Coming: The E-Wallet Wars

Shoppers wanting to get their caffeine fix online at Starbucks.com now have only one path to take when they pay for their beans. If they are already registered with Passport, Microsoft's new identity-verification program, they can use it to complete their purchase. If they aren't, they are sent to a site where they can sign up for Passport. What Starbucks.com shoppers can't do: buy their coffee without letting Microsoft be part of the transaction.

It's a preview of the next Internet hot spot, e-wallets, and features two of the Net's fiercest competitors, Microsoft and AOL Time Warner (parent company of TIME). Starbucks used to let shoppers pay for their purchases by simply providing a credit card and some personal information--like most e-commerce sites. But in May, it made the switch to Passport. Now every time a buyer makes a purchase, his e-mail address and other personal information is sent to Microsoft to be verified--and stored in Microsoft's vast database. Passport, which Microsoft plans to roll out in force this fall, already has more than 50 affiliated sites. But Starbucks.com may be the only one that forces buyers to use it.

Privacy advocates are waking up, and they don't like the smell. Last week the Electronic Privacy Information Center filed a complaint with the Federal Trade Commission charging that Passport collects personal information deceptively. The advocates' nightmare vision is that Microsoft will use Passport to collect piles of data on Internet users, including what sites they visit, what they buy, whom they send gifts to and where they travel to.

Passport has Microsoft's competitors worried that Gates & Co. want to use it to collect a fee on virtually every online consumer transaction. AOL has charged that Passport is Microsoft's attempt to gain a "choke point" on e-commerce.

But if the idea is so bad, why is AOL going down the same road? Reports have surfaced that it may be considering releasing its own Passport-style ID-verification and payment system, called Magic Carpet. AOL made a $100 million investment in Amazon.com last week in what may be an attempt to draw on the e-commerce giant's expertise in creating payment systems.

Microsoft insists that the complaints about Passport are overblown. The only information it collects from Starbucks buyers, it says, are e-mail address, city and state, and it promises not to turn that data over to third parties. Microsoft insists it never asked Starbucks.com to make it an exclusive payment option. "It's totally at the discretion of the participants to decide what makes most sense for their business," says Microsoft spokesman Adam Sohn.

Starbucks says its Passport-only policy is being done on a "test basis" and will be re-evaluated in the early fall. The company will then consider whether to keep the exclusive arrangement, adopt multiple registration plans (which eBay announced last week) or develop a system with even greater privacy protections--one in which private data would be discarded when a transaction is completed.