While most of us were preparing to go back to school or back to work this month, opinion pollsters Yankelovich Partners released a study that marked a shift of seismic proportion in our attitudes as online consumers. The results of that study: only 60% of Net users are satisfied with the state of Internet privacy (vs. the vast majority several years ago); and 90% felt that protecting the privacy of personal data is the most important Internet shopping issue. The cold front emanated from a “‘hacker chill,” a belief that there are predators on the Internet who pose a constant threat to personal security.
But where there is danger, there is opportunity. And that’s where eCharge comes in. With substantial backers such as Washington Mutual, and top-drawer executives, eCharge is developing new ways to pay online. We turned to the two guys leading the eCharge: CEO Truett Tate (TT) and Chairman Ron Erickson (RE), for the battle plan from inside the strategy room.–LS
Seattle24x7: We haven’t read the obituary, but it would appear that VISA International’s S.E.T. initiative, which promised us a world of “Secure Electronic Transactions,” has gone the way of the wooden nickle. Yet the concerns that S.E.T. was to address seem as pressing as ever.
Tate: Yes. The risk of credit card numbers and personal information being stolen online is beginning to dominate consumer concerns. At the same time, fraud impacts the online merchant, who has incredibly thin margins (if not negative margins) and can ill afford to be absorbing high fraud losses.
Look, Visa and MasterCard are handling some 93% of online purchases. But their relationship with merchants is not healthy. VISA and MasterCard have treated online purchasing as “Card Not Present” transactions, and they’ve stuck the merchants with the entire burden of fraudulent purchases. Also, interchange rates are broadly accepted as cumbersome, complex, expensive to the point of onerous.
The real issue–the lack of security online through traditional payment systems–threatens the both the profitability of e-tailers and the willingness of consumers to buy online.
Seattle24x7: The risk is considerably greater to the merchant than to the consumer.
Tate: That’s right. It’s much more immediate for merchants, because of fraudulent buying and because fewer than half the people who visit sites make a purchase (often it’s 1-in-10).
Erickson: We have some evidence here locally that fraud is a significant issue. Within the last few months, Expedia [Microsoft’s travel website] announced they were taking a quarterly hit of some $4-$6 million because of fraud online. Almost every week there’s news of increased vulnerabilities in the system.
Tate: All of this is why eCharge defined its purpose as providing secure and convenient online purchasing. The whole fraud and security risk umbrella has created an industry underneath VISA, MasterCard, Amex and Discover for people who want to have alternatives for buying online.
Seattle24x7: How hot is the industry?
Tate: One of the fascinating aspects of the Department of Justice lawsuit against Visa and MasterCard is that while they dominate online purchasing today, the fact is that underneath that carapace, thousands of companies are springing up trying to tackle the online market.
Seattle24x7: Don’t credit-card companies cover up to $50 in fraudulent charges?
Tate: Yes, but that’s pretty weak, considering that you’re not liable for anything when you use our solution.
Seattle24x7: What is eCharge offering online retailers?
Erickson: The first thing we offer is a lower discount rate than Visa and Mastercard, and we do not charge a set-up fee. Next, we’re able to guarantee transactions against fraud. We also provide access to detailed transaction information in real time.
Seattle24x7: So you’re providing a tracking function?
Erickson: Yes. We offer SKU-level detail. In a store, every item on the shelf has an SKU (Stock Keeping Unit) number. But bills from VISA/MasterCard aggregate purchases: you see only “JCrew $250.” At SKU-level detail, we can tell you bought white socks, pants with 34 waist, 32 inseam, and a blue sweater.
Seattle24x7: And you provide a whole new payment channel?
Erickson: Yes. Our system can charge an online shopper’s monthly telephone bill. And we just introduced our NetAccount, which is basically a new type of credit card. Why phone bills? For one, research shows that a large number of web surfers do not use credit cards. Depending on whom you read, 18% to 22% of all commerce in the real world is transacted with credit cards. So why would it follow that all cyber-world transactions occur via credit card? It’s just not going to happen. We’re giving the merchant another arrow in their quiver.
Seattle24x7: How did eCharge negotiate an arrangement with the phone companies to act as an intermediary? Is that on a case-by-case basis?
Tate: The key is that eCharge is an interface. We’ve brought the software, as well as the proprietary processes that make it incredibly easy for telcos not only to be the channel, but to participate in the revenue stream. This is revolutionary. In the last year-and-a-half, the telcos have begun getting into this business. Phone bills are the most ubiquitous bill in the world and have one of the best payment histories. Telcos are being cautious as to how that bill is itemized. So I think we’re going to grow with the telcos and the degree of sophistication they’ll eventually add to their billing application.
Seattle24x7: Are those relationships in place coast-to-coast?
