Will Old Risk to Credit Cards Threaten New ACH Web Proposal?

As an e-commerce payment system being developed for the automated clearing house nears a pilot scheduled for early next year, it may confront an old issue that sank an earlier such project: the potential for lost credit card sales online. That's according to an in-depth story on the ACH and its role in the electronic-transactions business appearing in the September issue of Digital Transactions magazine, a sister publication of Digital Transactions News. Already, fear of losing card share in Internet payments to generally less expensive ACH transactions has some bankers looking skeptically at the new idea, which is being spearheaded by NACHA, the rules-setting organization for the ACH. “Clearly there is potential impact and cannibalization to the credit card,” Patrick J. Moore, senior vice president and product executive for domestic ACH and global deposit services at JPMorgan Chase, told Digital Transactions. His bank is one of the nation's largest card issuers as well as merchant acquirers. “This is important to JPMorgan and other large credit card issuers,” he says. “I can't say that doesn't play into our position.” The credit card issue is one of several the new online payments proposal confronts, according to sources interviewed by Digital Transactions. Others include the necessity for consumers to leave merchant Web sites to complete payments and the apparent absence so far of rules dealing with certain kinds of disputed transactions. Indeed, Moore quickly reiterates that Chase has many questions about “appropriate consumer protection,” a point he also made in speaking to Digital Transactions News this spring (Digital Transactions News, May 11). But the issue concerning possible loss of share for credit cards online was one many industry insiders had hoped was settled. NACHA didn't make president and chief executive Elliott C. McEntee available for Digital Transactions' story, but in a column in the Federal Reserve's July News from FedACH newsletter, he denied that ACH online payments would erode credit card transaction volume. “Research shows that consumers who use cards online will continue to do so,” McEntee said. “By enabling financial information to remain private between consumers and their financial institutions, entirely new markets of consumer transactions could be conducted online.” Mary Ann Francis, a NACHA board member and senior vice president and manager for global treasury product management at Cleveland-based National City Corp., has two answers for the naysayers. “Number one, join the pilot, see for yourselves, and influence it,” she told Digital Transactions. “My second answer is, there's plenty of payment space for everybody. If we've got people who now for whatever reason don't buy online, we've just increased that pie.” According to Francis, there's no reason a transaction in the proposed NACHA system linking a merchant and a credit card account couldn't be done. The timing of the new proposal, which NACHA has had under development since at least 2004, may be right. When online shopping launched about a decade ago, credit cards had a virtual monopoly in online payments. With the rise of alternatives, however, their market share is declining as providers serve a large market of consumers and merchants who need or want other choices. Noting the rise of eBay Inc.'s PayPal, new debit options, and alternative credit providers, Dan Schatt, a senior analyst at researcher Celent LLC, told Digital Transactions credit cards will account for less than half of e-commerce payments by 2009. “Credit cards can go only so far. This [NACHA idea] addresses another segment of the consumer population,” he says. “It's somewhat of a misperception that is going to hurt the card-issuing operation.” NACHA tried an online payments service, which it called Project Action, several years ago, but this was eventually shelved because of opposition from major credit card issuers that feared it would siphon transaction volume away from cards in online commerce, observers say. Last year, it ran a proof-of-concept test of the new proposal, which it has provisionally called credit push, and announced earlier this year it would commence a pilot early in 2007 (Digital Transactions News, March 15). The new system will rely on banks to use their existing online-banking platforms to authenticate buyers, will guarantee payments to merchants, and will compensate consumers' banks with a fee akin to card interchange. NACHA argues an opportunity exists for an Internet payment system that allows consumers to buy online while keeping financial details confidential. Also, its existing category for Internet payments, WEB, has been mainly used for online bill payments rather than for spontaneous shopping transactions, owing to its lack of strong authentication.