The Secure Electronic Transactions standard for credit card business over the Internet may ultimately weaken the influence of its original champions, MasterCard International and Visa International.

That scenario is advanced in "The Electronic Commerce Report," released this month by Bill Burnham, senior research analyst for electronic commerce at Piper Jaffray Inc., Minneapolis.

Mr. Burnham said SET raises the possibility that credit card processors could use the Internet to bypass the established credit card networks, or "jump the switch."

That could deprive Visa and MasterCard not only of service fees but of the information contained in transactions that can often be used for marketing and cross-selling.

"In an ironic twist, SET, a mechanism created in part to ensure Visa and MasterCard's dominance of consumer electronic commerce, may ultimately undercut the influence of its creators," said Mr. Burnham.

One of the problems, he wrote, is that once all the costs of SET are added in, they can be just as high as in point-of-sale credit card transactions. But in basic overhead, the Internet still holds the promise of being cheaper than any other payment channel.

Mr. Burnham said American Express is encouraging merchants on the Internet to send transactions directly to American Express, bypassing third-party processors and other transaction networks in the process.

In theory, Mr. Burnham said, MasterCard and Visa banks could do the same thing. Card issuers and merchant banks could exchange authorization data over the Internet without going across the Visa and MasterCard systems and incurring their charges.

Another potential challenge to SET is assuring that software from the many vendors of payment systems interoperates.

"Apparently Visa and MasterCard share these concerns," Mr. Burnham stated. "They have very carefully selected SET demonstration sites in order to avoid any interoperability problems."

SET requires millions of digital certificates to be issued, managed, and revoked when necessary.

Mr. Burnham maintains that until SET certificates are loaded on smart cards and smart-card readers are widely deployed, SET will suffer because the certificates will reside in personal computers, lacking portability.

Paul Di Senso of SRI Consulting of Menlo Park, Calif., who recently co- authored a document on electronic payment systems for the firm's Media Futures Program, said, "SET certificates are an obstacle that everyone has recognized."

"I don't think SET is completely out of the woods," Mr. Di Senso said. "The problem that could slow it down is the authorization process." Because of the complexity of the encryption algorithms, an IBM prototype reportedly required 30 to 50 seconds per transaction authorization in a system connecting 1,000 customers and five merchants.

"What happens when you scale this up to hundreds of thousands of customers and thousands of merchants?," Mr. Di Senso asked.

Overall, however, Mr. Di Senso is more optimistic than Mr. Burnham about SET's staying power.

"Of all the systems in place, SET will dominate," he said. "SET has an existing customer base and is international, as is the Internet. All the other systems are proprietary, like Digicash or Millicent or smart cards in a PC environment or CyberCash in its original incarnation ... They all have to establish new account relationships and international currency exchange. SET has the entire clearing and transaction settlement in place."

He said one important alternative to SET will be electronic drafts that let customers use their existing checking accounts for peer-to-peer or customer-to-merchant transfers over the Internet. One example would be the Financial Services Technology Consortium's electronic check proposal.

With all the potential pitfalls, observers suggested SET will take longer than anticipated to gain acceptance, but it will be difficult for a competitor to push it aside. Mr. Burnham said concerns over the pace of SET adoption may eventually prompt the bank card associations to lower their interchange fees for SET transactions in order to spur adoption. Visa has already lowered some of its non-interchange prices to spur SET deployment.

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