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Mondex USA Partners Look to Ambitious '97 Tests
 
By VALERIE BLOCK 
 
The seven owners of Mondex USA have ambitious plans for 1997. 
 
Wells Fargo & Co. and AT&T Universal Card Services -- the two original 
stakeholders and now
owners of 30% and 10%, respectively, of the smart card system -- are
furthest 
along. Wells has issued
800 cards to employees; AT&T, 200; and both plan to expand the pilots
next year.
 
 
Chase Manhattan Corp., with a 20% stake in Mondex USA, had planned to
begin 
testing MasterCard
Cash on New York's Upper West Side by March, but its switch to Mondex
will 
force a delay until the
fourth quarter. 
 
Even so, Janet Hartung Crane, president and chief executive of the joint 
venture, said, "In 1998, we will
roll out" nationally. 
 
Chase's pilot, with 50,000 cards and more than 500 merchants, would be by
far 
the biggest. 
 
Speaking last week at the Bank Administration Institute's Retail Delivery
'96 
Conference, where
Mondex USA was officially unveiled, Ms. Crane, a Wells Fargo senior vice 
president, said Wells

would expand its San Francisco headquarters pilot in 1997. The bank also
plans 
to test card usage on
the Internet, look for a cobranding partner, and install the technology
on a 
university campus. 
 
AT&T senior vice president Keith Kendrick said he expects to expand the
test at 
his Jacksonville, Fla.,
headquarters in the second quarter, along with an Internet pilot, taking 
advantage of Mondex's ability to
download value via smart phones. 
 
First Chicago NBD Corp., another 10% owner, will begin testing in the
third or 
fourth quarter with 200
headquarters employees and 12 merchants. 
 
Dean Witter, Discover & Co. is "still formulating its plans," said
William 
Simmons, executive vice
president of its Novus Services unit. It is looking to get its feet wet
on a 
university or corporate campus.
 
Ironically, Discover is now in bed with MasterCard -- prospective
majority 
owner of Mondex
International as well as 10% owner of Mondex USA -- despite Discover's
thorny 
relationship with
banks. John R. Mannion, a Novus director, noted that all the Mondex USA 
partners are fierce
competitors. 
 
Michigan National Bank -- owned by National Australia Bank, a Mondex
global 
founder -- is planning
a test at its headquarters beginning in late spring with a fraction of
its 3,
000 employees. 
 
Still, winning over merchants and, thus, consumers may be difficult in
the 
United States. The
high-quality, low-cost telecommunications infrastructure that underpins 
magnetic-stripe card systems
weakens the case for a costly conversion of point of sale terminals to
smart 
cards. 
 
At a BAI seminar just after the Mondex announcement, where Michael J.
Shade, 
vice president of
Verifone Inc., and Fred J. Stephens, manager of technology for Shell Oil
Co., 
discussed the migration
to smart cards, one observer called them "a solution looking for a
problem." 
 
Mr. Stephens said the investment, close to $60 million for his company,
is hard 
to justify. While card
executives argue that chip cards reduce cash-handling costs and
transaction 
times, Mr. Stephens said it
might require reduced interchange fees, personal identification numbers
on 
credit cards to reduce fraud,
and cost-sharing to tip the scales in smart cards' favor. 
 
Other types of merchants will have other high-priced demands. 
 
Visa U.S.A. and its partners in the Visa Cash rollout in Atlanta shared
the 
lessons they had learned at
the conference. Michael Love, a First Union Corp. vice president, said 
merchants are "interested in
sales lift." 
 
As for the business case, "stored value can ride the railroad, but it
will not 
pay for it," said Richard F.
Shaffner, executive vice president at NationsBank Corp. 
 

Guardian (Manchester): Saturday, December 7, 1996
 
Surfing Superhighwaymen
 
By David Gow And Richard Norton-Taylor 
 
Carlos Arario, head trader at the Argentinian firm, Invest Capital,
picked up 
the phone and called
company director, Roberto Barbosa. "You had better get down here," he
said, 
"we've been raided."
Barbosa stared with horror and disbelief at his screen in his Buenos
Aires 
office. Some $ 200,000 had
disappeared from his firm's account with Citibank, one of the world's
biggest 
banks, overnight. 
 
