With two major payments associations stepping forward this week to propose systems under which banks not merchants would authenticate and orchestrate Internet transactions, momentum seems to be building for the idea that financial institutions should play a more direct role in the evolution of online commerce.
At Nachas Payments 2001 conference in Washington, which concluded Wednesday, both Nacha, the electronic payments association, and the New York Clearing House, a separate payments association and processor, said that they were developing Internet transaction systems in which financial institutions would authenticate their customers the buyers and send guaranteed automated clearing house payments to the Web merchant sellers. Executives at the two organizations said their proposals were complementary, not overlapping. Nacha sets rules and guidelines for payments, and the system it is proposing under Project Action would set credit payments in motion. But unlike the New York Clearing House, which calls itself the largest private-sector payment processor Nacha does not actually process payments.
Both organizations said the systems they want to establish would cut down on Internet fraud, since banks would authenticate both the buyer and the seller. Both systems would verify that the buyer had enough money to cover a transaction, and send a guaranteed payment to the sellers account.
Moreover, the organizations said their systems both still in the development and testing stages would stimulate e-commerce, since online shoppers would not have to give any credit card or deposit account information to Web retailers.
Nachas system, Action, was formally introduced this week but has been in development for nine months under the supervision of an advisory board that includes representatives of Wachovia Corp., Bank One Corp., J.P. Morgan Chase & Co., Compass Bancshares, and BB&T Corp.
On Tuesday banks were able to sign up for Phase 2 of Project Action, which is expected to last six to nine months and will involve fleshing out the bare-bones concept with product designs, pricing models, and operating rules. Nacha is hoping to raise about $350,000 from banks, billers, and technology companies for this phase.
The New York Clearing House says its effort is farther along and has already drawn $28 million of support from 11 major banks. So far Bank One and Morgan Chase are the only Project Action advisers that are also participating in the New York Clearing House project.
The New York Clearing House emphasized the business-to-business uses for its system. It would be particularly helpful to electronic marketplaces, since it would eliminate the need for companies to give their bank accounts and bank routing numbers to one another, the organization said.
Executives from Nacha and the New York Clearing House said they were aware of one anothers projects, but had not coordinated their announcements.
I wasnt really paying attention to what Nacha was doing, said George Thomas, senior vice president of the New York Clearing House. We kept ours a secret they really didnt know a lot about ours until this week.
Mr. Thomas said his organization was further along than Nacha. We are in business requirements and technical specs, he said. They are still a concept and have to get some funding and move forward, whereas weve got the funding.
But there is no competition between the two, Mr. Thomas said. Even under Nachas system, a transaction would by processed through the automated clearing house, he said.
Nacha is not building a separate ACH system, he said. They are laying out specs banks would build to. Both NYCH and Nacha, working for the most part on their own, came to the conclusion that credit, not debit, payments were the future of transactions initiated over the Internet.
The New York Clearing House has proposed assigning universal identification numbers to buyers and sellers engaging in ACH and wire payments, so that the ID numbers not account numbers could be exchanged by trading partners.
Mr. Thomas said the universal ID is clearly a place where Nacha and the New York Clearing House could work together. When a buyer clicked on Action to initiate an ACH credit payment, Nacha could tap into NYCHs universal ID to send the payment through, he said. Both organizations are accomplishing the same goals, in that both are getting ACH credit pushes coming out from buyer to the sellers, Mr. Thomas said.
Bill Nelson, executive director of Nacha, agreed that the universal IDs might be a good point of collaboration.
Nacha said Action which stands for ACH credit transactions initiated online would be useful for all kinds of transactions that rely on automated clearing house credit, including consumer-to-business payments, business-to-business payments, and electronic bill payments.
What were attempting to do is address the major problems between the Internet and the payments system, said Elliott McEntee, president and chief executive officer of Nacha, of Herndon, Va.
Internet transactions currently require the Web merchant to authenticate the customer, take an account number, bill the customer, and hope that the payment comes through, Mr. McEntee said. The customer must give sensitive information to the merchant, he said.
Under the Action system, which would appear as a payment icon on the merchants checkout page, the customers bank would work directly with the merchants bank to ensure the customers privacy and guarantee the transaction on both sides.
Moreover, Mr. McEntee said, the system would not be limited to the automated clearing house network. We think Visa, MasterCard, and the ATM networks would join and participate as well, he said.
The idea behind Action emerged more than two years ago as a way to solve the problem in the mutual fund industry of taking investments through the Internet, but the fund companies did not follow through, he said.
Mr. McEntee said he then started thinking more about the idea at last years Nacha conference in Los Angeles after hearing a speech by Rene Pelegero, director of global payments at Amazon.com, who cited the European payments system, in which many consumers originate payments and pay bills through bank-like post offices.
Over the last nine months First Annapolis Consulting, a payments system consulting firm, conducted focus groups about the Action idea and found that consumers liked it, Mr. McEntee said. Benton International, another consulting firm, also found the idea sound, he said.
Nacha then approached some major software vendors Digital Insight, S1 Corp., Corillian Corp., Financial Fusion and they said it wouldnt be difficult to add this in, to link it to the DDA and ACH systems, Mr. McEntee said.
Janet C. Boyst, the senior vice president and group executive at Wachovia Operational Services Corp. who has been working on Project Action, said that on Tuesday, the first day that banks could volunteer to participate in Phase 2, people were scrambling to sign up.
Action will be good for banks because it will generate fee income, the merchant gets guaranteed payments, and the consumer doesnt have to give away account information, she said.
Frank Prince, a senior analyst of e-business infrastructure with Forrester Research Inc., questioned whether sellers would be willing to pay for the system. The pricing must be competitive with other payment options like credit cards, he said.
If they want to charge the seller, in order for it to be worthwhile, the seller has to receive reduced costs over other payment models, or less identifiable risk, or it isnt going to be worth it, he said.