Let's face it: From a retail perspective, paying for something on the Internet involves a credit card, directly or indirectly, almost all the time. In fact, as recent research from Gartner made clear, second place is so distant, it's off the radar screen.

On the business-to-business side of the equation, the situation is markedly different. There, cash payments still rule, Gartner's latest research indicates, mostly within existing "open accounts" between trading partners. And while the use of the Net for electronic invoicing is rising, currently only about 16% of B-to-B payments are made electronically; in other words, when it comes time to pay those invoices buyers received instantly over the Web, about 84% do so with paper checks, according to survey data compiled by Gartner last July.

Even more recent research findings from the Stamford, CT-based consulting firm (still being prepared for publication by Gartner as this issue of Bank Technology News was going to press), show that about 15% of all electronic payments today are initiated over the Internet. Gartner expects that proportion to reach 25% by 2002 and exceed 33% by 2004.

Internet payment mechanisms on the B-to-B front have at least one thing in common with the retail side, says Avivah Litan, a Gartner vice president. Most small businesses are likely as not to pay for Internet purchases with a credit card, just like retail consumers. Of all B-to-B payments made electronically-by large and small businesses alike-about 10% are made by credit card while most of the remainder use electronic data interchange or automated clearinghouse services, data collected by Gartner last November shows.

Despite the fact that virtually all retail payments made via the Internet involve a credit card in one way or another, you can still find plenty of variety on the consumer side. Litan cautions, though, that "all the others-like (monetary token sites) Flooz.com and Beenz.com, shopping based on points, loyalty coupons, gift certificates ... all that-they're just not showing up on the radar yet."

The only Internet payment alternative to credit cards that has attained any foothold at all in consumer-to-business payments over the Internet is PIN-less debit. And it's on that front-the movement of debit or checking- account payments to the Internet-that software solutions providers believe banks will accomplish most this year. One enthusiastic vendor says he expects every U.S. bank to offer such payment options to their retail customers by year's end.

Moreover, the fact that banks typically need only add software to facilitate PIN-less, makes this an option for even small banks. (Some proposals for using debit cards online call for hardware. Consumers would key their personal identification numbers into readers attached to their home PCs-such as those supplied by SafeTPay, Atlanta, and UTM Systems Corp., Seattle.) Additionally, vendors such as TeleCheck Services Inc., Houston, want to take "checks" online by having consumers key in the equivalent of a physical check's magnetic ink character recognition number (MICR).

Vendors claim consumers will soon enjoy maximum choice in how they pay online.

Litan is skeptical. "In order for checking account payments over the Internet to become like credit cards, there will have to be some changes in both security and government regulation," she says. "Credit cards work for virtually all merchants; the problem is that no one wants to use these other schemes .... That's why the only system that has managed to get any traction at all is PayPal (Inc.)," she says, referring to the Palo Alto, CA, vendor of person-to-person (P-to-P) email payments. And its success was derived from online auctions, Litan adds. "You just have to find something that works for all merchants." It's noteworthy that the cash payments emails are funded by credit card.

Still, PayPal.com is not the only survivor among the new schemes, as noted below. In the big picture, these Web-enabled payment services may be garnering only a pinch of salt in an ocean of Internet purchases, but just as the credit card associations closely monitor the development of non-card payment schemes, banks would do well to keep tabs on the PayPals and Yahoo!s of the world.

What follows is a small sampling of a few companies preparing Internet payment alternatives to credit cards.

Web Payments Rising

As many as 80% of the world's financial institutions will be equipped to handle payment processing over the Internet by the end of this year, predicts Cap Gemini Ernst & Young, in its "2000 Special Report on the Financial Services Industry." However, the Paris-based consultant notes few are yet ready.

Only 10% to 12% of those institutions' customers are expected to be able to handle Internet payments and only 3% of those who are able are expected to be doing so at year's end. Needless to say, the driver of Web debit and credit payments is lower processing costs but consumers may also come to expect such options.

This would be music to the ears of John Filby, president of eCash Technologies Inc. Based in Seattle, the year-old software company's "Monneta Suite" solutions enable banks to do what a host of new rivals-many of them non-banks but nearly all of them based on credit-card funding of one kind or another-are doing on the Web. That is, to offer a full complement of Internet payment options, including the routine use of checking-account funds.

Filby, like most of his counterparts in this emerging sector, is quick to note that eCash Technologies' payment engine works with both bank accounts and credit cards. And to hear Filby tell it, the platform is as safe as it gets.

Both consumer and business Web payments are starting to "scale up," he says, "and at the same time, you see more people indicating they're not comfortable paying with a credit card online. There's a lasting place for online payment products other than credit cards."

The eCash Technologies' payment engine was developed initially in the early 1990s by DigiCash, a company that was created to commercialize the work of a technology organization formed by the Dutch government. Using a public-key encryption security model, the payments engine enables banks to provide "good funds" to merchants in real time, Filby says, noting that all transactions are "denominated in official currencies."

He's quick to hammer home that last point: "We're not one of these alternative-currency companies."

Variety Abounds On The Net

The companies to which he refers include "token" payment schemes such as those offered by flooz.com and beenz.com, in which tokens take the place of cash. In most cases, these models are tied to loyalty programs of one kind or another, normally involving alliances between the payment scheme and Internet merchants. More importantly here, they are funded in almost every case by credit cards.

