The Future of Money

The power of electronic cash is taking hold in Asia first. Here's why.
Tom LeanderOctober 1, 2001

Behind the bright, brown eyes of Helen Li, the 43-year-old head of finance for Café de Coral, is a brain that’s restlessly making connections. Li is also head of logistics and IT for Café de Coral, Hong Kong’s leading Chinese fast food chain. And lest you think that the food industry is just about food, think again. It’s about time and information and mobility.

The business has a high cost of sales and, with tiny margins, very little room to eke a profit. Li has puzzled over the problem of growth given these conditions through several degrees she earned since starting work at Café de Coral in 1981. These include two MBAs, and in her current doctoral studies in customer resource management (CRM). Like any true polymath, she is open to inspiration. And one day it hit her &mdash as she slapped her wallet on a scanner in an underground station of the Hong Kong Metropolitan Transit Railway (MTR). As the turnstile clicked over, she saw the future of her company &mdash all in an itty-bitty card.

Inside her wallet was an Octopus card, one of 4 million used every day in Hong Kong. Like everyone else, she shelled out HK$50 (US$6.40) for the convenience of prepaying her train journeys and thought no more about it. Who could blame her? Stored-value cards, mainly intended for single uses like transportation or telephone calls, have a bad rap.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

For years, pundits have talked about the possibility of a cashless society. Major banks and credit-card companies have experimented with smart cards all over the world. Problem was, nobody wanted to use them. For every statement about the withering away of cash to electrons, there stood another failed attempt to make it happen. But just as smart cards seemed destined to become another technology also-ran, new constituencies began to find that smart cards made sense. Asia’s consumers are one of those constituencies.

And Helen Li is poised to capture that advantage and take it worldwide. She sees smart cards not as a mere convenience or added liquidity, but as a method of unifying, controlling and growing a company in a low-margin, multi-market business. She also sees a Café de Coral smart card as a vehicle for better cash management and, in time, lower cost access to cash.

“Smart cards are changing the way we think about money,” says Li. The statement is no idle boast. Li is leading an ambitious scheme to install a smart-card system into all of Café de Coral’s eight different ‘brand’ restaurants, including some 192 stores in Hong Kong, Macau, and China. Next, it plans to offer the cards to customers at the largest Chinese fast-food chain in the United States, Manchu Wok, an 182-store chain it purchased last year.

Why bother customers with a new technology when the competition uses well-known plastic? Li aims for a piece of the control that electronic money can give over unruly parts of the business that squeeze an already tight margin. She can’t make food less perishable, but she can make orders smarter by closely monitoring her customers’ purchases. Will she need security guards in armored trucks to shunt cash to the bank, or bankers at all if her customers reach into their bank accounts to pay her up front? Will she need ad agencies if she can target her consumers directly, even personally, via electronic media? Li aims to be armed with the information that enables a profitable US$320 million-a-year Asian company to turn into a bigger, more profitable one. And, the plucky company also has its eye on the ultimate prize: to take advantage of prepaid float to lower its cost of capital and perhaps even reinvest that money, or even make a turn on its customers’ cash by turning it around as loans to cash-strapped suppliers.

Real Money, Really

When the CFO of a medium-sized company is thinking like a financial institution, something funny is going on in the world. There’s no magic behind banking, only a regulatory structure that favors the status quo. Several visionary companies know this and have been vying to cross this border for years, primarily Sony of Japan and Microsoft of the United States. They have long recognized that electronic cash could give commercial companies access to the mundane world where cash still lives.

Real money is already electronic, moving from computer to computer through telecommunications systems from central banks, via overnight bank loans and treasury settlement systems. But no financial institution has been able to hone in on the simplest of transactions: You pay HK$100 (about US$13) from your wallet for groceries or a meal. Electronic point-of-sale systems have grabbed some of this market, but there’s no technological barrier blocking regular companies from competing with banks — only banking regulators.

