Payments on the 'Net: How Many? How Safe? (1995)

If banks take on as strong a role in payments made on the Internet as they do in the traditional payments world, they can make a lot of passing funds around and issuing credentials for consumers and merchants. On the other hand, if MCI, AT&T, or other companies decide banks are moving too slowly and that they've got to set up their own online payment system, they'll handle the profitable business and banks will end up just doing the back-end processing, warns Michael Karlin, president and chief operating officer of Security First Network Bank. If banks don't take the initiative, money will get sucked out of that piece of the business, says Karlin. A subsidiary of Cardinal Bancshares, Lexington, Ky., Security First's one location, an Internet site, was scheduled to open Oct. 18. In 1994, $4.6 trillion worth of retail and wholesale purchases were made around the world, according to research firm Killen Associates, Palo Alto, Calif., which recently produced a report on Internet commerce for MCI. About 13% of those purchases, $595 billion worth, were made remotely, by catalog, TV, electronic data interchange, and on-line networks including the Internet. All of these purchases will start gravitating toward the Internet during the next ten years. While actual Internet purchases were negligible last year, Killen projects that people and businesses will buy $600 billion in goods and services on the Internet in the year 2000 and $1.25 trillion in 2005. This is backed up by a survey consulting firm Global Concepts Inc., Atlanta, conducted for Visa, MasterCard, and Verifone. While only 32% of Internet users said they currently shop on the Internet, 90.7% said they plan to in the future. Killen estimates there will be seven billion Internet payments made in 2000 and 17 billion in 2005. Assuming a typical transaction fee of $1.50, the organizations that dominate Internet commerce will take in $11 billion in 2000 and $26 billion in 2005. (The costs will probably be 50% to 60% of that.) Both nonbanks and banks have a head start in the embryonic Internet retail payment system, which so far includes only credit card and off-line debit card payments. Such nonbank companies as First Virtual, CyberCash, Netscape, and Open Market are facilitating the card-based transactions. But banks' cardholder and merchant relationships are, so far, intact because the actual credit card clearing and settlement process is the same as it normally is. Except, that is, that the Internet provides new opportunities for hackers and others to steal credit card numbers and commit fraud. New types of payments are coming to the Internet: electronic checks, on-line debit, and electronic cash. The Global Concepts survey showed that Internet users want such options. Asked to rate on-line payment options one to five, the respondents ranked credit cards 3.66, digital cash 3.33, checking accounts 3.25, ATM cards 2.80, and prepaid cards 2.62. CREDIT CARDS Cybershoppers currently can only pay for Internet items with credit cards or with MasterCard and Visa debit cards. They can type their credit card number on the Internet and take the risk that another Internet user will see it. They can also use some type of security. The first company to provide secure credit card transactions over the Internet, First Virtual Holdings, Inc., San Diego, has been growing 15% a week since February and the company has signed up 750 merchants. Its acquiring bank for now is First USA, although it wants to establish relationships with other banks. First Virtual holds card and payment information away from the Internet, so the consumer never passes a credit card number over the Internet, only a password. Consumers register credit card information with First Virtual by phone or e-mail, and it verifies this information and subsequent purchases by e-mail. The company is beginning to use digital signatures with its authorization messages. …