Wells Fargo & Co. and FleetBoston Financial Corp. will be the first customers to test a new online payment system for small and midsize companies from two-year-old Virtual Purchase Card Inc.

The banking companies plan to begin testing Virtual Purchase Connection this month with a handful of customers. The system is designed to replace the paper-heavy check and invoice payment method now used by most smaller companies.

David Kurrasch, president and co-founder of Virtual Purchase Card, of Alameda, Calif., said the patent-pending technology offers business buyers and sellers instantaneous, guaranteed payment for goods and services. The trading partners do not need to be familiar with one another to use the system, he said. It can also save merchants about $5 on a $500 transaction, Mr. Kurrasch said.

Financial institutions authenticate and pre-authorize participants in the Virtual Purchase Connection network. The banks approve or deny payment requests and communicate the results to merchants and buyers in two seconds or less.

"It's very much like the ATM, but in our case it's a certificate," Mr. Kurrasch said. "You say you want to buy something, VPC reaches out and touches the bank and asks if there is money sufficient for this withdrawal. If the answer is yes, they give you the money."

Steve Ellis, executive vice president of wholesale Internet solutions with Wells Fargo, said he expects the system to appeal to a large percentage of the company's 13,000 to 15,000 middle-market customers. It combines the best features of the current payment options for middle-market companies, he said: the nonrepudiation of wire transfers and low-cost delivery of the automated clearing house.

Wells will test Virtual Purchase Connection in-house for a few weeks and then with about 10 customers. Mr. Ellis said he expects the system to go live by the second quarter.

Though Wells liked the company's technology and business model, it also liked the idea of doing business with two Wells veterans, Mr. Ellis said. Alan Holroyde, chief executive officer and co-founder of Virtual Purchase Card, spent 30 years at Wells, Mr. Kurrasch 14, and John Scally, the chief operating officer, 16.

John Mutschler, executive vice president of global services at Fleet, said it will begin pilot-testing Virtual Purchase Connection with a "couple dozen customers" this month. FleetBoston already offers small-business electronic payment products from Bottomline Technologies of Portsmouth, N.H., and Clareon Corp. of Portland, Maine.

"There are lots of different products out there," Mr. Mutschler said. "Part of the reason to look at VPC, or at any of the initiatives, is to be where our customers are ultimately going to be. We try to cover payments as broadly and deeply as we can, understanding that it will change over time as new players come and exit."

Mr. Kurrasch said he thinks Virtual Purchase Connection will be successful, since more than 80% of electronic commerce transactions between businesses are still settled by paper invoice and check, according to analysts.

The system will help middle-market customers approach vendors they don't know, he said. Merchants typically will not do business with other companies "until they send them tax returns or a wire transfer," he said. "That is the whole problem of the Internet. How can partners who don't know each other transact in cyberspace? This product is designed so the bank's creditworthiness tells the merchant this transaction is done."

Virtual Purchase Card says its ultimate goal is to sign up many of the 50 largest financial institutions, which have relationships with more than 90% of the country's businesses. More immediately, the company says it wants to enroll 15 banking companies by yearend, and 25 to 30 by the end of next year.

"If I touch 35 or 40 financial institutions, or even 50," Virtual Purchase Card can make the product available "to almost every business in America," Mr. Kurrasch said.

A J.P. Morgan Chase & Co. spokeswoman confirmed that the company is in discussions with Virtual Purchase Card to use the system. On Monday, Virtual Purchase Card announced that LabMorgan, Morgan Chase's e-finance unit, led the company's second round of funding of $20 million. Wells contributed $2 million to a first round of $4 million.

Avivah Litan, research director at GartnerGroup Inc. of Stamford, Conn., said Virtual Purchase Card "is very focused on providing an alternative to credit cards without all the baggage that comes with credit cards."

The system provides all the upside of credit cards, she said. Anyone can pay anyone else, the merchant gets paid overnight, and it's nonrepudiatable, she said.

Most consumers use credit cards for small-ticket online purchases, but they are too costly for use in commercial purchases of more than $500, Ms. Litan said.

She said Virtual Purchase Card should have an easy time enrolling banking companies, but the "big obstacle may be signing up merchants," which would have to convert their systems.

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