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Some payment card organizations are beginning to work with providers of   alternative payment methods they once viewed as competitors.

Earlier this month, SunTrust Banks Inc. announced a pilot with Moneta Corp.'s online payment service that involves 75,000 of its customers. Pilot participants can link their SunTrust accounts to Moneta and use the company's service to pay for goods and services at participating online retailers.

And last month, First Data Corp.'s Star PIN-debit network became the first to sign up for what Ebay Inc.'s  PayPal unit is calling its Debit Access service. Consumers whose banks are part of the Star network can choose to link their debit cards to PayPal, enabling customers to fund their PayPal accounts through debit transactions.

The deals illustrate how financial institutions are attempting to reclaim some of the interchange lost to alternative payment methods. Alternative payment options also may help convince more customers to shop online.

  "There has always been a fairly sizable part of the population, for a variety of reasons, who are not comfortable using cards over the Internet to make purchases,"  says Hugh Gallagher, SunTrust senior vice president for deposit product management.

More importantly, however, the Moneta partnership helps SunTrust generate additional revenue from checking accounts, Gallagher adds.

Under the agreement, SunTrust will earn a percentage of the transaction fee each time a customer uses Moneta. Gallagher did not reveal the amount, but industry analysts say the rates for most alternative-payment services are similar to PIN-debit interchange rates, which are considerably lower than the rates applied to credit and signature-debit transactions.

The average for PIN-debit purchase  ranges from 40 cents to 70 cents for the smaller merchants, according to Adil Moussa, an analyst for Boston-based Aite Group.
 The typical signature-debit rate average 1.04% of the sale, while the typical credit card rate is about  1.71%, Moussa says.

Besides pursuing additional revenue, SunTrust's purpose in testing alternative payments is "to be defensive and at least try to get a few pennies back" that financial institutions lose every year to alternative methods consumers are using to pay, Steve Karp, SunTrust executive vice president of enterprise payments strategy, told attendees last month at the ATM, Debit & Prepaid Forum hosted by SourceMedia, publisher of ATM&Debit News.

Similar to  PayPal's service, Moneta uses proprietary software to process transactions using the automated clearinghouse system for settlement. Consumers can sign up for an account on Moneta's Web site and  link the service to a bank account.

To pay with Moneta at a participating merchat's Web site, a consumer logs into the account to complete the transaction. An email confirmation to further verify the transaction.

Moneta partners with 24 merchants and says it will add three more by January. Its largest merchant partner is Delta Air Lines Inc.

According to one industry study, financial institutions are losing a significant amount of transaction volume to alternative-payment methods.

Though payment cards dominate the $170 billion e-commerce market, buyers use alternative-payment methods for approximately 15% of that volume, according to a report issued last year by Celent. The Boston-based market-research company estimates that the major card brands and issuers stand to forgo $345 million in sales volume to alternative-payment methods next year and about $1.7 billion in 2015.

 "We want to make sure we have a fence or guardrails around that [DDA] relationship" with customers, Gallagher says. "We want to remain as the primary financial relationship and to do that we thought it was much better to offer a full suite of services including an alternative payment." 

Banks' argument against offering alternative-payment options is loss of interchange revenue, but they need not worry about "cannibalizing" their card activity because both options attract different consumer segments, Karp said at the conference.

"There is always going to be the card guy in the room who will say [alternative payments] are taking transactions away from cards," he said, noting that would be relevant if consumers using alternative payments also are card users.
"That's just not the case," Karp said, citing SunTrust's internal research.

SunTrust began examining alternative payments after it became clear services such as PayPal and Google Checkout were deemed competitive threats to the bank's debit card revenue, Gallagher says. "We did not want a third party to intermediate our payment-revenue streams," he adds.

SunTrust decided to seek partnerships with companies offering alternate-payment services because of the grim economy and new federal-government regulations aimed at banks that could reduce payment card income.

Indeed, with the SunTrust partnership, Moneta is positioning itself as a bank-friendly alternative payment, says Guido Sacchi, Moneta CEO.

"We believe that banks can be a great engine of customer acquisition for us," Sacchi says. Financial institutions are "searching for alternative-revenue models, specifically ones that center around the DDA relationship," he says. Moneta, however, will still face challenges despite the partnership, says Red Gillen, a senior analyst with Celent.

"The challenge, both to consumers and merchants, is why are they better than PayPal?," Gillen says. The pitch to interested parties in Moneta "has to be convincing, whether it's merchant pricing or user rewards," Gillen says. "Wherever Moneta goes, PayPal would have preceded it."

PayPal also is to become an asset for payment card organizations. Participating Star financial institutions can market the PayPal account when customers log in to their online-banking services, Julie Seville, Star vice president of product development, tells ATM&Debit News. During log in, customers can view a demo on how PayPal works, and the participating financial institution will send those interested to PayPal's Web site to register for a PayPal account.

The Star agreement is "a way for banks to participate in online transactions," Sanjeev Kriplani, a PayPal senior director and general manager, told ATM&Debit News last month. "We want to increasingly partner with the banking community."

PayPal plans to offer the service to additional networks, Kriplani says. ATM


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