CYBER VENDING MACHINE

By MICHAEL KRANTZ

It is a truth universally acknowledged that an infant media-distribution network in possession of a large audience must be in want of a way to cash in on it. Case in point: the World Wide Web, the interconnected computer universe that teems with affluent consumers whose only means of spending money online is to surrender their credit card to insecure networks--hardly a recipe for success.

This week CyberCash, based in Reston, Virginia, launches a product that could change all that, and turn the Web into one giant vending machine. The company's CyberCoin system will allow online "microtransactions" of as little as a quarter. "We think," says an exuberant Larry Gilbert, CyberCash's vice president and general manager, "it's going to be the core of electronic commerce on the Internet."

Here's how the system works: starting this week, you'll visit the CyberCash Web site, download an empty electronic wallet onto your hard drive and register it with the company (if your own bank signs up with CyberCash, it will offer you its own self-named wallet). The software acts like an ATM, allowing you to transfer $20 to $100 from your bank into your wallet before heading off onto the Web. When you reach a site that accepts CyberCash, you can spend your money by using either your credit card or CyberCoins.

For online entrepreneurs, these 'coins,' digital markers of your money, could be the magic bullet that makes commerce viable on the Web. Suppose that, say, a certain TIME writer wants to promote his short stories online. Putting them on a Web site is a breeze. But suppose he wants to charge readers 50[cents] a story? Nobody's going to fork over a credit-card number for that.

CyberCoins could let thousands of such harebrained Web schemes bloom. Take Worbble, a multiplayer word game created by Headgames Inc. of Edmonton, Alberta, that is set to hit the Web next week. From five to 2,000 players at once will look for words hidden in a 3-by-3 grid; the first player to find each word will win $10 to $60. The entrance fee: one buck. The currency: CyberCoin. "The product fits our marketing strategy like a glove," says Headgames president Ray Speichert.

That's music to CyberCash, whose revenue will come from usage fees, just like those of credit-card issuers. "On a 25[cents] transaction," says Gilbert, "we'll charge the bank 6[cents], and they'll charge the merchant 8[cents]." As transaction sizes go up, they'll get a much smaller percentage; still, over millions of users, CyberCoin profits could add up to big bucks.

Inevitably, the company will have company. CyberCash launches CyberCoins with a respectable roster of partners: some 30 Web hosting companies will offer CyberCash to their client sites, and by year's end CyberCash expects about 100 Web sites to take them up on it. Initially six banks will offer electronic wallets to their customers, including the Charlotte, North Carolina-based First Union, the nation's sixth largest. "There's an obvious niche for 'coin' payments on the Internet," says Parker Foley, First Union's director of electronic commerce. "CyberCash is the first company to have their model together."

But most banks are sitting out this round, notably Citibank, which is developing its own E-money software. And numerous start-ups are readying entries in the online commerce sweepstakes. And that can only mean transaction fees will drop quickly, just as they have in nearly every software-driven business extant.

Is cybercash safe from hackers and outright criminals? Last fall the Bank of International Settlements appointed a task force to examine security issues for E-money products like CyberCoin. The group, headed by Israel Sendrovic, an executive vice president at the Federal Reserve Bank of New York, reviewed a raft of upcoming 'smart card' and/or software-based products. Its report, released early this month, conveys guarded optimism. "These systems are much more secure than credit cards," says Sendrovic. "There's no single measure that's fully adequate, but a combination of measures taken together can make them relatively secure."

Not everyone buys that. And if you're a multibillion-dollar banking giant, micro-transactions may not be worth the risk--yet. But an eager start-up looks at risk differently, and so might consumers intrigued by the prospect of shopping in cyberspace. There are fortunes to be made by bringing impulse purchasing to the Web; why not stake the first claim? Notes Worrble's Sprechial, "We're taking a principle of instant gratification and applying it to a game." CyberCash is doing much the same thing, but on a vastly larger scale.