Big banks ramp up electronic payments

Posted: 6/13/2011

Charlotte-based venture will allow person-to-person pay using email, phones.
Racing to keep up with growing electronic payment options, three big banks have launched a service that will let their customers send payments using a recipient's email address or mobile phone number.

The new venture, called clearXchange, will allow Bank of America, Wells Fargo and JPMorgan Chase customers to send money directly from their online banking accounts. They won't need routing numbers or other information, although the end user will need to be a customer of one of the three banks.

The service could someday become a new source of fees for the three banks, but for now it largely appears an effort to catch up with growing rivals such as PayPal, ZashPay and CashEdge, said Zilvinas Bareisis, senior analyst with consulting firm Celent.

"It's more about protecting their turf and not losing ground," Bareisis said.

The new service comes as consumers are increasingly turning to computers and gadgets to conduct banking transactions and pay for services. Technology giant Google is expected today to unveil a system that allows users to make payments at stores and restaurants with a wave of their phone. Banks, credit card companies, and phone providers are working on similar approaches.

The bank venture is focused on helping customers move money from person to person, a growing form of payment. PayPal, which is owned by online auctioneer eBay, said its total payment volume in the first quarter climbed 28 percent to $27.4 billion from a year ago. In the quarter, eBay's payments unit brought in $992 million in revenue, nearly 40 percent of the company's total.

The new venture has been in the works for a year and a half, said John Feldman, a Bank of America executive who will serve as general manager of clearXchange. It's starting as a pilot program for Bank of America and Wells Fargo customers in Arizona but will be rolled out nationally by this time next year, he said.

JPMorgan already has a similar service that lets its customers make payments.

The banks said the new service allows them to meet customer needs and provide a service that differs from competitors. It could also encourage customers using cash to shift to another payment format.

"It's the next step in electronic payments," Feldman said.

During the trial period it will be free. After that, it will be up to each bank to determine how it will charge customers, Feldman said.

At PayPal, for instance, all personal payments made through a bank account or PayPal balance are free in the U.S. Credit or debit card payments incur a fee of 2.9 percent, plus 30 cents. The sender can pay the fee upfront or pass it on to the receiver. If a customer is sending money to pay for goods or services, a merchant fee of up to 2.9 percent, plus 30 cents, applies.

For now, clearXchange is for sending money person-to-person in the U.S., Feldman said. Down the road, the banks could look at payments to merchants or internationally, he said. The new service debuts as regulators are weighing new rules that would reduce the fees banks can charge merchants for debit card transactions.

As with any electronic format, fraud is always a risk, said Bareisis, the Celent analyst. In its early days, PayPal invested heavily in security after fraudsters sent emails to customers in an effort to obtain credit card and bank account data, he said. The banks "will have to be careful in managing that," he said.

The new service has two main security protections, Feldman said. Customers will log in using their banks' online banking security protocols. And account information won't be collected by clearXchange. "We believe we have a very secure environment," he said.

ClearXchange is based in Charlotte. The company employs about 14, split between Charlotte and the San Francisco area.

Financial terms of the venture were not disclosed. Eventually, the banks hope to add other banks.

PayPal issued a statement Wednesday highlighting its anti-fraud capabilities and its ongoing efforts to partner with other financial institutions.

"This is yet another sign that the traditional payment industry's model is looking more and more like PayPal's," said Dan Schatt, PayPal's head of financial innovations.

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By Rick Rothacker
Posted: Thursday, May. 26, 2011