Copyright Ben Livson, 12 February, 1999-2009

Scratch Cash Method of Payment for Electronic Commerce - Issues Register

  1. Availability of Credit
  2. Scratch cash and stored value cards have a very significant drawback in being prepaid - the requirement for prepayment was in fact a key reason why the initial stored value cards were so poorly received in the USA. There is a fundamental difference between consumers in Australia and USA with the Americans having a strong preference for living on credit whereas many (older) Australians are credit averse.

    However, it will be possible to operate a credit based scratch cash model for both business accounts and consumers without encroaching on the anonymity of scratch cash transactions. The way it could operate is to have an Acquirer (as in the Visa - MasterCard SET model) that has the credit card details for purchasing a scratch card with the card id but without having access to the scratch sequences. The issuer of scratch cash would only know to which retailer the card has been issued. The consumer purchases scratch cards from the retailer by a credit card with the credit provided by the acquirer.

    This requires funding both the retailers for selling the cards and the acquirer (s) for providing consumer credit. The processes are:

    Scratch Cash Card Issuance Process:

    Issuer --> retailer

    Consumer --> retailer --> acquirer --> issuer --> card status marked valid for use --> consumer

    Consumer Use Process:

    Purchase using a scratch cash sequence(s) <--> merchant <--> acquirer <--> issuer

    The advantages of adopting the SET model acquirers will be two-fold:

    1: Consumers will purchase the scratch cash cards on credit --- apparently important in the USA.

    2: The scratch card becomes universal.

    You can use scratch cash to buy from anything such as buying shoes in Wall Mart and to make long distance calls thanks to the Acquirer acting as the 'middle man'. Scratch cash won't succeed if you have to buy a different card for each type of purchase - there is a huge competition of your wallet space and the method of payment must be widely accepted to succeed.


  3. Ease of Use

A critical success factor for scratch cash will be the ease of use, in particular with web and e-mail enabled devices. Scratch cash cards are already easy to use in shops equipped with bar-code readers connected to a network. Concerns about ease of use with web and email enabled devices stem from consumers having to type variable length random character scratch cash sequences. The effort is comparable to entering a 16-digit credit card and a 4-digit month valid-through string but nevertheless tedious, in particular if multiple scratch sequences are required.

There are several solutions to this problem:

The inventors have constrained the claims to scratch cash sequences and avoided any claims that read as if we are trying to protect our IP for stored value cards. However, such extensions are perfectly feasible and will maximise ease of use.


  1. Distribution

The critical issues with distribution include:


Consumer requirements are:


We address the above by presenting possible methods of scratch cash distribution with pros and cons.


  1. Internet Distribution Method

The initial distribution will be over the Internet to support product demonstrations and start up commerce. The consumer will:

Pros of Internet Distribution

of Internet Distribution


  1. Centralised Physical Scratch Cash Card Distribution

Physical scratch cash cards are distributed by postal or express courier services by taking web-mail, email, post giro money order, fax, cheque-in-the-mail or phone orders

In the web-mail order a web-form is used to capture customer's postal and credit or debit details. Similarly such an order can be accepted by email. The backoffice functions for electronic payment and physical fulfilment can be automated to a high degree, thus making web based mail orders less expensive than normal mail or phone orders.

Phone orders are used to capture customer's postal and credit or debit details and involve both front and back office costs. Similarly for fax and money wired 'post giro' style orders.

Mail order by personal cheques and money wired allow people to purchase scratch card without access to credit or debit cards or not willing to use them.

Activation of scratch cash in physical card distribution must not take place before payment is approved but fulfilment may proceed without delay with scratch cash status marked pending.

Web-based and email based orders have the lowest distribution cost and could be used for ordering scratch cash cards for as little as $50. We expect the fulfilment process in such orders to cost about $2 per order. We may exempt the consumer from paying this cost for orders exceeding, say $200.

Either the consumer or merchant may have to pay up to $5 for expenses on mail, post giro, phone and fax orders and such orders should exceed $100. We may reduce or exempt customers for paying expenses on orders exceeding $200 or $500.


