The NYCE Network has ushered in a new era in person-to-person payments in which consumers will deal solely with banks, potentially taking third parties out of the picture.
With the help of Citibank and Bridgeport, CT-based People's Bank, NYCE was able to conduct what it bills as the first real-time consumer- initiated funds transfer between two financial institution accounts. The banks were linked to each other via the vast NYCE network, and the accounts involved were credited and debited with the speed of an ATM transaction.
In contrast, the P-to-P models employed today by such services as PayPal or Citibank's c2it use the ACH or credit card networks, explains Jim Judd, senior vice president of Woodcliff Lake, NJ-based NYCE. "When you use these services you have to register, open a new account and somehow fund that account. The recipient also must open an account with that service." Judd says the usual method relies on huge infrastructure and is prone to delays. The ACH can take a day or two to move money.
The NYCE solution channels money between two insured deposit accounts. "With a PayPal, you're moving money from your insured bank account to an uninsured account at PayPal," he adds.
Consumers may appreciate the difference. "You don't know who PayPal is," says Kate Gloss, head of EFT services at People's and a member of the NYCE advanced payments team. "All over their Web site it says they're not a bank and not FDIC-insured."
So banking partisans and outside observers insist that it's about time banks got into the driver's seat in the personal payments area. "Banks have waited long enough (to get involved)," says Jeanne Capachin, an analyst with Newton, MA-based Meridien Research. "They see there's a demand for this service."
Judd agrees that consumers want the capability to move money to each other electronically and that banks are gravitating to support such services. "By adding a real-time capability with NYCE, it makes it easier for banks to offer a P-to-P service."
But Citibank's Rodman Rees, president of Citishare, says not to be so quick about calling what NYCE is doing a P-to-P service. He says it is more like a mechanism that enables interbank transfers of money in real time. Individual banks will be responsible for creating the customer interface under which the NYCE system runs. "The underlying mechanism of the NYCE service can be used in a P-to-P environment as a payment alternative. It will solve an important problem for banks today-the lack of the ability to move guaranteed money in real time."
Another thing that will make NYCE's
P-to-P system attractive to banks is that it requires little effort on their part to implement. Some 2,400 financial institutions, primarily on the East Coast, are already hooked up to the NYCE network.
About the biggest change to the system is making it look for data that is not PIN-related, as in an ATM or POS transaction, according to Judd. "We're working with our participants to make their individual systems do the same," he says. "It's not a big deal to implement." NYCE-participating banks will be certified over the next two years to accept these PIN-less transactions.
Citbank's Rees, though he does not exactly dread the implementation, says there's still work to be done. For example, he says the check posting system at banks needs to be modified to accept an inbound electronic payment. "But we're not building Rome here," he adds.
The network previously had no involvement in the P-to-P area. Judd says this move gives NYCE an excuse to upgrade its network to accept non-PIN transactions. P-to-P is just the first step toward a future of PIN-less payments.
In addition, offering this service to its member banks can mean a chunk of new revenue for NYCE. The network gets a fee for every transaction it switches. Given the number of participating banks in the NYCE network, when one factors in the banks' customers-some 47 million of them-those fees add up.
Meridien's Capachin is leery of what usage fees could mean for consumers. Banks would likely set their own prices, but she thinks they could make it expensive. "This is definitely a viable payment model, but it sounds like they might charge a hefty fee," she says.
Judd hints at this, saying some banks might want to market this is a premium service.
However, People's Gloss has a different view. Although the bank has not evaluated a pricing structure for the product, she sees this more as a vehicle for lower-dollar consumer payments, like parents sending money to their child in college. "This will not be a huge revenue generator because there isn't huge volume in P-to-P yet," she says. "But it does have the potential to build up."
Besides, banks would be shooting themselves in the wallet if they charge significantly more for P-to-P transactions than their non-bank counterparts. Of course, it could also be argued that financial institutions have the trust factor in their favor, so consumers may be more willing to shell out a few more dollars for this service.
But consumers aren't out of the woods yet in terms of trust and security. When someone initiates a P-to-P transaction using the NYCE method, he needs to know the ATM or credit card number of the recipient. This is how the banks verify the identity of the account holders and give the go-ahead for the transfer. Judd views this as a potential problem, especially if the two parties are strangers.
However, he says it should be emphasized that only the 16-digit card number is revealed, not the PIN number. So even if someone did try using the recipient's number with malicious intent, an ATM would reject the card after three false PIN entries.
Gloss says people will definitely need to be educated about this aspect of the service. "Of course, they should be cautious about who they give their number to." Otherwise, she sees the NYCE method as a great add-on offering for her customers. "This is a lot easier than the other P-to-P services. Both parties already have their accounts established. You don't need to set up a separate one with a PayPal."
As for Citibank, Rees says it's important to understand that the NYCE service will not be a competing product to the bank's homegrown P- to-P product, c2it. "(The NYCE method) offers an underlying payment engine that can be used by banks, and it gives c2it an alternate payment mechanism for its customers."
NYCE will enter a pre-production phase over the next six months, adding more banks and more devices to the service. Eventually, the network hopes banks will offer this service on cell phones and PDAs as more of them offer wireless financial services.
"Consumers gain the flexibility to go to any device, it's immediate and they have the backing of insured financial institutions," says Capachin of the NYCE service. "It's a really interesting development, as long as they don't charge too much."