The Push Behind Credit Push Lauri Giesen With its credit push initiative, NACHA hopes to succeed in a tough area where earlier direct-debit payment schemes for online purchases failed. The keys: acceptable pricing for banks and merchants, and ease of use for consumers. Ever since consumers began buying goods on the Internet in the mid-1990s, bankers and others whose fortunes are tied to demand-deposit accounts have tried to find electronic alternatives to the Web‟s default currency, the credit card. Nearly all the efforts, which have included electronic coins, electronic checks, and online debit cards, have failed or experienced only limited success because the systems were cumbersome to use, required consumers to get extra hardware for their personal computers, or offered little additional benefits to consumers and merchants. Some even lacked the necessary security standards. But in the middle of this year, a new alternative sponsored by NACHA—The Electronic Payments Association will start undergoing market tests. Currently dubbed “credit push,” the application will allow consumers to make purchases from online merchants as well as pay bills using a direct debit that routes funds through the automated clearing house. What makes credit push different is that while consumers start out making a payment on a retailer‟s or biller‟s Web site, once they click on this payment option and specify the name of their bank on a menu of financial-institution names, they are taken directly to that bank‟s Web site for transaction approval. Then they move back to the original site to complete the sale or bill payment. A Snappier Name The process technically has consumers initiating what‟s known as an ACH credit (not to be confused with credit as in a loan) to the retailer‟s or biller‟s account, which provides a funding guarantee to those parties not available with a conventional ACH debit. Proponents believe the new payment method will provide a means for many consumers who currently don‟t buy online because they don‟t have a credit card or aren‟t comfortable with the security of current options to make a secured payment with funds coming from their demand-deposit accounts (DDAs). But critics say having consumers interrupt the checkout process to go to banks‟ sites is confusing. And they question whether there is a strong demand for another payment choice considering that signature-based debit cards are a widely available option for most consumers who don‟t qualify for credit cards. Finally, some say financial institutions may not be willing to get behind credit push because it could cannibalize profitable transactions from their credit and signature-debit card payment volume. Although NACHA has not yet set interchange rates for credit push, many industry experts do not believe they will be as lucrative for financial institutions as the rates for credit or signature debit. NACHA executives expect to begin testing the program in early summer with a full-blown pilot involving a so-far undetermined number of financial institutions and merchants beginning in the fourth quarter. Currently, Herndon, Va.-based NACHA, which governs the ACH, is busy on two fronts: recruiting the financial institutions, processors, merchants, and billers to participate in the pilot, and developing the final requirements. Key to the latter are rules and related fees essential to the success of the payment option. As part of that effort, NACHA hopes to come up with a new, consumer-friendly name. Elliott McEntee, NACHA president and chief executive, admits that while the term credit push may be appropriate for industry use, the payment option needs a snappier name that will resonate with consumers. On the recruitment front, NACHA is not ready to release any names, but McEntee says several large banks and credit unions already are onboard as well as several dozen retailers and some large billers and major processors, both from the payments and Web-hosting side of the business. “We have enough support already to be able to test the program,” McEntee says. “Already, there are some banks and merchants who are really excited about this prospect. We‟ll be announcing some of the numbers and names in the first quarter.” He adds, however, that some merchants and financial institutions are withholding support until fees are announced. Security Edge But if credit push, or whatever names it goes by later, is to be successful, it will have to overcome problems that plagued prior efforts at Webbased direct debit. One of those was NACHA‟s own Project Action (for “ACH Credit Transactions Initiated Online), which quietly died a few years ago before it could be rolled out, despite much fanfare in banking circles. Researchers believe opposition from credit card issuers concerned about loss of interchange income proved fatal to Project Action. And on the operations side, one of the biggest problems with earlier Web debit payments, including several e-check offerings from thirdparty check-authorization companies, is that they required consumers to type in their bank-routing numbers at the merchant site. “Consumers do not want to disclose this information to the merchant and have it transmitted via the Internet,” McEntee says. By contrast, credit push would only require the consumer to tell the merchant which financial institution holds the account from which funds would be debited. The application would then send the customer to the online-banking site of that institution. Only upon reaching that site would the consumer type in a log-in name and a password. The merchant, meanwhile, would only receive notice from the financial institution that the transaction had been approved and that funds are being sent. The merchant would never see any confidential account numbers or passwords. NACHA executives believe consumers will be more comfortable securing their transactions on a financial-institution site than on a merchant site. “Our consumer focus group showed that consumers liked having their transactions approved at the same site where they did their online banking. It has a familiar face and they use the same log-in information and password for approving the transaction that they use to bank online,” says Samantha Carrier, NACHA senior director of advanced payment solutions. And having only the bank see confidential information could get consumers who had shied away from online shopping previously to consider the sales option, says Beth Robertson, research director with Needham, Mass.