E-Commerce: Minting New Ideas for Virtual Cash

Jim Daly

The Royal Canadian Mint held a first-of-its-kind competition this year to spawn ideas for virtual cash. Could some of these ideas solve the problem of the high cost of low-value electronic payments?

From Silicon Valley to India, almost the entire world is bubbling with new ideas for electronic payments. In 2012, an attention-grabbing well of ideas sprang from a seemingly unlikely source, Canada’s Royal Canadian Mint.

From its name, the RCM’s main job is not hard to guess: overseeing the production of coins, 1 billion a year, in fact, including Canada’s famous gold-colored one-dollar coin known as the “Loonie” for its image of a loon, and the two-dollar “Toonie.” The Mint offers a host of other products and services, including the production of coins for dozens of foreign governments.

But the Mint, a for-profit Canadian crown corporation whose sole shareholder is the national government, is not as wedded to metal as one might assume.

In April, the Mint announced its “MintChip Challenge” contest for software developers to generate new applications for electronic cash, especially ones useful for small transactions and person-to-person payments. The Mint called the MintChip Challenge “the evolution of currency.”

“There hasn’t been [anything] like the MintChip program sponsored by a government or mint anywhere in the world,” says Brent Ho-Young, a Toronto-based managing director at DonRiver Inc., which submitted one of the winning apps.

The Mint developed a platform called the MintChip, for which it holds eight patents internationally. At its core is a smart card integrated circuit that resides on a micro SD chip that can be inserted in a mobile phone or on a USB stick that plugs into a personal computer.

Or, service providers can host MintChips on behalf of users to bring their capabilities to devices that don’t accommodate MicroSD or USB technology, such as Apple Inc.’s iPhone. For high-volume online merchants, the Mint developed a hardware security module to handle MintChip transactions.

‘Pretty Backwards’

Using the MintChip, developers were called upon to build digital wallets, P2P payments, and other electronic services that fulfill the functions of money. The developers could build their apps for one or more of the major mobile operating systems—Google Inc.’s Android, Apple’s iOS, Microsoft Corp.’s Windows, or Research in Motion Ltd.’s BlackBerry—or design multisystem apps.

More than 500 people expressed interest, about two-thirds from Canada and the rest from the U.S., and 57 actually submitted apps. The Mint’s seven judges—some of whom were from major tech companies, such as Osama Bedier, vice president of payments at Google, and Jeff King, senior director of the X.commerce platform partnerships at eBay Inc.—in September gave awards in seven categories, though several apps won more than one award. The contest also featured a popular choice award.

None of the apps is about to be commercialized, although some Canadian retailers and computer-industry firms are working with the Mint on possible next steps. The value of the contest was proving that an electronic platform for cash could work.

“What we did was use this as a competition to determine the applicability of our MintChip app in the marketplace of ideas,” says Marc Brule, the Ottawa-based Mint’s chief financial officer. “We think there’s a market to be ignited.”

In fact, the contest ignited interest from people outside the esoteric world of electronic payments, and some weren’t too impressed with the current state of things.

For example, FlashCash, which took third place in the best overall app category and first place among business-to-consumer apps, was developed by a four-person team consisting of David Huard, a physicist in Quebec City, Quebec; his sister, Estelle, who does technical consulting for banks; her husband, a software engineer, and one of his friends, also a software engineer.

“Banks in general were pretty backwards in dealing with transactions and payments,” says Huard.

‘Legitimate Halo’

The Royal Canadian Mint charged the developers with coming up with apps that offered the same advantages as cash. One was anonymity, or something as close to it as possible when computers and smart phones come into the picture.

“We like to use the term, ‘privacy is respected,’” says Brule.

Others included low cost for users, including merchants, and security. The RCM also wanted a platform that could be adapted worldwide.

“MintChip itself is currency agnostic,” says Brule. “You could load Canadian dollars, U.S. dollars, British pounds, for example.”

MintChip bears some similarities to BitCoin, a decentralized virtual currency that’s attracted its share of controversy because of its usefulness, according to some law-enforcement officials and politicians, in facilitating drug deals or other illicit activities.

“I don’t think there’s any question it [MintChip] will have a more legitimate halo around it,” says Patricia Hewitt, director of the Debit Advisory Service at Maynard, Mass.-based Mercator Advisory Group Inc. “The everyday user is not going to be comfortable using BitCoin. It’s a non-recourse transaction, and you have to have some savvy to use it.”

In contrast, using the apps developed by several MintChip application developers contacted by Digital Transactions requires little tech savvy. The assumption is that each consumer involved in a transaction has a MintChip in his or her smart phone or Web access to a MintChip app.

The developers’ apps covered a variety of functions:

– MintWallet, winner of best overall app and best person-to-person app, enables a user to find other users, pay for online purchases involving individual sellers such as those on Craigslist, and request money from someone else and send it. If sender and recipient are near one another, payment transactions generate a quick-response (QR) code that can be scanned to transfer value from one phone to another.

