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Connecting e-payments to e-commerce

www.nacha.org

Since the earliest days of business and industry, commerce has depended on the flow of value - companies and individuals paying what they owe and collecting what they've earned. The conduit for the flow of value is the payments system. Progressing from barter to coins to paper currencies to checks to electronic payments, the payments system is a dynamic mechanism changing to meet the economic needs and technological capabilities of its users.

As commerce continues to migrate to a more automated and electronic environment, so too must payments. In the United States, NACHA is working to enable the Automated Clearing House (ACH) Network to serve as a safe, secure and low-cost electronic payment method for a wide variety of e-commerce applications. In addition, NACHA is coordinating an effort to create an international link among the ACH-type payments systems in the OECD countries. This article will review many of the e-payments initiatives underway in the U.S., and explain the Worldwide Automated Transaction Clearing House (WATCH) project.

The Growth of E-Commerce
Estimates of the future of e-commerce transactions predict substantial growth. The Gartner Group, for example, predicts that worldwide business-to-business (B2B) e-commerce will surpass $7.29 trillion by the Year 2004. Forrester Research predicts total worldwide e-commerce to reach $6.79 trillion by 2004. While these estimates differ somewhat, they both represent growth of more than 1000 percent over current figures. The value of these goods and services must somehow move through the payments system.

In the U.S., credit cards quickly became the de facto payment method for business-to-consumer e-commerce. Merchants and consumers were familiar with the payment process, and consumers have substantial protection from fraudulent transactions, which alleviated, at least in part, any reluctance to make purchases on the Internet. Many merchants, however, have experienced substantial amounts of credit card-related fraud, and many consumers in the U.S. either have no cards or choose not to use them for this type of transaction. Furthermore, in the B2B arena, payment cards are not as widely used as in B2C e-commerce, and can result in transactions fees that many merchants are unwilling to pay. For these reasons, there is considerable demand from both merchants and consumers for other types of e-commerce payments.

Ultimately, we believe the payments system will evolve to allow merchants and consumers to use multiple electronic payment methods for e-commerce.

Internet-Initiated Debits
An obvious payment method is to allow consumers to authorize debits to their bank accounts. In the U.S., this is being developed in two ways. The first uses the ACH Network. Under this method, a consumer would provide a web merchant with his or her account number and the financial institution's routing number; the merchant would use this information to originate an ACH debit. While simple enough in theory, in practice the web merchant runs into the problem of authenticating the consumer and verifying that they have proper authorization to debit the account. The very nature of the Internet makes this a much riskier transaction than when a merchant obtains a written and signed authorization to debit an account.

On August 23, 2000 NACHA approved operating rules for the ACH Network that address this situation. First, a new transaction code for Internet-initiated debits will be implemented by March 16, 2001. The ability to identify these transactions as originating on the Internet will permit financial institutions to adopt risk control measures they believe are appropriate for these transactions. Second, the rules will impose minimum security and authentication standards for Internet-initiated debits. Third, NACHA's Internet Council is compiling a document of industry best practices which is intended to highlight ways that authorization and authentication can be performed for Internet-initiated debits.

The other way to debit a consumer's account is through an electronic funds transfer (EFT) network. Under this method, a consumer making an Internet purchase uses his or her ATM card number; but instead of using a personal identification number (PIN), the consumer digitally signs an electronic payment request. The payment request is then sent to the consumer's financial institution, via an electronic payments network, where the digital signature is verified. The merchant would then receive authorization, and the consumer's checking account would be debited.

In May 2000, participants in a pilot program being conducted by NACHA's Internet Council successfully sent a digitally signed payment through the STAR EFT network, the first time this technological feat has been accomplished in the United States. These participants and others are working on commercializing this payment concept.

DirectPay
Less obvious, but perhaps even more exciting than debit, is making a credit payment out of one's account (this should not be mistaken with making a credit card payment). A feature of the ACH Network in the U.S. is the ability to make credit payments as well as debits; that is, funds can flow in either direction. Consumer ACH credits are already used for some bill payments. NACHA is developing a pilot program that would test this concept, which is currently going under the name DirectPay.

