Two Canadian Companies Begin a U.S. Expansion for Online Debit

Two rival online payment companies in Canada are making moves to expand the market for Web-based debit payments to the U.S. Toronto-based UseMyBank Services Inc. has linked with processors in both Europe and the U.S., while Othentik Technologies Inc., Montreal, has signed a deal to license its software to US Dataworks Inc., a Houston-based processor of transactions on the automated clearing house, to offer a service that will enable both online debits and credit card transactions. And, in a development with potentially far-reaching ramifications for Visa and MasterCard, the credit card traffic could be privately processed, bypassing the bank card networks, according to US Dataworks. “We're looking at the fine print of the [Visa and MasterCard] rules to see if we can do that,” says John J. Figone, vice president of business development at US Dataworks. “We think we can.” At the least, both Canadian gambits further the cause of the nascent credit push channel for online payment, in which consumers may instruct their financial institutions to pay Internet retailers by debiting their demand deposit accounts rather than tap a credit card. UseMyBank, which will not reveal the processors it is working with because of non-disclosure agreements, plans to begin processing U.S. and European transactions during the first two months of 2005. “We're going to hit [both markets] at the same time,” says Joseph Iuso, chief executive of the 2-year-old company. Because of this expansion, he projects transaction volume of “tens of millions” monthly by the second quarter of next year, compared to volume in the tens of thousands currently. So far, growth hasn't been a problem for the company, which boasts about 10,000 consumers using its service each month to pay 200 enrolled and active merchants. “We're doubling [transaction volume] every 45 days,” says Iuso. The Othentik/US Dataworks product, which US Dataworks is calling “Hyperpay,” could be live by the end of the first quarter, says Figone. He won't project volumes, but Othentik, which is also talking to banks and merchants in the U.S., figures it can capture 5% of all online volume by the end of next year. “We want to be the first solution to give choice to consumers [of ACH or credit card payment],” says Patrick Rioux, co-founder and president of Othentik. “It's more strategic for us to be in the U.S. than in Canada right now.” For its part, US Dataworks will market Hyperpay to its existing client base, which includes heavy hitters like Bank of America, Citigroup, GE Capital, Chevron, and May Co. It plans to offer loyalty rewards programs for the service, not unlike those banks offer to holders of credit cards and signature debit cards to foster usage. “You'll get points or miles or dollars back,” says Figone. But the potential blockbuster development in U.S. Dataworks' plan for Hyperpay is its concept of offering credit card payment, with transactions flowing over the Internet between issuing banks and acquirer hosts rather than through established Visa/MasterCard channels. US Dataworks will charge merchants for both ACH- and credit card-based Hyperpay transactions. Pricing isn't final, but will feature flat per-transaction fees, says Figone. The idea, he says, is to offer card transactions to merchants at cut-rate processing fees. “We're looking at whether we can bypass interchange,” says Figone. This will be tricky. Cards carry the bank card associations' logos, and Visa has sued First Data Corp. over the processor's effort to network bank card transactions within its own private loop linking issuing and acquiring banks. And the company will have to work out how to identify acquirers and handle details like chargebacks and returns. But even if the company's examination of the “fine print” leads it to back off on Internet-based card processing, Figone says the idea won't die. “We'll just continue to grind on it until we find a way to do it,” he says. “There's some market pressure there [from merchants] that needs to be released.” Both Othentik and UseMyBank rely on a relatively new type of online payment known as credit push, in which the consumer initiates a transaction at an online banking site, a screen for which comes up during the checkout session at a merchant's site. Once the bank site authenticates the user, the user can pay the merchant directly out of his checking account. In the world of the ACH, this is known as a “credit” rather than a “debit” because the transaction is initiated by the account owner rather than by a merchant. UseMyBank, which charges merchants a fee of 1% to 3.5% per transaction with a $1.50 (Canadian) minimum, has signed up about 900 Canadian merchants, of which some 200 have so far gone live. Most of these are online dating services and gaming and charity sites. Consumers need not enroll in the service. Once they designate their bank, UseMyBank's servers present a log-in screen, get authentication and account data from the bank, and let the user proceed with the transaction. The user never leaves UseMyBank's network, nor do the company's servers store passwords or account data. Settlement to the merchant flows through GPay, an electronic biller. With Othentik's technology, the user hyperlinks to the bank's actual online-banking log-in page for authentication, and proceeds with the transaction at the banking site before returning to the merchant. In September, the National Automated Clearing House Association, Herndon, Va., announced it was launching a proof-of-concept project for a credit push initiative in the U.S. (Digital Transactions News, Sept. 30). Also, the major Canadian banks plan to launch a similar product, dubbed iDebit, next spring (Digital Transactions News, Sept. 1), while the Canadian Payments Association, the rule-making body for the Canadian payments system, has proposed a rule that would cover credit push initiatives that would flow transactions through its settlement services (Digital Transactions News, Oct. 22). The CPA's board has approved the rule, and the group plans to put it into effect by the end of March.