Kryptosima Banks on a New Network, New Money, and ISOs

A Hampton, Ga.-based processor that has tried for four years to bring to market a system to enable on the Internet debit card transactions linked to personal identification numbers may be close to signing an additional network for access to PIN debit accounts. Kryptosima, a unit of InstaPay Systems Inc., says it expects to sign an agreement in the fourth quarter with an unnamed electronic funds transfer network go along with its existing link to the Armed Forces Financial Network, a system based in Tampa, Fla., that has its mark on 80 million cards. With AFFN, Kryptosima claims coverage of at least 40% of the PIN debit card base in the U.S. Harry W. Hargens, chief executive of InstaPay, won't say how much the new network would expand that card base, but says he has “90% confidence” the deal will be done. InstaPay, which currently has three online merchants accepting its “Payenkrypt” service for Internet purchases, has also secured venture capital and is gearing up to add salespeople in the fourth quarter. The new salesforce will begin calling on big-ticket merchants while also relying on independent sales organizations to sell the system. Kryotosima's approach is to process transactions consumers make on the Internet by swiping a debit card and entering a PIN on a PIN pad they hook up to a home computer via a USB port. Kryptosima funnels transactions to eFunds Corp., a Scottsdale, Ariz.-based processor, which then sends them to AFFN for switching to card issuers for authorization. The company has spent much of its time in the past year developing the PIN pad, which it designed for home use and says it can make in small quantities for $45 apiece and in production quantities for under $30. Hargens says Kryptosima will subsidize the devices in the beginning to “jumpstart” adoption of Payenkrypt, but ultimately it sees merchants bearing the cost, much as they do in physical stores. To help cost-justify the expense, the company is concentrating on high-ticket merchants, like airlines, where the lower transaction fees on debit card transactions as compared to credit card and signature-debit payments would provide a faster payback. Hargens says Kryptosima's typical merchant fee is 30 cents plus 0.5% of the transaction, with a cap of 60 cents. Kryptosima absorbs fees from eFunds and AFFN and bundles them into its pricing. Thus, a merchant paying a 2% discount on credit and signature debit would save 40 cents on a $100 payment. Hargens also points out that the risk of fraud and chargebacks is much less, also, with PIN debit. “We're absolutely convinced there's pent-up demand from merchants [to accept PIN debit],” he says. “Internet merchants have a greater incentive than brick-and-mortar merchants, since there's less fraud and chargebacks.” But the effort to develop and sell this service has been a long and frustrating one, Hargens admits. Before the company signed on AFFN, a major EFT network that had seemed ready to adopt the system backed out, but not before Hargens and his fellow investors had burned through significant capital. Currently, it processes “hundreds” of transactions monthly for a trio of online sellers, Hargens says, including paybycash.com, a site that offers non-credit card payment methods to marketers of Internet games. Now, though, Hargens hopes a $5 million credit line from Cornell Capital Partners LP, Jersey City, N.J.,coupled with access to public capital through InstaPay, which is traded over the counter, will finally help his company turn the corner. He plans to hire a handful of salespeople who will focus on recruiting large merchants and on signing up ISOs to sell small retailers. That effort will be aided, Hargens figures, by the addition of the second EFT network and its incremental card coverage. He's not putting all his eggs in the Internet basket, either. Seeing opportunity in hooking up physical points of sale for debit card transactions via Internet Protocol connections, Kryptosima has already begun making connections to networks to serve that market. “That's a market niche we can step into,” says Hargens.