-based TowerGroup, an editorially independent affiliate of MasterCard Worldwide. “It‟s an important feature to many consumers,” says Robertson. “They will be able to enter their financial information with certainty that it won‟t fall into the wrong hands. Right now consumers fear that retailers will hold onto confidential information or that the wrong people will be able to intercept it.” Bankers also view security as one of the most important features of credit push. “This is part of the continued evolution of Internet payments to make them more safe, sound, and secure,” says Chris Ward, senior vice president and business-line manager for payments and receivables at Charlotte, N.C.-based Wachovia Corp. “There is nothing fundamentally wrong with how consumers pay over the Internet today, but this will make it even more secure.” Another advantage credit push holds over other systems, McEntee says, is that it does not require consumers to pre-register or own any special hardware. Some programs involving PIN-based debit cards required consumers to use a smart card and have a card reader attached to their home PC. A program sponsored by the NYCE electronic funds transfer network a few years back used CD-ROMs that required consumers to own a special disk that went into their CD-ROM reader. The Right Price But while having consumers go to their banks‟ sites to authenticate themselves and authorize transactions should provide more security, some observers say it could make the process more confusing. “Merchants may be attracted to this service if it lowers their fees, but an even bigger concern than pricing to retailers is their abandonment rates at checkout,” says Bruce Cundiff, an analyst with Pleasanton, Calif.-based Javelin Strategy & Research. “If customers are confused at checkout because they have to go to another site, and as a result they stop the transaction, that is a big negative to the retailers.” Additionally, TowerGroup‟s Robertson says that having consumers scroll down a list of financial institutions could become too complicated if a large number of banks, which will be needed to make the payment system commercially successful, sign up for the service. “It shouldn‟t be a problem during the pilot when you have a limited number of banks,” Robertson says. “But it could become unwieldy when you have thousands of bank names to scroll down, especially considering all the banks that start with a „B‟ or an „F‟ as in „Bank of whatever‟ or „First National Bank of whatever,‟” she says. (One option that some have proposed is to let consumers enter the first several letters, at which point the system would form-fill the rest). But not everyone buys into the notion that customers will be confused if they are directed to bank sites. “PayPal and Google both require customers to leave the retailer Web site for a short period to approve payments, and they are receiving traction,” says Dan Schatt, an analyst with Boston-based Celent LLC. “Leaving the retailer Web site is not necessarily a problem. The only problem would be if customers were not sent back to the retailer‟s Web site after the transaction was approved, because the retailers want them to come back so they can attempt to sell them more product.” Credit push also will need policies for handling exceptions—chargebacks arising from disputed transactions—an area where credit cards have well-established procedures that usually result in acceptable, if not always perfect, outcomes for cardholders, merchants and issuers. A NACHA spokesperson says the association has made “significant progress” in this area, though he wouldn‟t go into detail. “We are looking at a model where the consumer would be informed in cases where items would be shipped at a later date, and then would proceed to confirm the payment,” the spokesperson says. “The consumer, of course, could also choose a different payment method.” Critically important to credit push‟s success will be the yet-to-be determined interchange rates. Interchange is what the retailer‟s bank pays the bank that issues the card or, in this case, holds the DDA account. “At the end of the day, pricing will be key to the success of this program,” says Schatt. “The trick will be to find a way to distribute the economics fairly among all the parties, including the banks, the acquirers, the retailers, and the various integrators and processors involved in handling the transactions. If you price this too high to the merchants, they won‟t be willing to do the work necessary to integrate the payment option into their site. If you price too low, the banks won‟t put the marketing muscle behind this.” Many industry observers expect that because this is an ACH product, and ACH-based payments typically have been priced lower to merchants than other payments such as credit cards or signature debit cards, credit push also will be less expensive for merchants. That also means financial institutions would make less money on it. But first impressions can be wrong. “You would expect this to be less costly to the merchants, but that may not be the case considering it has guaranteed funds and most other ACH products do not,” says Robertson. The pricing issue may be especially important if the new service