News

InstaPay PINs Internet payment hopes on pad

InstaPay Systems Inc. has spent the last four years developing what the company claims is the first patented production system for delivering encrypted transactions over the Internet. The AFFN has been processing InstaPay transactions since late last year, says InstaPay's president.

May 10, 2004

What if an enterprising soul could come up with a way to handle Web-based transactions using debit rather than credit cards -- capturing some of the billions of dollars consumers spend each year making Internet purchases?

Just three years ago, the financial services industry was abuzz about SafeDebit. This brainchild of NYCE Corp. proposed a way for consumers to make PIN-secured debit purchases on the Internet from any standard PC using a CD-ROM drive.

But SafeDebit quickly lost what little head of steam that it had gained. As the American Banker put it so succinctly in an article last summer, "It never took off and has been shelved."  

Enter Atlanta-based InstaPay Systems Inc., whose Kryptosimasubsidiary has spent the last four years developing what the company claims is the first patented production system for delivering encrypted transactions over the Internet.

InstaPay President Harry Hargens said his company has been processing PIN-based debit transactions through the Armed Forces Financial Network (AFFN) since late last year.

"We found some merchants who were willing to be test cases" for the payment system, Hargens said.

He declined to say how many InstaPay transactions have been processed, or divulge the names of any of the participating merchants. "Right now our volume is very, very small because we're just at the beginning," he said.

Here's how it works: InstaPay distributes PIN pads to participating merchants, who give the pads to preferred customers as a reward for doing business with them. The pads may be hooked into the USB port of a PC.

The device allows the consumer to swipe his card, and then safely enter his PIN when making a debit transaction.

"Having to enter a PIN number will dramatically reduce merchant exposure to fraud since a thief would not only need the individual card and billing information, but also the PIN number which is usually known only to the cardholder," Hargens said.

In Hargen's view, hooking up with InstaPay is a no-brainer for merchants tired of being saddled with paying a 2 percent "card not present" transaction fee. PIN-based debit purchases are cheaper, he said.

Therefore, he said, merchants should be willing to pay the projected cost of less than $50 per PIN pad, which includes injection of encryption keys and shipping.

"The merchant is going to focus on their frequent customer," he stressed.

"Not a practical approach"

But InstaPay's business model contains flaws, said John Gould, director of consumer lending and bank cards for the Tower Group consulting firm of Needham, Mass. Gould doubts that merchants will want to purchase the PIN pads from InstaPay.

"Merchants have no interest in funding it, nor should they," he said. "Even a major merchant such as Amazon won't even support 'verified by Visa.'"

Gould acknowledged that a PIN is a stronger form of authentication than a signature, but noted: "Skimming counterfeit is 50 percent of the counterfeit in the marketplace. A PIN is not a practical approach. That makes a stronger case for the smart card."

Smart cards have failed to catch on in North America. However, it's becoming more common in Europe to see handheld readers combined with smart cards to make Internet purchases, he said.

French company XIRING provides authentication, electronic signature and secure transaction solutions, employing more than 5 million XIRING readers in 20 countries.

Likewise, Belgian company VASCO has a product called Digipass that may be used not only in PCs, but also mobile phones and other portable devices.

On its Web site, VASCO brags it has more than 10 million Digipass devices in circulation and counts 200 financial institutions, approximately 1,000 blue-chip corporations and governments representing more than 60 countries among its clients.

But Hargens claims his patent-pending invention will catch on as a way to handle Internet-based financial transactions.

One of his supporters is John Broda, AFFN's executive vice president of sales and service delivery. Broda said AFFN teamed up with InstaPay to offer an alternative for military personnel to pay their bills.

"With more and more unit rotation of Reservists, it's important that they be able to do their banking," he said. InstaPay allows mobile military personnel to make bill payments on a one-time or recurring basis, he added.

Hargens said InstaPay is building an inventory of PIN pads, and has begun to recruit a sales force and to identify marketing partners. Significantly, he said, the company has a $5 million equity line to help it grow.

"While this is a relatively fresh idea, there's not a lot of risk involved," he said. "We've just taken the model from the brick-and-mortar world and superimposed it on the Internet."