Online Currencies Go For Broke

N E W   Y O R K, Aug. 28, 2001 -- It seemed like a brilliant idea at the time. With no foolproof secure way for consumers to pay for purchases online, why not create a brand new Internet currency?

It would be safer and more secure than a credit card number and merchants would receive their payment instantly — without having to worry if the buyer on the other end is a crook. And for consumers, they would be able to use it on virtually any e-tailer they stumbled onto on the World Wide Web.

That idea seems a little less brilliant now with the closure in the past week of two widely known Internet currency companies: Flooz.com, a two-year-old firm that made its name with Whoopi Goldberg as its spokeswoman, and the lesser-known Beenz.com.

Green Stamps Go Digital

The two dot-com failures epitomize the difficulty merchants have had in finding a surefire way to pay for online purchases.

"People had nutty projections about e-commerce growth and knew that cash was never designed for the Internet," said James Van Dyke, a research director with Jupiter Media Metrix. "People thought it made sense to jump in and design an alternative payment method just for the Internet, but the bottom line was that it never proved to be a very good alternative."

No Coins in the Floppy Drive, Please

Long before Amazon.com became a household name, companies had been grappling with how to handle purchases from customers online. Since no one has ever been able to figure out how to send hard currency into the ether, most merchants had gravitated to the same type of system that mail-order and telephone-order merchants had long used: payment via credit card number.

But that had its obvious pitfalls. For one, no one could figure out how to verify identity. Since you can't check someone's signature over the Internet, companies accepting credit cards as payment for their wares could only hope that the person inputting the credit card number was who they claimed to be.

Poll: Security Concerns When Shopping Online?

For another, the major credit card companies — Visa, MasterCard, American Express — were, and still are, requiring higher percentage fees based on the risk of the transaction. For smaller e-tailers with more perceived risk, the higher the transaction costs and the higher the deposit needed to secure a payment system. That made it very difficult for e-etailers without big bucks to fork over to the bank to secure sales.

The hope, for both Flooz and Beenz, was to create an alternative currency that would be popular with e-shoppers, more secure with e-tailers and avoid all the rigamorale that both buyers and sellers continue to grapple with today.

Popular for a Time

And for a while it worked; Flooz sold more than $3 million of flooz currency in 1999 and $25 million in 2000.

The company also managed to persuade dozens of merchants to accept its currency, including J. Crew, Barnes & Noble and Tower Records, among others.

Cloning Credit Cards

While the pros were having guaranteed currency on many different e-tailers, the cons were actually getting money into a Flooz account in the first place. To fill up their accounts, customers would have to provide a credit card, which never solved the problem of having to verify credit card payment for the Flooz currency in the first place.

Case in point: A New York Times report Monday that said Flooz had unknowingly sold $300,000 of its currency to a ring of credit card thieves in Russia and the Philippines. Stolen credit card numbers were used online to buy the Flooz currency, the newspaper said.

Still Hope for Online Payments

To be sure, not everyone is giving in to the credit card as the only way to pay for goods on the Net.

You can't necessarily lick S&H Green Stamps in their virtual form, but the purveyor of the venerable food stamps recently introduced a Web version of its 105-year-old product. The stamps, a predecessor of airline "air mile" programs, were collectible stamps that could be saved up and redeemed for products.

Other forms of Internet payment have also worked quite well. E-cash, which has become popular among Web shoppers, works similar to a phone card, with the user moving cash into a holding place and spending it from there. And PayPal, a way for eBay auctioners to send payment for the items they bid on, has been wildly successful, according to Van Dyke.

Of course, none of that is particularly good news for Beenz or Flooz, which are both currently facing potential bankruptcy. Nor is it good for the credit card companies that bought a part of the alternative currency pie; NextCard, one of the biggest online credit card companies, along with other investors, purchased an undisclosed minority interest in Flooz.com for $27 million back in early 2000.