Despite its old-fashioned name, Electronic Check Services is forecasting revenue growth rates as if it were a high-flying Internet company.

In a way, it is.

The New Castle, Del., transaction processing company is quickly earning a reputation as a facilitator of Internet-based commerce. It has developed a novel way of guaranteeing on-line transactions by combining elements of banking, insurance, and risk management.

"It is a niche that we address in a unique way that no one else has sought out," said president Ray Moyer.

On-line commerce poses a major chargeback risk to banks-the reversals of payments that have cleared through the credit card networks. Merchant- acquiring banks are on the hook if they cannot collect from merchants.

Between 10% and 15% of on-line credit card transactions are returned, versus 1% in the physical world, said Alan Clark, a market segment executive in electronic payments at International Business Machines Corp.

"The underwriting of a merchant on the Internet, because he has no physical address and location, is a fairly tough issue," said Paul Martaus, president of Martaus & Associates, a Clearwater Fla.-based consultant. "There is no standard underwriting methodology in place that would protect the typical bank."

With more and more firms seeking to set up virtual storefronts on the World Wide Web, ECS sees a potential for its risk management methodology to be widely adopted. If banks can be comfortable enough with a merchant applicant's bona fides to sponsor their connection to the payments system, then a significant barrier to mass-market electronic commerce will have been eliminated.

"There is a whole market niche out here not being served," said David McAlhaney, executive vice president at American National Bank, Chicago. He called ECS' opportunity "tremendous."

Like ECS, American National has set its sights on the risky merchant segment. Ninety-eight percent of its portfolio of 29,000 merchants consists of start-ups, Mr. McAlhaney said.

ECS, though its roots date back a quarter-century to its start as a service within Wilmington Savings Fund Society, only recorded its first recent profit in December. It expects revenues to grow tenfold in 1999, to $10 million, said Mr. Moyer.

It started with a base of merchants that do business by mail and telephone, which presented many of the same merchant-processing challenges as the Internet. A quarter of ECS' 250 merchant customers do business on the Internet, representing the firm's "fastest-growing area," Mr. Moyer said.

A few unorthodox capabilities help ECS guard against chargeback risk in a way that banks cannot, Mr. Moyer said. One is ECS' ability to measure how well a merchant fulfills product delivery.

Fulfillment problems-caused by merchant cash-flow problems, inventory shortfalls, or other operational snafus-are a major cause of chargebacks, Mr. Moyer said.

ECS has developed software that it sells to merchants and which ties in to the United Parcel Service's tracking and ordering system. The linkage lets ECS closely monitor a merchant's delivery record and prevents transactions from occurring if fulfillment problems arise.

"If a merchant is insolvent, I will know that I have limited my liability because I have assured myself that as of yesterday, every order processed in our system has been fulfilled," Mr. Moyer said.

Another guard against risk is an insurance policy ECS has that bonds merchant credit card payments. Merchant bonds from Reliance Group Holdings Inc., New York, assure merchant banks against chargebacks.

ECS' on-line risk-management idea was born out of a chance airplane conversation in March 1998 between Gary Robinson, then president of ECS, and Joseph Babin, an insurance broker.

Mr. Robinson was returning home after settling a large chargeback loss that occurred when an ECS merchant customer went bankrupt. His encounter with Mr. Babin, chief operating officer of Norman Spencer McKernan of Conshohocken, Pa., a firm that specializes in product design for high-risk industries, led to further explorations of how an efficient underwriting process could enhance on-line merchant processing.

Within two months, a product was designed and shopped among several insurance underwriters, and Reliance was chosen.

"They were the second-largest surety in the country and had the best reputation," Mr. Babin said. "I knew the banks would be looking for that kind of credibility."

The underwriting process has many moving parts, including multiple connections to electronic data bases, merchant-site visits, anonymous spot checks of merchants' sales practices, and product fulfillment. Mr. Babin said the system enhances banks' regular assessments of merchant risks based on financial statements.

Mr. Martaus, the consultant, said, "Paying an insurance company to take that kind of a risk is a unique approach."

Mr. Babin said he knew of no other insurance firms underwriting merchant credit card payments, though Lloyds of London made an attempt in recent years with First USA.

Banks that can figure out "how to do a better job of underwriting and risk management for Internet billing and E-commerce" can move beyond "their four walls," said Mr. Babin.

ECS, founded by Gary Robinson's father, William, in 1975, has moved well beyond its beginnings. Then a unit of Wilmington Savings Fund Society, ECS operated one of the pioneering debit card programs, known as the WSFS Plan.

In 1981, Mr. Robinson bought ECS from its parent. Though the company processed recurring automated clearing house and credit card transactions, its activities gravitated toward payment systems consulting.

The elder Mr. Robinson, who is basically retired, remains an adviser to ECS. His son took the helm three years ago in the first of several rapid changes at ECS. Soon after, though, Mr. Moyer, who was president of a food processing and distribution firm that folded, joined ECS. Mr. Moyer described Gary Robinson's status as semi-retired.

Over the last three years, ECS developed a real-time credit card authorization and settlement service for point of sale transactions as well as those via the telephone, mail, and the Web.

With no marketing effort nor sales force to speak of, ECS has gained clients largely through word of mouth. Employing only 47 people, it operates from a 10,000-square-foot office. As of December, ECS was processing a million transactions monthly, worth $50 million.

ECS has landed contracts with big-name clients such as AirTouch Communications, Microsoft Corp., and the Federal Bureau of Investigation.

Mr. Martaus said ECS eventually will run up against merchant processors like First Data Corp. affiliate Cardservice International, which "invented the high-risk merchant business."

Another competitor is Paymentech Inc., a fast-growing merchant-acquirer that Bank One Corp. controls as a result of its 1997 acquisition of First USA Inc.

ECS is evaluating whether it wants to continue selling directly to merchants or to rely on banks as intermediaries. Small merchants have traditionally obtained card-processing services through agents known as ISOs, or independent sales organizations, of which Cardservice International is one of the most established.

George White, a consultant who is president of White Papers Inc., Montclair, N.J., and has worked with ECS, said its "secret has been quality and good pricing. Their reputation has grown, and people go to them."

Mr. Moyer said he sees a role for ECS in helping small banks hold on to merchant customers.

"Banks have lost (merchant) clients," said the 38-year-old president. "They are not bad customers, it's just that the bank has this one area that they are not really good at managing."

He added, "I am always surprised that someone else hasn't been here already."

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