The next "next big thing" in ecommerce could be person-to-person payment. And banks and tech vendors are scrambling to gear up for it.

While the complexities of electronic bill presentment and payment have painstakingly been ironed out over almost two decades, a form of online payment born yesterday is already helping consumers whiz money back and forth to each other at Internet speed. It's called email.

Practically unheard of a year ago, email payment, also known as person-to-person online payment, has already cropped up on company Web sites in industries ranging from banking to invitations. At least half a dozen proprietary versions of the technology have also been brought to market.

What's more, it appears to be a hit among consumers, as well.

Email payment service provider PayPal, Palo Alto, CA, announced in early April that it had already passed the 1 million customer mark. While part of the growth comes as a result of its February merger with Silicon Valley rival X.com, the numbers are still astounding. Such explosive growth is especially noteworthy, notes GartnerGroup analyst Avivah Litan, given that PayPal, at only seven months old, is the elder of the two chief email payment services.

"One million customers is phenomenal," Litan says. "It's important because whoever gets customers now owns the traffic."

Although person-to-person payment models vary, the basic premise is that a consumer registers with an email payment company by providing either a credit card or a bank account number. With PayPal's product, a customer registers for an account, in which money can be stored online. When an accountholder wants to send money to someone else, he simply fills out an email form with the fund recipient's email address, the amount that's being sent and an explanatory note, and then clicks the "send" button. If the accountholder doesn't have enough money in his online account, the balance is deducted from the credit card or bank account provided during the initial registration.

On the receiving end of the payment, recipients do not have to be registered with PayPal prior to having money sent to them. Instead, the receiver must fill out a form attached to the payment to access the money already waiting in a PayPal account in the receiver's name. To withdraw money from the PayPal account, a consumer may provide the number of the bank account to which he would like the money moved, or have a check mailed out.

The simplicity of PayPal's model, bolstered by an email marketing incentive program, has helped fuel the company's growth. Initially, PayPal gave consumers $20 for signing up and an additional $20 for each person they referred who signed up. So if a customer sent a non-member $50, the receiver would find $70 in his account upon registering-$50 from the person who sent him money and a $20 registration bonus from PayPal. Meanwhile, the one who sent the money would be credited $20 for referring a new customer. The signup and referral bonuses have since been scaled back to $5 each as growth has exploded.

PayPal charges no fees for its services. The company's revenues derive from the "float," or interest, that collects on the money customers leave in their online accounts. By contrast, most other payment companies make money by charging a per-transaction fee to a customers' credit card or bank account.

On the back end, person-to-person online payment looks a lot a like a shared merchant account. Businesses readily establish merchant accounts to process credit card transactions, but for individuals who would like to receive occasional credit card payments, establishing a merchant account would be cumbersome. In person-to-person payment, the customers of an email payment company are essentially treated as shared owners of a joint merchant account, allowing them to reap the benefits of accepting credit card payments, while sharing the costs.

It's this ability to accept credit card payments cheaply and easily that has made the method particularly popular on consumer-to-consumer auction sites such as eBay, where buyers and sellers initially faced more awkward payment processes, such as sending money orders or waiting for personal checks to clear before completing transactions.

"Person-to-person payment has been driven by online auctions," says Paul Jamieson, senior analyst of banking and payment systems with Gomez Advisors, Lincoln, MA. "People were looking for a safe, simple and fast method of settling auction transactions."

PayPal claims that one in four eBay auction items is paid for through its service. Spurred by the growing popularity of email payment among consumers, eBay has invested in a payment system of its own. In May 1999, the company acquired Billpoint Inc.; this past March, it sold a 35% stake in the payment engine to Wells Fargo & Co., San Francisco.

Although eBay won't exclude the use of other person-to-person payment services on its site, it's hoping that its investment will make Billpoint the preferred service among auction customers. "The fundamental way we're moving money is the same. What's different is how the process is showing up on the Web site," says Billpoint Director of Marketing Ann Ruckstuhl in describing the changes to the service after the eBay acquisition. "If you are a seller and you put up a lamp for sale, Billpoint became an additional box you can check for payment method."

In addition to key placements on Billpoint's Web site, eBay is using its understanding of the auction community to customize the payment service for different types of sellers. For example, sellers with error-free records who sell more than $1,000 worth of goods a month on the site are paid faster, Ruckstuhl says.

For Wells Fargo, buying into Billpoint means generating merchant account processing fees and valuable co-branding opportunities through eBay. Furthermore, person-to-person online payment presented a way to divert business lucrative credit card portfolio. "We are expanding the credit card environment. We are replacing checks and money orders," says Michelle Banaugh, senior vice president for ecommerce and Internet payments at Wells.

