As alternative payment schemes continue to proliferate, some contenders this year are aiming to rise above the fray by combining fresh shortcuts to achieve the desired scale with uncommon payment technologies not easily copied by rivals.
It is in some ways a departure from the historic path preferred by many classic would-be alternative-payment providers, which took the arduous route of building consumer bases from scratch while signing up merchants one by one. By joining forces with banks, electronic funds transfer networks and walk-in payment centers, some of the most promising new alternative-payment companies aim to quickly amass tens of millions of potential consumers, theoretically igniting merchant interest.
Indeed, with so many companies attempting to wedge their way into the payments industry, such alliances with influential, entrenched players could prove to be the most significant competitive differentiator in an increasingly crowded field. Regardless of the strategy, success will not come easy.
Piggybacking a new payment scheme onto an existing customer base is not a brand-new tack. PayPal Inc., arguably the only alternative payment concept so far to catch on widely, gained popularity through its role as the preferred payment method of its parent, auction site eBay Inc. PayPal, which had some 20 million accounts in 2002 when eBay acquired it, now has 78 million active accounts.
But through a combination of their own growth strategies and new technologies, some of the upstarts are putting a new spin on the alternative payments sector.
Acculynk Inc., which has patented technology supporting PIN-debit purchases online, has inked network-access agreements with some of the nation’s largest EFT networks. Moneta Corp. is leveraging close relationships with banks to process debit and credit payments online more cheaply. EBillme, an online bill-payment and e-commerce processor, is bringing online shopping to unbanked consumers through walk-in payment centers. And Bling Nation Ltd. is enabling community banks to use contactless-payment stickers to process local debit payments at a fraction of the cost of traditional card network fees.
Some observers say these four schemes are sidestepping problems common with many upstart alternative payment schemes, such as forcing customers or merchants to take extra steps to use their payment services.
“Any payment scheme that requires consumers to enroll or download software or relies on distributing hardware is just hopeless,” says Steve Klebe, senior vice president of business development at Vindicia Inc.
The Redwood City, Calif.-based company provides a broad array of online merchants with billing services, particularly those with recurring payments for digital goods, such as online games, and software and services, such as for online dating. It supports diverse payment types, including credit and signature-debit cards, e-checks through the automated clearinghouse networks, PayPal and regional international schemes such as Brazil’s Boleto Bancario.
Tough Odds
But Vindicia these days has grown weary of trying the many alternative payment schemes entrepreneurs propose, Klebe says. “Merchants often seem eager to try out new payment schemes, hoping they will be cheaper or more efficient. But when you dig deeper into most of these new offerings, you realize most of them lack robust fraud screening, reliable or quick transaction reporting, or dispute resolution, and they have little grasp of the legal aspects of handling payments,” he says. “There are so many complexities that go along with accepting new payment types that it’s not worth it for us to pursue most of these new schemes.”
Despite the lack of success among most new payment companies, the millions American Express Co. paid last year for Revolution Money, the two-year-old alternative online credit card operation, is helping spur further investment in new schemes (see sidebar below).
Investment fever aside, Red Gillen, a senior analyst with Celent, says the odds of any new payment startup succeeding are slim.
“The only alternative payment scheme that has ever caught on is PayPal, and it represents only a small sliver of all payments,” Gillen says. “The traditional credit and debit card networks are an extremely efficient vehicle for most merchants, and it is very difficult to beat that system.”
Still, many entrepreneurs will again launch new payment companies this year using the logic that “merchants are fed up with credit and debit card interchange and they want other options,” Gillen says. “The thing people forget is that you have to address consumer needs as well, and you cannot easily cut merchant fees and transaction costs from the process without raising prices somewhere. Meanwhile, consumers aren’t screaming for alternatives.”
Banks, however, are beginning to show more interest in alternative and online payment schemes, a factor some of the most promising alternative payment operations are exploiting.
Dan Schatt, PayPal senior director and head of financial innovations, says banks adding PayPal to their menu of services can gain a sophisticated online-payment service at a low cost while still earning revenue from transactions and retaining customers. “PayPal becomes an add-on to the bank’s services,” he says.
Banking On Deals
Moneta, founded in 2007, is taking a similar approach in sidling up to banks. However, unlike PayPal, which has diverse revenue streams from merchants, consumers and e-commerce companies, Moneta aims to focus primarily on meeting banks’ needs. Using proprietary software to process transactions using the ACH system for settlement, Moneta claims to offer merchants lower-than-average transaction fees and promises to share transaction-fee revenue with its partner banks.