From the point of view of companies that issue smart cards, it’s a very sweet proposition. Smart-card customers give the supplier a prepaid float in the form of stored value. Merchants who accept them give over a small transaction fee. The Helen Lis of the world are asking, why give that added value to a bank or a credit-card company when you can do it yourself?

Attempts at making smart cards work have been knocking around in much the same way. But most have involved cards with magnetic strips, which have limited ability to store information, and make consumers wait, just like credit cards. Craig Richman of Consult Hyperion, the U.K. consulting company that advised on a pilot for the Mondex smart card with MasterCard in England, explains why it and other ventures like it failed in Europe. “You had to wait,” he says, “just like in a supermarket EPS, and people couldn’t be convinced that they were getting any value added [compared with] simply pulling cash out of their pockets.” A similar trial between Chase and Citibank in New York City also fizzled.

By contrast, stored-value cards in Asia are fizzing. More than 20 million smart cards are already in circulation throughout the region, and that number is growing daily. The runaway success of Hong Kong’s Octopus card, which accounts for US$5 million worth of transactions a day, has spurred smart-card programs around the region. The Malaysian government will roll out its multipurpose smart card this month. It combines stored value with a national ID, a first. Korea has no fewer than four smart-card programs. Singapore is currently considering the expansion of the smart-card program now used for its road system.

Pick a Card

The technology and variety of these cards is changing almost daily. Companies and financial institutions offer single-function cards for pay and mobile phones, such as subscriber identity module (SIM) cards, as well as for retail loyalty programs, credit and debit functions of banks, mass-transit ticketing, and many others. Multi-application cards have now been developed that are capable of several functions, including storing monetary value, keeping personal information about the cardholder, and updating his or her accounting relationship with the card and the application issuer. In Hong Kong, for example, youngsters are buying colorful Octopus watches, a stored-value gadget that lets them buy drinks at 7-11 stores, jump on the MTR and, of course, tell the time with a flick of the wrist. They use it to buy at McDonald’s and to enter local stadiums. Hong Kong salarymen use Octopus to buy a grande at Starbuck’s.

The sharpest corporate eye on the smart-card phenomenon is Sony. The Japanese electronics giant, with its vast R&D budget, has a tradition of experimenting and pushing the limits of existing technology to understand its implications. It developed a multi-application smart-card high-speed processing chip called FeliCa, which became the basis of the Hong Kong Octopus transport card and Sony’s own Edy card, which it piloted through a spin-off company in Japan between March and August of this year.

Like the Octopus card, FeliCa is a ‘contactless’ smart card, meaning that you tap the card onto a reader surface without even removing it from your wallet. The pilot took place in a Tokyo shopping mall, where all the merchants were fitted with readers and consumers were handed the card. The pilot was so successful that Sony set up bitWallet, a separate company, to administer the card. It now plans, starting this month, to issue 30 million cards over the next five years, mostly throughout Asia. “The target market is anything to do with micropayment,” says Kazumasa Miyazawa, vice president of business planning of bitWallet.

Sony’s ambitions for the card can be gleaned in Edy’s name, which stands for euro-dollar-yen. “We want to see the card become a global currency,” says Miyazawa. Sounds farfetched, but the means of delivery is already here. Smart-card portals can be purchased for computer keyboards that allow users to refill via the Internet. Sony is researching ways to put smart cards in mobile phones, allowing automatic refill through WAP technology. This could add millions of users in mobile-phone-crazy Japan.

Experts have long recognized the ability of ordinary businesses to create currencies that ‘compete’ with national money as deposited and lent through financial institutions. They’re watching Sony closely. Sony Bank has applied to Japanese regulators for banking powers that would allow it to use prepaid float for banking. That means when Sony and bitWallet get enough cards rolling, with millions of customers paying money in stored value, it will have made the sea-change from industrial company to bank. “I foresee new private currency markets in the 21st century,” said Alan Greenspan recently. If so, it will be a first shot fired across the bow of Asia’s protected banks.

“If the banks act like lemmings, other sectors will muscle in on the payment and financial services field,” warns Bernard Lietaer, an expert on e-money and author of The Ecology of Money, published last year by Resurgence Books. “This will include, perhaps, telecoms, supermarkets, even Net marketers.”

