The weak economy is prompting consumers to use their credit cards for more of their regular expenses, opening a door for third-party companies that can process card payments on behalf of billers that do not accept them.
At least two such services have gone live in recent months, aimed at people who want to put their household bills on plastic.
Observers said high fees and the potential to drag consumers deep into debt may make these services vulnerable to the same criticism that has plagued payday loans.
Mitch Friedman, co-founder of ChargeSmart LLC, which announced its payment service last week, said it is a stop-gap — not a long-term financing tool.
"Let's say it's someone that just for whatever reason has come up short of cash one month and normally wouldn't want to pay their payments with a credit card but this month, one month, they need to," he said in an interview.
His company, he said, offers customers "all of the normal credit card benefits," including the ability to defer payments.
The service has been available for three weeks, and Mr. Friedman said it has already attracted customers, including a handful who used it to pay their mortgages. To use the service, people make a card payment to ChargeSmart, which sends the money to the biller by wire transfer.
Payment Innovations LLC, a New York start-up, began offering a similar service, BillCharger, in April. Andrew Fisher, a co-founder of Payment Innovations, said thousands of people have used BillCharger to send payments, for their mortgages and other bills, to companies that do not accept cards.
He said there is strong consumer interest in using cards with billers that do not take plastic, giving his company "plenty of opportunities to fill in these gaps." As with ChargeSmart, users make a card payment to his company, which then sends a paper check to billers. Both companies accept payments made on MasterCard Inc. and Visa Inc. cards.
Mr. Fisher said he expects to offer new services in the next six months that would match some of the features available through banks' bill-pay sites.
For example, consumers will be able to set up recurring payments and see their transaction histories. Eventually, he said, the site will be able to display digital images of the cancelled checks sent to billers.
Jennifer Roth, a senior analyst with the global payments practice at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard, said that "with the credit crunch and everything, I think there's a place for" such services now, though she said demand may wane when the economy improves.
These services could appeal to "a customer segment that needs to use a credit card for an unexpected expense," she said, but those are going to be one-off transactions. "I don't see the value to use this as a recurring-payment method," largely because of the high fees.
ChargeSmart, of San Francisco, charges $4.95 per transaction plus 2.29% of the amount. For a $2,000 mortgage payment, the fee is just over $50.
BillCharger charges 5%, with a minimum fee of $19.95.
Gail Hillebrand, a senior attorney with the advocacy group Consumers Union, said these fees are high and the services do not seem to be good money-management tools. "If you are having trouble paying your bills, putting them on a credit card is not a good solution, because you'll just get deeper and deeper into debt," she said. "It's borrowing your way into more trouble, and paying a fee in the process."
Consumers who default on a mortgage typically have more protection under bankruptcy laws than those who don't pay their credit card bills, Ms. Hillebrand pointed out. "You're always in worse shape if you transfer house debt into card debt," she said.
Ron Shevlin, a senior analyst at Aite Group LLC of Boston, said these high fees seem comparable to payday loans, which are often criticized for taking advantage of lower-income consumers.
"I definitely think this is going to draw some attention from consumer advocate groups, especially if over time it is turning out that the people who are signing up for this are people who are basically just shifting debt from one provider to another," he said.
"From the fees you have to pay, it definitely seems to me that this isn't a very consumer-friendly approach," Mr. Shevlin said. "I mean, it's a huge fee."
These types of services pose a "tricky situation" for issuers and card networks, he said. "On one hand, they will benefit in the short term from the revenue that's generated from" the transaction volume, he said. However, "they're all smart enough see that there is the consumer advocacy issue" they have to address.
More important, he warned, such services have the potential to create bad debt, especially if people are using them to pay their mortgages. "I can't believe that anyone would pay their mortgage" through one of these services "unless they are afraid of foreclosure," Mr. Shevlin said. "If I'm an issuer, and saw mortgage payments on the bill, that would be a pretty good sign that sometime down the road there's going to be some bad debt."
Representatives for several big issuers and card networks either did not return calls or would not make executives available to discuss the topic last week.
Mr. Fisher said that as long as consumers do not exceed their credit limits, issuers should not be concerned. "Whether you pay cash for your groceries and put your mortgage on your card, or vice versa, it doesn't make a significant difference from a risk point of view."
And though some people have used BillCharger to pay their mortgages, these have typically been one-time events and should "not raise any alarm bells," he said.
Mr. Friedman said his service "allows people to use a credit line that a bank has already given them," and his customers are looking for convenience. The typical user is "someone who is tight on cash but ultimately does expect to make all of their payments," he said. "I think very few people would use our system to make a payment on their house and then go and default on their credit card."
ChargeSmart also will appeal to people trying to earn rewards points by paying their bills with credit cards, Mr. Friedman said.
However, Mr. Shevlin said this is an expensive way to earn points, and there are less expensive alternatives.
The banking technology vendor Yodlee Inc. has developed a system that enables banks to accept customers' cards for bill payments, and says that two of the 10 largest banks are offering it now.
Fiserv Inc.'s CheckFree expects to roll out a similar service by yearend.
Fiserv and Yodlee have said consumers are eager to earn rewards points in this manner, though both services can route payments only to billers that accept cards.
Mr. Shevlin said that a free service offered through banks would be much more appealing to people looking to earn more rewards points than ChargeSmart or BillCharger, which he said seems to target a different type of customer.
"Reward cardholders will look at this with some interest, but not do it," he said. They would realize quickly that getting thousands of extra reward points a month is "not going to be worth it when you're paying 2%" or more.
The typical user of ChargeSmart or BillCharger will likely be "younger and low-end, from an income perspective," he said. It might be used by those who cannot afford their mortgage payments and are turning to their credit cards to "in effect, forestall foreclosure," he said.
For ChargeSmart and Payment Innovations, "that's not going to be a very sustainable strategy."