“Merchants pay us about half of what a PayPal transaction costs them, and banks offering our service get a share of the revenue of each transaction,” says Guido Sacchi, Moneta CEO. “ACH is the lowest-cost type of transaction, which gives us quite a bit of margin to work with compared with PIN-debit, signature-debit and credit transactions, which all cost considerably more, especially for card-not-present online transactions.”
SunTrust Banks Inc. last November launched a test of Moneta’s payment service, enabling customers to make online purchases through some 25 merchants that have signed on, including Delta Air Lines Inc. SunTrust has not provided details of its test.
Another relative newcomer grabbing attention is Acculynk, which supports PIN-debit payments online through its product called PaySecure. Founded in 2008, Acculynk claims its software-based system is less vulnerable to fraud than are other types of online payments and carries lower average interchange rates.
One of Acculynk’s initial advantages is its distribution though third-party channels. Several EFT networks in recent months announced plans to offer PaySecure to customers, including NYCE, Pulse, Alaska Option, Credit Union 24 and Shazam. Fiserv Inc.’s Accel/Exchange network last November began offering the service as an automatic offering to 2,500 financial companies and merchants that use its network.
Card-not-present signature-debit rates set by Visa Inc. and MasterCard Worldwide typically range from 1.64% to 2.2%, depending on the type of transaction, Acculynk says. The EFT networks set Acculynk’s interchange rates, which Acculynk would not disclose. But, Acculynk claims, merchants pay 20% to 40% less than card-not-present signature-debit rates.
“We help banks stay in the payment chain online so they can still earn revenue on interchange, and the customer stays within their bank site and doesn’t get routed off to PayPal or somewhere,” says Michael Kelly, Accel/Exchange general manager.
Acculynk has fewer than two dozen merchants in its network, including 2checkout.com, Ace Hardware, AirTran, J.J. Buckley and ShoppersChoice. The firm expects to add many more and says its relationships with EFT networks are helping to quickly enable large chunks of potential consumers to use its debit service.
Earlier this year, some 20 million debit card customers could use Acculynk’s service to make secure PIN-debit purchases online, and the company plans to have 60 million enabled by the end of this year, says Ashish Bahl, Acculynk CEO.
Bill-Pay Ties
Moda Solutions’s eBillme service, founded in 2005, also is gaining marketplace attention. With eBillme, customers buy online, then eBillme sends them a bill-payment request through their bank’s bill-payment service. The merchant completes the transaction when the customer authorizes the payment.
Consumers may use any bank account to access eBillme’s service, which links to more than 850 Web commerce sites, says Marwan Forzley, eBillme CEO.
While some critics complain eBillme’s payment process is slow because merchants must wait to be paid before shipping, Forzley counters that some 50% of its transactions are completed the same day they are initiated, and the other half are completed one day after initiation.
“We appeal to people who don’t want to use credit or debit cards online,” Forzley says.
Last fall, eBillme opened its service to unbanked consumers who want to shop online. Such individuals may make their selections online, then choose a walk-in payment option. EBillMe provides them with the location of the nearest of 75,000 combined U.S. walk-in payment centers operated by MoneyGram International Inc., IPP of America Inc. and PreCash Inc. EBillMe charges walk-in customers a flat fee of $4.95 for the service, which Forzley says is considerably less than most funds-transfer services, whose rates go as high as $12.95 per transfer.
Another promising alternative payment scheme grabbing attention is taking a decidedly local approach. Bling Nation, founded in 2008, last May launched its first proprietary local debit card network with a community bank in Colorado. The scheme, called Redi Pay Bling, uses the ACH system to link local merchants through a bank’s core processing system. Customers initiate payments using a “BlingTag” contactless sticker, which most attach to their cell phones.
Bling sends an SMS text message confirming a purchase to the customer’s cell phone within seconds of authorizing the sale, including the merchant’s name, the transaction amount, an updated debit-account balance and notification of any rewards points earned.
Merchant fees vary based on Bling’s contract with each participating bank, but Bling debit transactions cost merchants 50% less to accept than signature-debit transactions, says Wences Casares, Bling co-CEO. He declined to provide specific examples.
Brad Rose, vice president of IT security at La Junta, Colo.-based The State Bank, which was the first to support Bling’s scheme, says while it is collecting fees “similar to what we could get from Visa and MasterCard” on signature-debit transactions, the overall transaction cost to merchants is lower because no other parties are involved in the transaction.
