Two paradigms in person-to-person electronic payments are emerging, and some banks seem to be lining up behind both of them.

The systems in commercial use today, which are offered in one form or another by such banks as Citigroup Inc., Bank One Corp., and Wells Fargo & Co., are Internet-based money transfer methods that rely on e-mail, and do not move money in real time. Some of these — including PayPal Inc., which just signed a major cooperation deal with the credit card issuer Providian Financial Corp. — have been expanding their businesses, letting people make person-to-person payments from mobile devices and at the point of sale, as well as through the Internet.

NYCE Corp., the Eastern regional electronic funds transfer network, has developed an alternative system that runs on its network and will let people use the Internet — and ultimately automated teller machines, phone service, and wireless devices — to transfer money to someone else instantly. NYCE said its system is better than the PayPal-type alternatives because it is instantaneous: There is no time lag between when the recipient opens an e-mailed payment and the funds are moved from one account to the other.

NYCE plans to require that all its member banks support their customers’ ability to receive this type of p-to-p funds transfer, but it will be optional to support the sending of a p-to-p transaction. The network says it will work with its members over the next two years to upgrade their systems.

Citibank — the Citigroup subsidiary that already offers a PayPal-like person-to-person payment system called c2it — was one of two banks that took part in a Jan. 4 proof-of-concept test of NYCE’s system. A Citibank customer sent $1,000 to an account held by another person at People’s Bank of Bridgeport, Conn., and the institutions involved said this system — which debited and credited the appropriate accounts with no lag time — was superior to person-to-person payment schemes that rely on e-mail messages.

Rodman K. Reef, president of Citishare, a retail electronic funds subsidiary of Citibank, said he did not see any conflict between NYCE’s system and Citi’s proprietary product, c2it, which the company is advertising in credit card statement inserts. Mr. Reef said Citi could use NYCE’s system to speed up c2it transactions, which now use e-mail to notify recipients that funds are available. Funds are transferred either by mailing a check to the recipient, crediting a credit card, or crediting a depository account.

“Like the launch of any tool, none of us has got the view of the future so that we can predict well enough all the uses that it will have,” Mr. Reef said. The cost for the new service has not been determined, but for consumers, it could be a bargain compared with the cost of a wire transfer.

“The key value of what NYCE is doing is moving money immediately, and the funds are guaranteed funds,” Mr. Reef said.

Citibank, which is the largest credit card issuer, is not the only major card bank that seems to think its customers will want to conduct this type of money transfer. Providian, the San Francisco card company, beat out Capital One Financial Corp. for a branding deal with PayPal, according to a report in The Wall Street Journal. PayPal is a nonbank that competes with services such as c2it, Bank One’s eMoneyMail, and Billpoint, which is jointly owned by Wells Fargo and the online auctioneer eBay Inc.

Providian’s equity investment in privately held PayPal — the size of which the companies declined to name — will earn Shailesh Mehta, chairman and chief executive officer of Providian, a seat on PayPal’s board of directors and a license to create a private-label version of the PayPal service. As part of the deal, Providian will issue its first cobranded product, a PayPal credit card that it will market to PayPal’s six million registered users.

PayPal’s Providian deal is its second strategic partnership with a financial institution. Its first, with ING Group NV of the Netherlands, gives ING European rights to the PayPal name.

“There are other synergies we will seek to explore to get more value out of the alliance over time,” said Bill Buchanan, Providian’s senior vice president for partnership marketing. He said Mr. Mehta’s involvement in the management of PayPal was “a way to make sure we find more synergies” in the partnership.

David Alvarez, president of Providian’s credit card business, said in a news release that the PayPal credit card will be Providian’s first cobrand in the United States but not the last. He said the company is actively looking for more cobrand partners.

For now, Providian will not get involved in PayPal’s existing businesses, but Mr. Buchanan would not rule out the possibility of further refining the deal. “We are continuing to talk to them about places where we can add value to their business or they can add to ours,” he said. One area they might talk about is PayPal’s MasterCard debit card, or the money market fund where PayPal funds are deposited.

PayPal says its “viral” marketing technique, in which customers get $5 for each new customer they refer, has boosted its popularity, particularly among college students.

PayPal, in Palo Alto, Calif., is the oldest and largest of the U.S. person-to-person payment systems and the only one that is not run by a bank. PayPal’s main competitor is Billpoint, of San Jose, Calif., which opened last March, the same month that Bank One introduced eMoneyMail. PayPal says it processes an average of 150,000 transactions, for a total of $7 million, daily.

Experts say the person-to-person system developed by NYCE may have some incremental time advantage over PayPal and the others, but its availability would probably be limited to the banks that belong to the NYCE network. Moreover, at least in the test transaction, the person sending the money needed to know the debit card number of the recipient. Banks have always stressed to customers the importance of keeping such numbers private.

In the NYCE pilot, a Citibank customer logged on to a Citibank Web page designed specifically for p-to-p transactions, entered the amount to be transferred, and entered the ATM/debit card number (but not the personal identification number) of the recipient at People’s Bank.

Citibank verified that the sender had sufficient funds in his account, debited the account, and routed the transaction to NYCE, which in turn routed it to People’s Bank. The bank verified the ATM/debit card number and credited the recipient’s account. The Citibank customer then got a confirmation message.

James S. Judd, senior vice president with NYCE, said there was great security in the system, since when someone’s account is being credited, there is no risk of losing money, unlike a debit, where money could be stolen.

The consulting firm TowerGroup of Needham, Mass., projected in a recent report that U.S. consumers will make four billion online p-to-p payments in 2005, against 42 million last year. Beth Robertson, a senior analyst at TowerGroup, said NYCE will have an opportunity to make a dent in the market, but its share may be limited to its 2,400 member banks.

Even so, Ms. Robertson said, NYCE’s product is “unique and advantageous” and “puts NYCE a step ahead of person-to-person offerings currently available on the market, because it’s real-time.”

But Ken Kerr, research director for GartnerGroup Inc., a financial consulting company in Stamford, Conn., saw security issues as a stumbling block.

“Banks have been telling their cardholders not to give their card number out, and suddenly they’re telling people if they want to move money they have to give their card number out,” Mr. Kerr said. Even though the funds will be credited to the person who gives out a debit card number, the other person could turn around and use the number as with a signature-based debit over the Internet.

Kate Gloss, the manager of EFT services for People’s Bank, said the project’s planners had discussed that problem and concluded that the debit card number might not wind up being the identifying number used in the transaction. The MICR number at the bottom of a check, which includes the routing, transit, and account number, could end up being the preferred identifier. “And you give that out right now every time you make out a check,” Ms. Gloss said.

But Mr. Kerr said the need to exchange information would limit the system’s utility. “I don’t think it will be popular at auction sites,” he said. “People are not going to want to give their cards out to strangers.”


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