cannibalizes credit or signature debit transactions. NACHA executives say consumers who already use cards for Web purchases are unlikely to use credit push. Instead, the new offering will open up a whole new group of consumers to Internet shopping, they say. Yet some observers believe there will be some consumers who currently make card payments who indeed will move over to the ACH option. Depending on the comparative interchange rates, that could be a problem for financial institutions that garner sizable interchange revenues from their card programs. “Banks are making a lot of money today from their credit and debit card programs,” says Cundiff. “They want to make sure they are not losing any of those transactions to a new payment service for which they receive less revenue.” Confirms Wachovia‟s Ward: “All banks are concerned about cannibalization. Our first preference would be that consumers use our card products.” Indeed, Wachovia hopes that cards ultimately would be included as an option with credit push. In such a scenario, customers clicking on credit push would have a choice between paying by direct debit and using a credit or debit card. If they select cards, they would be directed to the Web site of the card issuer. The customer would then enter a log-in code and password to verify his identity. That would provide a more secure means of authorizing an online credit card transaction than what is done today. “Obviously cards won‟t be an option in the early program, but we would like to see this evolve to the point where card payments can be included,” says Janet Boyst, Wachovia senior vice president and general manager of electronic services. ‘Critical Mass’ But while credit push proponents say the new payment method is aimed at consumers who do not have or refuse to use cards for Web shopping, Cundiff questions whether that is a sizable population. “There may be a market consisting of consumers who would shop on the Internet if there was a non-card payment option, but I am not sure how big a market that is,” he says. “Although there may be a sizable population that does not have a credit card, there are not that many people who are likely to shop on the Internet who do not have a signature debit card. Yes, people want an alternative to credit cards to pay for goods on the Internet, but I think that alternative is signature debit.” And while much of the discussion of credit push revolves around online shopping, a big component of the program involves online bill payment. In paying a bill, consumers would be able to go to a biller Web site and request to pay a bill using credit push. In doing so, the consumer would be sent to her bank‟s site to have the transaction approved. Some critics question the need for such an option. Unlike direct-debit payments for retail shopping online, existing online bill-payment programs have found a level of success in two forms: bank direct and biller direct. Indeed, many such bill payments use an existing ACH echeck option called WEB. In the bank-direct version, consumers provide their financial institution with a list of the companies to which they frequently pay bills. Then they can pay bills electronically when they visit the financial-institution site to view their balances or conduct banking transactions. With biller direct, consumers go to a biller‟s Web site and pay a bill by providing bank-routing numbers. Thanks to heavy promotion by utilities, phone companies, and other billers, this option has gained some popularity—TowerGroup estimates transaction volume this year will be more than five times that of 2002 (chart). Besides reducing paper processing, billers like the fact that customers come to their Web sites, not those of banks, where they can see promotions for additional products and services. Credit-push skeptics say the popularity of these two methods show there is no need for additional bill-payment services, but NACHA executives say credit push can be an important addition to the biller-direct model. They note that current biller-direct services do not provide billers with guaranteed funds and do not offer the security that credit push would provide. “Billers like our model, especially for high-risk, large transactions,” McEntee says. “They will know the consumer‟s account is open and the funds are good, an assurance they don‟t get today.” And he notes that like the current biller-direct model, consumers would first go to the biller‟s Web site, so the biller would not miss out on promotional opportunities during the payment process. In the end, however, the success of credit push will largely ride on how the key players accept the service. “It‟s hard to say how merchants, billers, and bankers will react and whether they will embrace this program,” says Wachovia‟s Ward. “This is a good pilot for us to learn how all the participants will react to this type of payment and see if there is the potential for critical mass.” BOC’s Almost Here—So Who Will Adopt It? All signs point to a warm merchant welcome for NACHA’s new back-office conversion e-check option next month. But few processors agree on which merchants are most likely to accept BOC. By Jim Daly The automated clearing house family, already heavily populated with acronyms, will get a new member March 16 when the much-heralded back office conversion (BOC) code takes effect. Though questions remain about just how fast this new electronic-check baby will grow, payment processors and hardware vendors are readying themselves for new business from banks, retailers, and other organizations eager to dispense with paper checks as quickly as possible. But despite widespread enthusiasm for BOC, many vendors and processors are notably restrained in their forecasts for this new payment form, having seen earlier e-check codes such as point of purchase (POP) take years to gain momentum. The guarded hope seems to be that BOC is the e-check that finally makes ACH payments truly viable in stores and walk-in locations that attract lots of consumer checks. Yet BOC will have to prove itself to this chastened audience. “I certainly think back-office conversion is going to give MagTek a lift in sales, but it is a little early,” says John Arato, vice president and business unit manager at MagTek Inc., a Carson, Calif.