"We were very, very surprised when we opened the cash management account.
There 
were four wire
transfers made out of that account without our authorisation and
anonymously 
sent to four unknown
destinations." 
 
Barbosa alerted Citibank executives at 111 Wall Street, New York. That
was 
August 1994. For the
rest of the year, Citibank's anxiety made its Argentine client's problems

appear minor as its executives
watched in panic while nearly 20 of their accounts - worth about $ 10
million - 
were plundered. 
 
Citibank's marketing department proudly offers the transfer of funds in
any 
currency straight into a
client's account "quickly, easily and cost-effectively" as part of its
"wide 
range of international banking
facilities". But the world's fifth-largest bank appeared to have been
hoist by 
its own petard. 
 
A hastily-assembled "war-room" on Wall Street watched impotently as its 
clients' money flowed quickly
and easily, and at no cost, into accounts in California, Latin America,
Finland,
 Israel, and the
Netherlands. 
 
According to US court indictments, Citibank accounts held by Indonesia's
Bank 
Artha Graha,
Argentina's Banco del Sud, and Invest Capital SA, were raided with tens
of 
thousands of dollars
assigned to accounts set up elsewhere. 
 
Citibank's war-room began a global detective hunt as they realised their
bank 
was in danger of
acquiring a new image as victim of the world's first grand larceny via 
cyberspace. Others who have
hacked into computerised cash transfer systems were insiders. The hit on 
Citibank is presented in the
US as an outside job.
 
Superhighway Robbery, an Equinox programme to be broadcast on Channel 4 
tomorrow night,

suggests it was perpetrated by the Russian mafia exploiting the poverty
and 
disenchantment of
high-flying technocrats under post-Soviet capitalism. 
 
At the centre of a continuing Citibank-FBI investigation is Vladimir
Levin, a 
29-year-old Russian
computer programmer and former biotechnology student from St Petersburg.
He is 
accused by the US
authorities of being the person who hacked into the bank's computers and 
carried out the attempted
multi-million-dollar fraud from a laptop at the St Petersburg offices of
AO 
Saturn. 
 
That is a shabby software and accountancy firm run by a group of
mathematicians 
and scientists who
were losing out on the Croesus-like wealth enjoyed by the entrepreneurial

Russian nomenklatura and
criminal elite. 
 
"The salary at the Institute (St Petersburg's Technological Institute) I
was 
receiving was very low and I
was too ashamed to ask for money from my parents," says Levin in an
exclusive 
interview. Computers,
he says, were "one of the symbols of perestroika. Unfortunately, since 
perestroika there was so little
money being given to research and science a lot of scientists left Russia
and 
went to other countries
where money was more available." 
 
Citibank's war-room traced an unauthorised money transfer -- allegedly
the 
result of Levin's hacking --
to banks in Switzerland and St Petersburg. But the saga did not end
there.
 
Evgueni Korolkov -- a Russian who moved to the US for a better life --
set up 
two Californian
companies, Shore Co and Primorye. His wife, Ekaterina Korolkova, opened 
personal accounts at the
San Francisco branches of the Sumitomo, Pacific Union, Great Western, and
Wells 
Fargo banks as a
conduit for cash from unauthorised Citibank transfers. 
 
In August 1994, Ekaterina Korolkova was arrested by FBI agents as she
tried to 
withdraw stolen
money from one of her accounts which, they had discovered, was the
destination 
of some of the
Argentinian money. 
 
She agreed to co-operate with the FBI who persuaded her to enlist her
husband, 
a former employee of
AO Saturn, to help track down the perpetrators. The FBI told him they
would 
treat him and his wife
leniently if he played ball and gave the name of the hacker. He pointed
the 
finger at Levin.
 
