Moving forward with what could become a major new method for Web payments, Nacha’s board of directors has agreed to build and test a system that would use the automated clearing house to transfer money from consumer or business deposit accounts to wherever it needs to be sent.
The electronic payments association will form a limited liability corporation to oversee the effort, called Project Action, and will solicit funding from banks. A vendor will be selected to build the necessary switch, the system will be tested extensively, and, if all goes well, it could be available to banks and merchants in 2004.
Under the proposed system, which Nacha has been working on for the last year, consumers who want to pay a bill or buy something from a retail Web site would be able to pay by direct debit instead of, say, by credit card.
Consumers who clicked on an icon on the merchant’s Web site would be sent to a bank’s Web site. (The consumer would select the bank from a list.) The bank would then verify that there were sufficient funds in the deposit account and would initiate an ACH transaction, which would transfer the funds to the biller within a day or so.
The system would work the same way for business-to-business payments.
Technically, the payments would be ACH credits, which guarantee that the funds are good. Thus, they would be safer for the recipients than the few ACH payments being made over the Internet today — which are ACH debits, in which the recipient accepts the transaction on the promise of future payment.
The other benefits of the system, according to those who are developing it, would be that the payments could not be repudiated (except in cases of fraud), the merchants would never have access to customers’ financial information (which would remain at the bank), and the banks would be at the center of the transactions.
Executives at Nacha, and the bankers working with them, acknowledge that Project Action (an acronym for “ACH credit transactions initiated online”) is just one of many proposed or nascent systems for securing Internet payments and boosting confidence in e-commerce. Verified by Visa, which asks consumers to use a PIN when shopping online, is one; the Microsoft Passport single sign-on system is another.
Nevertheless, “we are very excited about the project,” said Elliott C. McEntee, the clearing house group’s president and chief executive officer. “We think it brings to the marketplace something that isn’t there today.”
In the first phase of the project, Mr. McEntee said, Nacha tried to determine whether the technology could be built (37 vendors said yes), whether merchants would be interested in using it (they were), and whether there was a business case for banks (there was).
Participants in Project Action estimate that the banking industry could earn $1 billion of revenues in its fifth year of operation by charging for the Internet payment and authentication products and services.
“Based on the research that we’ve done and interviews with financial institutions, we’re reasonably optimistic that Project Action could be a success in the marketplace,” Mr. McEntee said.
Once the limited liability corporation is set up and funded by banks, Nacha will solicit bids from vendors to build the switch that would facilitate the Web toggle between billers and banks.
Charles B. Bretz, the Compass Bank senior vice president who oversaw the first phase of the project, said that consumers would like the system’s privacy and security aspects, merchants would like the payment guarantee, and banks would like the revenues and the fact that they would play a central role in the process.
“The bank brand comes first, because the buyer is going to be on the bank site,” Mr. Bretz said. “It’s a new source of revenue, and banks are always looking for revenue to offset the cost of the system.”
Moreover, banks could expect low chargebacks and exception processing, as well as reduced fraud, and they would be able to use existing systems — a big advantage for the banks that have spent so much to build Internet banking and treasury management systems, he said.
Project Action could coexist peacefully with Verified by Visa and other systems, Mr. Bretz said. “Visa will continue to be a key partner of ours, but Visa doesn’t meet all the payment system needs.”
Steve Ellis, the Wells Fargo & Co. executive vice president who chaired Project Action’s financial institutions committee, acknowledged that the information superhighway was littered with bright ideas for payment security that did not succeed. “Any time you’ve got a new kind of payment service, there are a lot of issues to work through — how things get built, how do you drive adoption. You have to recognize that it takes a while to build the base and get the momentum going.”
Though there are a lot of wild cards, Project Action has a lot going for it, including demand from consumers, businesses, and merchants, plus banks’ familiarity with the automated clearing house and their desire to dominate e-payments, he said.
Steve Schutze, the director of e-strategies at the American Bankers Association, said that the companies involved in Project Action are not “trying to create another payment system — we’re trying to create another interface, front end.”
Under the current e-payment system, merchants usually store customers’ payment information and other data on their servers, which are vulnerable to hacking.
“In the debit push model, all that information is retained by the financial institution that you do business with,” Mr. Schutze said. “At banks, that’s one of the things that we do have — the trust — and we do safeguard information vigorously.”
