With Gateways Under Pressure, Authorize.net Tries to Reinvent Itself

As transaction processors add services to their basic product, they put increasing pressure on gateway providers to differentiate themselves. One of the most ambitious strategies for differentiation is being pursued by Authorize.net Inc., acquired this spring for $82 million by Lightbridge Inc., a Burlington, Mass.-based provider of billing and fraud-management services. With new backing from Lightbridge, American Fork, Utah-based Authorize.net has sketched out a two-pronged plan: beef up value-added services and expand quickly into the physical point of sale, which is more competitive than e-commerce but offers high-growth potential in high-throughput markets like fast food, which seek the lightning-like payment speeds of the Internet. The strategy, according to Roy Bank, vice president and general manager for Authorize.net. is to leverage Lightbridge's fraud detection and other solutions to transform Authorize.net into a value-added gateway. This comes at a time when some observers are beginning to doubt the value of the gateway concept itself. “All processors have the infrastructure to accept [Internet Protocol]-based transactions,” says Michael Mulcahy, chief operating officer and executive vice president of sales for Exadigm Inc., a Tustin, Calif.-based maker of wireless and landline payment terminals. “If merchants are not getting added value from their gateway provider, then gateways become an extra layer of expense.” By adding real-time fraud prevention and related security applications to Authorize.net's core IP services, Lightbridge figures there is an opportunity to expand Authorize.net's reach deeper into the brick-and-mortar merchant community. IP transactions cut authorization times by at least 10 seconds, and can be cheaper because they piggyback on existing broadband connections in the store. Authorize.net already provides gateway services to about 200 physical merchants, including several quick-service restaurants, which have embraced IP-based POS solutions for their speed and architectural flexibility. During the second quarter of 2004, Authorize.net added 5,900 Web merchants, raising its total merchant portfolio to more than 100,000. The portfolio is made up of primarily small and mid-size and Web-based merchants. With about 30% of the market, Authorize.net is second only to Verisign among the gateways, according Celent Communications. “There is a natural trend among merchants toward IP enablement of the POS device,” says Authorize.net's Bank. “Providing this service is not a departure from our core competency as an IP-based transaction platform provider.” Industry experts see the combination of value-added services, cost reduction, and faster authorization as key selling points in Authorize.net's strategy to expand its reach in the physical merchant world where competition for clients is stiffer than in e-commerce. “For merchants the question is whether gateways provide added value,” says Exadigm's Mulcahy. “If they don't, why add the service?” One potential bump in the road: the departure this month of Pamela D.A. Reeve, who had been chief executive of Lightbridge for almost 15 years. Board member Robert Donahue, who has held executive positions with Manufacturers Services Ltd. and Stratus Computer Inc., has been named Reeve's interim successor while the company conducts a search.