NACHA is relaunching Project Action, an ACH-based online payments idea that died four years ago because some NACHA members were worried that ACH-based competition would cut into their revenues from online, card-based payments.
Even NACHA concedes that not much has changed since then, and that as a result, the new project may meet the same fate. But the association sees a need for the system—it’s NACHA’s job to promote ACH payments—and wants to give it another shot.
“We don’t have any illusions that this is going to be a slam-dunk—we just think it’s time to try,” says Michael Herd, NACHA’s spokesman. The pilot, conducted by network provider eWise Systems, goes live in mid-year.
Emerging as it does against a backdrop of public concern about identity theft and data security, the concept makes plenty of common sense: NACHA’s program allows consumers to make online payments without divulging personal information to anybody.
Under NACHA’s system, consumers who want to buy something pick the ACH-payment option at the website, which redirects the buyer to their bank’s site. Then they log on to the bank site, enter the terms of the transaction, and authorize the ACH payment. While not as smooth as a credit card transaction, the system has the virtue of keeping all personal information off the Web—no mean advantage in an atmosphere filled with concerns about data losses and identity theft.
The problem for the new pilot is that, defying all common sense, most consumers seem perfectly content to use their credit and debit cards to buy things at strange websites. A similar idea in Canada, called Interac Online, has gained remarkably little traction in the market since it was launched in mid-2005: Only 18 organizations are signed up, including four social agencies. No major online merchants are among them.
Not to say Interac has accomplished nothing: A fourth institution, BMO Financial Group, is slated to go live soon with Interac, and Chase/Paymentech is about to join Canada’s Moneris Solutions as a merchant acquirer. But Interac is a Canadian bank-owned consortium, and only three of Canada’s banks participate—Royal Bank of Canada, Scotiabank, and TD Canada. And a Canadian non-bank solution called usemybank.com has likewise found scant interest among merchants and the general public, having signed no new customers in the past 10 months despite predictions of an imminent explosion of business, especially in the United States.
Added to this is the awkward fact that it’s not exactly in the interests of some of NACHA’s membership to create an online payments alternative. While online commerce keeps growing—up 23 percent in 2005, compared with a 6 percent growth in all retail sales, according to the U.S. Census Bureau—few observers believe today that card revenues from both fees and interest will be as profitable in the future as they are today (see Electronic Payments Week, Feb 6, 2006).
When revenues are under pressure while transactions volume increases, institutions typically either exit the business, or try to make up their revenues through volume. But in this instance, banks are between the bus and the curb; they can’t just refuse to allow online card payments, especially since online retailing is growing so fast. This means they have to opt for staying in the business and maximizing volume. In that predicament, encouraging competing payment methods is apt to be viewed in the board room as cannibalizing established lines of business.
NACHA thinks things aren’t so dramatic. “We don’t presume that they’re going to lose credit and debit transactions,” says Herd. “They may lose a marginal amount, but if they did, we’d expect it to be minimal—less than 5 percent.”
And NACHA thinks the cannibalization issue is overblown. “They could look at it like that, but they could also look at it as an area for new markets,” says Herd. “They could see a lift in online transaction by having a different method, and they could see a lift from being able to utilize their own authentication services—that may be unrelated to payment transactions, but that could have a life of its own.”
In fact, says Celent Communications' Alenka Grealish, this version of Project Action may have a better shot at success than the first effort. “NACHA realizes that its growth depends on innovation, and its members invest in ACH payment upgrades on a pretty steady basis, so they want more flow though the pipeline,” she says.
Also, she says, the card associations are preoccupied these days with the many interchange suits now before the courts, so that their objections may be minimized, while merchants are more interested than ever in low-cost payments alternatives. And since debit card payments go over the ACH, and there are estimates that online debit card payments are likely to overtake credit card payments by 2007 (see Electronic Payments Week, March 31, 2006), the ACH channel seems likely to grow by default, while the credit card banks may find themselves outvoted in the marketplace. This, she thinks, favors the new Project Action.
“When it comes to credit card issuers, that’s an increasingly concentrated business, but there are 10,000-plus banks that want to make money from their debit cards, and they’re going to be a little more open-minded about cannibalization,” says Grealish. (Contact: NACHA, 703-561-1100; Celent Communications, Alenka Grealish, 503- 228-0878)