Pay Now

New direct-debit payment systems bloom as more consumers develop an allergy to credit

The sour economy has soured consumers on credit cards—43% say they are determined not to run up big credit card bills, according to a recent BIGresearch survey. One sign online shoppers are sticking to that pledge: payment processor Litle & Co. reports 12% more use this year of debit cards versus credit cards for Internet purchases.

Seeking to take advantage of this pay-as-you-go mood, several new payment systems have emerged that enable consumers to pay for online purchases directly from their bank accounts. And they offer an appealing lure for e-retailers in the form of lower fees than merchants pay on credit cards or Visa- and MasterCard-branded debit cards.

But will they catch on sufficiently to justify the work required for a retailer to implement and manage another payment method? With one exception, these systems are too new to have much of a track record. But analysts are paying attention because these alternatives are in sync with the times.

“We’re definitely seeing consumers switching from credit to debit,” says Bruce Cundiff, a payments specialist at research and consulting firm Javelin Strategy & Research. “But the hurdle for these systems is that consumers already have a debit card in their wallet. So a behavior change must take place for consumers to use these solutions.”

Consumers usually need an incentive to change their behavior, and whether these direct debit payments systems can offer sufficient incentives will depend on whether merchants and banks get behind these payment alternatives.

Merchants could benefit from lower fees and might be able to appeal to consumers leery of giving a card number—debit or credit—to an online retailer. But what’s in it for the banks?

“We give them a cut of the revenue,” says Guido Sacchi, CEO of Moneta, one of the companies pushing a new direct-debit payment system. While the cut Moneta gives the banks is not as big as the interchange fees they get today from credit or debit card purchases, it’s better than systems like PayPal and Bill Me Later that may provide the bank with no revenue. “It’s a defensive strategy against alternative payment transactions that now don’t generate value for the banks,” Sacchi says.

Cundiff says banks may be leery of payment methods that pay them less than they now get from credit and debit cards. But Javelin predicts greater use of alternative payment methods, with those systems accounting for 31% of online purchases by 2013 versus 18% last year. Javelin predicts the biggest component of those alternative payments will be prepaid and gift cards, followed by PayPal and other e-mail-based systems, and store-branded cards.

The big advantage the new debit systems have is low cost, which comes from using existing bank networks or online bill payment systems. That allows them to pass savings on to merchants, and potentially to compensate banks for pushing their systems.

While all tout low merchants fees, they otherwise differ in several ways, including how many consumers can use them and how consumers pay with these systems. Here’s a capsule look at four newcomers and one system that’s been in the market, with a description of how they operate and the pros and cons of each.

In market

The only direct-debit offering with a real track record is eBillme, which was launched in late 2005 and enables consumers to pay through their online bill payment systems. When an online shopper chooses eBillme, eBillme e-mails an invoice, the consumer sets up eBillme as a payee in his bill-pay system and pays the bill. The consumer only has to add eBillme once; after that, he selects eBillme and pays the bill.

EBillme does not report transaction volume or how many consumers use the system. In a Javelin survey last year, 3% of online shoppers said they had used eBillme, compared with 64% who used PayPal and 17% Bill Me Later.

EBillme is in discussions with banks about sharing merchant transaction fees, says Marwan Forzley, president and CEO of ModaSolutions, the parent company of eBillme. That could lead to banks promoting the service to their customers.

EBillme runs periodic promotions, typically sharing the cost with merchants. When online retailer ShoeBuy.com introduced eBillme last November, a $10 off promotion helped drive consumers to the site, and 42% of the shoppers who checked out with eBillme were new customers for ShoeBuy.com.

Over 200 online retailers accept eBillme and for those that do it accounts for between 1% and 10% of transactions, Forzley says.

Pros: All 110 million U.S. consumers who bank online can use the system; no bank setup is required. No chargebacks.

Cons: Consumers have to go through additional steps, setting up eBillme as a payee in their bill-pay system, then paying the bill. Payment typically takes one to three days. Until then, the retailer either takes the risk of shipping without being paid, or holds the inventory awaiting notification. Forzley says that’s no different than what retailers do while waiting for a check or money order to clear.

‘Just like cash’

Mazooma, launched in February after testing with a handful of merchants, also is aimed at consumers who bank via the web. Its slogan is: “Just like paying with cash. Online.”

The first time a consumer pays with Mazooma, she registers with five pieces of personal information. With subsequent purchases, she enters a Mazooma user name and password. Once signed in, she selects her bank from a drop-down menu, is prompted to enter her online banking user name and password, and is presented with the amount of the transaction. If she approves, and has sufficient funds in her account, the bank is directed to pay the merchant.

