ou cannot step twice into the same river, for other waters are continually flowing in, said Greek philosopher Heraclitus circa 500 B.C. The notion still rings true: Alternative payment systems are flowing into our industry. Over the last two years, many new options have been announced, re-announced, tested, trialed, released or re-released. Many others are in development.

But are these newcomers friend or foe? And how likely are they to roil the waters? Let's dip our toes in and test the current. Marc Abbey, a Partner of First Annapolis Consulting, said this innovative surge in alternative payments means ISOs and merchant level salespeople (MLSs) will have greater sources of revenue, but their businesses will also be more complex.

"The development of alternative payment systems is well ahead of merchant demand at this time," Abbey said. "So it is an extremely difficult time for ISOs and MLSs to pick the winner and losers. Most of these companies are completely speculative right now."

Ken Musante, President of Humboldt Merchant Services, agreed. "Which one of these systems the consumers will accept will be the driving force for which solutions merchants will demand," he said. "It's hard to predict what it will be." Big names like Microsoft Corp. and Yahoo Inc. have made false starts: Microsoft scratched plans to turn Passport into a payment service, and Yahoo gave up on its PayDirect Network service in 2004. Regardless of which products survive, everyone in the industry will be affected.

Dan Schatt, a Senior Analyst with Celent LLC, forecasts that credit and debit card payments, which accounted for over 90% of online payment volume in 2000, will take a nose dive. "Innovative alternative online payment initiatives will grow to over a quarter of all U.S. online payments volume within the next three years," he said. "Credit card volume will drop below 50% of online payment volume by 2009."

New players in the field

Abbey said most innovations used to come from acquirers or ISOs developing new products. "Right now many of the entrepreneurs in this arena are coming from outside the payments field and creating a new layer, if you will, under the acquirers," he said. How unsettling is this? To provide clues, here are snapshots of emerging alternative payment products offered by Debitman Card Inc., FastLane Secure Payments, Google Checkout, Pay By Touch, PayPal and Secure-eBill:

Debitman

Debitman is an electronic payment network for retailer-issued debit cards. It operates like any other PIN-debit network. Cards are swiped at the POS and routed through a processor for authorization and settlement. Debitman collects payment through the automated clearing house network and guarantees the retailer all payments that have been authorized.

"What's important is that any retailer using our primary processing partners, Fifth Third, [Chase] Paymentech and RBS Lynk, can simply request that Debitman acceptance be turned on for their locations. They don't need to change anything at the point of sale in order to accept Debitman cards," said Mike Grossman, Debitman's Chief Executive Officer. "Any merchant can enjoy our lower interchange rates even if they opt not to issue Debitman network cards."

Debitman's strategy

According to Grossman, more than 200,000 locations nationwide accept Debitman cards, including sites for Wal-Mart Stores Inc., Sam's Club, CVS/Pharmacy, Dollar General Corp., The Kroger Co., T.J. Maxx, Piggly Wiggly Carolina Co., and Walgreen Co. These retailers are at various stages of implementation, ranging from pilot stage to complete implementation.

"The near-term strategy is to increase card issuance and card acceptance and to extend our product line beyond PIN debit to other PIN-secured products," Grossman said. "That might include PIN credit, stored value, prepaid debit or whatever the market requires. We also expect that our recently announced partnership with HSBC will accelerate our plans for rapid growth in card-issuing and card-accepting retailers."

How Debitman works with ISOs and MLSs

"Currently, our connection with retailers is directly through processors, so there is not an ISO/MLS reseller proposition," Grossman said. "However, we believe they are an extremely important factor in the retail industry payments sales cycle, and we look forward to future opportunities. It would be premature to speculate on how that may evolve."

FastLane

To be properly identified by the FastLane network, consumers swipe their driver's licenses or state issued ID cards through merchants' payment terminals. FastLane works like an electronic wallet, debiting funds from consumers' checking accounts to pay for purchases. FastLane also offers POS loyalty and gift-card services.

FastLane's strategy

Launched in April at ETA (Electronic Transactions Association's Annual Meeting & Expo), FastLane is a division of Boulder, Colo.-based Combined Payments LLC. It has spent more than $5 million developing the technology behind this single-swipe product.

"Our goal was to work with ISOs to board 20,000 to 40,000 of their existing merchants by the end of fourth quarter 2006, and we are solidly on track for that," said Linda Bryant, FastLane's Senior Vice President. "We'll start our live transactions with existing customers in August and then later roll out to new customers through our ISOs' existing MLS channels."