The bank also sees opportunities in eventually offering the payment service to start-up businesses that are not yet ready to set up merchant accounts, she adds.

Other banks have rushed to form partnerships with payment vendors as well. In March, FleetBoston Financial Corp., Boston, allied with Providence, RI-based Tradesafe.com, and in April, Bank of America Corp., Charlotte, NC, announced a person-to-person payment agreement with electronic bill payment and presentment leader CheckFree Holdings Corp., Norcross, GA.

FleetBoston and Tradesafe.com refer to the model they are supporting as a party-to-party payment model, and stress that beyond consumer-to-consumer auctions they see a variety of opportunities in the B2B and B2C arena. "One of the biggest growth opportunities is in small business and personal Web sites," says Ken Pereira, president and chief executive officer of Tradesafe.com. "You can put up a Web site, and we can come in and 'ecommercize' it and allow you to do business on it."

One of the next development goals is to enable the service to process higher dollar amount transactions. Right now, Tradesafe.com pays sellers immediately for transactions under $1,200, but for larger purchases it holds the buyer's money in an escrow-type arrangement until the product is delivered.

The different versions and goals of the existing email payment models in the marketplace today underscore the ambiguity over what role email payment will eventually play. Bank One Corp., Chicago, chose not to partner with an existing vendor when it began developing eMoneyMail, launched in March. The service, currently available on Bank One's Web site, was designed and developed exclusively in-house.

Furthermore, unlike other financial institutions, Bank One is making a point of gearing the service strictly to consumers, rather than pitching it to businesses as well. The reason? Competition. "We really want to stay in the person-to-person space," says Dean Lehman, senior vice president of marketing with Bank One. "We don't want to compete with MasterCard or Visa. If an online merchant comes to us who is interested in using the product, we will tell them we think they are better off with MasterCard or Visa."

Lehman goes as far as saying the bank will monitor customer usage and might suggest that a customer switch to a MasterCard or Visa processing account if the payment transaction volume indicates the user is using the service for business purposes.

In addition to use in e-auctions, Bank One sees more practical applications for eMoneyMail, such as sending money to kids at college, birthdays and classifieds. If the bank were to expand the service into the business arena, it would be for enterprises like a greeting card company, which could enable customers to send money in ecards, or a rebate processor, which could send e-rebates to customers instead of paper checks. The bank plans to offer the service to other Web sites, including to other banks to re-brand as their own.

GartnerGroup's Litan notes that the new payment method represents potential competition for electronic billing vendors. For example, drawing on the banking expertise of merger partner X.com, PayPal is now considering whether to offer bill-pay as an added service for its rapidly growing customer base.

CheckFree is quickly jumping into the email payments scene. The company says it has designed an email payment based on direct deposit, which would require customers to supply bank account numbers to enroll in the program. The danger of a direct deposit email payment system is that cautious customers might be reluctant to enter an bank account number over the Web.

"I know there is some concern about providing your bank account number online, but products in the marketplace today show that consumers are getting over those fears," says Tim Renshaw, product manager of person-to-person products and payment at CheckFree. The vendor is working on a new version that will allow transmittal of credit card payments.

The person-to-person service will be launched only through partners, including Bank of America and the U.S. Postal Service. BofA plans to kick off its service by year's end; the USPS has not announced a launch date.

Another feature CheckFree is developing for future versions of the product is real-time money transfer. Its initial email payment system will have a three-day lag time in transferring money from one bank to another. However, Renshaw says that some systems that claim to have instant payment actually have a several day delay in withdrawing money from online accounts.

The new person-to-person package is distinguished from CheckFree's existing "Pay Everyone" electronic bill payment service in that the entire person-to-person payment process is electronic. With Pay Everyone, consumers enter the information of individuals to whom they want to send checks and to authorize online payment, but on the back end a check is still cut and mailed.

Beyond auctions and away from public partnerships with banks, Mambo.com Inc., an event planning and invitation company in Menlo Park, CA, saw potential in tying an email payment service directly to its product. That's why it has developed its own in-house payment service.

"We believe that as a service, person-to-person payments work best when they are contextually integrated," says Greg Richards, Mambo's vice president of strategy and co-founder. The company tested the idea with consumers who use its invitation service and found that it was a good fit. Mambo users send invitations for sports events, concert tickets, going-away parties, or other activities that include payment or money exchanges.

The service is free, and the company collects float and Web advertising revenues.

"If we start developing a financial relationship with customers, if we are helping plan events that cost money, there are larger marketing possibilities," Richards says. We can capture information about events planning and the costs associated with it. We can develop financial relationships."

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