Merchants participating in the scheme pay between 1% and 2% of each sale, Rose says. “This is a huge savings for small-town merchants who are typically paying north of 2.5% or 3% in merchant fees,” he says.
Some 80% of local merchants offer Bling payments, and 50% of the bank’s approximately 5,000 customers are active users, according to Rose.
“Customers like it because it’s convenient, portable, and they know exactly how much money they have in their account after every transaction,” Rose says. Merchants like the scheme because they are guaranteed payment for each transaction, and transaction fees are about half the cost of a Visa or MasterCard signature-debit transaction, he says.
Rose says he likes that Bling transactions are less prone to fraud compared with card-network transactions, and the bank retains “direct control over each account.” The State Bank has set a $1,200 ceiling for transactions.
Bling in November launched its second, similar closed-loop debit network with Park State Bank & Trust in Woodland Park, Colo., and plans to launch a third network in upstate New York during the first half of this year.
Additional banks in regions across the U.S. are interested in participating in the scheme, and some networks may have more than one bank participating within a community, Casares says.
“We are focused right now on choosing the right banking partners for our next deployments, particularly seeking different regions, demographics and types of financial institutions so that we can prove our product,” he says.
The odds of success for alternative payment schemes are low, given the entrenchment of traditional players and difficulty of building customer and merchant bases. But solidly run initiatives combining efficient technologies with strategies have the best shot at long-term survival.
Sidebar:
Who Will Thrive? Best Bet Might Be To Follow The Money
Besides sky-high expectations for success, alternative payment schemes are generating impressive sums of money from investors, evoking faint memories of the 1990s dot-com boom that subsequently went bust.
Alternative payments already have spawned some big winners. Last year, American Express Co. paid $300 million for upstart alternative ACH-based credit card payment network Revolution Money. And eBay Inc. in 2008 paid nearly $1 billion for Bill Me Later after having paid $1.5 billion for PayPal in 2002.
The specter of new mobile-payment technology possibly redefining the $6 trillion point-of-sale payment market is further fanning the flames of investment and acquisition, observers say. And the possibility that social networking might play a larger role in payments is adding to the intrigue.
Bling Nation Ltd. has generated significant venture capital, receiving an additional $20 million in November from Balderton Capital. And in January Bling announced that Chamath Palihapitiya, vice president of user growth, mobile and international, at social-networking Web site Facebook joined its board of directors.
No indications have emerged yet on whether Bling plans to expand into social media, perhaps by encouraging its users to register credit cards on its site to acquire “Facebook credits” for purchasing virtual gifts and playing games.
Obopay Inc., founded in 2005, continues to charm investors with its mobile person-to-person funds-transfer service, touted as highly versatile compared with competitors’ versions. The company received several rounds of double-digit funding through 2008, and last March it announced that mobile telecom giant Nokia invested an undisclosed sum in the company.
“As long as these guys can get money from investors, regardless of their actual prospects, we are going to see more schemes,” says Steve Klebe, senior vice president of business development at Vindicia Inc., which provides online merchants with various payment options. “The fact that American Express paid so much for Revolution Money last year will seed more investment from the venture capital world.”
A smorgasbord of alternative payment schemes too numerous to list has come and gone in recent years. A few that gained attention in the past continue to inch ahead, although some changed their game plans notably.
One example is San Mateo, Calif.-based Tempo Payments Inc., which launched in 2001 as Debitman Card Inc. and alarmed the payments industry as one of the first decoupled debit card providers offering retailer-branded cards. It has since backed away from that model. The firm now specializes in the much-tamer business of supporting affinity decoupled debit cards to groups and organizations such as In Defense of Animals, through First Bank & Trust of Brookings, S.D.
NACHA, the electronic payment association that manages the U.S. automated clearinghouse system, changed gears last year with its ACH-based Secure Vault e-commerce transaction system. Launched in May 2008 with ambitious plans to link U.S. banks and retail Web sites, the scheme now primarily promotes Secure Vault as low-cost institutional payment option for tuition and donations within the higher-education and charitable-giving markets.
A few schemes initially perceived as significant threats to traditional payments players have lost their fangs. One is Google Checkout, founded in 2006 by Google Inc., whose electronic wallet-style payment system seemed to gain popularity quickly because it was free to merchants, thanks in part to merchants purchasing ads on Google’s Web sites. The gravy train ended in 2008, when Google began charging merchants for transactions. Google Checkout has since faded in significance, with prices similar to PayPal’s but with far less consumer familiarity and brand recognition as a payment channel.