Pros of Centralised Scratch Cash Card Distribution


Cons of Centralised Scratch Cash Card Distribution


  1. Retailer Scratch Cash Card Distribution

Scratch cash cards could be sold by retailers such as newsagents and other widely distributed outlets. The retail model is currently used to sell phone cards, bus and rail cards, scratch lottery tickets etc. normally at a 5% margin for the retailer with payment in 7 days net (the margin relates to Australian newsagents and has to be confirmed elsewhere).

Assuming a $1 cost to manufacture a scratch card including the end-to-end process of delivery to retail, handling costs of retailers and average card purchase price of $100 combined with the 5% retail margin, administration and credit risks yields a 7-8% distribution cost that has to be paid by the merchant or partly by consumer and merchant.

Pros of retailer scratch cash distribution


Cons of retailer scratch cash distribution


  1. Comparison of Distribution Costs and Methods

Scratch cash distribution has several complimentary methods for distribution with varying costs.

The initial stages of scratch cash distribution will see Internet based fully electronic distribution followed by centralised scratch cash card distribution with the final leg of fulfilment by postal or parcel services. Gearing for distribution by retailers is likely to take the better part of a year and certainly not recommended as the initial method.

Electronic distribution by Internet has the cost of accepting credit or debit cards whereas retailer distribution has a cost base that could be up to 5% and has to be absorbed at least in part by merchants. Centralised card distribution has a cost base somewhere in between depending on the particular method used.

A further 2-5% of cost is added to distribution if scratch cash is sold on credit. Again the issuer's credit rating as a function of credit history and volumes will determine the actual cost of credit.

In comparison to other methods of payments for electronic commerce the cost of distributing scratch cash can be classified into:


Merchants carrying the distribution cost should be attempted where possible to increase sales. Consumers of low cost distribution methods could be rewarded by giving a discount by the issuer and/or by merchants. Similarly, consumers may be rewarded by lottery prices. Scratch cash is ideal for the purpose.

Scratch cash benefits from being a highly flexible method of payment supporting a wide variety of distribution methods.


  1. Universality of Scratch Cash

    Scratch cash cards like any other physical method of payment is subject to intense competition of consumer wallet space. Thus, scratch cash has to be either universal or at least available for highly desirable niche markets, eg. sex or gambling sites. The preferable long term solution is to assure universality or at least wide acceptance of scratch cash by both consumers and merchants.


  3. Revenue Streams

Scratch cash has at least the following revenue sources:

NB. The above revenue streams are highly speculative and have to be thoroughly researched with careful online monitoring to firm up market research.


10. Operating Costs and Losses


Scratch cash has manned front-office and highly automated back-office functions. Front-office fields support calls from consumers, retailers and merchants of scratch cash and handles phone-fax-mail orders. Back-office generates, activates and distributes scratch cash, manages transactions and physical card distribution related fulfilment functions. Detailed cost analysis of operating costs and analysing best industry practice is a major task.

Operating losses relate to activating scratch cash without receiving payment. The guiding principle is process fulfilment up to the point of delivery where the final delivery can be suspended if payment is not forthcoming. In this way any delays can be minimised. There will be some losses for suspending or cancelling fulfilment at the last moment. However, we believe that the model for 'suspended final fulfilment until payment authorized' minimises such losses.

Merchants with downloadable soft goods may be willing to waive any losses for existing customers with a good financial record and thus further streamline the process by unencumbered fulfilment.

11. Extended User Determined Scratch Cash Nomination Model

The extended user determined scratch cash nomination model follows:

The customers only pay the retailer for the margin of purchasing blank scratch cards, say for each card pays a nominal 25c. They then activate the card and pay for the value of the card via credit card over the phone or via a web site. Benefits of this mechanism are:

a Denomination of the scratches are up to the consumer

b Still an anonymous transaction

c If they want to purchase goods and don't want to use a credit cards over the net have the option with
scratch cash

d We still get our money up front, i.e. credit card is cleared prior to use.

e more marketing options and distribution channels such as gift vouchers, give aways, card vending machines.

Process flow

1.1 Card production with id and scratch values. Same as before, except each card not active. Still needs expiry date though.

1.2 Distribution - give aways, in magazines, milkbars newsagents etc. Here all we do is give the cards to the retailer. There is no risk for the card being stolen as it is not active until the consumer activates it.

