Making Web Commerce Safer
By JOHN M. MORAN And STACY WONG
The Hartford Courant
November 16, 2000
Will you be paying for that by credit card?
At the e-commerce checkout lines on the Internet, increasingly the answer is "no thanks."
Instead, many cyber-shoppers are turning to a growing range of payment alternatives that allow them to buy from online merchants or to pay other individuals without transmitting their credit card number over the Internet.
These alternatives - being offered by companies such as Paypal, Ecount, RocketCash and a host of others, including banks - serve as middlemen in managing payments within the sales transaction.
The idea is to go beyond credit cards to give online shoppers the diverse kinds of payment options long available from traditional brick-and-mortar retailers.
Alternative payment systems also expand the pool of online shoppers by bringing in certain customers, such as teenagers and some minority group members, who often lack credit, as well as people who simply don't like putting their credit card numbers online.
Think of it as a kind of virtual checking account. For starters, an individual would create an account at a payment service provider and deposit money in that account via check, credit card, money order, bank transfer or other payment.
Once the deposit has been made, users are free to spend from the account. When paying a Web merchant, for example, the alternative payment account holder might enter a special code instead of a conventional credit card number.
When paying another individual, on the other hand, the alternative payment account holder might send an e-mail with the payment information embedded in a Web link within the message. The recipient of the e-mail payment would, in turn, create his own account at an alternative payment provider to claim the money.
In essence, the alternative payment companies hold the money and manage the accounting for monetary exchanges between different parties, whether individuals or businesses.
Alternative payment services typically are free to consumers, although there might be fees for business users or for enhanced services, such as the ability to make mass payments to many recipients. In addition to those fees, payment services also make money from partnerships with merchants and by earning interest on the money that has been deposited by users.
Although alternative payment services offer a certain measure of security, they're not entirely without risk. For one thing, it's possible that someone could crack into the system or steal a password to access a particular account. And in these days of dot-com failures, it's also possible that a payment provider might find itself in financial difficulty.
Some sites limit the risk by offering insurance to users. PayPal accounts, for example, offer protection against unauthorized withdrawals up to $100,000. Fraud protection is available for goods that are not received. Payment sites also typically use the same kind of strong encryption that protects other kinds of Internet-based transactions from being intercepted.
Still, the accounts are not federally insured, leaving those with money on deposit facing the risk of losing their account balance in the event of a financial failure by the payment company.
One example of a payment service provider is Ecount, which uses connections to the regular banking system to enable its users to make virtual payments at any Web site that accepts MasterCard - including such well-known "e-tailers" as Amazon.com and Buy.com.
"Consumers really like this as an alternative to a credit card," said Matthew Gillin, Ecount president and chief executive. He said the company's customers often feel a greater sense of security and privacy because they are dealing with one payment site and not placing their regular credit card number with e-commerce sites throughout the Internet.
Ecount also allows individuals to send payments to each other via e-mail. So someone making a purchase at an online auction, or someone giving a cash gift or gift certificate, can use Ecount to make the transfer.
In fact, the company found that customers who receive money through the system tend to keep the account for online spending rather than withdrawing the cash. "Something like 90 percent of our customers are people who have just received payment from another source," Gillin said.
Another player in the alternative payments market is RocketCash, a provider that aims to serve teenagers, many of whom don't have ready access to conventional credit cards for online shopping.
Carol Kruse, RocketCash vice president of marketing, said teenagers like to shop and have $156 billion worth of disposable income. But only about 9 percent of them have their own credit cards.
Thus, if they want to buy something online, teenagers usually have to ask a parent to use the family credit card - which can be a real barrier to purchasing.
"They have a lot of purchasing power, they're on the Internet in droves, but they can't participate in electronic shopping," Kruse said. "One of our key targets is enabling teenagers to shop online and giving them the independence and freedom that they want."
Another example is PayPal, which allows individuals and businesses to send money to anyone who has an e-mail address. To claim the money, receipients can create their own PayPal accounts, have the money transferred to their bank or request an ordinary paper check.
Like Ecount, PayPal is also moving to connect with the regular banking system so that users can spend money from their PayPal accounts at merchants - both online and off-line - that accept credit cards. Users will even be able to withdraw money from cash machines using a PayPal debit card.
"We provide people with a way to spend online from their bank or their online account," said PayPal spokesman Vincent Sollito. "We see no reason why PayPal can't be used for any and all transactions."
The service, which is popular among participants in eBay's online auctions, has 4 million users exchanging more than $6 million a day.
Christina Kasica, a senior consultant for Ovum, a research and consulting firm, said that the evolution of alternative payment systems online means cyberspace is catching up with what's available in traditional storefronts.
In real life, customers making a purchase can often choose cash, checks, debit cards, credit cards, traveler's checks or even gift certificates. "We think that the online economy needs to mirror the breadth and vigor of the bricks-and-mortar world," Kasica said.
All this activity has drawn interest from banks eager for a major role in the transfer of funds online. Citigroup recently launched a new person-to-person money transfer system to facilitate payments on the Internet and off.
The new service, to be called c2it, is being offered free to anyone in the U.S. with an e-mail address for the first three months, after which the person sending the money will be charged $2 per transaction, said Antony(cq) Jenkins, chief financial officer for c2it.
The service also will be available to America Online customers, where it will be known as AOL Quick Cash, Citigroup said.
Some banks and credit unions are angling for more than a middleman's role, opting instead for a cut of the action. A handful of banks throughout the country now offer online shopping with national retailers such as HickoryFarms.com, ToysRUs.com and Borders.com, and they let customers pay right from their checking accounts.
The banks get a percentage of the sales, and the online retailers get more traffic driven to their Web sites. As with credit card transactions, encryption software is used to guard against online theft.
One of the first banks to adopt such a system is the Connecticut-based Savings Bank of Manchester, which serves 100,000 account holders in Greater Hartford and the eastern half of the state.
The bank's NetShop@SBM system debuted in September, and it lets customers pay by either credit card or direct account withdrawal, or even a combination of the two. Executive Vice President Douglas Anderson said the system has been attracting new customers as well as existing account holders.
"Some people have specifically said, `Gee, I like the fact that I don't have to use my card,''' he said. "It's not the majority, but they like it.''
Connecticut-based Open Solutions Inc. in Glastonbury created SBM's online shopping system, and now offers it to small and mid-size banks that don't have the staff to create their own online customer banking systems.
About 60 banks and credit unions throughout the country plan to unroll the system in the next year, although not all will offer the direct payment option.
Louis Hernandez Jr., Open Solution's chief executive, said these types of banks and credit unions have close relationships with their customers, and offering online shopping is one more way to strengthen that bond.
John Hall, a spokesman for the American Bankers Association, said this kind of direct payment will become increasingly common among retail banking customers.
"The real driver will be the consumer, and the number one attribute they will look for is convenience and security," he said.
He said that electronic commerce is a top item of concern among the country's banking industry chief executives as they try to devise strategies to keep them on the cutting edge of commerce while increasing market share.
Besides direct payment, the technology exists now to download money into "smart cards" that can be used to pay for things such as subway rides or merchandise. The drawback is that these cards are not yet widely accepted, Hall said.
"Everyone's looking for the killer [application] in online banking, and many have said that the day your computer can give you cash is the day that everyone will sign up for online banking," he said.
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