Nacha's Project Action is on hold. Was the ambitious program too difficult to build, or did it threaten banks' revenue streams from Internet credit card payments? And what's next?
The latest program to be listed on the Internet payment endangered- species list is Project Action from Nacha-The Electronic Payments Association. Nacha in late November put Project Action on hold. If the initiative is sidelined for good, it will mean that banks aren't very interested in spending the time or money to create payment systems that could challenge credit cards' 90%-plus share of consumer Internet purchases.
Unveiled in April 2001, Project Action's plan was to use so-called automated clearing house credits to pay the seller from a demand-deposit account when a consumer or business bought something through a Web site. As outlined by Nacha, the proposal had a long list of advantages for nearly everyone.
Among them: consumers using a drop-down Project Action payment menu on an Internet retailer's Web site could pay without giving sellers their financial account numbers, directly addressing the most serious problem retarding the growth of e-commerce. Merchants would receive guaranteed funds, unlike ACH debit transactions that are subject to reversals for non-sufficient funds. Banks could choose their own authentication technology. Plus, in return for bringing buyer and seller together, banks would receive a new revenue stream for their services.
Everybody wins, right? Not quite.
Banks started to worry that they could lose time and effort, not to mention development funds, on a program that could take years to get up and running on a mass scale. Compounding those misgivings, according to some observers, was the expectation by online retailers that they would get some price relief from Internet credit card interchange, which they almost universally decry as too high for the risks posed.
Once those realizations set in, banks refused to pony up the $1 million to $1.5 million in development money that Nacha wanted to form a limited-liability corporation that would conduct live tests. Less than two months after its Oct. 3 announcement that Project Action was about to move into its second, or "proof-of-concept" phase, Herndon, Va.-based Nacha's board of directors quietly disclosed that the program was indefinitely delayed.
Nacha has consistently said that Project Action would not compete with credit cards on the Web. "We're not selling or promoting this as an alternative to credit card payments," Nacha President and Chief Executive Elliott C. McEntee said as Phase 2 got underway. "We think this has the potential to make the pie bigger for everybody."
In sidelining Project Action, Nacha cited the economy.
"Although many financial institutions and their customers support the Action concept and believe it benefits stakeholders in the payment system, the board now believes that, due to the current business investment climate, Action will not receive the investment necessary to proceed at this time," a Nacha spokesperson told CCM in an e-mail. "The board has instructed the Nacha staff to place the proof of concept on hold until such time as market conditions warrant moving forward."
The banker who headed up Project Action's first phase, a feasibility review, expressed a similar view.
"My sense is that after talking to Nacha is that Project Action is still a good idea, but it's a timing issue," says Charles B. Bretz, senior vice president of alternative delivery at Birmingham, Ala.-based Compass Bank. "We think Project Action will come back."
Steve Ellis, the executive vice president of San Francisco-based Wells Fargo & Co.'s wholesale services group who was heavily involved in Project Action's Phase 1, says that while the planned model has some strong advantages, putting it into effect would be a difficult and time-consuming task, with no sure return. Among other things, creating the system for wide public use would require technological investment, new rules and marketing.
"You're always wondering how new things will take off," Ellis says. "There are folks that were very interested in it, but I don't think we're going to get the momentum needed to get started."
'Keep It Simple'
Ellis' colleague at Wells, Debra Rossi, executive vice president of business Internet services, adds that "it was a pretty lofty project with a pretty high dollar amount. With payments, you've got to keep it simple."
But others say there is more to the story than simply the tenuous state of the technology investment climate ("Tech Lite," page 42). Part of the problem may have been simply getting a large cast of payments characters to coordinate their efforts to develop common standards. Phase 1's oversight committee had 44 members consisting of 15 banks and credit unions, payment processors and technology vendors. (Nacha, it should be noted, sought investment capital for Phase 2 only from financial institutions.)
One of the non-bank members of the Phase 1 panel was Milwaukee-based Metavante Corp., a payment processor and a major player in electronic bill presentment and payment. Metavante is owned by Marshall & Ilsley Corp., Wisconsin's largest bank-holding company.
"I've had the opportunity to participate in a number of consortiums of financial institutions," says Cary Serif, executive vice president and general manager of Metavante's electronic presentment and payment unit. "It's a tricky business."
While today's see-saw economy and difficulties in balancing the interests of a large team may have played some roles in delaying Project Action, the real culprit was interchange, according to Gwenn Bezard, senior analyst at Boston-based Celent Communications. Bezard is a payments researcher in New York who has spoken with many executives closely involved in the initiative.
