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.

PayPal Still Growing

Posted by Mark Brousseau

An interesting article from the Austin American-Statesman about PayPal's plans:

PayPal doubles Austin office space

Many of the online payment company's 200 people here develop software.

By Kirk Ladendorf
AMERICAN-STATESMAN STAFF
Friday, August 15, 2008

In a little over a year in Central Texas, PayPal has grown to 200 people, most of them software developers, at its new Northwest Austin technology center.

Now, the online payments company has doubled its office space in Austin and plans to keep hiring aggressively.

Chief executive Scott Thompson offered explanations for the expansion: His company is growing fast, it needs more technical workers and it likes what it sees in Austin.

"PayPal is a technology and risk-management company more than anything else," Thompson said. "Our product development is done by engineers. They are all technology people who have a lot of talent, skills and capabilities in doing things with software."

The company is entrusting some of its most important work — software for new payment products, fraud detection and help-desk assistance —to the Austin technical team.

"It was a big decision, but we are extremely happy with what the result has been in a very short period of time," Thompson said. "We have been able to get tremendous quality and many more people than we thought. When we tell people we have openings and we are PayPal, lots and lots of people turn up. We get to pick from the best of the best because our brand in this market has a lot to it."

PayPal, which is owned by eBay, is the leading alternative payments company for e-commerce and other online payment transactions. Much of the company's transaction business is tied to eBay, but it is also expanding into other areas of e-commerce and electronic payment.

Thirty-three of the top 100 e-commerce sites in the United States use PayPal as a payment option. It is growing rapidly in Europe, and it is just starting its growth in Asia and Latin America, where e-commerce is in its infancy.

"They are the largest alternative payment company," said analyst Bruce Cundiff, with Javelin Strategy and Research in Pleasanton, Calif., who estimates that PayPal handles roughly 5 percent of e-commerce payments now but probably will double its market share to 10 percent over the next four to five years. "They are growing with e-commerce. We have them growing faster than credit card or debit card payments, but they are starting from a smaller base."

The company, with more than 60 million active customer accounts worldwide, handled $47 billion in transactions in 2007, and its first-quarter business this year was up 35 percent from a year ago. The company employs 7,000 people worldwide, and its major business operations centers are in San Jose, Calif.; Scottsdale, Ariz.; Omaha, Neb.; Dublin, Ireland; and Austin.

Thompson said the company is giving the Austin development center more responsibility because it has done very well so far.

"So far, it has been fabulous, and that type of success breeds on itself," he said. The company subleases office space in Freescale Semiconductor's Northwest Austin campus, and it is doubling its lease space to 70,000 square feet.

Some of the most interesting work being done in Austin is tied to the company's sophisticated software that detects fraudulent activity.

The software examines the online behavior of customers using PayPal and shuts down transactions involving those that exhibit fraudulent behavior patterns. The company said its loss rate to fraud is 0.27 percent, which it said is among the best in the payments industry.

PayPal's software developers work hard, Thompson said, but they get a chance to relax on the job, too.

The company break room has a pool table and a foosball table. And workers on motorized carts deliver free beverages to workers' cubicles. Sometimes the cart drivers conduct impromptu races in the halls.

The culture, Thompson said, is about moving fast and having fun doing it.

"The best part of our culture is, we have a furious desire to go fast and build stuff and have customers use products that are uniquely PayPal and very special in their lives," Thompson said.

Although other companies also do electronic payments, Thompson said, his company does it very quickly, safely and conveniently.

kladendorf@statesman.com; 445-3622