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Shopping online without plastic

September 10, 1998
Web posted at: 5:37 PM ET
internet shopping

by Jason Krause

(IDG) -- After the almighty greenback, the humble check is the workhorse of the U.S. economy. Last year in the offline world, an estimated 60 billion cash transactions were handled with checks, compared to 10 billion credit card and debit card transactions.

Despite their overwhelming popularity, the vast majority of e-commerce sites continue to hang out a "No Checks" sign. But with several new check-processing services slowly coming online, some e-commerce sites are beginning to wonder if they're missing out on an untapped market of people who either don't have a credit card or don't want to use one online.

When Value America in Charlottesville, Va., decided to survey customers of its shopping club, the Web site learned it had enough check-writing customers to justify adding the payment method. Value America decided to use the backend check-processing services of PaymentNet in Pleasanton, Calif.

"We can't exactly figure out why, but our customers have no fears of using their checking account, while credit cards are still a problem," says Tim Stevens, application developer at Value America. "I'm assuming checks have been around longer, and are more trusted, while credit cards have a sort of stigma attached to them."

Despite the appeal, virtually no e-commerce sites on the Web accept checks electronically. Credit cards rule.

Few people even realize that it's possible to send a check over the Web. To charge a customer's checking account, all an online merchant needs is the string of numbers printed at the bottom of a check. Most merchants that take checks then print a paper check on their end and forward the checks to their bank. A small but growing number of sites are processing an electronic version of checks through the Automated Clearing House (ACH), a system used by banks to batch-process debits and credits to checking accounts.

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Automatic check payments based on ACH are beginning to be widely used on the Internet at online banking sites, which let customers pay recurring bills like utility or mortgage payments. With recurring bills, there's little risk involved for the bill collector: If someone writes a bad e-check, the company simply turns off their electricity or repossesses their house.

But using checks for other kinds of online purchases is still a risky proposition for businesses and customers alike. "We have the capability to process personal checks online right now, but we won't do it," says Maureen Loftus, senior VP at CyberCash, now a backend e-commerce software vendor. "It's just too difficult to manage the risks involved."

In the offline world, merchants can check a person's driver's license, for example, but online mechanisms are not well established for identifying a check writer, validating a checking account and checking for sufficient funds.

One way to make checking safe for e-commerce is to set up a system of assurances for consumers and merchants. PaymentNet, an e-commerce hosting company, offers this kind of assurance.

Just as a Web site visitor would enter a credit card number, a customer using PaymentNet to pay by check enters a checking account number and answers identifying questions. The questions may include standbys such as, "What is your mother's maiden name?" (Granted, questions like that one do little to inspire consumer confidence in the area of privacy.)

The information is cross-referenced with a financial database to make sure of the check writer's identity. PaymentNet then weeds out bad-check writers by running the information through Telecheck, the service used by checkout clerks across the country.

Of course, a service like PaymentNet isn't cheap – processing checks typically costs about the same as taking credit cards. PaymentNet's check-processing fees are still being negotiated with about a dozen customers, but the company says they will be in line with what PaymentNet charges for credit card transactions.

For up to 2,000 credit card transactions a month, for instance, PaymentNet charges about $229, plus a $250 set-up fee. Costs go higher depending on the number of transactions and on whether PaymentNet guarantees each check for the full amount.

"When we first looked at fully guaranteed services, we looked at the price and said 'no way,'" says Value America's Tim Stevens. "Fortunately, all of these companies were eager to negotiate a better price."

Rather than focus on the backend, Virtual Payment Systems Commerce in De Land, Ill., offers its 238 Web-based customers a cheaper front-end software solution known as the VirtualCheck.

VPS Commerce found that most clients were not overly concerned with authentication. "We offered a check-guarantee service, but it was not terribly popular," says Ty Hall, VPS Commerce's director of business development. "Services like that only tell you if someone is in a negative database, not whether the check will actually bounce or not."

Hall prefers not to ask his customers too many questions. "We don't like to require customers to enter too much personal information, like driver's license numbers or social security numbers," he says. "Anyone worried about security on the Internet is going to be leery about giving that information away."

One company using VirtualChecks is 9NetAvenue, a Web hosting company based in East Rutherland, N.J. According to billing manager Victoria Ambart, 9NetAvenue encourages customers to use checks rather than credit cards for administrative reasons. "We'd run into problems like a customer disputing a charge-card bill, and because we didn't have documentation to prove they were billed correctly, we'd lose the claim every time," she says.

"It wasn't our primary concern, but a nice benefit with checks is that the cost per transaction is lower than credit cards," she adds. And at a one-time cost of $488 for the enterprise version on VPS Commerce 4.0, VirtualChecks are cheaper than full-service solutions offered by PaymentNet.

E-check services fail to solve one nagging e-commerce problem: selling to international customers. Because these consumers don't have as many credit cards as Americans do, they have had little practice with e-commerce so far. E-check services, unfortunately, will not pick up the slack any time soon. For foreign checks to work would require a whole new level of financial cooperation among countries with widely varying banking infrastructures.

Even within the U.S., no clear banking standard for e-checks has emerged. While merchants accepting electronic-only checks on the Web typically use the ACH system, a new specification known as Financial Services Markup Language (FSML), a subset of HTML, is slowly emerging as a secure specification for business-to-business transfers.

Until a simpler and more secure day comes, only a handful of companies will persist in giving consumers more payment options than plastic. "We're looking to make a nice profit tapping into this market, but checking is an old payment method," says Tim Stevens of Value America. "You can't afford to ignore it, but I wouldn't plan my business around it for the next five years."

Additional reporting by Elizabeth Heichler, IDG News Service, Boston bureau.

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