- The Washington Times - Monday, February 7, 2000

Matthew P. Lawlor says his company has an "advantage." Others say he is sitting on a gold mine.

Mr. Lawlor's on-line banking service is connected to dozens of automated teller machine (ATM) networks. It has a virtual lock on a method of processing electronic transactions from home devices like personal computers.

These kinds of debit transactions, in which payment is immediately deducted from a customer's account, have mostly been limited to such things as paying bills. But it appears that will soon change.

The financial industry is pushing hard to introduce the next generation of electronic payment services when customers will use debit cards to make purchases on the Internet as if they were paying cash.

While companies such as Mr. Lawlor's McLean-based Online Resources & Communications Corp. are likely to reap big benefits behind the scenes, the stakes are even higher for consumers, merchants and the future of electronic commerce.

"It could spur the adoption of e-commerce at a greater speed than we see already," said Avivah Litan, payment systems research director for the Gartner Group, a technology research firm. "Everyone knows we need a better payment system on the Internet."

Industry officials say widespread acceptance of this new debit payment option on the Internet would open the on-line shopping door to an untapped market those consumers who don't have credit cards or consumers who don't buy on line because of the possibility of fraud.

Merchants would be guaranteed payment for a purchase, and they would cut down considerably on finance charges that result from credit-card transactions.

The financial industry is creating programs that would allow consumers to use debit cards to make real-time purchases that is, purchases for which money is deducted immediately from their checking accounts.

These Internet debit cards would be used much like ATM cards are used, accessing a customer's checking account through a personal identification number (PIN).

Credit cards prevail

Currently most people buy on line with credit cards. Some consumers already are using their debit cards for on-line transactions, but those ATM/debit cards are affiliated with credit card giants Master Card and Visa. On the Internet those cards are considered by the merchants as credit cards, processed through Visa or Mastercard, not allowing for real-time transactions.

The use of debit cards at point-of-sale transactions has skyrocketed over the past several years.

Debit networks, like Star Systems and the Mac Network, had double-digit increases in transactions in December compared to the same period in 1998, according to Bank Network News, a Chicago-based industry publication.

The electronic-fund-transfer industry, made up of associations, ATM networks and other financial institutions, are hopeful the debit-card phenomenon will spill over to the Internet.

While e-commerce is still in its early stages, 1999 sales were estimated at $14.9 billion, according to Jupiter Communications, which tracks Internet commerce. By 2003, e-commerce could reach more than $78 billion in sales.

There's no doubt that credit cards are the dominant payment choice for on-line purchases. However, Jupiter Communications estimated that by 2003 underserved consumers and merchants trying to cut costs will drive the adoption of new payment methods.

Industry officials hope it's sooner than that.

Two different initiatives are under way that would allow debit transactions to purchase goods and services on line giving merchants a guaranteed payment and immediately debiting a customer's checking account.

Pilot program

The Internet Council of the National Automated Clearing House Association (NACHA) has developed a pilot program that would allow consumers to authorize a transaction by signing forms using a digital signature in place of a PIN.

In the pilot, a participating consumer will use a "private key" to generate a digital signature. The private key is stored in a chip on a device such as a preprogrammed card or within a Web application.

"It's very secure," said Julie Hedlund, director of Internet commerce for NACHA, based in Herndon. "It's comparable to a PIN in a point-of-sale transaction in a grocery store or at an ATM machine."

When making an Internet purchase, the consumer would use a debit-card number but instead of entering a PIN, the consumer would digitally sign an electronic authorization form. The bank verifies the signature, sends confirmation to the merchant and debits the consumer's account.

NACHA's pilot, which already has participants such as Citigroup and Star Systems, is undergoing more technical tests this month and is expected to start by the end of the second quarter, Ms. Hedlund said. NACHA is currently looking for more banks and on-line merchants to sign on.

New Jersey-based Nyce Corp. is also looking for financial institutions and on-line merchants to sign on with its new SafeDebit card.

The card, which fits inside a computer's CD-ROM drive, acts just like a real ATM card. The consumer's banking information is encrypted on this card and can only be decrypted by the bank. Only the consumer knows the account number and PIN.

When a consumer is ready to purchase from a participating on-line merchant, the consumer selects the debit icon, inserts the card into the CD-ROM and enters the PIN. The bank, after decrypting the information, will immediately be able to check if there are sufficient funds, debit the account and send authorization back to the merchant.

Secure and private

"It's a secure, private and 100 percent authenticated transaction," said Paul Tomasofsky, vice president of advanced products for Nyce.

The Nyce initiative will be introduced on a limited basis beginning in April, followed by a nationwide rollout, Mr. Tomasofsky said.