Within 12 to 24 months FastLane plans to introduce a credit line accessible to its customers. According to Bryant, the pricing will be very competitive with MasterCard Worldwide and Visa U.S.A.

How Fastlane works with ISOs and MLSs

FastLane CEO Carl Towner said ISOs will be a key sales channel for FastLane. FastLane has a revenue-share incentive plan to benefit ISOs and merchants for enrolling consumers (consumers may enroll at merchant locations). Originating ISOs and merchants receive a percentage of fees for each transaction, wherever the transactions occur and for the life of the customer.

"We recognize the value of the ISO/MLS channel, and we're very excited to have them be a part of our success," Bryant said.

Google Checkout

Google introduced its long-awaited Google Checkout (formerly dubbed Google Wallet and GBuy) online payment service on July 3. Users provide Google with their credit card and shipping information, which is stored by Google. Users then purchase goods and services at participating merchants without sharing credit card information with merchants. Checkout supports credit cards from Visa, MasterCard, American Express Co. and Discover Financial Services.

This service is similar to PayPal, except users cannot maintain an account balance with Google Checkout for future transactions, make payments using online bank withdrawals or make consumer-to-consumer payments. Google's transaction fees are lower than PayPal's. Google Checkout charges merchants $0.20 and 2% per transaction.

Google Checkout's strategy

One week after launch, Checkout was accepted at about 100 merchants including Starbucks Corp., Jockey International, Zale Corp., Ace Hardware Corp. and Buy.com Inc. It is only available in the United States.

To attract consumers, Google is offering $10 rebates to people who use Checkout to complete online purchases from participating merchants. Citigroup Inc. cardholders who enroll in Checkout and make at least one purchase before Sept. 15 will receive a credit on their statement, cash back or reward-program points.

Checkout offers discounts to merchants who buy AdWords (for every $1 merchants spend on Google AdWords, they can process $10 for free), and merchants will have a Checkout shopping cart icon next to their listings to indicate they accept Checkout.

Google versus PayPal

Although Google denies Checkout is meant to compete with PayPal, experts say it does indeed challenge the 100-million-customer-strong PayPal, and it wouldn't be hard for Google to roll out a consumer-to-consumer service. For now, it appears it is cherry-picking the higher end of the market. Demographic and sales-pattern information garnered through Checkout could prove much more valuable to Google than transaction fees for small, individual-to-individual payments.

Checkout bundled with AdWords could be a powerful incentive for merchants to advertise with Google, boosting AdWord sales. Additionally, analysts and investors have criticized Google for being heavily dependent on online ad sales, so a recurring revenue stream that relies on e-commerce is a strong response to that criticism.

PayPal could, in theory, be a payment option within the Checkout platform. Indeed, Google is rumored to have provided eBay Inc. (PayPal's parent company) with information about Checkout. Will the olive branch work? EBay currently has a loophole (its Safe Payments Policy introduced last October) that allows it to ban mention of Checkout in merchants' eBay listings, which it has done, citing that Checkout is unproven. Experts predict a clash of the online Titans as PayPal and Google Checkout go head-to-head over consumers' e-wallets.

How Google Checkout works with ISOs and MLSs

It doesn't. "The Google solution is definitely a threat," Musante said. "They are not only looking to supplant the existing business we have, but they cut the MLS and ISO out of the loop entirely."

Pay By Touch

Pay By Touch uses front-end biometric authentication in the form of fingerprint scans for payment, age verification, check cashing and loyalty programs. At checkout, shoppers place a finger on a reader and enter a search number (usually their phone number). They are then authenticated and presented with a list of financial accounts from which they select their payment method. Transactions are then processed as if a card or check were present. Loyalty programs are automatically recognized.

Pay By Touch's strategy

Pay By Touch launched its product in Piggly Wiggly stores in 2004. It now has 154,000 retail clients across the country. In addition to Piggly Wiggly, it has implementations and pilot programs at such retailers as Supervalu Inc.'s Albertsons , Cub Foods, Farm Fresh, bigg's, and Jewel-Osco stores; Lowes Food Stores Inc.; and Quiznos restaurants. Pay By Touch also manages opt-in shopper rewards programs for Food Lion LLC, Sally Beauty Co. Inc., United Parcel Service of America Inc. and Winn-Dixie Stores Inc.

According to Shannon Riordan, Pay By Touch Director of Marketing, the company has also established "solid, strategic partnerships with top global category leaders" such as IBM, Accenture, Discover Financial Services, VeriFone, Ingenico, Hypercom Corp., Radiant Systems Inc., Cogent Systems Inc., NCR Corp., Certegy Inc., and MTXEPS Inc., among others.