Mazooma creates the step-by-step prompts that lead the customer through signing in with her bank and authorizing payment, and no agreement from the bank is required. At the time it launched, Mazooma could be used by customers of 14 banks that represented 70% of online banking consumers, Mazooma says.

Among the merchants that tested Mazooma was BowlingBall.com. John Congdon, chief information officer, says the system worked, but few consumers used it. Incentives will be required for Mazooma to catch on, Congdon says.

Payment processor CardinalCommerce has announced it will offer Mazooma to its 30,000 merchant clients.

Pros: Doesn’t require banks to sign up.

Cons: Consumers may be leery of providing bank sign-in information. Mazooma does not store the user name and password, and data is encrypted for transmission, says president Sean Kelly who concedes Mazooma will have to do a good job of communicating this to consumers.

Banking on banks

Moneta, which also launched this year, emerged out of Checkfree Corp., a major provider to banks of online bill-payment services. Moneta aims to partner with retail banks, offering them a share of merchant fees in exchange for banks enrolling established, and presumably low-risk, customers, says Sacchi, Moneta’s CEO. For consumers who accept the offer, banks can fill in customer data, making enrollment easy, he says.

To pay with Moneta, a consumer enters her Moneta user name and password, and a confirmation screen—which can be bank-branded—pops up in which she approves the purchase from a web retailer.

Payments go through the automated clearinghouse system, a low-cost system banks use to settle transactions among themselves, usually overnight. The merchant typically receives payment the following day, Saachi says.

Pros: The consumer completes the purchase in one step, says Jim Keller, senior vice president of ShoeBuy.com, an early adopter of Moneta. He sees it as complementary to eBillme, which is a two-step process but requires no prior registration.

Cons: Bank support is crucial to Moneta’s strategy. Saachi says he expects to announce deals with banks within the next few months.

Also, there is a small chance that a transaction will be approved at the time of purchase, but that the funds will not be available because the actual debiting of the bank account takes place hours later. Set-up fee is a hefty $25,000; Moneta is waiving that through June.

Online PIN-debit

Consumers who use debit cards in face-to-face purchases prefer entering a personal identification number, or PIN, to signing for the purchase, by 45% to 35%, with 20% having no preference, according to a BAI Research survey last year. PIN-debit users consider it more secure, faster and easier, BAI says.

The roadblock to using PIN-debit online has been how to enter a PIN without exposing that crucial data—which can be used to draw cash from a bank account—to hackers.

Acculynk’s PaySecure solves that problem this way: it pops up a PIN pad, but the order of the numbers varies each time; the consumer clicks on the numbers of his PIN; Acculynk captures only the coordinates of the clicks, not the numbers selected, and in its host computer reformats that into the PIN. The PIN pad only pops up if the consumer enters a debit card number of a participating bank.

Three large debit networks, Pulse, Accel/Exchange and NYCE, plan to test the system. And online payment processor Chase Paymentech expects to work with a few merchants on a pilot this spring.

Pros: Some consumers like the security of PIN-debit. The interchange he’s paying with PaySecure is 20-30% lower than what he pays on signature debit transactions, says Corey Tisdale, chief operating officer of e-retailer ShoppersChoice.com, who has tested the system.

Cons: Consumers may be reluctant to enter their PINs online. Banks may not want to push PIN-debit because they get more income when consumers use debit cards without entering a PIN.

Online checks

Noca Inc. began testing this year its Secure Check system, which mimics writing a check. At checkout, the online shopper is presented with a check with the purchase amount filled in; she fills in her name, address, a check number, bank account number and the bank routing number at the bottom of paper checks. (A similar check-like payment method called MyECheck has been available since 2004.) Subsequently, she can verify this information with a single click.

The transaction is sent through the ACH and the merchant is paid in two to three days, says Pankaj Gupta, founder and president.

The big selling point is a very low merchant fee: 0.25%. That’s great for merchants selling low-ticket items, says Johannes Bhakdi, CEO of online self-publishing service Klatcher that’s testing Secure Check. He says the credit card fee on a $5 purchase would be around 45 cents; Noca’s fee would be just over a penny.

Pros: Any consumer with a bank account can use it. Very low fee.

Cons: Consumers may be reluctant to enter a bank account number, and may be confused about what a routing number is. Not a real-time transaction, so merchants are not guaranteed payment for a few days. Gupta says a real-time version is in the works.

Indeed, many of these systems are still works in progress and none has been adopted by large numbers of consumers. Most online retailers figure to wait to see which, if any, of these debit options gains traction before adding a new way to pay.

don@verticalwebmedia.com