With two major initiatives underway to bring debit cards to the Internet, banks may find further ways to skim the profitable cream off the top of e-commerce.

NYCE Corp., Woodcliff Lake, NJ, plans to introduce SafeDebit in April, a system that depends on a miniature CD-ROM resembling a debit card that the consumer inserts into a computer when making purchases off the Internet. Among its advantages, according to Paul Tomasofsky, vice president at NYCE, is that it will satisfy security requirements while demanding no additional computer equipment by either the consumer or the merchant.

When SafeDebit hits the market, it will be as more than a test. "We will roll out in April, and it will be used by merchants and consumers in the real world. It will be a mass deployment," Tomasofsky says.

Banks will mail out the CD-ROMs to customers. The devices will have "branding all over them naming the issuing bank," Tomasofsky notes, and they will fit into a wallet. Encrypted on each card will be the consumer's bank account number, name, address, and email address. In a separate mailing will be an "e-Pin" that differs from the PIN the customer would use offline.

ATM-style tech online

On another front, the National Automated Clearing House Association (NACHA) is engaged in a pilot to use the nationwide ATM network infrastructure for payments over the Internet.

STAR Systems Inc., Maitland, FL, proposed the idea to the NACHA Internet council, says Julie Saville, the San Diego-based vice president of product development at STAR. Under the NACHA model, a digital signature would replace the PIN in the debit transaction. Consumers will use private keys stored either on smart cards or within a wallet application to generate the digital signatures.

"It's an architecture we're testing right now, but no consumers are actually purchasing things from the Internet using it," Saville says. "We're testing the transport of a digital signature through the network infrastructure."

A technical test scheduled for December had to be delayed and was rescheduled for January. "We're still trying to target the second quarter for the expanded pilot," Saville says.

Citibank, the main financial institution player in the pilot, will send the consumer a smart card. On the card will be a private key that the consumer uses to generate a digital signature at a retailer's Web site. After the digital signature is verified by the consumer's financial institution, the merchant receives confirmation of payment. The consumer's account is then debited through a participating ATM network. To use the chip card, the consumer will need a reader that attaches to a computer. Citibank plans to send its customers these readers.

Cost-saving concept

There are compelling reasons for developing a system whereby a debit card can be deployed to secure online purchases.

For one thing, debit use-the "buyer present" variety-has increased dramatically over the last couple of years, and merchants on the Internet have taken notice. But besides wanting to offer their customers another payment option, online retailers will save a significant amount of money if customers opt for debit cards instead of credit cards.

And currently, those buying on the Internet use credit cards 86% of the time to pay. For merchants, such heavy use comes with a high price. Whereas a merchant will pay 1% or 2% of the purchase total for an item bought in person at a store, over the Internet the range is 3% to as high as 7%.

"Merchants are the ones with motivation to change," notes Avivah Litan, research director with GartnerGroup, Stamford, CT. "Margins are slim enough, so why give 3% to 7% to Visa and MasterCard?"

In contrast, a debit transaction at a store costs the merchant about 25 cents.

"The merchants are the ones who are extremely interested in this," says Saville of STAR. "Not all consumers have credit cards, or some would rather not use the cards. Of course, there's also the cost of credit card use that's charged to the merchant. Online merchants also want their customers to have many options of payment."

Satisfying requirements

But because in a debit transaction funds shift out of the consumer's account in real time or, at the latest, overnight, regulations demand that a PIN be used. Conveying that consumer's PIN in a secure fashion to the merchant over the Internet is the big technological hurdle.

"The problem is that whereas ATM networks are closed and private, the Internet is open and public," Saville notes. "We don't want the PIN number to be in the clear, over the Internet, where someone could have access to it."

For the NACHA pilot, those involved wanted to use technology that's been developed for the Internet. Under the NACHA-STAR model, banks would authenticate their own customers using the digital signature. "The infrastructure is very similar," Saville says. "Right now, the banks do PIN key management for issuing PINs, so they would do PIN key management for issuing a public key pair for their customers."

For financial institutions, debit transactions are expanding the value of ATMs to the consumers, she says, adding that banks "would retain their role as the trusted agent over the Internet. This is in contrast to other payment systems that would leave the banks out of the picture."

Profit spur

The credit card industry is highly consolidated, with the "top five or ten credit card companies controlling 95% of credit cards issued," notes Tomasofsky of NYCE. "As a result, many financial institutions get no revenue when consumers use the cards-they are no longer in the credit card business. Yet they all have checking accounts."

The financial incentive to debit use for banks is generating fee revenue. "There's an interchange attached to the product that will go from the acquirer to the issuer," Tomasofsky says, "and banks may decide to price this product to their consumers."

The NYCE SafeDebit card system will initially be introduced at Walgreen stores and CVS pharmacies, which will be updating their Web sites.

According to Saville, NACHA is hoping to put rules and technical standards in place whereby financial institutions can offer one of several methods to allow their consumers to make purchases over the Internet.

"The different financial institutions may want to deploy different things to their consumers. So there needs to be consistency, and, over time, that's what we'll be striving for," Saville says. That debit use over the Internet is coming in some shape or form is certain. As Litan of Gartner notes, "There's much financial incentive for this to work."

John Hackett is a business writer based in Brooklyn, NY.

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