With a subject having serious financial implications such as processing credit card transactions over the Net, you might think First Virtual was the result of a joint venture between a mega- bank and a network provider, carefully planned and created by financial gurus. Not so. It may then come as a surprise that First Virtual owes its beginnings to a chance airport encounter between two of its would-be founders, Lee Stein and Einar Stefferud, and a joke—actually 30 million jokes, to be exact.

Stein and Stefferud met in an airport lounge in early 1994. Stein, a lawyer/accountant, was at that time the business manager for recording artists Peter Gabriel, Rod Stewart and Kenny Loggins, and actors like Gene Hackman. Stefferud was well-known in Internet circles for his achievements in computer science and networking. (He was named by Communications Week as one of the top ten visionaries of the computer communications industry.) Intrigued by Stefferud's use of his laptop computer to retrieve his email using a wireless communications link while seated in the lounge, Stein and Stefferud struck up a conversation. The two hit it off so well that they changed their seats so as to sit next to each other on their flight.

But the story doesn't end there. First Virtual might not have come into being were it not for the two travelers' idea of selling jokes over the Internet. They thought that Internet users, for the cost of a penny a day, would sign up to buy a new joke each time they turned on their computer. If everyone on the Net were to buy a joke, they figured they could clear as much as $300,000 daily by distributing 30 million jokes. The obvious obstacle was the lack of a secure billing system on the Internet to allow the transaction to take place. Necessity being the mother of invention, the two set out to find a simple, secure method for conducting cyber- commerce.

First Virtual, formed shortly after Stein and Stefferud's chance encounter, has the corporate mission to "be leaders in intellectual property commerce." In so doing, First Virtual provides merchants with a menu of services: first, as a "market enabler" allowing merchants, regardless of size and financial resources, to conduct business; second, as a "marketing tool" merchants can make their products known via First Virtual's Infohaus Web page; third, as a "transaction facilitator" providing the mechanism for merchants and buyers to conduct simple, fraud-free transactions; and finally, as a distributor, providing the resources for merchants to store and distribute their soft goods via First Virtual's Infohaus file server. Merchants may choose to use some or all of First Virtual's services to run their business.

First Virtual's solution does not rely on the insecure Internet to send sensitive information, such as credit card account numbers, "in the clear." In fact, sensitive information is never sent using the Internet. Most of First Virtual's rivals are trying to overcome the Internet's insecurity through data encryption—the use of complex algorithms to scramble transaction information and prevent its unauthorized interception. Unfortunately, encryption-based solutions are not simple to implement or use, may be incompatible between various vendors, and cannot guarantee perfect security.

With the potential for cashing in on a small piece of each one of the millions of potential daily transactions forecasted to occur via the Net, it is not surprising that First Virtual is not alone in tackling the cyber-commerce conundrum. Network providers such as America Online, Prodigy and Microsoft; banks such as Chase Manhattan, Bank of America and Citibank; and software suppliers such as Intuit and Netscape Communications are rushing to forge alliances, roll out solutions and attempt to set de facto standards. In addition, companies such as Amsterdam's DigiCash, and CyberCash, based in Vienna, Virginia, are already providing alternative solutions. First Virtual, however, has the distinction of being first company to market.

Slightly less than two years after its formation, First Virtual currently has over 900 merchants and 58,000 buyers. First Virtual charges buyers a registration fee of $2 for each credit card account, and merchants, a one-time fee of $10. Merchants also pay a 29-cent processing fee plus 2% of the purchase amount on each sale, which includes the Visa or MasterCard discount. There is also a $1 settlement deposit fee.

At setup time, buyers are assigned a unique personal identification name (similar to a personal identification number used with bank cards, and called a VirtualPIN by First Virtual), which can be transmitted "in the clear" when placing an order with a merchant, as its security is not critical to the overall transaction. The transaction itself consists of email messages among buyer, merchant and First Virtual (see sidebar: "How a First Virtual Transaction Works"). It is an interesting side note that the merchant never learns the buyer's name, email address or any other personal information—a great benefit to those of us who are tired of receiving "junk mail," whether of the email or snail-mail variety. Because of the unique way in which the First Virtual transaction is processed, it is an ideal business model for many "micro-merchants," purveyors of goods and services unable to qualify with a commercial bank for Visa or MasterCard merchant accounts.

