payment system: private auctions. Okay, private auction—singular—because there’s really only one auction site that matters on the Net, and that’s eBay.

eBay’s success highlighted the need for a way to transfer money from individual sellers to individual buyers. We’re talking about people who don’t have credit-card or check-clearing capabilities. They just want to sell their collections of Pez dispensers and get paid quickly and reliably. That’s where PayPal comes in.

Let’s say you win the bidding on eBay for 20 pounds of bird’s-eye maple from a furniture maker in Maine. You go to the PayPal site ( and enter the seller’s e-mail address and the amount you agreed to send. You fund the transaction by giving your credit card or bank account info to PayPal. Click on Send. The furniture maker gets an e-mail telling her that she has cash. She can leave the payment in her PayPal account, request a check or spend it somewhere else. PayPal takes a cut of 2.2 percent plus 30 cents per transaction. It also earns interest on the amount you leave in your PayPal account.

This turns out to be a pretty good business model. From a standing start in January 2000, PayPal now claims more than 17 million account holders. More than half of all eBay deals are completed through PayPal. Indeed, eBay saw the numbers as so compelling that it bought PayPal for $1.5 billion in July 2002. But it’s not just auctions anymore. Thousands of smaller retailers are signing up. Oh, and law firms, too.

Solid money may be around for a while, but keep an eye on your inbox. You may have cash.

Mark Tamminga ( practices law and fiddles with software at Gowling Lafleur Henderson LLP in Toronto.