A consumer using DirectPay would, at the end of checkout on a web site, identify his or her financial institution, perhaps through a drop-down box supplied by the merchant, and would be automatically linked to that financial institution's web site, online banking site or specifically developed DirectPay screen. The financial institution would display the amount and terms of the transaction, and ask the consumer to confirm the purchase and initiate the payment. The financial institution would then initiate the credit payment via its normal ACH operations and link the consumer back to the merchant's web site.

In order to make this transaction work, the merchant and the financial institution communicate information about the transaction in the background. At the time the consumer is transferred from the merchant to the financial institutions, the merchant provides the amount and terms of the transaction and other pertinent information such as a reference number for reconciliation purposes and its account information. When the financial institution sends the consumer back to the merchant web site, it provides information about the payment.

The first key feature of DirectPay is that the consumer's identity is authenticated by his or her financial institution. This relieves the merchant of the responsibility of authenticating a consumer with whom it may have no previous relationship or taking the risk of completing an unauthenticated transaction. It also makes it unnecessary for the consumer to provide personal payment information to the merchant. A second key point is that since a credit payment is made instead of a debit, funds are always good and there is no risk to merchant of the payment being rescinded.

Although Direct Pay is in very early stages of development, it does offer a way to address consumer concerns about privacy and security, and merchant concerns about fraud and payment finality

Electronic Billing and Payment
While many analysts have predicted an oncoming wave of bill payments being made over the Internet, consumer adoption of electronic bill payment has lagged behind most of these predictions. While NACHA continues to develop and promote the use of the ACH Network for bill payments, two initiatives in particular are aimed at speeding consumer adoption.

One reason that slows adoption of electronic bill payment is that most bills are not yet being presented electronically. It takes a motivated bill payer to initiate an electronic bill payment when a paper bill was delivered. To encourage electronic billing, NACHA's Council for Electronic Billing and Payment has created a web site - eBilling.org - to educate billing companies on the benefits of electronic billing and payment. eBilling.org provides information about the EBPP marketplace, such as statistics and regulatory information, explains the various bill presentment models and payment models, and explains other service elements, starting with customer enrollment. This practical information will hopefully speed the conversion of paper bills to electronic bills.

The second initiative is intended to address consumer concerns about privacy, security and error resolution. In February 1999, the Council for Electronic Billing and Payment issued the first version of business practices for electronic billing and payment companies and their service providers.

The business practices are based on the following principles:

1) the security and privacy of the billing and payment information is essential

2) EBPP participants must act upon requests and instructions in a timely manner

3) participants must maintain adequate records and tracking systems

4) problem notification must occur so that participants can take corrective action

5) contact information must be provided to other industry participants and to customers.

The business practices specify how these principles apply to the processes of customer enrollment, bill presentment, and bill payment. Furthermore, the document specifies that business practices for EBPP build on, and do not replace, existing billing practices used in the paper world. Widespread adherence to principles such as these would substantially address consumer's concerns about privacy and security.

B2B E-Payments
As the predications cited at the top of this article indicate, a majority of the volume of e-commerce will likely take place in
the business-to-business arena. Today, offline B2B commerce employs a variety of payment methods, including checks, cards, ACH, EDI, and wire transfer. Unfortunately, B2B e-commerce is not very different where payments are concerned. In many cases, electronic payments are the last piece of the electronic commerce puzzle fitted into place. However, a host of new initiatives and partnerships by banks, technology companies and NACHA promise to connect electronic payments with B2B e-commerce.

The ACH Network is already widely used for business-to-business payments. In 1999, 1.1 billion business-to-business payments, including cash management transfers, were made using the ACH Network, up from 932 million transactions in 1998. Financial EDI (electronic data interchange - the electronic exchange of payments, payment-related information or financially related documents in standard formats between business partners) increased from 81 million payments in 1998 to 107 million in 1999, a 32.2 percent increase.

Although there has been much speculation about the future of EDI due to the development of XML, these figures are significant because they show that companies use financial EDI extensively. Instead of the out-and-out replacement of EDI, more likely there will be a gradual transfer to XML-based information exchange, with much work in the interim on integration and translation between the two. In fact, some of the largest EDI service providers are already implementing translation services. Furthermore, NACHA exploring the potential for expanding the addenda-record capability of the ACH Network to allow for any payment-related XML-based standards such as Interactive Financial Exchange (IFX) message sets.