"Pay By Touch has incredible momentum right now and is building on its mission of becoming the global leader in biometric authentication, payment, personalized rewards and payment processingsolutions while building significant, recurring revenues," Riordan said. Pay By Touch expects to launch its offerings into new vertical markets such as health care, financial services, hospitality, gaming, travel and transportation, vending, and quick-service restaurants. It also intends to expand into several global regions outside of the United States in the coming year.

How Pay By Touch works with ISOs and MLSs

Pay By Touch has an ISO program. "Biometrics offers the customers the perception of something quite new; but for our purposes, it still rides on the existing infrastructure. It's not a disruptive force by any means," Musante said. "Pay By Touch could prove to be very ISO- and MLS-friendly. There is no reason for them not to be and every reason for them to forge these kinds of relationships."

PayPal

Consumers sign up online for PayPal accounts. They can then draw cash from their online checking accounts or credit cards and send it to merchants or individuals. In addition, PayPal recently announced it intends to roll out a "virtual debit card" to "hundreds of thousands" of users by the end of August. Its virtual debit card is software the consumer downloads that generates a one-time MasterCard debit account number.

This can be used at online merchants who accept MasterCard (even if they don't accept PayPal). PayPal isn't charging merchants to handle these transactions. This, some sources say, is one shot in its battle with Google for online commerce dominance.

PayPal's strategy

PayPal has more than 100 million users, and it reached $1 billion in revenue last year. According to Schatt, PayPal is now accepted by about a quarter of all merchants and represents approximately 10% of U.S. online sales volume. It also has accounts in 55 countries and can accept payment in multiple currencies. Its transaction fees start at $0.30 plus 2.9% of the total payment.

Schatt expects PayPal's merchant services capabilities to deepen its relationships with online merchants and allow new online merchants to lower their overall cost of sales by bundling various merchant services with Web hosting and payment processing. PayPal spokeswoman Sara Bettencourt recently said the company is targeting small to mid-size businesses for growth. It's likely to face a fierce challenge for that market from Google Checkout.

How PayPal works with ISOs and MLSs

It doesn't. "We don't have what you'd call an ISO channel," Bettencourt said. "There are some shopping cart companies that package PayPal merchant accounts into their shopping carts, but we don't have an ISO agreement per se."

Secure-eBill

Secure-eBill is an online payment service owned by MODASolutions Corp. It appeals to consumers who bank online but don't have credit cards or who don't want to reveal personal financial information to online merchants. Consumers select the Secure-eBill icon when purchasing online. Seconds later, an invoice confirming the purchase arrives in their e-mail, and shoppers use online bank accounts to make payments. Merchants pay MODASolutions a 1% to 1.5% fee (depending on merchant volume) for Secure-eBill transactions.

Secure-eBill's strategy

Secure-eBill was launched May 2005. It has a number of merchants live including Tool King LLC, BigAlsOnline Inc., NextWarehouse.com and CompSource Inc. "The traction with the merchant community has been strong, including merchants that are in the top tier that cannot be disclosed at the moment," said Marwan Forzley, Secure-eBill's President and CEO. Forzley also said Secure-eBill has channel relationships with a number of companies such as Cardinal Commerce Corp., Novator Systems Ltd., ScanAlert Inc. and Devix Group LLC.

"In the next five years, the alternative payments market will see significant growth, and payment options like Secure-eBill, PayPal, Google's Checkout and Bill Me Later [for more on Bill Me Later, see "A new payment option with an old twist," by Patti Murphy, The Green Sheet, July 26, 2004, issue 04:07:02] will be available on many shopping carts," Forzley said. "Secure-eBill extends online banking to the shopping cart, and we believe that we have a great opportunity ... to help merchants tap into this large, growing and active base of online banking users."

How Secure-eBill works with ISOs and MLSs

Secure-eBill has ISO revenue-sharing agreements in place. "We are looking for partners to introduce Secure-eBill to merchants," Forzley said. "ISOs, acquirers, processors and channel partners are important to the growth of our business. We would welcome the opportunity to partner with these companies."

Of the six alternative payment systems surveyed here, the sailing looks smooth for ISOs and MLSs with FastLane, Pay By Touch and Secure-eBill; a little choppy with Debitman; and rough with Google Checkout and PayPal. When chasing the online behemoths or other upstarts that aim to bypass the ISO/MLS channel entirely, best batten down the hatches.

Some ISOs and MLSs have asked us for insight on how they should best market their services to online merchants when PayPal is also a contender. The cover story in our next issue will address this.