Desperate to find hard evidence linking Levin to the crime, the FBI also 
contacted the Russian police.
An official St Petersburg Special Branch video of what it claims to be
the 
contents of AO Saturn's
office shows computers, guns and Levin's passport. 
 
Meanwhile, Russian mules -- charged with picking up stolen money from
foreign 
accounts -- were
arrested elsewhere as Citibank managed to recover a little over half the
$ 10 
million loss it initially
feared. 
 
Among them was Vladimir Voronin, who was arrested in the Netherlands
where he 
was about to
collect $ 1 million from Rotterdam's ABN AMRO bank. "It was not because I
liked 
to do it, I had to
do it," he says. He was extradited to the US where he pleaded guilty; in
return 
he agreed go cooperate
with the investigation. 
 
Tomorrow night's programme reveals that, around a year before the alleged
Levin 
conspiracy was
plotted, another hacker -- known only as Megazoid -- was the first
Russian to 
break into Citibank's
computers. 
 
Megazoid, a mathematical wizard obsessed with computers, remains
anonymous for 
fear of criminal
gangs anxious to acquire his skills, which he claims enabled him to
navigate 
the Citibank network
undetected for months, penetrating secret files, using a computer and
modem he 
bought for $ 10 and a
bottle of vodka. 
 
But he also claims to know the origin of the attempted $ 10
million-dollar scam.
 Megazoid, it is alleged,

did not work alone. One of his fellow hackers, a regular surfer on the
Internet,
 got drunk and depressed
one night -- and sold the secrets of how to break into Citibank for $ 100
and 
two bottles of vodka. 
 
The buyers are said to be the mafia who allegedly used AO Saturn and,
claims 
Janet Reno, the US
Attorney General, in a formal extradition request, Vladimir Levin. On
March 3 
last year, Levin was
arrested at Stansted airport. Levin, who proclaims his innocence, has
spent the 
past 21 months in
Brixton prison, and yesterday he won a provisional right to appeal to the
House 
of Lords against
extradition to the US. 
 
He has told his lawyers, who are seeking his return to Russia: "I have
never 
committed any crimes and I
do not wish to be sent to America, a country to which I have never been,
where 
I have no home, no
relatives, no friends and no money with which to defend myself. I
consider my 
detention here in England
to be both illegal and a breach of human rights." 
 
The significance of the alleged conspiracy, with some of the players
tried and 
convicted, some released,
others on the run and yet more unknown, goes beyond the issue prompted by

Megazoid's "career". It
highlights the vulnerability of financial institutions' computer systems.

 
Mike McKenna, former Citibank vice-president in charge of technology,
talks 
openly of "years of
neglect" during which the bank amassed 10,000 employees in technological 
services, 1,500 consultants,
and, most tellingly of all, 3,400 subsidiaries in almost 100 countries.
And, he 
relates, virtually each
daughter-firm, certainly each country, had its own protocol for accessing
the 
network.
 
Five years ago there were 200 home-grown protocols, what he describes as
"an 
orchestra with many
people with different violins playing different tunes", rather than a 
full-scale symphony in which strings,
horns and percussion talk to each other. 
 
The Bank for International Settlements, Bank of England, and Bundesbank
have 
recently issued
warnings about the threat posed by electronic money and open-access 
computer-networks like the
Internet bulletin boards. There is even talk of "off-planet" banking --
banks 
on Saturn and Jupiter
reached by satellite. 
 
"These transfers can take place from anywhere," Dietrich Snell, a New
York 
attorney told one of the
many US court hearings on the Levin case. "You have the right user ID and
the 
right password and the
right computer equipment, the hardware, and so long as you know what
you're 
doing on the computer,
you can get into the system literally anywhere." 
 
Says Bill Marlow, a banking security consultant: "Let's put it in
perspective - 
the average bank robbery
nets you $ 1,900, gets prosecuted 82 per cent of the time and you could
get 
shot. With a computer you
see $ 250,000 and get prosecuted less than 2 per cent of the time . . .
these 
figures are staggering. It's
safer to go and buy a computer than a gun." 
 
