CYBS is in B-2-B:Interview w/ COO
CyberSource Handles Mechanics of E-Commerce Business
techweek.com
By David Needle
Evan Ellis is president and chief operating officer of CyberSource Corp., a San Jose-based company that is a leading provider in the hottest area of the Internet, so-called e-commerce services.
The company is actually a spinoff of the original Cyber- Source founded in 1994 as one of the first Internet stores. CyberSource was split into two separate businesses by CEO William McKiernan in 1997. One branch, called Software.net (now Beyond.com), sells software via the Internet. CyberSource specializes in e-commerce transaction services and touts itself as "The power behind the Buy button."
CyberSource has grown from 400 merchant customers in June 1999 to more than 1,000 today, including Buy.com, Casio, Nike, 3M and Amazon.com. Ellis is responsible for day-to-day operations at CyberSource. He was previously at Silicon Graphics and IBM in high-level sales and marketing positions. An avid outdoorsman, Ellis likes to take his family white-water rafting in the summer.
Why do companies outsource to CyberSource? Why not do it themselves?
Fundamentally we are an outsource provider. The main thing we sell is a suite of services that are targeted at folks trying to do business over the Internet. So it ranges from payment to delivery address verification, credit card verification, security and fulfillment services. Some companies buy all our services; others pick and choose certain ones.
Right, but why go to CyberSource?
The trend today in business is that there is so much to get done in a competitive environment that companies want to focus more on what their core competency is. Part of the heritage of our company is that we began as a merchant ourselves and realized all the things you need to worry about to compete effectively.
Merchants today need to focus on how to get buyers to the site, selling the right stuff and ways to differentiate. The basic things behind the scenes, like calculating taxes, deliveries, etc., you have to do well. You can't screw up. But if you can outsource those tasks to a company with a track record you can trust, you can focus more or most of your energy on merchandising. Even the largest high-volume merchants are open to outsourcing their back end services.
How does it work? Do you get a cut of each transaction or charge a flat fee?
We're a bit unique. We made a decision to position a suite of services to the customer to buy on an a la carte basis. We charge a transaction fee per service, but we don't take a percentage of the gross sale. The merchant knows they pay from 7 cents to 50 cents a transaction with volume discounts. The more volume they do, the bigger the discount.
Some other companies would take a percentage of whatever you charge for a widget; we don't. For example, we charge 10 cents per transaction to authorize credit card transactions, and that's whether you're selling something for $10 or $1,000.
By all accounts this was a huge year, a breakthrough really for e-commerce during the holiday shopping season. Is it safe to say it will be even bigger next year?
I think so. The early figures I've seen is that a year ago, e-commerce represented less than 1 percent of total holiday sales. The early figures coming in are that e-commerce was 1.8 percent of 1999 holiday sales, so it's still less than 2 percent of overall sales.
Some venture capitalists and analysts have suggested that as much as we hear about the Internet, it's actually under-hyped because there is still mega-growth ahead, particularly in the area of e-commerce. Do you agree with that?
I think it's right on target. The Internet phenomenon is not overblown. What's beginning to happen is that pure play e-tailers have done extremely well, but in the last 12 months, many of the brick and mortar companies have come to realize the potential of the Internet as well.
The market allows both to flourish. As you see more traditional brick and mortar companies incorporate e-commerce, more consumers will accept it. It's not going to be half of all retail sales, but it's going to be a lot more than 2 percent.
Some consumers might not be comfortable in an e-commerce environment, but they are comfortable with a certain store that they trust. As those stores go online, it's going to expand the market.
What about security? There have been some recent disasters with credit card numbers released or threatened to be released on the Internet. How do you assure consumers?
One of the differentiated factors of CyberSource from our early days is that we had a program for credit card fraud reduction. We experienced it ourselves when we started out as a merchant. There was even some question we would be able to stay in business because of credit card fraud—this was back in 1996. We studied the trends of credit card fraud, and developed an application to predict where the fraud was. Now we sell the application that came out of that research.
Which is?
The program is now in its fourth generation and is called Internet Fraud Screen Enhanced by Visa. It's a major reason merchants come to CyberSource because they are concerned with security. In fact, so concerned, we had several key customers want to do physical onsite audits of our procedures. We pay a lot of attention to security.
