STRATEGIC PARTNERS
Is this what the future of Internet payments looks like? Yes, if NYCE Corp. has anything to say about it. The company's SafeDebit product, pictured here, appears to be an early leader in the race to offer online, real-time debit to consumers. by Ann All, editor
May 15, 2000
Want a bestseller from Amazon.com? Great -- unless you're one of the millions of Americans who doesn't have a credit card. Or maybe you're less inclined to use your card in the wake of some high profile hacking, like a recent incident in which 300,000 credit cards were compromised in a raid on the CD Universe Web site. While the overwhelming majority of e-commerce is conducted with a credit cards, that could change soon. Several initiatives to bring PIN based debit to the Internet are under way, led by regional EFT networks like NYCE Corp. and Star System Inc. It's actually already possible to make a debit transaction over the Internet but, because a PIN is not used, funds are held several days for settlement rather than being debited immediately from a consumer's checking account. EFT networks are the most logical entities to deliver real-time, PIN based debit to the Internet, according to Matthew Lawlor, chairman and CEO of Online Resources & Communications Corporation, a McLean, Va.-based company which offers Internet banking services to customers of 430 regional and community banks. They already process more than a billion ATM and debit transactions a month, Lawlor said. "They have an infrastructure with the security and speed to make it work." Demand for debit The project that appears to have the most momentum is being spearheaded by Woodcliff, N.J.-based NYCE. Paul Tomasofsky, vice president of NYCE's advanced products group, said that NYCE's product, SafeDebit, is "right on track" in its development, with plans for a "live" transaction by the end of April. SafeDebit is a disc that fits inside a PC's CD-ROM drive. Much like an ATM card, it carries encrypted information that can be decrypted only by a card-issuing financial institution. Just as in the physical world, a consumer must key in a PIN to make a transaction with the card. Farmington Hills, Mich.-based Michigan National Bank will be SafeDebit's charter issuer. Joel Blom, the bank's head of direct retailing and channel management, said Michigan National wanted to capitalize on debit's growing popularity with its customers. Internet users tend to be among the heaviest users of debit, he said. Also, he said, most people are creatures of habit when it comes to making financial transactions. "People tend to have certain things they buy with cash. Even if you open those transactions to credit, they tend not to use credit because it's a cash transaction in their minds." Purchases typically made online -- items like CDs and books -- tend to be for amounts that are "right in the 'sweet spot' for what people use their debit cards for," Blom added. Security is a primary concern in the virtual world, Blom said, but he believes SafeDebit is "at least as safe as debit in the real world." The bank has had "no serious problems with PIN debit," he said. Michigan National plans to distribute SafeDebit to all of its online banking customers -- unless they advise the bank they do not want it. The discs, which cost about $3 each, will be provided to Michigan National customers free of charge. Unlike an online debit concept being developed by the National Automated Clearing House Association's Internet Council, which will use digital signatures instead of PINs for authentication, SafeDebit uses technology that is in place today, Tomasofsky said. "The digital certificate looks good on paper, but the infrastructure isn't quite there yet," he said. "It's like pruning a grape vine as opposed to planting a whole new varietal. You'll get vintage wine much quicker with the vine." Lawlor thinks there is probably room for more than one Internet debit solution. "I'll predict that we'll have at least two ways within six months, 12 months at the outside, to get to an ATM network for a real time, Internet POS transaction," he said. Quicker is better Tomasofsky, Blom and Lawlor all agree that the networks need to seize the opportunity before someone else -- perhaps an e-tailer like Amazon.com -- does. "It's imperative that whatever is done catches on fast. Otherwise someone could come up with a better way, and we'll be on the outside looking in," Tomasofsky said. Online merchants are pushing for a more economical alternative to credit cards. Merchants pick up the tab for chargebacks, which are estimated to be as high as 10 percent for Internet purchases. They also pay "card-not present" rates, which are significantly higher than standard credit card rates. While still finalizing the fee structure for SafeDebit, NYCE is considering an interchange rate that would be higher than those for traditional PIN based debit transactions but lower than the card-not-present rates. "This is a new product, so we have to estimate the costs of processing the transactions. Rates will be based on an examination of what we believe costs will be," Tomasofsky said. Strength in numbers NYCE is spinning off a separate business unit that will license SafeDebit to other EFT networks, which will in turn distribute it to their financial institution members. "NYCE has 32 million cardholders, primarily in the northeastern U.S., but the Internet is in a lot more places. Total coverage is what consumers and merchants want," Tomasofsky explained. "We need Star, PULSE and the other networks to make it work. We need to compete, but not on standards or technology. We need to cooperate on technology, because that's the only way it's going to work." Star, the nation's largest EFT network, recently gave SafeDebit a vote of confidence by becoming the first to license the product. Together, NYCE and Star serve more than 5,500 financial institutions. One of SafeDebit's biggest advantages, Star spokeswoman Barbara Span said, is that it "rides the rails that are currently there." Its ATM-like interface -- insert disc, enter PIN -- is another bonus, she said. "It will seem familiar to (consumers) because of the way it mirrors the ATM experience." Even though Star will distribute SafeDebit, it is also a participant in the NACHA trial. Noting that networks should strive to "continually improve" the EFT system's core infrastructure, Span said that Star is supporting NACHA in its efforts to establish industry standards for routing digital signatures through networks. "Various financial institutions and retailers may want to support different solutions, or possibly be involved in both," Span added. "As we move forward, it will be interesting to see if one technology migrates more in the direction of the other." If SafeDebit wins acceptance in the U.S., Tomasofsky said, NYCE plans to market it to international EFT networks like the U.K.'s Link and Canada's Interac. The biggest remaining challenge for NYCE may be enlisting e-tailers to accept SafeDebit. Two online pharmacies, Walgreens.com and CVS.com, have signed up, and Tomasofsky said NYCE is in discussions with 20 or so of the top Internet merchants. He called it a real "chicken or egg" dilemma. "The merchants all want to know how many cards have been issued, and the issuers all want to know how many merchants will accept it," he said. "I don't know which came first, but I think the egg's about to get cracked." Plenty of possibilities SafeDebit is not a hardware-specific technology, Tomasofsky said. While NYCE opted to use a CD for the initial release because most PCs have a CD ROM drive, it could migrate to a smart card or even a wireless appliance like a cell phone. In fact, QSI Payments Inc., a developer of Internet-based payment solutions, has already announced plans to launch a smart card version of SafeDebit. Lawlor, of Online Resources, believes the smart card may ultimately be the best platform for both hardware and software encryption. The need for customer authentication, driven by the Internet, could be the trigger for smart cards' widespread acceptance. "I see almost a consensus in the financial services industry to reorient the chip card as an authentication vehicle. And oh, by the way, you can store money on it too," Lawlor said. Blom, of Michigan National, thinks SafeDebit could be used for credit as well as debit. "I don't want to scare our friends at Visa and Mastercard, but it would be very easy to build online credit authorizations on the back of this. With authentication, it would solve a lot of the chargeback problems," Blom said. "This could be used for credit, debit or stored value, potentially." Opening up the EFT infrastructure to more varied transactions -- and combining it with the broad reach of the Internet -- could turn the financial services industry on its ear, Lawlor agreed. Imagine applying for a loan on E-Loan, obtaining online approval and having the funds automatically credited to a bank account, Lawlor suggested. "The networks are real time, and they can go both ways. They need to think more broadly."
