July 24, 2000

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Major E-Payment Initiatives Combat Online Fraud

Visa and Citigroup roll out payment infrastructures designed to meet customer demand

By Cheryl Rosen

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wo of the nation's largest financial services firms last week launched major E-payment initiatives, designed to make online purchases easier and more secure, in light of growing concern about online fraud.

Visa U.S.A. rolled out a high-capacity payment infrastructure that it's been developing for 18 months with Cisco Systems and Sun Microsystems. Visa's DirectExchange network is designed to make online payments "faster, safer, and more convenient," says Carl Pascarella, president and CEO of Visa, the nation's largest credit-card company.

Visa developed the enhanced payment system to meet the "unprecedented volume of transactions" the company expects to generate as consumers increasingly use cell phones, personal digital assistants, PCs, and television set-top boxes to shop, Pascarella says. Visa DirectExchange will use StorEdge arrays, Sun Enterprise servers, Sun's Solaris operating system, and the Java 2 Enterprise Edition platform. It's built to handle 10,000 messages per second and as many as to 100 billion transactions a year--double the volume of Visa's current network.

"The Internet age demands applications hosted at Visa and downloaded quickly to merchants through Java and other networking technologies," says Jim Bressler, director for strategic initiatives at Sun's worldwide financial services group. "And for consumers, it will mean they can carry a digital copy of credit cards in their Palm Pilot to buy things on the fly."

One key feature of the system is improved security. It will accept free-form data messages that could accommodate biometric identifiers such as fingerprints and other new security methods, Pascarella says. In addition to its regular merchant partners, Visa plans to offer the DirectExchange service to Web sites and other online retailers, but hasn't yet signed any customers.

Citigroup, meanwhile, says it inked a deal to provide online payment options for America Online, the largest online content and Internet service provider. The deal will let AOL subscribers transfer funds, make purchases, and pay E-merchants with a "virtual credit card" on AOL and the company's three other online operations, CompuServe, Digital City, and Netscape. Citigroup will begin to roll out the services in the fall.

Antony Jenkins, Citigroup Internet payment chief operating officer, says Citigroup will offer three types of payments through AOL: person-to-person payments for auctions; the ability to move money between accounts at different institutions; and the ability to pay merchants for E-commerce transactions.

Barbara Landes, AOL's VP of strategic businesses, says the goal of the online service is to "give consumers alternatives for making payments, conducting transactions online, and sending money to friends using E-mail. Credit cards are the backbone of online transactions, but people may not have credit cards or may be looking for new payment mechanisms."

Landes says AOL chose Citigroup for the "ease of use and simplicity" of its offering, and AOL's "confidence in Citigroup's ability to handle the volumes we expect."

The initiatives come as concern about online fraud grows. A Gartner Group report released last week said the incidence of credit-card fraud in online purchases is 12 times as high as that in the physical world. Gartner's survey of 165 companies found that 1.15% of all online purchases were fraudulent, compared with only 0.06% to 0.09 % offline. In addition, 64% of all "charge-backs," where consumers get credit for incorrect charges that appear on bills, are the result of fraud online, vs. 44% offline.

"This eats into the margins of online merchants," says Gartner analyst Avivah Litan. "They not only have to absorb all the cost of the fraud, but also pay much higher fees to credit-card companies, resolve disputes, and absorb the cost of those disputes."

Vendors are responding. Online payment processor CyberCash Inc. this week launches a fraud-detection service called FraudPatrol. Based on the number of transactions processed on a credit card in the past few minutes, the buyer's address, what he or she is buying, and historical data, the system ranks the possibility of fraud on a scale of 1 to 999. CyberCash offers the service for 15 cents to 20 cents per transaction, plus a set-up fee of $99 for existing customers and $495 for new customers.

GlobeID Inc. has another approach. This week it begins testing a CD-ROM system with the NYCE automated teller machine network. "We wanted to enable debit cards on the Internet to get rid of charge-backs and fraud," says managing director Fabrice DeComarmond. The bank sends users a CD-ROM encrypted with an E-PIN number to plug into users' computers.

Online sites that sign up for the service use the E-PIN to positively identify customers placing online orders. In Europe, the system is being tested with smart cards.

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