-based manufacturer of check readers and payment-processing hardware. He adds, however, that “everybody is talking about it.” Doug Roberts, the new president of banking and payment-processing equipment manufacturer Panini North America, a Centerville, Ohiobased unit of Italy‟s Panini S.p.A., also is somewhat guarded in his forecasts. “I think there is a good interest,” Roberts said in December. “Now are we going to break the bank next year? No.” Panini will be testing BOC in some pilots that should produce “business for us” in the second half, he added. Recent E-Check Volumes (transactions in millions, excluding on-us items) Code ARC POP TEL WEB ACH Total Source: NACHA 3Q 2006 547.1 80.5 74.3 342.0 3,085.7 3Q 2005 432.0 41.8 61.8 261.6 2,712.7 Change 27% 93% 20% 31% 14% Note: ARC is for lockbox payments; POP for point-of purchase checks; TEL for telephone-based payments, and WEB for Internet sales and bill payments. But with no prompting, payments executives frequently compare BOC favorably to POP, which has several perceived shortcomings. Under POP, a consumer writing a check at the point of sale gives the check to the store clerk, who scans it to capture the data on the magnetic ink character recognition (MICR) line. Then, after getting explicit permission from the customer to convert the payment into electronic form, the clerk returns the voided check to the consumer. Following ARC Under rules set by Herndon, Va.-based NACHA—The Electronic Payments Association, the body that governs the ACH, the BOC transaction process will be simpler than POP‟s. The consumer will present the check as always, but scanning for conversion purposes would occur in the back office. That rule frees retailers from the widespread belief that every lane should have a scanner. (Scanning at checkout will continue unchanged with BOC if the retailer uses a check-verification or -guarantee service for risk management.) Scanning in the back office also gives merchants more time to determine the best routing option for the transaction. Checks that don‟t qualify for ACH clearing—credit card convenience checks and money-market account checks, for instance—could be routed through processes spawned by the Check Clearing Act for the 21st Century, or Check 21. BOC notifications are to consist of in-store signs and receipt notices; no upfront customer OK would be required. That means less time and potential confusion for customers, and less training for clerks. “We are definitely seeing some really great interest out there from the folks who considered POP in the past who did not implement,” says Jeff Thorness, president and chief executive of Allen, Texas-based ACH Direct Inc., an independent sales organization that provides ACH and card-processing services to more than 4,000 merchants, most of which are utilities, governmental agencies, fitness centers, and other non-retail businesses that accept checks. Those who care to read the NACHA rules also would know that BOC takes many of its cues from ARC, for accounts-receivable conversion, the standard entry class (SEC) code for converting paper checks sent to lockboxes into ACH debits, according to Steven Buchberger, senior vice president of solutions management at Wausau Financial Systems Inc. That presents opportunities for companies such as Mosinee, Wis.-based Wausau, which specializes in check-related software and remittance-processing services, to leverage their lockbox experience and products. Chuck Harris, president and chief operating officer of Camarillo, Calif.-based processor Electronic Clearing House Inc. (ECHO), adds that BOC “fits nicely between the POP and the ARC.” He predicts BOC will appeal to retailers reluctant to make changes in their point-ofsale procedures. Tom Kettell, vice president of marketing at Waterloo, Ontario-based RDM Corp., a developer of payment-related hardware and software, adds, “BOC allows you to process your checks just like you do today, and at the end of the day, you can electronify everything.” Managing Risk So while there seems to be general agreement that BOC eventually will be good for business, payment-services providers profess no unanimity when trying to predict just what kind of merchants will embrace BOC. Some executives assert that multilane retailers will be the biggest users, while others say small businesses. Still others say firms that take walk-in bill-payments, such as insurance-agent offices or utilities, will be enthusiastic. BOC could give a big boost to electronic check imaging. In case of a returned check or other problem, the check originator must, under the NACHA BOC rules, retain a “reproducible” and “legible” copy or microfilm of the check‟s front for two years after the transaction settles, according to Deborah Matthews, ACH Direct‟s vice president of marketing. Minneapolis-based U.S. Bancorp, through its Nova Information Systems merchant-acquiring unit, is attempting to marry imaging and risk management through a new service for multi-lane retailers called ECS, for Electronic Check Service. Aimed at stores with five or more checkout lanes, ECS provides real-time authorization at the point of sale and image uploads in the back office. For authorizations, ECS uses Visa USA‟s Visa POS Check Service, which Nova says has access through agreements with major banks to accounts that generate 30% of checks written. Amy Gutierrez, vice president of strategic market development at Atlanta-based Nova, claims ECS