Citibank said in a statement last night that it had lost less than $
400,000 in 
the scam. "No customers
have lost any money," it said, adding that the accounts that were hacked
into 
were not encoded. 
 
It has installed an access control system, Des-cards, which uses
passwords 
altered after each time they
are used. "Citibank," the statement said, "is a leader in the financial 
services industry in fraud
prevention."
 

 
American Banker: Tuesday, December 10, 1996
 
Microsoft Shows It's Catching On and Catching Up 
 
By DREW CLARK 
 
A year after chairman Bill Gates set out to mend fences with the banking 
community, Microsoft Corp.'s
transformation into a bank ally looked virtually complete at last week's
Retail 
Delivery conference. 
 
Through product giveaways, educational efforts, and old-fashioned public 
relations, Microsoft
established its bona fides more convincingly than ever at the Bank 
Administration Institute conference. 
 
And there was evidence that Microsoft is gaining where it really counts
-- in 
the marketplace -through
growth in such areas as the NT operating system and Money personal
finance 
software. Microsoft
Money appears to be making up ground in the business dominated by Intuit
Inc.'s 
Quicken. One
indication was a survey of personal-computer users by Atlanta-based 
Synergistics Research Corp.,
showing 13% use Money. Quicken still had a commanding 59%. 
 
There was additional, anecdotal evidence of Money's gains. In the three
weeks 
that Community Credit
Union in Plano, Tex., has been offering both Money and Quicken, Money 
downloaders are
outnumbering Quicken users two-to- one. 
 
Through some partner companies, Microsoft also showed how its computer
language,
 Active-X, could
be used to get bank Web pages to function like personal financial
software 
managers. 
 
"The Internet provides the opportunity to do exactly what financial 
institutions have wanted to do for a
long time - to get customers to go directly to them," said Lewis Levin,
general 
manager of Microsoft's
desktop finance division. 
 
"We live and breathe the Web," added Money product manager Matthew Cone.
"Bill 
(Gates) outlined
the vision" at last year's Retail Delivery conference, he said. "This
year, 
Microsoft is helping banks build
on the Web." 
 
Last year's remarks by Mr. Gates came only months after bankers
interpreted 
Microsoft's attempted
acquisition of Intuit as a threat. Mr. Gates apologized for what he said
was a 
quotation taken out of
context -- that banks are dinosaurs -- and proceeded to say Microsoft is 
bankers' friend. 
 

This year, banks are buying Windows NT over its competitors by a 6-to-1
margin, 
Microsoft officials
said. When demonstrating Internet-related products last week, vendors 
invariably used Microsoft's
Internet browser, Explorer. And Microsoft placed booths throughout the
Dallas 
convention center
providing unlimited access to the Internet -- through Explorer, of
course. 
 
To be sure, Microsoft still faces stiff competition in many areas,
including 
its attempt to set financial data
standards with the Open Financial Connectivity protocol it unveiled in
March. 
 
Others looking to establish similar standards include the Integrion
Financial 
Network (Gold), Visa
Interactive (Access Device Messaging Standard), and Intuit (Open
Exchange). 
 
Representatives from Integrion, Microsoft, and Intuit appeared on stage
with 
panelists from Checkfree
Corp. and Security First Technologies in a session dubbed "The Great
Debate." 
The participants
generally agreed that their respective standards needed to become 
interchangeable for on-line
consumers to be best served. 
 
Some questioned whether Microsoft was geared for such a cooperative
effort. In 
last Wednesday's
conference-opening speech, Sun Microsystems Inc. chief executive officer
Scott 
McNealy mocked Mr.
Gates as Big Brother. 
 
Mr. McNealy touted Sun's Java computer language, citing its ability to
operate 
with a wide variety of
computer platforms, including Microsoft Windows, Apple Macintosh, and
Unix. 
 
But in the exhibition booths, more systems were written in Active-X than
in 
Java. 
 
