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Hold It Right There, Citibank

Finance: BANKING


Japan could hobble the bank in the race to develop E-cash

When Citibank applied for Japanese patents for its digital-money technology, the money-center giant did everything by the book. It thoroughly checked existing research and even ran a 200-page description of its work by Japan's Ministry of Finance. Having won patent protection in the U.S., and with similar filings in 40-odd countries, Citi figured Japanese approval wouldn't be a hassle.

Not so. In March, a group of Tokyo banks, led by Sakura Bank Ltd. and Mitsubishi Bank Ltd., complained to the Japanese patent office that Citi's claims on proprietary electronic-cash technology were too broad and might stymie their own moves into cyberbanking. Citi execs were left reeling. "We've been working on this for four years," says Sholom Rosen, Citi's vice-president for electronic commerce and inventor of the bank's Electronic Money System. "This is real technology."

Unfortunately, owing to Japan's glacial patent system, it could be years before Citi gets an answer. Eastman Kodak Co. spent more than a decade fending off objections from Japanese rivals to a pending patent for recording technology used in videocassette recorders. Japanese opponents claimed the technology was common knowledge and had been disclosed in journals as far back as 1974. But Kodak won the case in 1993.

Citi's Japanese rivals are going to make the most of the delay. A group of Japanese commercial banks and high-tech powerhouse Hitachi Ltd. will soon back the rival Mondex cybercash system under development by London-based National Westminster Bank PLC. The group, which includes Fuji Bank, Sakura, and Nippon Telegraph & Telephone, is considering taking a stake in Mondex International, which will be spun off from NatWest and owned by franchises worldwide.

In an increasingly wired world, digital-cash technology looms as the Holy Grail. The prospect of designing the definitive system for convenient and secure electronic-cash transactions has everybody from Microsoft Corp. to Visa International exploring the technology. Such a system would allow consumers to use smart cards with embedded microchips to load up with electronic money via automated teller machines or personal computers and telephones.

Pulling it off won't be easy, given the potential for pirating bank accounts or counterfeiting. But those first into the market could reap big rewards. System providers could collect franchise fees and, possibly, royalties. Banks plan charges of their own. Natwest and other British banks will charge consumers about $2 a month to hook into Mondex.

HEADSTART. In the U.S., some 20% of all household purchases, or about $3 trillion worth, may be made electronically by 2006, according to some estimates. In Japan, where consumers already pay utility bills electronically at convenience-store chains and personal-computer sales are booming, E-money could catch on as well.

And the Japanese aren't about to let the business fall into enemy hands. Fuji Bank Ltd., one of the Japanese Mondex partners, has set up an E-money prototype of a separate system in an "intelligent" building in central Tokyo. The bank has wired up shops and restaurants, and lets consumers conduct transactions with special cards. On Mar. 11, Hitachi unveiled an array of Mondex card-compatible gadgetry, including an electronic "wallet" with a modem that allows consumers to bank on the road. As exclusive supplier to Mondex, Hitachi aims to grab the lion's share of the hardware business.

Thanks to the likely support of Japanese banks and Hitachi, Mondex may have an early lead over Citi and other wannabes. But it's hard to rule out Citi, with a huge worldwide branch network and international payment system few rivals can match. Indeed, Citi's Rosen isn't fretting about the apparent setback. "This won't put the technology on hold," he says. "It doesn't stop us." Maybe not, but with Japan backing the competition, Citi seems to have fallen behind in the race.By Brian Bremner in Tokyo, with Joan Warner in New york and Jonathan Ford in LondonReturn to top

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