Tate: Well, during 2000, which was our proof-of-concept year, the initial agreement was concluded with AT&T, because AT&T gives us access coast-to-coast to all the telephone lines. eCharge Phone during 2000 is actually in production mode in the United States, in Canada, in UK, and in Sweden. We’re in dialogue with telcos or financial institutions in literally dozens of countries. Our focus on very easy implementation that allows our phone partners to be up and running in their country in short order is a critical differentiator between us and a lot of the other payment solutions that are incredibly U.S.-centric.
Seattle24x7: How exactly does the eCharge Phone product work?
Erickson: The very first time you use eCharge, we download a small client – it takes little more than a minute. When you click to buy at a merchant site, our system briefly disconnects you from your ISP, dials up a number associated with the transaction, and then redials your ISP, bringing you right back to where you were. Unless you had your modem volume turned up, you wouldn’t know any of this happened. This approach takes less time than doing a VISA or MasterCard transaction, and you don’t have to enter any information. Your phone bill contains the “eCharge” amounts.
Seattle24x7: How about people using a high-speed line (ISDN, DSL, cable modem)?
Erickson: Our current product works only with dial-up Internet connections, via local phone lines. Future products will work in other contexts.
Seattle24x7: Does the phone company get a cut?
Erickson: Yes, both the long-distance carrier and the local phone company receive a percentage of the discount rate that the merchants pay eCharge. The amount of revenue will vary, depending on the system, the sales volume, and the country where the telcos are located.
Seattle24x7: Do consumers in these other countries use credit cards like Americans do?
Tate: No. For example, Argentina has the highest credit-card penetration of any Latin American country, and it’s at 30%. We have a product in eCharge Phone that is particularly well-suited to developing nations, where you have 20% to 40% increases in the number of new people accessing the Internet.
Seattle24x7: What about NetAccount?
Tate: Net Account is our direct response to the major credit cards. We offer a regular credit account and a pre-paid account. We co-branded the product with Washington Mutual, which acts as the issuing bank. And we expect to expand our business by relying on the respect that Washington Mutual has among both merchants and consumers in the Pacific Northwest.
For the pre-paid card, we’ve actually established a bank in Utah that allows us to support that product in-house. One of the great validators of our moodel is that the FDIC approved our bank application. They did pretty intense analysis on whether the banking model is viable.
Seattle24x7: What led to your decision to become a bank?
Tate: When you get down to actual money transfers, it’s necessary to have the involvement of a financial institution. We could’ve elected to use financial partners, but that would have meant keeping less of the revenue.
Seattle24x7: Are there promotional marketing or merchandising aspects to your program?
Tate: When we sit down with a new merchant, all the dialogue is about how do we get more people being loyal to your site?
For example, MP3.com is going to be one of our launch partners for NetAccount. When you go to MP3, you’ll find a number of promotions, such as a “Get Free Music Download for Signing Up with eCharge.” They believe eCharge is a superior payment solution.
All e-tailers need to find out how to convert surfers to buyers; it’s not simply a matter of offering a better product; you’ve also got to create a more secure environment that encourages purchases. You must combine “how you pay” with “what you buy,” and attack the fact that people are basically surfers and browsers.
Seattle24x7: How are you being perceived by the 800-lb. gorillas in the marketplace, Microsoft and AOL? Are they threatened by you, or are they interested in partnering with you?
Tate: There are literally hundreds, if not thousands, of online payment solutions now vying for dominance. Our competitors are typically very narrowly focused, niche solutions, such as a wallet. And, consequently, we’re seeing companies like Brodia teaming up with Wells Fargo, and PayPal teaming up with Yahoo and CIBC. What we’ve tried to do is offer a suite of solutions.
But we’re not trying to do everything ourselves. Our model is based on a partnership with either a significant financial institution or a significant telco. And if you look at who has invested in this company, you’ll see that. Broadly speaking, the large corporations are often our potential partners; they’re not our adversaries.
Larry Sivitz is managing editor at Seattle24x7.
E-Commerce Facilitators eCharge Corp.
500 Union Street, Suite 1000
Seattle, WA 98101
Year founded: 1997
Number of employees: 203
Amount of VC funding: $60M+
Major investors: Deutsche Telekom, Korea Tel,
NDC, Washington Mutual
Major clients: McAfee.com, Classmates Online, Inc.com, MP3.COM
eCharge regional offices: Vancouver, BC, London, Tokyo
Executive team: Truett Tate, President & CEO. Formerly at Citicorp (now Citigroup), where he managed several different overseas operations.
Mark Tremont, COO & CFO. Formerly EVP of Finance at Visa Int’l.
Ron Erickson, Chairman. Among other things, former CEO of Egghead Software.