InformationWeek

That's the vision of ProPay.com, a person-to-person E-commerce payment system launched four months ago by an Orem, Utah, credit-card transaction processing company.

Its goal is to let any two people exchange money, anywhere and at any time.

In today's economy, credit cards are a primary way for people to pay businesses for products and services. But they don't work for person-to-person transactions because, until now, only stores could obtain permission to accept credit-card payments. ProPay intends to change that by offering a system that lets anyone fill out the necessary paperwork and get approval online to receive credit-card payments. While the system will let people transfer money between PDAs, the company's focus isn't based entirely on wireless technology, says president and founder Brad Wilkes. He sees the system working in a variety of applications, including online auctions where strangers today exchange goods and money on faith.

To get started, customers sign up for credit approval on ProPay's Web site, just as merchants do. Once approved, buyers from online auction sites pay ProPay via credit card; their credit-card information isn't passed along to the seller. ProPay guarantees payment to the seller in two days.

There is a price involved, of course, and a time lag in payment. ProPay charges sellers 35 cents plus 3.5% of the transaction--more than the usual merchant fee charged by credit-card companies. ProPay also holds the money for two days, gaining interest on it during that time.

Wilkes--and apparently Wall Street--say the price is right for a secure, global, personal electronic payment system. ProPay has raised two rounds of venture capital. Next on the agenda: an IPO.

Payment processing is becoming a commodity, so the value proposition is coming down to the lowest price, says Aviva Litan, Gartner Group's research director for payment systems. That has resulted in a number of trends, including companies thinking about cutting out Visa and MasterCard altogether and offering a closed-loop system in which both the consumer and the merchant are viewed as customers. Once a company does that, processing consumer-to-consumer transfers becomes a cost-effective business. The service also capitalizes on the growing wireless trend.

"What's neat about ProPay is that it has executed on all of those trends, positioning itself to do payments between anyone in the consumer-to-consumer or consumer-to-business space," Litan says.

That prompted one major Internet company interested in cutting its merchant fees for online transactions to ask Litan to take a close look at ProPay. Gartner's research shows that online merchants usually pay about 2.6% plus 25 to 30 cents per transaction to Visa or MasterCard, plus 11 cents for the online payment gateway, another 11 cents for authorization and settlement, and 11 to 15 cents for fraud detection--for a total of close to 5%. "So here comes ProPay with 3.5%, and it looks like a good deal--all sorts of payment models and you don't have to worry about fraud," she says.

"The idea of electronic payment between individuals presents huge value--the potential to save time and money and effort and a way to bring the person-to-person market a payment system that has flourished because of its ubiquity and ease of use," says IDC research manager for E-commerce Keith Waryas. "Person-to-person may always be dominated by cash, but it will rely increasingly on the electronic transfer of information."

The launch of ProPay.com marks a transition many companies are addressing in the E-era: the conversion of an old-line data-processing company into a dot-com and a shift in priorities to focus on getting personal with customers.

"We're not a new entrant," says Wilkes. "Our traditional business was credit-card processing, so banks were already our customers. And they told us they needed a system that enables person-to-person E-commerce electronic payments from one individual to another."

ProPay already had much of the technical infrastructure the new business would need: a proprietary network for payment processing, the capability to accept and receive credit-card transactions, and the ability to check on the status of cards in real time for cashiers in stores around the nation. "Our job was to receive the request for authorization, validate it with the issuing institution, check the available balance, and send back the OK to the cashier at the store," Wilkes says.

With its new dot-com focus, the real change comes in the ability for anyone to become a "merchant" with the right to accept credit cards. Until now, "you couldn't walk into a bank and get approved to accept credit cards," Wilkes says. "What we bring to the table is making the ability to accept a credit-card payment as easy as it is to accept a check."

The typical paper process in becoming a registered merchant involves several steps, including a trip to a bank for underwriting. "Now in person-to-person, we do the underwriting electronically on the Internet and don't need to send them anywhere else," Wilkes says. By automating the steps and leaving out the human intermediaries, ProPay makes the whole process of merchant authorization inexpensive enough that the smallest business and even individuals can use it.

Because it's an established business migrating to an E-commerce arena, ProPay could build on its existing technology infrastructure in a number of ways.

"We have a fairly sizable investment in Internet connectivity and redundancy--we had already spent millions on that and we haven't needed to make additional investments for the person-to-person model," Wilkes says. "What you want to do in terms of planning is hope you've covered the architectural issues

up front. We have substantial capacity right now for transaction processing and account underwriting, but there will likely be some scalability issues as we grow. There's no question that in the next 12 to 18 months, we'll be scaling up as we get millions of accounts on board. That will require some additional capacity, but it's not a huge investment."

ProPay.com's business is based on a proprietary online account underwriting and risk-assessment system that identifies the person requesting an account, verifies the credit-card number, and accesses their credit worthiness. It has a secure data center, with six Compaq dual-processor servers with grade 5 technology for redundancy, a spare drive and replaceable hot-swappable drives, and a dual power supply running off two separate circuits. The company is standardized on Microsoft products, using Microsoft Internet Information Server and Windows NT 4.0. The IS staff includes two managers for network connectivity and router configuration and 10 developers.

What ProPay brings to the market is the development of processing and payment-handling technologies, with the Internet as its distribution channel. For example, the software team is working on splitting transactions on the back end among many parties, so that one payment from an eBay buyer could automatically be split among the site, the credit-card company, ProPay, and the seller.

"If you use a credit card, the Visa or MasterCard fee is built in," Wilkes says. "What we're doing now is extending that to an auction site, so we'd send a piece of the payment to the card, a piece to the bank that issued the card, and a piece to the auction site. There's no reason the auction site couldn't be bundled into that, and it makes it cheaper for everybody involved."

The ProPay.com team is building links using HTML, C++, and XML for connectivity across the Internet, plus some custom dynamic link libraries to interface with the servers and talk to the database.

Total staff, now at about 35 people, may increase to 100 by year's end. ProPay already has leased a new headquarters with room for 200 people and a larger data center.