A Finextra member 11 February, 2009, 09:13 0 likes

To be successful, a payment network needs to be accepted by both consumers and merchants. NOCA might be good for merchants but only to the extent that consumers would be willing to use it. It's like organizing a conference of merchants and consumers but only merchants show up.

A consumer with a card account will likely choose to pay with a card. Why? 1) Consumer is mostly oblivious of the merchant service fees or interchange fees that the merchant has to pay. 2) If something goes wrong, its easier to initiate a chargeback with a card 3) money isn't taken out of the checking account right away, in case the card is a credit card 4) earn awards and points when you use a card 5) security concerns would also rank high - consumers are not as comfortable sharing their bank account information.

Looking at above reasons, 2), 3) and 5) are all security related. For people in the business, we know security is a major issue with payment systems. Enabling the consumer to feel secure if underestimated will impact the company's bottom-lne. Award points or not, if the consumer does not feel secure, he will take his business elsewhere.

Paypal takes this (security and confidence) quite seriously since it affects their bottom-line. Just one look at their filings prior to being bought by ebay, it is evident that "Credit card chargebacks comprise paypal's largest source of transaction loss expense. As a percentage of total payment volume, paypal incurred transaction losses of 0.38% and 0.43% for the three and six months ended June 30, 2002,"

6 months ending June 30 2002 (in thousands):

total revenues 102,533

processing expense 35,322

provision for transaction losses 13,114

customer service 20,410

etc.

Despite this high rate of fraud (transaction losses), Paypal manages to grow its business to over 64 million accountholders (probably more than that now). The tie-in to EBAY might be one reason but the main reason, I believe, is that consumers aren't concerned with how much 'merchants' are paying paypal. They are happy to use their cards and even happier in the thought of being able to chargeback any transaction (fraudulent or because of non-delivered goods).

NOCA is limited to the US market, I think. Cross-border direct debits are still being worked out in Europe and are not quite standardized in other parts of the world. This aspect also limits NOCA.

A compelling competition to paypal, I believe, must also allow card transactions. In order to present a compelling competition to paypal in terms of lowered ‘merchant’ fees, the new company should create new sources of revenue (new products which will attract more consumers) and operate at a much lower margin than Paypal. And I’m not saying what these new products are because I might want to get into this sometime soon. There is also an opportunity here in lowering the cost of operations by lowering its cost of fraud.

A Finextra member 12 February, 2009, 17:06 0 likes

For alternative and new methods of payments, security is the #1 issue driving both new customer volume, as well as driving existing customers to decide which existing payments methods they will use (and yes, we do have the factual data to support this assertion). As with Maslow's Heirarchy of Needs, until your foundational needs of security everything else (rewards, interest rates, grace period, etc.) is secondary. Security positioning is sometimes based on substance while at other times marketing alone changes perceptions. PayPal owes some of its success to brilliant security positioning related to the inherent safety of "push" payments along with drafting off of the financial industry's security investments (with the two random-amount deposits innovation), while American Express and Citi have famously succeeded with pure-positioning efforts. Because security is a foundational need security substance is important, but security also sells in and of its own right.