The Power of Octopus

Miyazawa notes that Sony was very deliberate in testing its technology in Hong Kong, where it first approached the MTR to use its FeliCa chip in the city’s upgrade of its stored-value turnstile card in 1997.

The rapid expansion of the Octopus card confirmed Sony’s view that if smart- card technology were flexible enough, it had vast potential. Rob Noble, the MTR executive in charge of Octopus’s deployment, became convinced that the use of the card based on the FeliCa technology would soon encompass other retail uses as well. He suggested to the MTR’s board that a service and settlement company be created as a separate entity, funded by the MTR, but which would eventually be spun off and made independent.

Creative Star began by getting local transportation companies, including the Kowloon-Canton Railway Corporation (KCRC), Hong Kong’s three major bus lines, its tram line, and eventually, its minibuses. It also began offering the card for nontransit applications. Seeing the potential, Creative Star applied for a license from the Hong Kong Monetary Authority (HKMA) to offer it at stores. The HKMA decided that the wider application turned it into a deposit-taking institution, and required it to sever its connection with the MTR. This year, according to Noble, nontransit applications, from grocery stores to restaurants, should reach 20 percent of turnover, or more than US$1 million.

Creative Star began introducing personalized Octopus cards this year. These cards hold user IDs, which the memory capacity of the Sony chip allowed. Although it has issued only 440,000 personalized cards, the step is important. In a deal with Dah Sing Bank, the cards can be automatically refilled to a level specified by the consumer each time the amount falls near zero. These personalized cards are being closely watched by bankers, savvy CFOs, and government authorities worldwide.

With personal IDs and bank account information, the card then becomes a trackable data tag. Customer loyalty programs can be implemented, and every detail of the transaction can be gleaned, packaged, or sold. The cards can also be used as staff, government, or bank ID cards. “Hong Kong’s retailers,” says Greg Pote, head of the Asia Pacific Smart Card Association, “are now pursuing Creative Star to be signed up as Octopus merchants so they can accept Octopus at the retail point of sale.”

The success of Creative Star has almost embarrassed the company. Says Rob Noble, “We have more potential applications than we can explore.”

Buy One, Get One Free

He’ll have to act fast, because Helen Li wants to take his business away. “From the CFO’s point of view,” says Li, “smart-card technology offers far more than speeding payment and enhancing customer loyalty. Stored-value technology allows for much more efficient management of customer resource data, a better grip on the supply chain, and helps cash management enormously.” With characteristic moxie, while others are getting in line to be accepted by the Octopus card, she says she’s contemplating working a deal with Creative Star where a Café de Coral card could be used on the public transport system. For now, the real appeal of a smart card is logistics. Café de Coral’s goal is to maintain two days of supplies on hand in each of its outlets. “Tracking smart-card sales would automatically update our system and we’d be able to fine-tune our deliveries,” she says. It will also improve its purchasing, which currently amounts to HK$600 million (US$77 million) a year.

She plans to dovetail the smart-card data with the company’s ERP system. “We’ll be able to make an estimation of consumption patterns, and manage the menu in ways we’ve never done before,” she says, adding that “the system will be able to alert us when the price is going up.”

Since the size of the order affects the size of the discount, a better handle on demand would arm her with a better view of when to buy. Since the price on some of the perishables on Café de Coral’s menu fluctuates from month to month, proper timing of the orders can significantly control costs.

The company already offers electronic coupons through its Internet service. Li wants to extend the coupon plan to smart cards, in a bid to create customer loyalty and improve cross-selling opportunities. Installation costs for the entire project, including the ERP link-up, the smart card “readers,” and the smart cards themselves, is not punishing. Li estimates it will cost about HK$600 million, which she plans to finance with Café de Coral’s current cash flow. Rollout will begin next year.