gives a superior risk assessment of the consumer‟s account than third-party check-verification services can provide because they don‟t have direct access to those accounts. For accounts that can‟t be accessed through the Visa service, ECS uses a third -party check-guarantee provider, Miami-based EnCircle. Besides having the availability of the Visa system, retailers using ECS could settle a transaction as an ACH item such as BOC or, for checks that don‟t qualify for ACH settlement, as Check 21 items. BOC doesn‟t do anything to improve a merchant‟s risk in accepting checks, according to Gutierrez. “The only benefit they‟re getting with BOC as opposed to paper checks is a more efficient method of getting checks deposited,” she says. “BOC on it‟s own, it‟s a step in the right direction, but it doesn‟t take it all the way.” While Nova is aiming at large retailers with its new hybrid service, others see a BOC opportunity with non-retail merchants that take in a lot of consumer checks on a walk-in basis. Wausau‟s Buchberger notes that insurance companies, especially big ones, may be highly receptive to BOC in many of their far-flung agent offices. Many consumers take their insurance bills to a local agent‟s office rather than mail them to a lockbox where they can be processed as ARC items, he says. Assuming the agent‟s office isn‟t equipped for POP, the checks typically are bundled and sent on to headquarters, which means lost float and more risk for the insurer. “There‟s a big advantage over POP” with BOC for such businesses, he says. POP Perks Up ACH Direct‟s Thorness says his mostly non-retail merchant base will be receptive to BOC because of the code‟s advantages over POP. He says consumers, during POP transactions, would often wonder why they were getting a voided check back, and merchants complained about the expense and staff training. “[BOC] eliminates all of the negative complaints about POP,” he says. Still others say the small merchant will prove to be a key constituent of the new payment form. For example, a single-location, familyowned pizza restaurant may find itself taking in a lot of cash every day, but only a few checks, says Jerry Federico, product marketing manager at the ProfitStars division of Jack Henry & Associates Inc., a Monett, Mo.-based bank processor and services firm. Such businesses haven‟t embraced POP in part because of the difficulties in collecting on returned checks created by the absence of the source document, he says. Plus, BOC will lower their deposit costs and save owners time in preparing deposits, he adds. NACHA executives, meanwhile, downplay the notion that POP‟s aforementioned deficiencies will be the prime drivers of BOC‟s anticipated growth. Daniel L. Miner, senior director of network development and risk management, notes that POP‟s formerly lackluster growth rates have kicked into high gear. This magazine‟s sister publication, Digital Transactions News, reported Dec. 27 that after years of slow growth, POP volume hit 80.5 million transactions in 2006‟s third quarter, up 92.8% from 41.8 million in the year-earlier quarter. POP‟s growth rate in the third quarter, the latest period for which data are available, led the ACH‟s 13 SEC codes. “One of the beauties of BOC is you don‟t have to make the [routing] decision at the point of sale,” says Miner. “We didn‟t develop BOC because POP wasn‟t doing well. We developed BOC at the demand of the industry because of merchants saying … they wanted an alternative that will allow them to decide whether to clear [an item] as an ACH or as a check in some form. With POP you have to do it right away.” For a declining payment form, checks retain an uncanny ability to capture attention from bankers, merchants, and attendant processors and vendors. There are several reasons for that, not the least of which is that Americans still write billions of them annually—an estimated 36.7 billion in 2003, according to a major 2004 study by the Federal Reserve. About 6 billion of those were written at the point of sale. But with check-writing declining at an annualized rate of 4.3% earlier this decade, according to the Fed study, payments executives fret about the inevitable rise in per-item processing costs. That, in turn, is a big reason why check-conversion options from NACHA—The Electronic Payments Association, the governing body of the automated clearing house, garner so much interest in payments circles. Against this background, NACHA‟s newest product, back-office conversion, hits the streets March 16. BOC will enable merchants to convert paper checks into ACH debits in their back offices. Vendors and processors predict merchants will give BOC a good reception, though they‟re somewhat guarded in predicting just how popular (see main story). But Robert Meara, senior analyst and banking researcher for Boston-based Celent LLC, believes BOC will be a big hit, after a short introductory period, because of its advantages over POP, NACHA‟s existing e-check code for point-of-purchase echeck conversion. How Much of a Pop from BOC In a November 2006 report, Meara predicted that BOC could account for 425 million items in 2007, its first year, and grow to 2.75 billion by 2010. That works out to a compounded annual growth rate of nearly 80%. After that, BOC transaction volume will decline as overall check-writing at the point of sale continues to slide. NACHA executives refuse to make a forecast for Digital Transactions, but they say they are comfortable with Celent‟s numbers. Some of the companies Meara expects to make hay out of BOC are check processors and merchant acquirers that are adding their own enhancements to the new code. And armored courier services are starting to offer their own facilities to retailers as the back offices for e-check conversions, according to Meara‟s report.
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