Digital pennies? Micropayment ideas sought by Mint

The penny's days are numbered but the Royal Canadian Mint is now researching ways to find a second life for the one-cent denomination in the digital world.

Mere days after Finance Minister Jim Flaherty announced Canada wouldstart phasing out the penny, the Crown corporation launched a research and development project called MintChip, with a goal of creating a new digital method of exchanging money in small denominations, anything $10 or less.

"Commerce is changing," chief financial officer Marc Brule said in an interview. "Who can predict what it's going to be 10 years from now so with this changing economy and the growing digital economy ... we decided to engage in an R&D project to see what kind of payment options there are out there.

"We came to the conclusion that there is still no cost-effective electronic solution that can accommodate low value transactions, protect privacy, and have some of the familiar properties and characteristics of cash."

The Mint is banking on a future in which tiny micro-transactions are far more common, whether it's sending money to another user or buying something in the real world or online. The MintChip system would presumably have lower fees than using traditional payment methods like credit cards or emailed money transfers. Being able to easily buy and sell digital products that cost next to nothing could make the lowly cent relevant again, Brule said.

In a promo video, it's suggested that MintChip could enable easy micro-transactionsfor things like buying music, news articles or add-ons for video games, like weapons in a role-playing gamefor as little as one cent.

"One of the things we're concentrating on is what we call a micro- or nano-transaction, we're trying to stay in the space where coins are used today," Brule said.

"We think there's a nascent market that's ready to be ignited if you have the proper payment tool.... (MintChip) possibly could ignite a market out there for people who want to do things and transact with either virtual or physical goods at less than a dollar."

The Mint has challenged software developers to design applications that use the prototype MintChip technologywhich in its current experimental form is embedded in a microSD cardwith mobile devices or computers. There are a number of prizes, with the top award for best overall application being 10 ounces of gold, worth nearly $17,000 at today's prices.

Winners announcement on Sept. 24

Brule said all 500 slots in the developers' contest were quickly snapped up and some of the best ideas will be revealed on Aug. 15. Winners will be announced Sept. 24.

The launch of the MintChip project also closely followed the release of a report by the Task Force for the Payments System Review, entitled "Moving Canada into the Digital Age."

The report, written for the federal government after 18 months of research and work, argues the Canadian economy could get a two per cent productivity boost worth $32 billion by modernizing how the country makes and handles payments.

The task force found dozens of countries around the world are closer to embracing digital payments than Canada. The report in part blamed how payment systems in Canada are largely controlled by banks and other powerful institutions that have no interest in seeing new competitors emerge with game-changing ideas.

"Financial institutions' reluctance to replace legacy systems when a digital alternative may not deliver the same revenues is understandablee but it is not good for Canada and will not, in the long term, be good for the financial institutions," the report states.

"Technology has radically changed consumers' behaviours and expectations. We are early adopters of smartphones and tablets, and we are among the world's heaviest users of the internet and online banking and shopping. Why, then, are mobile payments largely absent in Canada?"