This is no Mondex — many of these ideas have been tested at a pilot smart-card program at Hong Kong Polytechnic, where Li is polishing off her doctorate in CRM. Café de Coral issued smart cards to students, who used them at venues throughout the school. The application for the pilot, and the programming development for the eventual Café de Coral card, will be done by an in-house programmer. This is in keeping with a Café de Coral tradition. The company’s founder, trained as an urban planner, designed Café de Coral’s shops himself. It might be hard to make the connection between Redmond, Washington, and Fo Tan, Hong Kong, but Microsoft and Café de Coral have something in common. Both see the traditional limits of business vanishing in the world of digital information. And both see no reason why commercial companies can’t harness the power of electronic money.

“The whole point is to earn more from your existing market and sustain growth,” says Li. “Having that kind of control over money gives us the power to do that.”

Tom Leander ([email protected]) is the deputy editor of CFO Asia, based in Hong Kong. For more articles on finance and technology in Asia, see

Drivin’ That Train

Following the runaway success of Octopus, public transportation systems throughout Asia are eager to latch on to the Hong Kong model. Taiwan is developing an EasyCard, Singapore and Malaysia have their versions, and South Korea has no fewer than four different forms of electronic cash. The most successful example is the MyBi card.

Developed by the Pusan Metropolitan City Government, MyBi integrates two smart-card programs, the local bank e-purse program, and a transportation card. Since customers would use the card for banking, for stored-value transactions, and as an ID, it required both contact and contactless smart-card capabilities in the same package. A joint-venture company was set up, with partners that included the Pusan Metropolitan City, KPMG, Microsoft, and Korean IT Ventures, a technology consultant.

The plan quickly spread to other cities. There are currently about 50,000 daily MyBi transactions, and each day the joint venture issues 5,000 new cards. Asian governments love programs like MyBi because they provide a window on taxable business income. Whereas cash transactions can be slipped into the private till, electronic transactions leave a trace.

Are Asia’s successes with the smart card exportable? There are unique factors fueling the smart-card boom in Asia. These range from teenagers who view technology as a fashion statement to Asia’s relatively high dependence on public transportation. Asians are also used to a high degree of government intrusion into their lives — most carry ID cards as a matter of routine. Another card in their wallet is no big deal. Privacy-conscious Europeans and Americans, however, may be less eager to put themselves into yet another computer database. “Malaysian consumers are likely to see the government’s new combination ID and e-card as a convenience,” says Foo Suan Pin, a Unisys systems integrator who helped design the new Malaysian smart card. —T.L.

Smart-Card Glossary

Cardholder verification. Smart cards have one clear advantage over notes and coins: They can be made harder to steal. Can be, because nobody has yet produced high-security smart cards for commercial use. There are cards protected by a PIN, but researchers are more interested in biometrics; when you make a smart-card payment in the future, the card reader might check your fingerprints or your retina. (Watch Charlie’s Angels, the movie, to learn how to crack the system.)

Contact or contactless. There are two kinds of interfaces between a smart card and its card reader. Contact cards transfer data via electrical contact points that physically connect to the corresponding points in the card reader. Contactless cards transfer data using radio waves over a maximum range of 10 centimeters between card and reader. Contactless-card users are easy to spot: They do the strangest things to avoid taking the card out of their bags or wallets.

Smart credit cards. The world’s largest debit-card and credit-card issuers — Visa, MasterCard, Europay, and Amex — have issued credit cards with microprocessor-enhanced features to compete with cards issued by non-mainstream financial institutions. Smart credit cards have yet to become a hit in Asia, but they are bound to replace the magnetic variety soon. Each contains the functions of a regular credit card, an electronic wallet, and details of the loyalty programs that you belong to. Will the next fad in body piercing be subdermal chip implantation?

Mobile smart cards. In Europe and Japan, mobile-phone users commonly made purchases with electronic cash after it became possible to store bank details on SIM cards. The 3G SIM will do a lot more. NTT DoCoMo, for example, will introduce phones with an internal smart credit card and card reader, allowing users to conduct more-complex transactions over the mobile network. They can also download all sorts of applications and discount coupons from vendors. This type of smart card will be contactless, so it can also be used for offline, physical payments. —Enid Tsui