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Big Financial Institutions Make A Play For Internet Business
Payment Market

08/28/98
Communications Billing Report

After four or five years of ramping up and heavy doses of hype, the
Internet payments industry hasn't exactly set the world on fire. Despite
gains over the past few years, "two to five years" away remains the
unofficial timetable for when consumers and merchants will gravitate
robustly to Internet commerce applications, and technology companies
and financial institutions will have the system running smoothly.

What is clear is that titans in the financial industry, such as major banks
and credit card companies, are sold on the value of an Internet-based
payments system and that is prompting some market upheaval, said Julia
Pickar, an analyst who follows electronic commerce for Zona Research
Inc. in Redwood City, Calif. "We're only seeing the beginnings of the
potential of what Internet transactions are going to mean to our
economy," she said.

As the large financial institutions experiment with and test their own
payment systems for their multitudes of consumers, merchants and other
clients, technology companies that dared to develop the industry are
facing heavy pressure. Some of these fast-track start-ups are finding they
cannot compete with the titans, while others are struggling to stay
competitive until the market develops further.

For instance, one of the leading payment companies, First Virtual
Holdings Inc., abandoned the segment in July in favor of a business model
based on offering Internet messaging services, transferring its
2,000-merchant base to payments pioneer CyberCash Inc. While the
deal gives CyberCash additional critical mass, the Reston, Va., company
itself has floundered lately with lower-than- projected earnings and may
have trouble surviving over the long haul, analysts told CBR.

"You can see a pattern of this in a lot of different industries, where the old
traditional players hang back a little bit because they're not quite sure
what to make of the Internet," Pickar said. "So the start-ups move
forward. They're nimble and they've got great technology, they've got
great ideas and they're going to revolutionize the industry and leave
everyone else in the dust. Well, the big guys are not going to sit back."

Card association Visa International is setting up a proprietary network for
Internet payments, for instance, but "is thinking well beyond its
proprietary network and figuring out ways to incorporate the Internet,"
Pickar added. "The market is kind of catching up with the notion of using
Internet transactions."

While a full-fledged market shakeout remains to be seen, according to
observers, the competitive landscape has heated up for obvious reasons.
According to CyberCash 's Maureen Loftus, senior vice president for
corporate marketing and strategy, the use of credit cards for Internet
payments and purchases will start to soften as consumers find an
electronic payments system as inviting for commerce.

Although U.S. consumers are credit card-centric, Loftus said "other
forms of payment [debit cards, electronic checks and electronic cash] are
enabled on the Internet and are going to be more widely accepted in the
next two to five years." She noted that in Europe and Japan, where there
is less reliance on debt and credit card use, CyberCash pilots have been
successful. Loftus predicts that credit card use over the Internet will drop
to less than 50 percent among U.S. consumers within five years as more
of them move to other forms of payments, such as smart cards.

A recent study from Palo Alto, Calif.-based Killen & Associates
forecasts that the volume of repetitive bills presented electronically to
consumers will reach 8 billion by 2000, which bodes well for banks,
telecommunications and utility companies, large retailers and services
merchants. Electronic bill presentment and payment will make up 12
percent of the worldwide total of all bills by 2000, according to Killen.

"Repetitive billers now spend 70 cents to $1.50 per conventional bill,
while electronic bill presentment can reduce that cost by as much as
two-thirds," said Michael Killen, president of Killen & Associates.

Despite the pressure from large financial institutions, CyberCash plans to
remain independent, even though it has a number of key partnerships with
technology companies such as IBM Corp., financial institutions and
Internet service providers, Loftus said. In June, CyberCash 's stock
took a 14 percent hit after the company revealed that second-quarter
revenues would be lower than expected and said it would reduce its staff
by 20 percent. Second-quarter revenues had been expected to top $5
million.

Current Analysis Inc., a Sterling, Va., market research company, said in a
recent report it expects multiple models to succeed in Internet bill
presentment and payment. So while CyberCash was among the first
companies to develop the market, its solutions are going to meet critical
competitive challenges, Current Analysis principal analyst Scott Smith
says in the report. "Many end-users will hedge" their bets by testing
multiple payment schemes before deciding on a model, he said.

While many analysts question how much longer a company like
CyberCash can survive without a merger or being bought out, Loftus
insisted CyberCash is adding 750 to 800 merchants per month and will
stick to its guns. "We often joke about how many companies out there
are trying to buy us," Loftus said. "We joke about it because one of the
things that is our competitive advantage is the fact that we are neutral
relative to any major store builder or major technology company and
neutral relative to any kind of major financial institution."

While its many partnerships might portend its being a target of an
acquisition, such a deal actually would diminish its standing by taking out
"all of the other financial institutions that we're partnered with ... and all of
the technology partners that we're partnered with. One of the things that
we have to a large degree is ubiquity in our distribution," Loftus said.

CyberCash 's goal is to continue its technology work to make it easier
for consumers and merchants to use an electronic payments system,
Loftus said. It is working on a system whereby consumers won't spend
useless time constantly entering credit card and personal information but
can order simply with a click. The personal and financial information
would be contained in a password application.

Loftus said she sees such a system as an "ease of use" issue. Just like
when consumers have to wait in line to make a purchase at a store, many
will leave if they have to wait too long, Loftus said. The Internet is the
same way. If they have to spend too long filling out forms, they will leave
as well and not make the purchase.
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