“It’s like a social network for payments,” says developer Jan Hannemann, a native of Germany who is now a researcher in forest biology at the University of Victoria in Victoria, British Columbia.

Hannemann also is a part-time developer of Windows Phone applications and built MintWallet just for the Windows operating system.

“What I like about the Windows Mobile operating system is that it has a very unique, user-friendly interface,” he says, adding that a number of commentators said they were impressed with the tools he built into MintWallet, tools he says were made possible by Windows.

– FlashCash is a multiple-platform application intended to let users split restaurant tabs and connects with a restaurant’s point-of-sale terminal. When a waiter prints a receipt, the app adds a QR code that each diner scans with his or her smart phone to get an individual tab.

“When you accept payment, it’s drawing cash from your MintChip to the restaurant’s MintChip,” says Huard.

QR codes are the “most favorable” technology for this type of function, Huard adds.

“There are other technologies like near-field communication, but I don’t think they’re quite ready for prime time,” he says.

Google, developer of the NFC-based Google Wallet, and the three big mobile-phone companies backing the budding Isis mobile-payment venture might beg to differ on NFC, but PayPal Inc. and Starbucks Corp. have built big leads in mobile payments without NFC, which requires NFC-enabled phones and terminals.

– DonRiver, which provides systems integration, testing, and consulting services to telecommunications companies worldwide, won the Large Organization Recognition Award for what it simply calls its DonRiver MintChip App, which provides P2P money transfers, cell-phone airtime top-ups, and cross-border transfers.

“Our company does a lot of work with international remittance providers like Western Union,” says Ho-Young. “We wanted to show that the funds on that MintChip could be sent on an international remittance network.”

DonRiver didn’t actually use Western Union, but instead did a simulation that Ho-Young says showed the MintChip indeed could be used for international transfers in 200 currencies. Recipients could receive funds in their local currency on a mobile phone, or at a physical location of a remittance provider after receiving a text message that funds have been sent.

“It doesn’t matter where you’re sending,” says Ho-Young. “The sender doesn’t have to go to the remittance-company branch office; the transaction is completely digital.”

DonRiver’s app uses Apple’s iOS and connects to cloud-based individual MintChip accounts.

– The Pennies a Day app from Calgary, Alberta-based software developer Altira Solutions Inc. enables an Android phone user to add a tiny amount, as low as 1 cent, to each transaction for donation to a designated charity.

“Pennies a Day makes donating simple by incorporating it into your everyday life such as when you buy a cup of coffee, pay for groceries, or visit the food court,” Altira Solutions founder Dickson Wong says by e-mail. “The overall cost to you is small but with enough participation, the impact can be huge. Think of this as the digital version of the cash-register donation box.”

The cost for processing such tiny transactions is low enough that they could be done economically, according to Wong.

While none of the apps from the contest is being rolled out commercially, all of their developers say they could be adapted to the market at low cost, in fact, possibly a much lower cost that the present credit and debit card systems in North America.

“I believe that the MintChip will be a huge game-changer for merchants and consumers and that the card companies should be really scared,” says Wong. “Their monopoly over consumers’ behavior has let them charge unfair fees, but once the MintChip becomes popular, I would expect them to drop their fees significantly.”

Brule says the Royal Canadian Mint is “looking at all kinds of scenarios” regarding pricing.

The Mint is working with some Canadian retailers it won’t identify as well as tech firms to investigate whether some of the ideas and apps arising out of the MintChip Challenge could be rolled out to the public.

“There is a scenario where the transaction fee could be very low or even zero,” Brule says. One idea the Mint is kicking around with some merchants is a monthly subscription charge. In any case, an electronic-currency system would need some form of revenue to be viable, he says.

“That’s really what we’re trying to work through with various merchants today,” says Brule.

‘An R&D Project’

The Durbin Amendment to the 2010 Dodd-Frank Act in October 2011 imposed debit card interchange price controls on large U.S. financial institutions, controls that cut their debit revenues roughly in half.

To partially compensate those issuers, Visa Inc. and MasterCard Inc. turned the Federal Reserve Board’s Durbin price cap—21 cents plus 0.05% of the sale, with another cent for fraud control—into a straight fee for small-ticket transactions, which had the effect of significantly raising debit card acceptance costs for vending-machine sales and other low-value transactions.

Mercator’s Hewitt says a system like MintChip that digitizes cash could offer a way to solve the small-ticket cost problem “assuming you deliver for under 22 cents.”

“One of the interesting value propositions for these currencies … is there’s no recourse, no fraud, no chargebacks, there’s no disputes,” she says. “That pulls some of the expense out of it.”

For now, the Mint is being guarded about what’s next for MintChip.

“It’s part of an R&D project,” says Brule. “Certainly one of our objectives is to commercialize some of our projects.”

One more thing. The Mint awarded prizes to the winners, a total of C$52,700. In old-fashioned gold.