The automated clearing house network may someday be the preferred payment method for online shopping.
Of course, that’s what Nacha, the electronic payments association, said three years ago when it unveiled Project Action. This effort to put banks at the center of Internet purchases by pushing credits to retailers over the ACH network initially garnered significant buzz among bankers who wanted to displace credit cards as the go-to method for online shopping.
However, the initiative died on the vine when it became clear that banking companies did not want to invest in the needed back-end wiring.
But undeterred, the Herndon, Va., trade group is sponsoring a test of a new credit push system with four banks, and hopes this new initiative will catch on.
“This is taking a fresh look at the whole concept of credit push,” said Julie Hedlund, a senior director with Nacha’s e-commerce group.
She also said this effort offers protection against something that was a far less pressing concern in 2002: online fraud.
Several recent incidents have shown that the extensive financial databases that retailers have on their customers can easily fall into the wrong hands.
Of course, there already is an ACH category for online shopping, WEB, and a few Internet merchants have added it to their checkout process, but few people actually use it. Part of the reason for the low use: WEB requires people to enter their bank account number and the bank’s routing number — a cumbersome process for people who don’t know what a routing number is, or where to find one.
A more significant problem is that many people are reluctant to reveal their account number on the Internet, for fear that it will be stored in a computer that might someday be compromised. Many people are just as wary about using their credit cards online, for the same reason. “A lot of companies have a lot of information about a lot of people,” Ms. Hedlund said.
To bypass this concern, Nacha developed a system that links a merchant’s Web site with a bank’s online bill payment site. The goal is to create an easier, less risky method for shoppers to make purchases online by authorizing ACH credits to the merchant. The current ACH mechanism for online shoppers requires them to hand over these details to the merchant, which initiates a debit to their account.
“One of the big value propositions [of the new system] is fraud prevention,” Ms. Hedlund said. “You don’t give your financial information to the seller; it stays with the financial institution.”
The new system opens a window to the customer’s bank site, where the customer can initiate a credit to the retailer. The transaction functions much like an online payment to a gas company or a cell phone provider.
“We look at this as an extension of online banking,” said Mary Ann Francis, a senior vice president and the manager of global trade and treasury solutions at National City Corp. of Cleveland.
National City, Bank of America Corp., Wells Fargo & Co., and Gardiner Savings Institution in Maine are conducting the proof-of-concept test and are scheduled to report their findings in November. For now they are working with one retailer, Radio Shack Corp., and are using technology developed by eWise Systems Ltd. of London.
On paper, the project is much like Project Action. The difference is that the earlier effort never got past the on-paper stage. After drafting a business case in 2002, Nacha asked its members to contribute $1.2 million of seed funding to build back-end connections. The banks balked, and there was no further action on Project Action.
“This time we realize that testing, to make sure this is possible, is very important,” Ms. Hedlund said.
However, there are some skeptics.
Leonard J. Heckwolf, a senior vice president in the treasury services unit at JPMorgan Chase & Co., who stepped down as Nacha’s chairman this year, said that the credit push idea “makes sense,” because there are no effective ACH formats for one-time payments over the Internet. However, he also said that the behind-the-scenes wiring needed to connect the banks and the retailers is more complicated than systems used today to process credit card payments or initiate ACH debits, and that credit push “could be more expensive” than other payment systems.
Marcie J. Haitema, a senior vice president with JPMorgan Chase and its global ACH operations executive, was even more blunt. “It can’t possibly be priced comparably, because it is so much more complex.”
Ms. Francis said that each bank would likely set its own pricing, and it is unclear at this point how much it would cost to process the payments. “That’s why we are doing the proof-of-concept.”
Ray Vines, the director of treasury operations at Radio Shack, said he hoped that the banks would find a way to make the system cost-effective. “If the banks don’t price it economically, then nobody will use it.”
Ms. Francis also said that the new system is simple for consumers to use, even easier than using a credit card. Once a customer opens the window to their online banking site, it only takes a few keystrokes to log in, and the details of the transaction are already on the page waiting for the customer’s approval, she said.
Improving “the user experience is what this is all about,” she said. “If the end user is not happy, credit push won’t take off.”
She also said that the system could attract new customers to e-commerce retailers — the people who were unwilling to shop online because they did not want to disclose their credit card numbers on the Internet. “The overall pie could get bigger.”
Ms. Hedlund said that the United States is far more dependant on merchant-initiated ACH debits than other countries, where consumers routinely make payments by authorizing credits to merchants. She noted that the Toronto electronic payments company Acxsys Corp., which is owned by eight major Canadian banks, is planning to introduce a credit push system this summer that would route payments through its Interac Association network.
Marc-Andre Lacombe, the general counsel and corporate secretary for Acxsys, said the Interac Online payment system is similar to the system Nacha is testing, with direct links between retailer and bank sites. Acxsys has not yet set prices for the payments, but “the idea is to make sure it is competitive” with other online payment systems, he said.
The goal is to reduce risk by no longer requiring customers to disclose their banking details, Mr. Lacombe said. “To us, this is the natural evolution” of online payments.