Did you let them come onsite?
Yes. One of the companies was Amazon, which came down to our facility. It's critical to our business not to have a breach of security, and Visa has helped us significantly enhance the Fraud Screen as part of a two-year agreement we struck with them last August. Visa is in a unique position to know what transactions end up in fraud, and we joined that with our predictive technology to improve the overall service.
Can every aspect of commerce be virtualized or put on the Internet?
I think anything that can be traded between two people can be done on the Internet. It's a medium to bring marketplaces together. The beauty is it expands the market worldwide, and it changes the pressure on pricing. One story that's meaningful to me is that I have a 10-year-old son who's into baseball cards. He's been buying and selling them on the Internet. Before that he went to the local store to buy cards. Now he's saying, "Why go to the store when I can use the Internet from the house?"
Is CyberSource positioned strictly as a business-to-consumer (B-to-C) company?
No, we're B-to-B (business-to-business) as well. We've been positioned by many as B-to-C because so many of our customers are in that area, but we do a lot of B-to-B work. We sell to a lot of government agencies for handling property taxes; I'm not sure what you'd call that.
G-to-C?
(Laughs) Right, maybe. Our technology applies in both markets. We just acquired a company that is focused on gift and promotional certificates and corporate incentives. The category is called "stored value"; it's like an alternative form of payment, like frequent-flier miles. It applies to B-to-C and B-to-B. And it fits right in as a service that can be outsourced.
I've seen some sites start to appear that specialize in luxury items such as high-end jewelry. Can you do anything for them, or is CyberSource best for high-volume transaction sites?
What's interesting is the higher the value of the item you sell, the more it attracts bad guys. A lot of these luxury sites come to us because we have Internet Fraud Screen.
How many employees do you have, and what areas are you hiring in?
We have approximately 250 employees around the world. About 20 in the UK and about another 25 to 30 in other U.S. cities. We have openings in almost every area of the company: engineering, operations, sales, it's across the board. It's an exciting and challenging time in the Valley. Our biggest challenge is hiring great people, and it's the most important thing we can do.
What specific technology skills or background are you looking for?
We support all the major platforms, so whether someone has experience with Java or the Microsoft environment, it's relevant. As far as the kinds of people we look for, we have a set of values we talk to prospective employees about because we feel it's very important. Do you want to hear about them?
Sure.
We very much have a high respect for the individual. The other key values include honesty and integrity and a passion for excellence. We're operating in the Internet economy, so we have a bias for action and people who can move quickly. We expect folks to work hard but have fun while doing it.
It seems like your company could be based almost anywhere. What's important about being in Silicon Valley?
The main thing is we're an Internet-oriented company. We write world-class leading application software and the kind of engineers we wanted to attract originally are here. We definitely need to stay here for the major part of our business.
Our latest acquisition is in the Midwest, and we plan to keep that location operating. Looking ahead, we see it as a base to grow multiple functions there. But we'll grow here as well. The offices we have in the Midwest and the UK make sense for us because we provide 24-7 support, and our customers are running mission critical applications, so having people in different time zones is a plus and a requirement.
Who are your biggest competitors?
By far and away our biggest competition is this issue of companies deciding to develop the technology themselves versus outsourcing it to us. Some of the e-tailers who tried to do it themselves, like Amazon, are now more willing to outsource.
There are portions of what we do where there is quite a bit of competition but no companies that offer our whole suite of services. For example, someone might offer a credit card payment service, but not an Internet Fraud Screen.
What kind of spike did you see over the holidays?
Transactions have grown at a very strong rate. In the second quarter of last year we handled 8 million transactions, and that went up to 11 million in the third quarter. Q4 grew dramatically to 21.7 million transactions, as we saw the same kind of seasonal spike traditional retail business is used to.
What is the game plan for growth?
We definitely will continue to expand our suite of offerings in areas that are not core to the businesses we serve. It's very important to listen to customers.
We have a delivery service verification service that came about as a direct result of one of our customers telling us their shipping costs were going up because of a lot of items that couldn't be delivered.
The beauty of our architecture is we have a simple API that gives merchants access to one or all of our services, so there is very little work to it for them. |
