For all those who attended the investors conference you might remember that CKFR already demonstrated this system.
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The Tech Scene: Can Industry Handle Another E-Pay System?
American Banker Wednesday, October 23, 2002
By Jennifer A. Kingson
It will not be an easy sell.
Nacha wants to build an Internet payments system that would compete with the credit and debit card infrastructure, relying instead on the automated clearing house to authorize and settle all manner of electronic transactions.
With Nacha's proposed Project Action system, people or companies that wanted to make payments through the Web would be shunted from the payees' Web sites to their banks'. There they could authorize withdrawals from deposit accounts, and the banks would guarantee that the funds were available.
In Nacha's vision, banks would reap interchange fees from an entirely new source; merchants would be thrilled because chargebacks would disappear; and consumers would no longer worry about the privacy and safety of their financial information at merchant Web sites.
Nacha plans to start asking banks Monday for money to fund the proposal, which faces opposition from credit card bankers but enjoys support from merchant-acquirers. Nacha will circulate a prospectus for a company to house Project Action and will seek a total of $1.2 million from at least six banks, but no more than 12. These would get discounts and other perquisites if the system came to life.
Nacha officials know they have their work cut out for them. The business climate is hostile to theoretical R&D projects; banks say that their IT spending priorities are core systems and privacy and security initiatives, not experimental e-payments ventures. Credit and debit cards work just fine for many (but not all) of the transactions that Nacha is proposing to handle through Project Action.
Perhaps equally damning is the fact that banks have been burned in the recent past by e-payments projects: Think Spectrum, Transpoint, Integrion.
Banks will have until Feb. 28 to sign up as project sponsors during the coming "proof of concept" phase. This will involve crafting a request for proposals, issuing it to technology vendors, and selecting a vendor. (Nacha said that 37 vendors responded to a preliminary inquiry, all saying the technology could be built quickly and inexpensively.) If things go as Nacha wants, all the planning will be done by the end of next year, and implementation will follow.
Among the beauties of the system are that consumers (and businesses) would make payments exclusively through their demand deposit account bank and that merchants would know the funds were good, said Elliott C. McEntee, Nacha's president and chief executive officer.
"It's really the only system where the consumer does not have to provide any banking account information at all to the merchant," Mr. McEntee said. "It would enable the banks to compete with the nonbanks" in such areas as person-to-person e-payments, in which eBay Inc.'s PayPal service dominates and banks have faltered.
Mr. McEntee is also a realist. He acknowledges that banks are are worrying, "Is this going to turn out to be another Spectrum, where we invest money and see no return?" and are telling him, "While this seems very promising, we have a lot of projects on the way."
With Project Action, the shift from a merchant's Web site to the bank's would take a few seconds, adding time to a transaction in exchange for additional privacy and security benefits, Nacha says. (Consumers would still have the card payment option.)
"Some of the banks are questioning whether the consumer would really spend the time - which we think is only going to take 15 to 20 seconds - for the privacy benefit," Mr. McEntee said. "All surveys indicate that consumers are concerned about … [privacy] and would be willing to do this to solve the problem, but you never know whether that turns out to be true."
Mr. McEntee also acknowledges that "the environment, the timing, is not the best for convincing banks that this would be a good investment."
Indeed, though 44 banks participated in the planning phase of Project Action, not all of them are going to wind up supporting it. One banker whom Nacha had lined up to talk about Project Action a month ago, when it was given the green light by the payment association's board, declined at the last minute, saying his bank was ambivalent about funding the project.
Julie Hedlund, Nacha's senior director of electronic commerce, said that the limited liability corporation that Nacha aims to set up would have three levels of ownership and would aim to attract banks from disparate asset leagues. The least expensive category of ownership would be reserved for banks with under $1 billion in assets, and the next level would include banks of up to $50 billion. A third category - with the most clout, and involving the most financial commitment - would cover the largest banks.
The advantage of ownership would be "having influence over how it's built out, priced, positioned in the marketplace," Ms. Hedlund said. "Once Action gets rolled out there will be transaction discounts for the original owners."
Mr. McEntee said that a lot of banks find the potential for additional fee income attractive.
"This would be the first time that there would be an interchange fee associated with an ACH transaction, the theory being that the buyer's bank, because they're authenticating the buyer and guaranteeing the transaction, is providing very valuable services to the seller," Mr. McEntee said.
James Van Dyke, the principal of Javelin Strategy and Research, a San Fransisco consulting firm, said that Project Action could turn out to be a flop like Spectrum - or it could turn out to be a huge hit, "another future Visa" or a PayPal.
"I see banks as being heavily conflicted in their support of Nacha's Action," he said. "Privately, bank executives - people running credit card groups, for example - have been very critical. … They see it as being the enemy. But the side that supports merchants and is trying to cross-sell to consumers - that side has a lot to gain."
Mr. Van Dyke said that Action represents "an alternative to the entire system of credit cards" and would "require a lot of efficiency and volume in order to drive its costs down."
If Action gains traction "there's going to be a completely different set of winners and losers," Mr. Van Dyke said. "That's what makes this both enticing and absolutley frightening for banks."
Avivah Litan, a director of research at GartnerGroup, said that the Project Action system would be inexpensive to build. "It requires a lot of cooperation among the banks, and it won't work well unless all consumers can get [to] all their banks," Ms. Litan said. "Given that there are 9,000 banks, that's going to be hard."
Pricing issues could also prove tricky, Ms. Litan said. Will the interchange be significantly lower than for credit cards? If not, why would merchants embrace the system? And what happens if there is a chargeback?
"It's a great idea," Ms. Litan said. "Consumer push - the consumers have control over their funds." Nacha has "all the right ingredients," she said. "This would work very well in Canada, where there are only five banks."
Edward Neumann, the managing director of Farragut Group LLC, a payments systems consulting firm, said that unlike the failed bank consortiums, whose owner banks often had conflicting interests, Project Action will have members, rather than shareholders, whose goals are identical.
"I think that they're doing it right," Mr. Neumann said. "I think this is a major development, and I think that it's going to get funded." |