1.3 Customer has card and phones up freecall number to activate and pay for card via credit card, quoting card id. Customer determines value of each scratch amount. All done by Active voice response system. If credit validation is successful card is active with denomination customer as requested. Alternatively, customers can use the web for activation.

Network of merchants who pay between 2% and 10% to us. dependant on transaction value. We have the money up front.

Criticism: The above model is can be challenged by consumers post-activation and thus is not workable! The only way one can avoid losses is to ensure that either the cards are prepaid or paid by credit at a post office or card member institution (in Australia the 14 credit card members include the four national banks - thus multiple nationwide retail branch networks are available to gurantee clearance and to prevent a customer from challenging a purchase.

Trust accounts involving customers and merchants will be set up to gurantee that no party loses money. A merchant does not get paid until delivery is complete. A delivery is complete if not challenged by consumer in xxx days.

12. Extensions towards Stored Value Cards

We have all the distribution mechanism to allow replenishment of scratch cash card values. Thus, a scratch cash card can in fact be reused. Obviously, any sequencies peeled off or scratched off are exposed but the acceptability of that is up to the consumer.

A possible extension is to have the scratch cash card-id as a peel-off second password token.


13. Scratch Cash Profit/Loss Modelling

Year 1 Implementation in Australia

  1. Strategy, Market Research, Brand Promotion and Loyalty Marketing $1,000,000
  2. Database Development $400,000
  3. System Interfaces to scratch production and bar-coding $200,000
  4. Internet Services set-up $200,000
  5. Office, legal and admin expenses $200,000
  6. Management $200,000
  7. H/W, S/W, Comms, ISP etc. expenditure $500,000

Total year 1 expense: $2.7m, income: $0.00 and loss=$2.7m

Scratch Card Costing

Bank fee for a teller operation is $2. Thus a scratch card purchase should exceed $100 to keep the cost to consumer to 2% or less. The teller fee is charged to the consumer.

The provision of credit to the consumer is charged back to the merchants. Production and distribution cost of scratch cash is rated at 0.2% (10c production cost per card) and we as the issuer have to foot card production, distribution and promotion. The most expensive issuer cost is brand promotion. We'll budget for a 2% cost burden.

Handling of trust accounts is assumed cost neutral. Advertising revenue is assumed small and assumed to offset some of the administration and fulfilment costs.

The real revenue is assumed from scratch cash never reclaimed. Percentage of scratch cash never reclaimed is assumed in our model scenarios to be 3%, 5% and 7% (the postal stamp no reclaim value of 16-17% seems far too high). All scratch cash will have a due date set 12 months forward. The no-reclaim covers both unused scratch sequence residual values and no claim by due date.

In the model adopted there will be no bad credit losses.

Scenarios and Break Even

The two critical parameters are volume and unclaimed scratch cash percentage. We assume a moderate take up of 100,000 cards for year 2 start of operations growing to 20 million cards for year 7 or 1 card per every Australian.

The average card value is assumed as $100 and the percentage of unclaimed scratch cash is varied as 3%, 5% and 7%. The break-even year is 6, 5 and 4 depending on scenario. This makes sense as all Internet services have run for years at loss.


14. Simplifying Use of Scratch Cash

Ease of use is a critical success factor for any method of payment. The following can be done to maximise the ease of use of scratch cash:

  1. The rear side of a scratch cash card can be sealed with a peel off. Thus, allows all the bar codes to be left visible. This solves the problem of having scratch at merchant point-of-sale sites. The reverse issue of how to mark such scratchies as used has to be resolved. If left to the consumer, one option is to have a tiny scratch icon that can be either scratched or marked by pen. This is not an issue with online use.
  2. Lower denomination scratch card with the reverse side peel-off may at consumer's choice have not only bar codes but also scratch sequences visible, thus eliminating the need to scratch.
  3. The physical card format is not necessary for consumers that wish to use scratch only on-line. The scratch cash sequences can be provided on-line over a SSL session or by secure email to be downloaded to a scratch cash client web applet distributed for free to consumers. On-line distribution is only possible after the payment has cleared.


End of Issues register draft 5, 12 February 1998