Micropayments and major disappointments

Two years ago, contactless micropayment vendor Dexit was quietly morphed into the point-of-sale company HDX. No-one cared much.

But just a few years before, the tech sector was all abuzz over the possibility of paying for small-ticket items under $20 with its small RFID-enabled fob that could be pressed to a reader to pay, and then refilled at a bank for a couple of bucks.

Back in 2003, there were partners on board, including the big banks, who would allow users to refill their cards at their branches, and Telus, who stuck the tags on their phones. By 2004, there were 225 merchants on board, and 25,000 consumers signed up. That year, Bell Canada jumped at offering the service to its enterprise IP network customers; the following year, it announced that it would set up a biometrics-based telephone system to add value to Dexit fobs.

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But by 2006, the company had slashed staff and started scaling back its downtown Toronto ops, even though it boasted of 450 merchants and 50,000 customers. The company was now public and hemorrhaging money, according to company founder Renah Persofsky, who now works for the Toronto office of Ubequity Capital.

Eventually, Persofsky stepped down, and Dexit became HDX under the rule of Paul Howell.

Now the Dexit offices are being leased out to save money, and HDX is almost back to profitability, according to Persofsky, who said that she is supportive of the direction of the Dexit brand under the HDX banner. HDX is projecting around $9-million in revenue for 2008, and recently acquired two other companies. But the business is more in general POS technologies, and its Dexit ops are nowhere near its glory days levels. It’s left in exactly seven downtown Toronto locations, although there were new roll-outs of the Dexit Payment Solution with the HDX touch screen Point of Sale (POS) solution at Robin’s Donuts in Sydney, Nova Scotia, and the Manufacturers Technology Centre in Whitby, Ontario in late 2007.


“It was not surprising at all,” said Info-Tech Research Group senior research analyst George Goodall.

Micropayment (or stored cash card) services and devices have a long history of failure going back to the late eighties, and unsuccessful attempts like the Visa Cash, Visa SuperSmart, MasterCash, and Mondex cards. “It’s a game of scale, of cost structure. You have to scale up quickly,” Goodall said. Targeting downtown Toronto for its primary roll-out meant that it was “only a matter of time.”

Several people interviewed used the term the-chicken-and-the-egg. Said Goodall: “Without the vendors on board, there’s no value for the customers. Without the customers, why would the vendors get involved?”

Probably the best example of a successful micropayment system is The Octopus, the Hong Kong Transit System. It utilizes a contactless stored-cash payment system. But, said Goodall, the key to its success lay in the humongous scale of the endeavour. “It’s a massive transit system with huge usage,” he said, “So they had a very rapid subscriber base, with almost 80 per cent of the population using it. It’s hard to reach that critical mass.”


The mechanics of the set-up were off, too, according to TD Bank’s vice-president of merchant services Jeff van Duynhoven, who functioned during Dexit’s time in the sun as vice-president of electronic banking and payments and sat on the Dexit board of directors. Said van Duynhoven: “The challenge was the POS — it was a separate device that sat at the merchant’s checkout. They had to key into the POS and the Dexit terminal to get that transaction processed, so by the time you were charged, you’re not seeing that throughput. It’s a longer process for the merchant in addition to the rental charge for the terminal.”

TD, who made TD-branded tags available through its Web site and offered them to its employees, weren’t able to reach a satisfactory business deal, he said. van Duynhoven resigned from the board in 2005, and TD sold its share on the market once the company went public.

The National Bank of Canada was another Dexit partner. “It sounded exciting, so we did a small pilot with employees in downtown Toronto of two to three buildings,” said manager for payment strategies and debit cards Carlos Martinez. But, again, it was the scaling-up that proved troublesome. Said Martinez: “We went back and forth in negotiations, but there was no demand for participation.” Dexit also erred in taking on a lot themselves, according to Martinez: “They strongly believed they could do it all, both participating with the banks and competing against them. And usually a third party handles the merchant relationship and operates the terminals, which Dexit did itself.”


Then there was the fob itself. Said IDC Financial Insights analyst Rob Burbach: “The whole technology never caught on because Dexit never understood what consumers use cash for. It was touted as a replacement for cash, but with cash, you can borrow it, you can give it, but Dexit didn’t seem that convenient.”

van Duynhoven also pointed out the annoyance factor of having to reload a Dexit fob at a bank, which added yet another step to the process.

Burbach said, “You weren’t taking something away — you were adding something when you’re already juggling cellphones, keys, and wallets.” Even the vendors’ cardreader demands didn’t mesh with what the customers truly wanted, said Persofsky. “The merchants wanted to own the real estate, and have the royalty paid to them directly, and have their own cards,” she said. “They wanted value for their brand, rather than what consumers were looking for — consumers wanted only one card.”


And, looking in people’s wallets these days, most of them have something in common: credit cards. Dexit may have just been ahead of its time, as micropayment, chip-enabled, and contactless cards are finally making small inroads due to that customer-coveted all-in-one appeal, courtesy of the big boys — Visa and MasterCard. With them on your side, it’s easy to reach that critical mass that Goodall mentioned.

One of the key success factors is that they already have a gigantic subscriber base, and the cards are already in their pocket or purse. “There has been some restructuring of the financial sector and banking that makes contactless payments more attractive to the card companies and banks, and there has been some standardization around RFID. The readers are also cheaper now,” said Goodall.

MasterCard got in there first with its PayPass, a mag-stripe-based card that a user taps to the terminal for purchases up to $50, which has been rolled out to several large chains, including the coup of landing their machines in Tim Horton’s, and Loblaws, along with other small-ticket vendors.

Visa has the PayWave card, which, along with other card chip-enabled card brands, is undergoing a trial-run in the Kitchener-Waterloo area, and sees the user inserting it into a reader for purchases up to $25. Duynhoven said that several quick-service restaurants and larger national merchants have expressed interest in the TD-branded Visa PayWave technology so far.

Said Gartner Research senior analyst Ben Pring: “If you look in your crystal ball, in ten to 15 years, it will be ubiquitous, but between now and then is a long journey. Dexit was probably ahead of the curve — there’s always entrepreneurs who get the timing a bit wrong.”

Even in the future, though, it could be tough for the little guy to make a go of it in a space so thoroughly dominated by a few companies with such global reach. Burbach said Dexit-like technology could be used as a niche application for something like a customer loyalty program where the key could act as a points collecting device. “But it’s very difficult for a small outsider to make it (alongside the big boys),” Goodall said. “It’s hard to imagine anyone doing it.”

Said van Duynhoven: “It’s the fundamental difference: the consumer experience is identical, and there’s already a relationship.”


There’s another blossoming relationship here, too: that of micropayments and the IT manager. It shouldn’t be too stressful, however. “Unless you work for Visa or MasterCard themselves, it won’t really be your problem.” Goodall said, “Most of the infrastructure issues happen on the provider side with the banks and credit card companies. It’ll be more the financial department than IT, unless you do IT for accounting. The only thing they might be involved in is any sort of reporting or invoicing software.”

IT managers might have to bone up on the issues that go hand in hand with the new chip cards on the horizon, according to Burbach. “You need to think about what else you can do with these cards,” he said. “You can start a loyalty program, or do some enhanced reporting and tracking. There are data implications from that on the back-end. If you’re collecting all this data, you need to know what to do with it.”

Oh, and one more thing, said Goodall: “If you’re an entrepreneur, stay away from micropayments!”

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