With eCash Technologies' software, banks can create similar loyalty programs for their merchant customers as well as retail consumers, says David Keenan, the company's senior vice president for financial markets. Gift certificates-another popular offering of online payment services such as Yahoo's PayDirect (run by CIBC National Bank's Amicus unit)-are among the core capabilities of the Monneta Suite, he adds.

"My feeling is, banks are going to find strong demand for this among their merchant customers," Keenan says.

Acknowledging that PayPal "kind of paved the way" in building customer demand for online, P-to-P payments that can be made by email, Keenan hit on a universal theme among virtually all market participants: Lots of people out there who would like to make Internet purchases don't have credit cards. Chief among that segment are those teens under 18, whose buying power in the United States is legendary.

A critical difference between companies like eCash Technologies and PayPal.com is that "we're not going out and trying to build a huge consumer base," he says. "Our strategic approach ... has been to go out and partner with market leaders who already have large numbers of customers." The company counts Deutsche Bank among its financial institution clients.

Vendors Hedge Bets

In the same breath, however, Keenan and other executives in the payments business are careful to point out that their solutions work with credit cards as well as online debit. "We think it's better to have MasterCard and Visa as customers rather than competitors," he adds.

John Burns, chief executive officer of FundsXpress, an Austin-based provider of a variety of financial services software and services, strikes a similar chord: "Watching some of these different schemes develop, I just don't see credit cards being replaced," Burns says. "The ones that are going to work are going to be those that complement existing and trusted payment mechanisms, especially credit cards."

Like Keenan and Filby, Burns says P-to-P payments represent a tremendous opportunity for banks. "It's pretty neat, but there's no magic in it." And while services like PayPal and Billpoint act as "third parties" for payment, banks' offerings will involve only the consumer, the bank and the merchant. That way, only the consumer and bank ever see account data.

FundsXpress isn't in the business of enabling Internet payment from checking accounts as yet, but Burns said a major goal of the company this year is the addition of such capabilities to its digital wallet product. While that wallet enables the exchange of money funded by a credit card, the CEO says FundXpress ultimately will introduce automated clearinghouse, or ACH, capabilities for Internet payments from checking accounts.

"Banks really are the ones that need to step up and fill this void," Burns says, "and we're going to give them the tools to do it."

If PayPal demonstrated "pent-up demand for P-to-P payments via email," as Keenan says, banks have begun to recognize that such payments "aren't just about splitting the $20 check for lunch with a colleague." The inevitable Web-enabling of virtually all bank payment instruments may also be the catalyst that finally lifts bill-pay services out of the consumer- adoption ditch.

"My dry cleaner would love to put his email address on his statement and have me pay him that way," Keenan says. "He doesn't have to worry about whether they are good funds, he doesn't have to wait for the funds and he doesn't have to deposit the funds."

For merchants, meanwhile, bill payment by email, with banks as the intermediary, is even more secure and, in Keenan's view, significantly more cost effective than credit card payment. "(Online) bill payment hasn't exactly caught fire," he laughs, "and in my opinion, bill payment by email will take off."

Visa Warns: Buyer Beware

Observing such developments preoccupies e-Visa, a Charlotte, NC-based unit of Visa USA, according to Jim McCarthy, an e-Visa manager. Visa is constantly looking for "ways to deliver more functions from the card platform," McCarthy explains.

"We think of these third-party folks as a 'buyer-beware' issue," McCarthy says. When a consumer makes a purchase at an auction site, for example, "it looks to them like they're simply using their Visa card to pay the merchant," but, in fact, the payment is made to a third party. "You're sending your money to that third party and the third party is sending it to the merchant, minus whatever fee," he adds. (Actually, some of the existing schemes make their money solely through interest on the "float" involved in the funds they receive.)

"But some of these third parties don't necessarily give you the right to dispute it later." (Auction giant eBay Inc., which uses PayPal, recently reported the defrauding of its first consumer who paid for goods that were not received.)

Credit-card purchases carry a maximum customer liability of $50. "The (third-party) guys that are getting the most traction are the ones who make themselves look most like Visa and MasterCard but are in fact (providers of) a digital currency," McCarthy says.

The trend has gotten Visa's attention in other ways, too. McCarthy says the company is on track to launch a new online security system for Visa- card issuers, "payor authentication." (See Visa story in this month's news section.)

In the space between providers, such as eCash Technologies and the credit card companies, one discovers payment schemes out there of the anything-goes variety you'd expect on the Internet. Many are solid offerings, including more than one sponsored by banks.

For instance, a recent story in the Wall Street Journal noted that analysts give high marks to C/Base Inc., a company based in Conshohocken, PA, that is enjoying considerable success with its "eCount" and "Web Certificate" products. But, again, these products typically are prepaid set-ups based on credit-card funding rather than transactions involving customers' checking accounts. The driver is customer demand for ways to send money instantly over the Internet.

Clearly, though, companies that traditionally have offered processing and clearing services are taking note of the potential new markets as well. Recently, eFunds Corp. of Milwaukee announced a partnership with Electronic Funds Clearinghouse Inc. to enable automated payments from end-user bank accounts directly to the payee or merchant's bank account. These types of developments, fast and furious in the B-to-B arena for a couple of years now, appear to be taking hold in the consumer market today.

Still, as nearly all players agree, the credit card companies will continue to dominate Internet payments for years to come.

"You know," says FundsXpress CEO Burns, "that's just what consumers are used to."

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