Start-Up’s E-Payment System to Bypass Card Nets

A telecommunications entrepreneur hopes to overtake Exxon Mobil Corp.’s Speedpass by offering consumers the ability to make small purchases directly from a checking account using a wand on a keychain — and cutting credit card interchange fees out of the picture altogether.

The new system, marketed by FreedomPay Inc., is being tested in 60 McDonald’s restaurants in the Boise, Idaho, area, as well as in convenience stores, movie theaters, company cafeterias, and similar locations in other parts of the country.

“Speedpass was developed as a marketing product for Mobil to make it more convenient for current customers,” said Robert Pons, the president and co-founder of FreedomPay, a privately held company in Wayne, Pa. “We have developed our own system, which enables us to be the low-cost provider.”

FreedomPay will build its own payment-settlement network to bypass interchange fees, he said.

The system will go fully live in March, though the McDonald’s Corp. pilot and private corporate systems are already active. Mr. Pons said it would charge merchants about 2% of the transaction amount, plus 7 cents.

He said the company is marketing the system to banks as a sort of mobile automated teller machine. “Banks will offer FreedomPay to allow customers to pay for things at places where they pay cash.”

The company hopes to build a client base among merchants that do not typically get much credit card business, and it is “receiving five inquiries a day” from interested retailers, Mr. Pons said.

He also said that two major banking companies (which he would not name) had signed on to offer FreedomPay to their customers. “When a retailer learns that ABC Bank is soon going to be distributing FreedomPay to customers,” it becomes more interested in signing up for the system, he said.

Nokia Venture Partners, the technology investment arm of the Finnish cell phone maker Nokia Corp., is helping to fund FreedomPay and recently made an $8 million investment.

The system is nearly identical to Exxon Mobil’s popular Speedpass, which was introduced in 1996 to let Mobil customers pay for gas or other items without having to pull anything from their wallet.

Customers who sign up for the system receive a tag, or “wand,” to put on their keychain. When the tag — known as a “radio-frequency identification device” — is waved in front of the transponder unit at the pump or the checkout, it transmits the card information to the system, which authorizes the transaction on a designated credit or debit card.

More than four million customers have signed up for Speedpass.

Over the past few years McDonald’s has tested several technologies at some of its restaurants to allow customers to use a credit card without slowing down the line at the counter. However, the Oak Brook, Ill.-based company, which operates 13,000 restaurants and says it serves 22 million customers a day in the United States, steers clear of calling plastic the wave of the future for the fast-food industry.

Lisa Howard, a McDonald’s spokeswoman, said it is looking at a range of payment alternatives. “Right now we are testing several different cashless options. It is too early to see if one of them will emerge.”

In addition to the FreedomPay pilot in Boise, McDonald’s has tested Speedpass, tollway payment transponders, and fingerprint scanners, among other options.

The fast-food giant has been testing Speedpass since late 2000 in its nearly 400 restaurants in the Chicago area. It is also testing a fingerprint-reading system from Indivos Inc. that encourages the use of credit cards at a restaurant in California.

Indivos, of Oakland, got its start when its system was piloted in Visa U.S.A. Inc.’s company cafeteria. Frank Pierce, Indivos’ senior vice president of marketing and business development, said the system is designed to be a quick way to call up a customer’s credit card account, not a replacement for cards.

Indivos and FreedomPay both offer goodies for signing up. Those who sign up for the Indivos system get a T-shirt and a Big Mac; Boise customers who choose FreedomPay get a $5 bonus.

Both companies say that sign-ups are meeting expectations and that they are hopeful that McDonald’s and other fast-food chains will see the benefits of their systems.

But Ms. Howard says McDonald’s is in no hurry to make any decisions about the technology.

“If there is one thing we have learned, it is that the only thing that is constant is change,” she said. “We don’t want to implement systemwide and have it become obsolete. We need to look at the numbers and see if it makes sense. If cashless is the future, we will be there.”