In addition to having First Virtual process the payment portion of a transaction, merchants can, for additional fees, contract First Virtual to handle the entire transaction from listing the merchant's product(s) on its Infohaus Web page, to processing the entire transaction including product distribution. Distribution capabilities are currently limited to soft goods (information or software)—anything that can be stored and transferred from a file server. First Virtual is thus an ideal solution for the thousands of micro-merchants who have heretofore provided their goods as "shareware," relying on the buyers' honesty and motivation to open their checkbooks for small amounts of money. Now, merchants can be assured of receiving payment when the goods are provided.

The lack of simple, reliable, secure transactions has been the principal obstacle to cyber- commerce since buyers and sellers first imagined using the Internet to conduct business. First Virtual is currently at the forefront of offering solutions. For information on First Virtual's services, call (619) 793-2700, send a message via the Internet to info@fv.com or visit the First Virtual Web Page.

THE BUYER ACCOUNT SETUP PROCESS

• I used the First Virtual New Account Page. Email and TelNet application methods are also supported. I found the Web Page form to be straightforward. I was prompted for the usual name, address, telephone number and other personal information. I also selected one of two free gift options (free three-month trial subscriptions to WeBster or NetGuide Magazine are offered— not bad for a minute's work!) and then clicked on the Send button. It is at this point that I have to admit that I fat-fingered one of the fields on the form. Not to worry—First Virtual's error checker caught the problem and an error message very clearly the field in which I had entered an error. Although I was confused as to the nature of the information being requested in the specific field, clicking on the appropriate field's Help link easily cleared things up. The form took only two minutes to fill in and send, including the time to fix the error.
• Within five minutes I received an email message confirming receipt of my application and supplying me with a unique one-time-only transaction ID number and an 800 phone number. Instructions were supplied outlining the remainder of the steps for completing the account setup. Calling the 800 number and using the automated system with my touch-tone phone, I entered the transaction ID number and credit card number. The whole process took another minute.
• A short time later (it took about 15 minutes in my case—First Virtual says it can take as long as 24 hours), I received confirmation that my account had been set up and I was assigned an account identifier, referred to as a VirtualPIN. The VirtualPIN is used by buyers and merchants for conducting cyber-commerce and is required before I can purchase anything. After this step my account is charged the $2.00 one-time setup charge by First Virtual.

A BUYER TRANSACTION

Now I was ready to try my first purchase transaction. Firing up my Web browser, I surfed over to http://www.infohaus.com. Here was the Infohaus merchant Web page offered by First Virtual as an add-on service to cyber-merchants. A powerful search engine provides buyers with several different ways to locate merchants, offering a wide variety of information, goods and services. Spending a few minutes here, I finally settled on a merchant offering an article of interest to me, and purchased it.

• I filled in the merchant's form with the VirtualPIN number supplied to me when I set up my First Virtual account. The information I wanted from the merchant was then automatically downloaded to me.
• About an hour later (this time can vary), I received an email message from First Virtual asking meto confirm the transaction and notifying me of the charge on my account. I was given instructions to respond—"yes," "no," or "fraud"—with an email message to First Virtual.
• Having received the information I requested and, generally pleased with it, I responded "yes" to the email message. My credit card was automatically charged $5.00, the price the merchant had set for this particular file. Note that I wasn't charged for the information until I received it, reviewed it, and found it acceptable—another powerful protection offered the buyer. Other than the cost of the information from the merchant, no other charges are incurred by the buyer for a transaction. If I had responded "no" or "fraud" to the email message, or failed to respond to the confirmation email within 72 hours and after two more attempts from First Virtual, the transaction would have been cancelled and my credit card would not have been charged.

---