Wednesday, October 29, 2008

The Bedrock of Alternative Payments

By Mark Brousseau

The ACH Network began as a low-volume network transmitting large recurring transactions between well-established entities. However, changes in rules and business models have brought about significant changes in the nature and volume of ACH activity.

More than 18 billion ACH payments were made in 2007, representing a 12.6 percent increase from the total number of transactions generated in 2006, according to Mercator Advisory Group. Much of the growth in ACH volume can be attributed to fundamental changes in payment methods consumers and businesses use, with the network transforming into a high-volume platform of relatively low-value, non-recurring transactions. These transactions are originated from a rapidly expanding number of merchants, aggregators, corporations, and financial institutions, Mercator Advisory Group says.

Alternative payment providers such as Google Checkout, Bill Me Later and, of course, PayPal leverage the ACH to provide consumers and merchants with a secure and efficient means of payment and in doing so are experiencing phenomenal growth.

Non-financial institutions have been beating the banking industry to the punch of developing unique and cost efficient payment solutions, especially in the e-commerce space. Ironically, alternative payment providers have succeeded using the banking industry's own infrastructure to capture interchange-like revenues.

However, a new solution has emerged from NACHA that could level the playing field for banks to compete against alternative payment providers and push the ACH network in a new direction, Mercator Advisory Group says. NACHA's recently released Secure Vault Payments (SVP), an e-commerce payment solution not only enables customers to move payments from their direct deposit accounts to merchants and service providers, but transactions occur with real-time authentication and authorization from the consumer's bank Web site. The push method ensures merchants and service providers that payments are being made with “good funds,” thus reducing concerns about fraud, charge-backs, and non-sufficient funds.

Although signature debit and credit card usage online has yet to be hugely impacted by alternative payment solutions, in many cases, non-traditional payment providers offer significantly enhanced value propositions including discounts, sales and loyalty tools, and the ability for merchants to cross sell on non-competitive merchant Web sites. These value added services create significant competitive pressures for traditional payment types and are giving alternative payment methods solid traction, Mercator Advisor Group believes.

“As alternative payment methods continue to evolve and more players step into the space, the use of traditional payment cards for online transactions will continue to decrease. It is foreseeable that merchants will increasingly promote alternative payments and consumers will become more accepting of new payment types,” said Brent Watters, senior analyst of Mercator Advisory Group’s Prepaid Advisory Service. “Mercator believes that in the next five years, 35 percent of payments made online will be in the form of alternative payments, including prepaid cards, new forms of credit and programs leveraging the ACH.”

Other findings from Mercator Advisory Group include:

… The ACH continues to show solid growth and transaction volume will continue to escalate as more alternative payment schemes leverage the network.

… The ACH is moving to push versus pull method of payment thus creating direct competition for EFT networks that have been eager to develop a PIN-less debit solution for online transactions.

… The ACH's eCheck services continue to fuel the networks' transaction volume and penetrate markets currently targeted by debit and credit cards.

… NACHA's Secure Vault Payment (SVP) creates an opportunity for banks to compete in online alternative payments.

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