Nacha, which sets rules for ACH payments, had said all along that merchants would pay some fee for accepting a Project Action transaction. The fee would be akin to the interchange fee that merchant acquirers pay to bank card issuers for each Visa and MasterCard transaction. Acquirers, of course, simply pass those card-acceptance fees on to their merchant clients, a scenario sure to be repeated under the Nacha program.
In the Project Action model, the originating depository financial institution-the buyer's bank-would receive some sort of payment from the seller's bank, the receiving depository financial institution.
While Nacha never publicly discussed the range of possible Project Action fees, the expectation in the banking community was that the interchange to be earned by the buyer's bank would be somewhere around 1.5% of the sale, perhaps as high as 1.7%, according to Bezard. For merchants, that was too close to what they pay now in card interchange. Web sales are assessed Visa and MasterCard card-not-present rates, which are a bit less than 2% of the sale.
"Merchants were expecting the (Project Action) fees might be around 1%," says Bezard.
Online merchants thought Project Action might reduce their transaction expenses because of the ACH's reputation as a low-cost payment system. Based on his discussions with Internet merchants, Bezard believes online retailers could have lived with interchange rates of up to 1.3%.
"Banks were probably a little bit too greedy," he says. "Above 1.5%, it doesn't make sense to merchants. Why bother for such a marginal benefit?"
Project Action's pricing battle mirrors the current feud between banks and merchants over signature-based versus personal identification number-based debit card transactions. Banks are heavily promoting their signature-based Visa check cards and debit MasterCards because they garner higher interchange than PIN-based debit. But merchants, not surprisingly, strongly favor PIN debit.
While not admitting to any inside information that the threat to card interchange derailed Project Action, Metavante's Serif says, "I could certainly see that being the case, no question about it. You've got these dueling interests."
But some bankers dispute that a conflict over interchange was what put Project Action on ice. "Actually, I haven't heard that," says Wells' Ellis.
So who's the culprit-interchange or a concern about reinventing the payments wheel?
"Probably the answer lies somewhere in the middle," says Rene Pelegero, former director of global payments for Amazon.com. Pelegero left the pioneering Internet retailer in September and now runs his own firm, Retail Payments Global Consulting Group L.L.C. in Woodinville, Wash.
In order to provide real-time authorizations at all times, Project Action would have required a central switch, with the consumer's computer linking to his or her financial institution's Web site, according to Pelegero. "Project Action, it is my personal belief, probably got over-engineered," he says.
But there's little question that banks also were concerned about cannibalization of card transactions, he says. "In the e-commerce card-not-present space, any new alternative form of payment is considered a threat to credit cards."
The Nacha spokesperson would not comment on the interchange issue, saying that it's too early and that rates would be set by the program's eventual owners. But Nacha continues to assert that Project Action will not compete with cards.
"The business case for Action ... estimates that, by its fifth year of operation, Action would have just 4% of the market of online consumer-to-business purchase payments, and that these transactions would come primarily from applications in which ACH debits would otherwise have been used," the Nacha spokesperson says. "So Action would increase revenue to the bank by converting a non-revenue-generating payment-an ACH debit- into a revenue-generating payment-an Action ACH credit."
It's not clear when Project Action will be brought out of mothballs-if ever.
"The Nacha board asked the Project Action financial-institution members to identify the types of marketplace conditions that would be more conducive to moving forward with Action," the Nacha spokesperson says. "After that happens, we might be in a better position to estimate a timeline."
Nacha has long said that Project Action could be applied to more than just consumer retail payments since the system is designed to replace ACH debits. Potential applications include micropayments, electronic bill payment and presentment, the purchase of mutual funds on the Web, and business-to-business transactions. The business-to-business payment market might have the most potential.
Citing a Benton International Inc. study that it commissioned, Nacha says B2B could grow from 50 million transactions in 2000 to 1.5 billion by 2004. Some 87% of electronic B2B transactions in 2000 went over the ACH, according to Nacha.
"In particular, the B2B payment market seems well suited for an ACH credit application," the spokesperson says. "Currently, most B2B payments are by check, which is a debit, but those companies that move to ACH tend to use credits."
Nacha estimates that 61% of banks' Action-generated revenue would come from B2B transactions by the program's fifth year.
Celent's Bezard says banks indeed are still interested in using ACH credits for Web payments, but only if they won't compete for the card-dominated mass market of consumer Internet payments.
The only thing certain at this point is that there are far more questions than answers about Project Action. "Honestly, it's a bit fuzzy," Bezard says.
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