Much of B2B e-commerce is expected to take place in digital marketplaces - online areas where buyers and sellers within an industry converge to conduct business. By some estimates, as many as 500 digital marketplaces are in existence, yet most require payments to be made offline via paper checks or wire transfers. Adding electronic payment capabilities to digital marketplaces promises to greatly reduce the administrative burden associated with making offline payments for online commerce. Many financial institutions and technology companies are, either independently or in partnership, developing and marketing electronic payment products and services for digital marketplaces.

Companies will continue to do a tremendous amount of business with each other offline, and efforts are underway to develop electronic invoice presentment and payment capabilities, a B2B version of consumer electronic bill presentment and payment. NACHA's Council for Electronic Billing and Payment has formed a work group to focus on issues involved with B2B electronic invoicing and payment. The Council will determine whether business practices, similar to those developed for consumer EBPP, are appropriate for the B2B market.

WATCH for international electronic payments
The increasing globalization of business has created the demand for a more efficient, cost-effective means of executing cross-border payments. In 1999, NACHA was asked by a group of banks to coordinate the development of a low-cost, cross-border electronic payments system based on Internet Protocol. Dubbed WATCH - the Worldwide Automated Transaction Clearing House - the project envisioned the creation of a new bank-owned, not-for-profit company to process cross-border payments.

On September 1, 2000, WATCH was incorporated in the United Kingdom as a company limited by guarantee. At the time this article is being written, thirteen financial institutions have committed to taking ownership stakes in WATCH.

Under the WATCH model, a payment is received from a sending bank in the national payment system's format or the UN/EDIFACT format. WATCH would then convert the file into the format of the automated clearing house in which the receiving bank participates. Foreign exchange would be done by the originating financial institution. Unlike wire transfers, WATCH is intended to process lower-value, high-volume payments in a batch mode. Implementation of such a system could reduce the costs for cross-border payments by up to 40 percent.

Phase I of the project - defining WATCH's organizational governance and developing business specifications - was completed on schedule in mid-2000. Forty-eight members, representing 14 countries, participated in Phase I. Phase II, involving the issuance of a Request for Proposal to begin building the WATCH processing system, will begin upon the commitment of 25 financial institutions to Phase II. WATCH is currently on schedule to begin operations in mid-2002.

Conclusion
Through rulemaking and other initiatives, NACHA is enabling the ACH Network to be a secure and reliable payments system for consumers and businesses conducting e-commerce. Innovations in electronic payments are occurring in the marketplace at amazing speed; electronic payments are quickly becoming and integral component of end-to-end electronic commerce. Progress toward globally connecting electronic payment networks will increase the attractiveness of the electronic payments for all types of global commerce.

Definitions
NACHA - The Electronic Payments Association: NACHA is the leading organization in developing electronic solutions to improve the payments system in the U.S.. NACHA represents more than 12,000 financial institutions through its 33 regional payments associations, and 700 organizations through its six industry councils and corporate Affiliate Membership Program. NACHA facilitates the development of operating rules and standards for the Automated Clearing House (ACH) Network and for electronic payments in the areas of Internet commerce, electronic bill payment and presentment (EBPP), financial electronic data interchange (EDI), international payments, electronic checks, electronic benefits transfer (EBT) and student lending. NACHA's web site address is http://www.nacha.org.

Automated Clearing House (ACH) Network: The ACH Network serves 20,000 financial institutions, 2.5 million businesses, and 100 million individuals in the U.S. The ACH Network is commonly used for Direct Deposit of payroll and government benefits such as Social Security, Direct Payment of consumer bills, business-to-business payments, federal tax payments, and, increasingly, e-commerce payments. In 1999 there were more than 6.2 billion ACH payments made worth more than $19 trillion.

Operating Rules
The NACHA Operating Rules standardize payment formats for the ACH Network, and define the rights, obligations and warranties of parties involved in ACH payments. Operating rules provide a uniform business and legal framework for the exchange of payments, which enhances participants' confidence in the safety and reliability of the payments system.

Elliott C McEntee
President and Chief Executive Officer
NACHA
The Electronic Payments Association

 

 

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