Microsoft collaborators -- such as Vertigo Development Corp., Checkfree
Corp., 
Block Financial
Corp., and Ultradata Corp. -- are using Active-X to develop what they
promise 
will be the next
generation of banking Web sites. 
 
But there were signs that the combat is far from over. 
 
During the debate, an audience member asked the panelists which
electronic 
banking technology each
uses.
 
Security First Technologies chief executive officer Michael McChesney
said he 
uses a sister company,
Security First Network Bank. Microsoft's Mr. Levin said he uses Money. 
 
But Quicken still took 60%: Intuit executive vice president William H.
Harris, 
Checkfree's Ken
Benvenuto, and Integrion's William M. Fenimore Jr. 
 
"We use Quicken, and it has improved our quality of life," said Mr.
Fenimore.
 
 

Financial Times: Tuesday, December 10, 1996
 
New Smart Card to Be Tried in Russia 
 
By George Graham
 
LONDON -- Russian bank customers will be the guinea pigs next year for a
new type of smart payment card that could become the standard for
emerging markets with inadequate phone networks and weak payments
systems. 
 
The new Visa card uses a built-in microchip to provide verification in
shops
and outlets where telephone authorisation is impossible or too expensive.
Unlike so-called electronic purses, however, the card is loaded not with
money but with a credit limit. 
 
Trials will begin in the second quarter of next year by Inkombank, one of
Russia's largest commercial banks. Sberbank, which has already issued
some
smart cards, is also expected to transfer to the pre-authorised system. 
 
Ms Anne Cobb, Visa International's president for central and eastern
Europe, the Middle East and Africa, said the card provided a way round
the
infrastructure problems in many countries such as Russia. "If we succeed
in
Russia, then we will have proved this is the product we need in emerging
markets," she said. 
 
The card is based on technology developed in South Africa, which, like
Russia, has gaps in its telecoms infrastructure. 
 
Banks in many countries with still evolving financial systems are often
reluctant to issue credit cards, because they do not have enough data on
their
customers' creditworthiness to judge the risks accurately. But debit
cards
only work if the telephone network is extensive and cheap enough to allow
every transaction to be authorised by the bank's central computer. 
 
For small transactions, Visa and its rival MasterCard, along with a
number of
national payments groups, are developing electronic purses such as the
Mondex card. These are loaded with money from a bank account and used
instead of cash in shops or machines. But customers are reluctant to load
large sums on to them because in many cases they distrust the banks and
because if they lose the card they lose the money. 
 
The new Chip Off-Line Pre-Authorised Card system to be launched by Visa
in Russia is a close cousin of the electronic purse. However, the bank is
safe,
because it holds the money customers have loaded on to their cards, and
customers are safe, because they can still get that money back if they
lose the
card. 
 
Spending limits and personal code numbers are held on the card's
microchip,
so they can be checked by retailers without a telephone call to a bank
computer. 
 

 
Washington Post: Monday, December 9, 1996
 
Transaction Network Services
 
Faster Than a Speeding Cashier . . . 
 
By David S. Hilzenrath 
 
If you use a credit card reader in the self-service lane at the gas
station,
there's a good chance a Reston company called Transaction Network
Services Inc. is helping to speed you on your way. 
 
Though it's virtually invisible to consumers and retailers alike,
Transaction
Network Services and companies like it have changed the way people buy
things like a tank of gasoline, a bag of groceries or a movie ticket. 
 
The company provides a telecommunications network of leased lines that
link
the credit card terminal to companies that process credit card
transactions
for banks and other card issuers. By cutting the time and cost required
to
authorize these transactions electronically, Transaction Network Services
and its competitors have helped make plastic the coin of many realms
where
paper once reigned supreme. 
 
"What we've managed to do is reduce the time of a credit card transaction
to

about the same amount of time it would take the cashier to do a cash
transaction," spokesman Karen Kazmark said. 
 
