A technology company affiliated with a California community bank says it has come up with a way to let consumers make Internet purchases with debit cards.

Electronic Paycheck LLC, majority-owned by Community West Bancshares of Goleta, Calif., is seeking a patent for its "virtual PINpad." Developed over the last 15 months, the software emulates the entry of card account and personal identification numbers that occurs at a merchant location.

The company contemplates putting the system to work with prepaid cards, which might contain workers' wages or might be purchased by consumers at conventional retail stores. Today's cards can be used at points of sale or to withdraw cash from automated teller machines. Once Internet merchants are signed to participate, on-line transactions could be effected with the PIN software.

Electronic Paycheck proposes the same answer for bank-issued ATM/debit cards, which, because of the need to enter and secure personal identification numbers, cannot be used on the Internet and have not challenged the dominance of credit cards there. Banks issue MasterCard and Visa debit cards that are accepted as Internet payment, but advocates of PIN-based debit say those products do not offer the security that comes with a PIN, and, as a result, many consumers are being left out of the electronic commerce phenomenon.

Executives at regional ATM networks are grappling with ways to make their cards work on the Internet. Many experts are skeptical about one proposed response -- distributing some form of hardware device that could help personal computers read the plastic card's magnetic stripe, and that would use data encryption to prevent fraudulent or inaccurate processing of the PIN code.

"I think my answer could be the standard solution," said Douglas King, who co-founded Electronic Paycheck in 1996 and serves as its president.

In 1997, Community West Bancshares, the parent of Goleta National Bank, bought a majority stake.

Electronic Paycheck started out providing prepaid ATM cards for companies to give to employees who lack bank accounts. Cards used as electronic paychecks account for 40% of the company's business.

The company, which says it has 15,000 cardholders, also sells prepaid cards through check-cashing outlets and other retail stores, and the cards can be used at most ATMs and certain merchant locations that accept debit cards with the Star and Interlink logos.

Electronic Paycheck is planning a loyalty program aimed at building its base of cardholders and expanding its reach to Internet merchants. From there it wants to sign deals -- with banks, ATM networks, or processors -- so that virtual PINpad can be used by other ATM card issuers.

"In order for (banks) to get excited, they've got to see it working," Mr. King said. The company's goal is to have 40 merchants accepting its cards for Internet payment by yearend.

An Internet merchant would have to sign a contract with Electronic Paycheck to make what the company says are "minor modifications" to enable Web shoppers to select an ATM card as a payment option.

A consumer who chooses that option would type in the card number (assigned by Electronic Paycheck or, potentially, a bank). Then a computer pop-up screen would prompt the consumer to enter the personal identification number. If the system recognized the combination, the purchase would be authorized.

"We don't want to own all the ATM cards, going forward," Mr. King said. "We could be the processor for the issuing bank for these transactions, or we could just switch it out to their processor."

For bank-issued ATM cards, Electronic Paycheck would act as a "trusted third party." Card numbers and other sensitive data would flow from the merchant to Electronic Paycheck -- either through a merchant processor or directly. Electronic Paycheck would then match that information with the encrypted PIN entered by the consumer and send it on to the issuing bank's system for authorization. PINs would never be sent to the merchant.

"We've designed it so that it would be very easy for a credit card processor to connect to us and add us to their list of networks that they can process transactions for," Mr. King said. He said his company's fee -- which would be 1% to 2% of the transaction amount -- would be lower than what merchants are accustomed to paying for credit card processing.

Electronic Paycheck is promoting its system as a way to make secure Internet shopping possible for teenagers and other people who lack credit cards. But its concept has competition from credit cards, smart cards, and other tools.

Universal Teller Machine Systems Corp. of Bellevue, Wash., has developed a diskette-shaped magnetic-stripe card reader for PCs and is trying to get banks to start distributing them. A microcomputer chip inside the reader would help to secure transactions by sending an encrypted message to UTM's server computer.

As with Electronic Paycheck's system, the banks would rely on the vendor company to verify customers' identity.

Mr. King called UTM's approach too "revolutionary" to take hold with consumers. He said Electronic Paycheck has solved the "chicken and the egg" problem that card issuers face when trying to sell a new payment method that requires merchant and consumer buy-in.

Mr. King said, "What we have that's unique are existing relationships that are going to build cardholders' attraction to merchants, (and) merchants' attraction to cardholders."

Electronic Paycheck plans to pull in Internet merchants through an agreement with a loyalty services company, A La Carte International LLC of San Diego, that has relationships with newspapers across the country.

In exchange for free newspaper advertising, Internet merchants would pay for rewards points to be loaded on to Electronic Paycheck cards as a benefit to the publications' subscribers. Consumers would earn points each time they used their cards.

Electronic Paycheck has recently signed another contract that it hopes will widen its cardholder base. ACE Cash Express Inc. of Irving, Tex., a check-cashing outlet chain, has commissioned the company to develop a card system for issuing short-term consumer loans.

Electronic Paycheck distributes wages and commissions on cards, which are often rebranded by payroll companies or other clients.

The company's retail product, which sells for $5 to $10, is called PayCard Plus. A retailer would load these cards with any amount desired by the consumer, and could charge a reloading fee.

Electronic Paycheck charges different fees depending on the type of card. For a retail card the cardholder is charged $1 to $1.50 per ATM transaction and 25 cents per transaction at the point of sale.

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