Going Dutch on Internet: Mike Hewitt finds 'virtual money' could be the answer to cash-flow problems

With the recent announcement of the Mondex 'smart' credit card and other such financial innovations, the concept of digital cash seems to be much in vogue at the moment. Yet it is hardly a new idea.

For most practical purposes, money has in fact been digital for decades. Take payment by cheque. Were I to send a cheque for, say, pounds 200 to my accountant, my bank would not then dispatch a little man with a wheelbarrow heaped full of pound coins to his bank. At this level, all that happens is that credit points are subtracted from one bank's computer and passed on to another. No physical transfer of currency takes place. This holds true for most other types of payment, save perhaps for those to some used car salesmen.

In essence, this is the concept behind E-Cash, a 'virtual cash' service being offered by a Dutch company, Digicash. When and if the system becomes fully established - several large financial institutions are interested - users of any personal computer will be able to send money over the Internet, the global information network, to each other or to E-Cash registered vendors, as easily and securely as electonic mail messages.

There are two types of E-Cash user: the consumer and the retailer. Each has their own version of the E-Cash software. Consumers can download the 'client' software to their computer's hard disk free of charge from the E-Cash server on the Internet. They then use the software for logging on to the server and registering.

The procedure is the same as registering with a conferencing system like Cix or Compuserve; credit card or bank details are entered on-line, together with security details, such as passwords. To access their cash, users log on, specify the amount required and click on 'OK'. This is then downloaded to their computer in E-Cash units. Simultaneously, their credit card or bank account is debited by that sum.

At this stage, users are left with a hard disk full of 'virtual cash'. If anyone tried to mug them and steal it, it would be of no use without the special password. Then again, E-Cash is of no use until you can find a retailer who accepts it, in exactly the same way as American Express cards are just pieces of plastic until you find a shop willing to honour them. So who is likely to sign up?

'The niche for electronic money is primarily for low-value purchases, of typically less than pounds 10,' according to David Chaum, the managing director of Digicash. 'Here, cheques are impractical. This is especially so if the merchant is in another country, using a different currency. Currency conversion charges would render low-value international transactions uneconomic. Similarly, it isn't cost-effective for small dealers to take such a small sum by credit card because of the individual transaction surcharges imposed by the credit card companies.'

Mr Chaum believes E-Cash transaction surcharges will be far less than those for credit cards, encouraging smaller businesses, such as takeaway food outlets and small software houses, to sign up.

In particular, he sees E-Cash giving a boost to 'shareware' - programs which are freely distributed and require users to then register and pay for them. 'Most people don't pay for their shareware,' he says. 'It's not necessarily because they're dishonest, but because there's no satisfactory mechanism for paying for it. With E-Cash, there will be, so encouraging more to be written.'

So retailers will advertise their willingness to take E-Cash, in the same way that shops place credit card symbols in their windows. Buyers will then contact the retailer, place the order, and E- mail the money over the Internet. That sum will then be subtracted from the buyer's hard disk and transferred to the vendor's.

On each occasion, a small percentage of the sum received by the retailer - a transaction charge - will go to Digicash. Buyers can carry on making purchases in this way until their stock of virtual cash is exhausted.

E-Cash can also be transferred between individual users, without transaction charges being incurred. However, Digicash has ensured that its server is intelligent enough to recognise when private individuals are processing multiple transactions, perhaps trying to act as retailers without registering as such. E-Cash accrued by retailers and any surplus left on a user's hard disk can be converted back to 'hard currency' at any time, simply by uploading it back to the E-Cash server, which then automatically credits the users' bank account.

In due course, systems such as E-Cash may mark the end of 'Your cheque is in the post' as an excuse. They may yet inaugurate another variety, however: 'Your cash is in a bad hard disk sector,' perhaps?