With these two models and more initiatives in the works, there could eventually be several on-line ATM cards on the market.

"It's not competition," Ms. Hedlund said. "We're all working toward the same goal advancing payment [systems] on the Internet."

Industry officials say it's too early to tell which programs will prevail in the consumer market.

"It's a little hard to predict how fast these things will be embraced," said Paul Schmelzer, executive vice president of Star Systems. "There's the potential for these things to move rapidly."

He added that it's more important for the industry to work out all the kinks and establish operating rules and regulations than rush to get these programs on the market.

"Our infrastructure is a secure system," Mr. Schmelzer said. "We're putting the integrity of that security on the line."

The ATM infrastructure is exactly what Online Resources has a hold on.

If electronic fund transfers for Internet purchases gain acceptance, Online Resources has the exclusive rights to process those transactions.

The company, which offers financial services to on-line banking customers on behalf of 430 regional and community banks, has connections to 51 ATM Networks. Online Resources had to be certified with each network a process that took from six to 24 months for each network.

Bridge to the Internet

"Online Resources has built a bridge from the Internet to the ATM networks," Ms. Litan said.

Any ATM transactions from the Internet will have to go through Online Resources.

"We're sitting here with a lot of connectivity, a patent and a business that supports this," Mr. Lawlor said. "We're partnered with the networks and banks … and this tool gives us an advantage."

Ms. Litan believes the company is "sitting on a gold mine." The publicly traded company, which has not made a profit since it was founded in 1989, stands to gain at least from royalties and licensing fees.

"I don't know how it will translate to dollar and cents for Online Resources shareholders," Mr. Lawlor said. For now he is waiting to see how the industry will embrace a new electronic payment option.

Industry officials don't know how these Internet ATM-type transactions will fare in the minds of consumers. Getting them signed on will be one of the toughest challenges. Consumers are slow to embrace unfamiliar methods of payments on the Internet.

"People buying on line are a hip crowd," said Ed Rigdon, associate professor of marketing at Georgia State University. "You have got to show them how it's good for them."

As of now there has not been consumer demand for an ATM-type card on line, Ms. Litan said. "People are happy with their credit cards," she said.

Industry experts agree that an on-line debit option could open Internet purchasing to a whole new consumer market those who don't have credit cards.

What remains to be seen is how the industry will convince consumers that the new on-line debit option is safe and secure.

Smart cards

That's been an issue for smart cards, which are individual cards that carry information stored on a computer chip. Depending on what the cardholder wants, the chip can store everything from bank account and credit card information to health records and insurance information. Currently there are about 3 million smart cardholders, according to Donna Farmer, president and chief executive of the Smart Card Forum.

American Express recently introduced its new Blue card, which stores the customer's information on a chip, which eliminates them from having to fill out order forms when ordering on line. Until the end of March the credit card company is offering free smart card readers that hook up to the consumer's PC. To reduce the possibility of fraud, a customer must have the Blue card, a smart card reader and a PIN, to activate a transaction.

"It's all around a security issue," Ms. Farmer said. "People have an interest in privacy and security."

According to a May 1999 survey by Jupiter Communications, 54 percent of the respondents said that protection from fraud would make them more comfortable buying on line.

Some on-line shoppers are reluctant to put their account information in cyberspace for fear of it getting into the wrong hands.

Just last month CD Universe, an on-line music store, was targeted by a hacker who broke into the company's database and stole the credit card numbers of its customers. Out of the company's control, the stolen numbers were then posted on a Web site.

But proponents of Internet ATM cards say the methods being developed are as safe and secure as an ATM transaction in the real world.

"The industry needs to find a way to replicate that secure debit payment in the virtual world," Mr. Schmelzer said.

Industry proponents say the use of a PIN or a PIN-substitute will cut down on fraudulent transactions. With the current use of credit cards on the Internet there is no way to authenticate a user. With ATM cards, however, the PIN verifies the user.

"Anytime a customer doesn't have to present a plastic card, there's a high likelihood of fraud," said Melissa Shore, analyst at Jupiter. In the on-line world there is a similar level of credit card fraud as there is in the catalog industry because the card is not present, she said.

Merchants would save an enormous amount of money if consumers used the new ATM-type cards on line because their overall fees would be lower. When a credit card is not physically in front of a merchant, like in on-line purchases, merchants must pay a fee for each sale ranging anywhere from 3 percent to 7 percent.

Debit transactions cost merchants just 15 cents each, Ms. Litan said.

"It's a guaranteed payment that merchants don't have with credit," said Jeff Green, editor of Bank Network News. "Legitimacy is guaranteed"

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