Transaction Network Services claims that it is biggest and fastest in the
business, but company officials concede that they know of no
authoritative
data to prove so. This niche accounts for such a small percentage of
revenue
for rivals Sprint Corp. and AT&T Corp. that they disclose few if any
details
about it. 
 
At the company's largest client, First Data Corp., Vice President George
Barby said he has not made a scientific comparison of different carriers'
transaction speeds. In terms of reliability, "they're all relatively
similar," 
Barby
said. 
 
"I believe that in any given situation . . . that we're going to be as
fast and 
as
market competitive as any of the providers," said Bart Westberg, director
of
enterprise services for Sprint. 
 
It's a business in which price competition is measured in fractions of a
penny:
The company's average fee -- paid by the credit card processors -- was
about 1.77 cents per transaction during the last quarter, down from 2.3
cents
per transaction last year. But it all adds up. Transaction Network
Services
handles about 5.7 million transactions a day. 
 
The company, launched in 1990, capitalized on founder and chief executive
John McDonnell Jr.'s idea of using a special type of local telephone
service
to connect to his network instead of the toll-free 800 lines that were
widely
used. Along with other innovations, McDonnell's approach cut transaction
times by about half, to 9 or 10 seconds, when it debuted in 1991,
McDonnell said. 
 
Since that time, the company's competitive advantage seems to have
narrowed, as rivals such as ATT and Sprint have used a similar approach
and as technological improvements have speeded up toll-free 800 service. 
 
The company has since diversified by using its network to help authorize
food stamps and Medicaid eligibility in some states that automate those
benefits. It also sees health insurance as a potential growth area as
insurers
increasingly automate their benefits systems, enabling doctors' offices
to
verify patients' coverage on the spot, McDonnell said. 
 
Transaction Network Services has developed a second line of business
combating telephone fraud by checking calling cards against databases
when
people place credit card calls from certain pay phones. The company
completes the check during the brief pause before the call is put
through,
remaining just as invisible to the consumer as it is in the retail arena.

 
But that business has been challenged by the growth of prepaid calling
card
services and other services that use toll-free 800 numbers to "dial
around"
(bypass) Transaction Network Services' traditional clients, the pay phone
operators. The company can't fight the trend, so it plans to join it by
helping
out in those services, McDonnell said. 
 
"We have to become a player in this dial-around business, because that's
where this market's headed," he said. 
 
The company's revenue rose to $41.4 million last year from $11.5 million
in
1993, making it one of the region's fastest-growing companies. Revenue
for
the first nine months of this year was $38.9 million, up 32 percent from
$29.6
million a year earlier. 
 
The company earned $4.2 million during the first nine months of the year,
up
30 percent from $3.3 million during the same period last year. 
 
However, Transaction Network Services sees the increase of its core
business slowing. McDonnell said growth in the volume of merchant
transactions the company handles will likely slow to 25 percent to 35
percent
next year -- faster than the industry as a whole but not as fast as the
50

percent increase the company is logging this year. The company isn't
projecting "any real growth" in the phone fraud control area next year,
he
added. 
 
So McDonnell is looking for fresh pastures to plow. 
 
"We really need to find a new business that we can create a new growth
opportunity," he said. 
 
For expansion, the company is looking overseas, to develop network
business in Europe. And it is also looking to Wall Street. 
 
McDonnell said he hopes to create a new network for brokerage firms and
money managers. The network would help the financial firms exchange
information about trades over data lines instead of by talking on the
phone,
he said. "That's the major domestic thing that we're working on." 
 
Many firms already are automated, but they rely on a patchwork quilt of
networks. "We know that we're not going to just walk in and scoop this
thing
up," McDonnell said. 
 
Christopher Morstatt, a vice president at securities firm Salomon
Brothers
Inc., said Transaction Network Services' best prospect is to capture
firms
that are just automating communication functions rather than the larger
firms
that already are wired, though it could differentiate itself by offering
greater
privacy and security than existing services. 
 
"The reality is that this has been in production . . . for quite a while,
and 
Jack
is certainly new to the effort," Morstatt said.